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What’s it: Downsizing is a company’s strategy to reduce the size and complexity within their organization. It involves reducing employees making the company smaller by laying them off. Companies may delete job titles or eliminate overlapping jobs. Or, they remove divisions, spin-off units unrelated to the core business, or sell unproductive units. And it usually accompanies organizational restructuring.
Companies adopt this strategy for several reasons. Challenges in the business environment are the first. Then, there is a merger as another reason, where after this corporate action, several units or jobs become overlapping.
Downsizing aims to increase efficiency and profitability. In addition, companies become more agile because they are not burdened by their large size. They can also focus efforts on their core business and exploit their core competencies better.
Why is downsizing important?
Three reasons explain why downsizing is important. First, it becomes a way to streamline operations. Changes in the business environment, such as during an economic downturn, force companies to take efficiency measures. Without it, their profitability could fall deep.
Second, companies can become more flexible. When the organization becomes large, the company is difficult to move. Finally, they are less responsive to changes in the business environment.
For example, changing technology requires companies to adapt. Otherwise, they could lose out on the competition.
Third, companies can focus more on core competencies. Removing the unnecessary allows companies to pay more attention to what they do best. They may have to change their strategy in response to a changing business environment. And it may require them to remove some non-essential jobs or business units. So, they focus on the areas where they excel.
How does downsizing work?
Downsizing aims to reduce the size and complexity within the organization. Management may see the organization within the company as too large and inflexible. Thus, the company does not operate at peak efficiency. At the same time, the business environment is becoming more dynamic, which requires companies to be more adaptive.
Then, management looks for ways to make the company more efficient. Downsizing is usually an option, which is a reduction in organizational size and operating costs. It could involve redesigning the organization or simply cutting employees.
As a result, management expects the organization to be leaner and more efficient. Thus, operating costs can be further reduced. And the new organizational structure makes the company more agile in dealing with changes in the business environment, enabling it to remain competitive in the marketplace. In addition, they perceive smaller organizations to be more agile.
Reason for downsizing
Several reasons explain why companies choose a downsizing strategy. Economic downturns are usually the reason. For example, household spending falls during a recession, causing demand to decline significantly. As a result, companies face pressure on their profitability.
The company then looked for ways to reduce the pressure. They then take efficiency measures to lower operating costs. The most common way is to reduce employees.
Other reasons for downsizing are:
Strategy shift. For example, a company may previously pursue a growth strategy through acquisitions. However, it makes the organization becomes too large and difficult to control. As a result, management decides to downsize the organization by redesigning its structure.
Merger. A merger involves combining two companies into one surviving entity. Thus, it is likely to result in some overlapping functions and units. The surviving entity then removes those functions or units to achieve a more efficient structure.
New management. New management often brings new approaches, including changes in the company’s strategy. For example, the new management introduced a new, more radical approach to making the company more flexible by redesigning the organization.
New technology. New technologies can create job redundancies within the company. It often replaces several jobs, so the company decides to cut employees. Technology adoption is an option because it is more cost-effective.
Industry decline. When entering a downturn in its life cycle, the industry faces a decline in demand. As a result, companies face pressure in their sales. It forces them to seek to cut costs to maintain profits. At the same time, they may use existing profits to invest elsewhere.
Alternatives and strategies for downsizing
How companies carry out a downsizing strategy can involve the following three alternatives:
- Employee reduction
- Organizational redesign
- Systemic redesign
Employee reduction. For example, the company eliminates several overlapping units or jobs. They contribute to high operating costs. So eliminating them is a way to reduce costs. How does the company do it? It is possible via:
- Early retirement. The company offers employees the option to retire early on favorable financial terms.
- Outplacement. The company sponsors employees with benefits as a severance package to help them move to other jobs.
- Golden parachute. It is a lucrative compensation package to upper management when the company lays them off.
- Attrition. Companies do not replace employees who leave, and employees are free to decide whether they want to stay or leave.
- Voluntary termination. Employees decide to leave work of their own accord.
Organizational redesign. Companies are rearranging organizations to be more efficient. It may involve rearranging specific functions, processes, hierarchical levels, business units, or product lines. One way is by delayering, namely removing the managerial layer to make the organization less bureaucratic. In addition, companies expect higher efficiency by streamlining the organization.
Systemic redesign. The company reorganized the system within the company, which is an ongoing program. Organizational culture, attitudes, and values are the main focus, as are the company’s rules, procedures, and policies.
In other models, downsizing could involve the following strategies:
- Retrenchment
- Downscaling
- Downscoping
Retrenchment. Companies focus on reducing costs. Companies do this by eliminating redundant, overlapping, or unifying production facilities.
Downscaling. The company scaled down operations while maintaining existing business activities. As a result, they cut down on the resources used. For example, they reduce workers, close locations, or sell equipment and machinery.
Downscoping. The company narrows its focus to a particular business unit or portfolio. It is common to refocus on the core business, where they have superior competence. Divestment usually often accompanies it. General Electric is a good example. The company divested 350 of its product lines during 1981-1992.
What are the advantages of downsizing?
Increasing profitability is the main advantage for the company. They reduce costs by laying off employees and restructuring functions, hierarchical layers, or business units. Such efficiency measures are vital, especially for survival during a tough economy.
Other advantages of downsizing are:
More flexible. Organizations become leaner by reducing unnecessary parts and refocusing on core capabilities. Thus, companies can be more flexible to adapt to changes in the business environment.
Less bureaucratic. The company rearranged the organizational structure, for example, through delayering. They removed some managerial levels to make the chain of command shorter. As a result, communication and decision-making are faster because they go through fewer managerial layers.
Better control. Companies are becoming leaner and more focused. Thus, they have more control over business functions, product lines, business units, or resources.
A more productive composition. This strategy allows companies to rid themselves of unproductive employees. In addition, they also get rid of redundant work or functions. So, what’s left are those who are the best.
Build a better culture. By retaining the best employees, companies can build a new, better culture. It becomes an important catalyst to drive productivity and innovation within the company. However, building a new culture may be difficult when they still have a lot of poor-quality employees.
What are the disadvantages of downsizing?
While downsizing can increase profitability and productivity, it doesn’t always yield the expected benefits. Quite the opposite. It causes companies to lose skilled workers, decrease customer service, and lose morale.
Here are the possible disadvantages of downsizing:
Lowering employee morale. Reducing employees can have a negative impact on morale. Existing employees may be anxious because they may be in a similar situation in the future. Eventually, their motivation and productivity decline.
Bad public image. The public perceives a negative image when companies reduce their employees. For example, they may view the company as irresponsible. Or, they see the company has problems, affecting their interest in buying its products.
Heavier workload. The workload may still be the same as it was before the downsizing. The company only reduces employees without removing related jobs. As a result, existing employees find their workload and responsibilities increase. And it can lead to more stress.
Skill gap. Companies may not be selective in reducing employees. Finally, they fired key employees with specialized skills and knowledge. And such decisions can be problematic later on.
