Layoffs Without Broader Strategic Planning = Bad News

Last Updated Apr 12, 2007 2:42 PM EDT

Vonage is in serious trouble. First it lost a patent suit to Verizon, and it was ordered to pay up $58 million. Then a district court issued an injunction forcing Vonage to stop signing up new customers. And today the company announced that it would slash an undisclosed amount of jobs to cut costs. Layoffs are a commonly used to lower expenses and sometimes Wall Street reacts favorably towards a company when it announces the cuts. Except when the layoffs are not backed up by solid strategic plan. From the Wharton School of Business
"Research has shown that if a company announces a downsizing without a broader reference to a strategic plan, its stock price will, on average, drop 5% to 6% over the next several days, according to [Michael Useem, a management professor at Wharton.] By contrast, if large-scale job cuts are announced as part of a broader restructuring, and a strategic plan is laid out, the firm's stock will rise some 4%, on average, in the days following the announcement. Useem says the research shows that, contrary to popular wisdom, Wall Street does not always welcome job cuts for their own sake."
So far Vonage has come up short in articulating what its strategy will be from here on out. But it might now matter; it has already reached a point where probably only a miracle can save it.