Firms Traditionally Claim that they Downsize

Reading Passage Question

Firms traditionally claim that they downsize (i.e., make permanent personnel cuts) for economic reasons, laying off supposedly unnecessary staff in an attempt to become more efficient and competitive. Organization theory would explain this reasoning as an example of the “economic rationality” that it assumes underlies all organizational activities. There is evidence that firms believe they are behaving rationally whenever they downsize; yet recent research has shown that the actual economic effects of downsizing are often negative for firms. Thus, organization theory cannot adequately explain downsizing; non-economic factors must also be considered. One such factor is the evolution of downsizing into a powerful business myth: managers simply believe that downsizing is efficacious. Moreover, downsizing nowadays is greeted favorably by the business press; the press often refers to the soaring stock prices of downsizing firms (even though research shows that stocks usually rise only briefly after downsizing and then suffer a prolonged decline). Once viewed as a sign of desperation, downsizing is now viewed as a signal that firms are serious about competing in the global marketplace; such signals are received positively by key actors—financial analysts, consultants, shareholders—who supply firms with vital organizing resources. Thus, even if downsizers do not become economically more efficient, downsizing’s mythic properties give them added prestige in the business community, enhancing their survival prospects.

“Firms traditionally claim that they downsize” - is a GMAT reading comprehension passage with answers. Candidates need a strong knowledge of English GMAT reading comprehension.

This GMAT Reading Comprehension consists of 3 comprehension questions. The GMAT Reading Comprehension questions checks the candidates’ abilities in understanding, analyzing, and applying information. Candidates can actively prepare with the help of GMAT Reading Comprehension Practice Questions.

Solution and Explanation

1. According to the passage, the “key actors” view a firm’s downsizing activities as an indication of the firm’s

(A) troubled financial condition
(B) inability to develop effective long-term strategies
(C) inability to retain vital organizational resources
(D) desire to boost its stock price
(E) desire to become more competitive

2. The primary purpose of the passage is to

(A) criticize firms for engaging in the practice of downsizing
(B) analyze the negative economic impact of downsizing on firms
(C) offer an alternative to a traditional explanation for the occurrence of downsizing
(D) chronicle how perceptions of downsizing have changed over time
(E) provide evidence disputing the prevalence of downsizing

3. The passage suggests which of the following about the claim that a firm will become more efficient and competitive by downsizing?

(A) Few firms actually believe this claim to be true.
(B) Fewer firms have been making this claim in recent years.
(C) This claim contradicts the basic assumption of organization theory.
(D) This claim is called into question by certain recent research.
(E) This claim is often treated with skepticism by the business press.

4. The passage suggests that downsizing’s mythic properties can be beneficial to a downsizing firm because these properties

(A) allow the firm to achieve significant operating efficiencies
(B) provide the firm with access to important organizing resources
(C) encourage a long-term increase in the firm’s stock price
(D) make the firm less reliant on external figures such as financial analysts and consultants
(E) discourage the firm’s competitors from entering the global marketplace

5. The author would be most likely to agree that the treatment by the business press of changes in the stock prices of downsizing firms is misleading because the press tends to

(A) focus excessively on the short-term stock price movement of downsizing firms while paying insufficient attention to the long term
(B) exaggerate the extent to which stock prices of downsizing firms rise in the short term
(C) exaggerate the link between long-term stock performance and the economic viability of downsizing firms
(D) misinterpret a long-term decline in the stock prices of downsizing firms as a sign of desperation
(E) underestimate the impact that the press itself can have on the stock prices of downsizing firms

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