Downsizing

From CEOpedia | Management online

Actions taken by the management in order to improve the effectiveness and competitiveness on the market. Downsizing which is often associated with the staff reduction means lowering costs of an enterprise as well as a scale of its action. This type of reorganization has recently taken place due to the changing economic conditions. Over the years companies were producing goods to maximize the profit regardless of the produced goods. Currently demand not supply dictates the terms of playing the market.

Typology

Term downsizing means reducing. In literature downsizing means reducing the number of people who work in a company. In practice downsizing may refer to such areas as: organizational structure, making decisions, control system, employment, employees' paths of career, communication, approach to the employees' knowledge and abilities.

Downsizing and strategy

One of the most common mistakes made by the executives deciding about downsizing is no connection between the process itself and long-term strategic plans of a company. Downsizing does not bring results if it is just a process which is used to improve the financial condition of a company. Results of changes

Downsizing may produce positive as well as negative results. Among positive results are: cost reduction, an increase in productivity and efficiency of an organization. Among negative results are: low morale among employees, costs connected with reducing the number of staff, low reputation as well as uncertainty of the above-mentioned benefits.

Examples of Downsizing

  • Automation: Automation is a process of replacing human labor with machines. By automating certain processes, companies can reduce their labor costs while increasing the efficiency and productivity of their processes. Automation can be used to replace manual labor in any industry, from manufacturing to customer service. For example, Amazon has implemented automation technologies to its fulfillment centers, allowing it to reduce labor costs while still providing customers with fast, reliable service.
  • Outsourcing: Outsourcing is a process of hiring outside firms to complete tasks that were previously completed by internal employees. By outsourcing certain processes, companies can reduce their labor costs while still maintaining the same level of quality. For example, many companies outsource their customer support to call centers located in countries with lower labor costs.
  • Streamlining: Streamlining is a process of reorganizing a company's internal processes in order to increase efficiency and reduce costs. For example, a company may streamline its procurement process by switching from manual ordering to automated ordering. This can help reduce labor costs while still ensuring that the company is able to purchase the items it needs in a timely manner.
  • Mergers and Acquisitions: Mergers and acquisitions are a type of corporate restructuring that involves combining two or more companies. By combining two companies, the combined company can reduce its costs by eliminating redundant processes and personnel. For example, in 2018, the pharmaceutical companies Pfizer and Allergan merged, resulting in a combined company that was able to reduce its costs by eliminating redundant processes and personnel.

Advantages of Downsizing

  • Cost Reduction: Downsizing can help a company reduce its costs. By reducing the number of employees, the company can reduce its payroll costs, as well as its overhead costs associated with providing benefits, such as insurance and retirement plans for those employees.
  • Increase in productivity: By eliminating the number of employees, a company can increase the productivity of their remaining employees, as they have fewer people to manage and more time to focus on their tasks.
  • Streamlining processes: Downsizing can help a company streamline its processes, eliminating redundancies and optimizing the way they do business.
  • Increase in profits: With the cost reductions, increased productivity, and streamlined processes, a company can increase its profits. This can help the company reinvest in itself, allowing it to stay competitive in the marketplace.

Limitations of Downsizing

Downsizing often has various limitations that should be taken into consideration. These limitations include:

  • Negative Impact on Employee Morale - Downsizing can have a significant impact on employee morale. Employees may fear for their job security and may feel unappreciated and undervalued. This can cause employees to become unmotivated and less productive.
  • Potential Legal and Financial Implications - Downsizing can lead to potential legal and financial implications. Companies must consider the legal implications of dismissing employees and the financial implications of providing redundancy payments.
  • Lowering of Quality Standards - In an effort to reduce costs and remain competitive, companies may cut back on quality standards. This can lead to a decrease in customer satisfaction and an overall decrease in profitability.
  • Disruption of the Remaining Workforce - Downsizing can also cause disruption to the remaining workforce. With fewer people to do the same amount of work, employees may experience burnout or feel overwhelmed.

Other approaches related to Downsizing

One way to improve the effectiveness and competitiveness on the market is downsizing, which is often associated with staff reduction. However, there are other approaches to improve the effectiveness and competitiveness that can be taken by the management. These include:

  • Automation: Automation is the process of replacing human labor with technology. This can be used to streamline production processes, reduce labor costs, and improve accuracy and quality of output.
  • Reallocating resources: This involves shifting resources from non-essential departments to those that are more productive or necessary. This can help to focus resources on the most important aspects of the company.
  • Outsourcing: This involves contracting with another company to perform specific functions such as manufacturing, marketing, or customer service. This can help to reduce labor costs and allow the company to focus on its core competencies.
  • Mergers and acquisitions: This involves combining two or more companies into one. This can help to reduce overhead costs, improve efficiency, and increase market share.

In summary, there are several approaches that the management can take to improve the effectiveness and competitiveness on the market. These include automation, reallocating resources, outsourcing, and mergers and acquisitions.


Downsizing — recommended articles
Cost advantage — Business process outsourcing — Outsourcing and offshoring — Tactical outsourcing — Experience curve — Cost reduction strategy — Economies of scale — Offshoring and outsourcing — Factor of production

References

Author: Anna Opalińska

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