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Great Debate

The underperforming global economy is forcing business leaders around the world to

consider any means of improving organizational efficiency. Fluctuating prices and volatile

consumer markets are some of the reasons that cause companies to underperform. One of the

pervasive methods used by most firms during financial crises is laying off certain employees

to cut costs and ensure sustainability. Downsizing is a strategy used by many companies to

gain operational efficiency and productivity amidst increased competition. Many firms have

downsized, especially in times of financial turmoil. Labor-intensive and export-oriented

organizations in both service and manufacturing have been at the forefront of downsizing.

The millions of layoffs during the recent global economic recession show just how popular a

method it has become for managers. It has been associated with diverse activities apart from

the layoffs as mentioned earlier. Organizational redesigning, mergers and acquisitions, hiring

freezes, and industry consolidations are other examples.

Downsizing is a term referring to the reduction of a company’s use of physical,

financial, information, or human assets. It could be reactive or proactive depending on the

prevailing economic conditions. In a broader sense, it could be viewed as a strategic

transformation aimed at changing the work process and corporate culture of an organization.

The most prevalent form of downsizing occurs on the human assets resulting in a reduced

workforce. This topic has come under increased scrutiny recently as people debate about the

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effectiveness of reduction as a strategy. The magnitude of companies engaging in this

approach is a vindication of its pervasiveness in the corporate mindset of most managers.

Poor company performance is one of the leading causes of downsizing (Cooper 52).

In times of market turmoil, most firms react to the situation by reducing their workforce

accordingly. Such economic clumps could be short term, as is the case with industrial

recessions, or long-term like the newspaper industry. Companies reduce their staff numbers

as a means of survival as they anticipate improved economic conditions. On the other hand,

some companies will cut jobs proactively even during a favorable economic climate. These

firms do not react to bad situations but prepare for them in advance. This approach is radical

and future-oriented. It aims to ensure the long-term viability of an organization is not

adversely affected. This paper is going to look at the effectiveness of downsizing and how it

can help the group to grow.

Downsizing is an Effective Tactic

Workforce Reduction

Several schools of thought are of the idea that downsizing ends up doing more harm

than good. One of the chief advantages of this strategy is the fact that it reduces the cost of

labor. People costs form the bulk of operational expenditure in most firms. We have

witnessed some big manufacturing corporations outsourcing work to other countries where it

is considerably cheaper. One of the ways that managers use to increase shareholder value is

reducing the cost of doing business. Eliminating specific jobs or positions will result in

reduced spending on salaries and this money is channeled to other areas that benefit the

investors. Elimination of organizational positions can occur through transfer of individuals,

firing, layoffs, and mandatory early retirement. The primary focus for managers is to reduce

the headcount by truncating as many positions as efficiently possible. For example, a

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supermarket could eliminate the bagging job and delegate it to the cashier during the

workforce reduction. It reduces one position but maintains the same services offered to the

customer (Robertson n.p.). Workforce reductions are usually most effective as short-term

cost-cutting measures rather than long-term strategies. One way of reducing the headcount in

the firms is by instituting Early Retirement Incentives for the older staff members. ERIs will

open the doors for voluntary moves from the employees thus reducing the apathy that comes

with mandatory layoffs. There is a variation in the figure of employees who would accept an

ERI, but the fact remains that some will pick this option. The underperforming employees are

most likely to consider early retirement since they lack the confidence of future increases in

salary.

Individual businesses will downsize to reduce labor costs and increase shareholder

value through the higher profit margins. While it is a strategic step towards future projections,

other firms will cut down employment opportunities out of necessity. Bankruptcy or

dwindling sales could force a company to downsize leaving only the most necessary

positions. It is a move aimed at ensuring the survival of the business for all interested parties.

Work Redesign

Sometimes downsizing does not always result in job losses. This method is primarily

focused on eliminating ineffective positions in the organization (Robertson n.p.).

Bureaucracy is one of the leading causes of slow decision making in companies. When

companies are unable to make quick decisions, their competitiveness is low. Apart from

eliminating these hierarchies, work redesign also entails merging. A business that is operating

at a loss, and unable to remain competitive, may combine with a successful company. This

arrangement is very beneficial to the employees and other stakeholders of the deteriorating

company since they get a chance to survive and keep their jobs. When two companies merge,

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the management may choose to downsize one firm due to duplicate staffing (Cooper et al.

61). There are redundant positions all over the organization due to the merger and managers

could decide to eliminate them for the sake of remaining competitive. The redundancies

undercut the financial performance of the company and hence downsizing is a vehicle for

removing the slack to realize significant operational synergies.

Managerial Downsizing

The long-term performance of any business relies heavily on how it responds to

market changes. Companies will opt to downsize on labor or management depending on the

prevailing conditions. Managerial layoffs are not unheard of as businesses are in a race to

become nimble and efficient. One disadvantage of many senior officials is the long chain of

decision making. An idea must go through many offices before it is adopted or discarded.

This lengthy process makes it difficult to respond to sudden competitor activities or market

conditions. Downsizing helps to shorten the distance between those who learn of market

situations, the ones who decide what to do, and the implementation people (Hornstein n.p.).

This move reduces the turnaround time of ideas and gives the business the ability to respond

to market changes and competitor actions.

Firms will eliminate managerial posts and delegate more responsibilities to the line

managers who are more in-tune with the employee activities. The communication between

line managers and employees is direct with minimal managerial interventions. It makes

distortion of information or instructions highly unlikely to occur unlike the case of

organizations with plenty of administrative spots. A flexible company can withstand the

market rigors and uncertainties of the future without deteriorating. The consistent

collaboration between staff and line managers will also eliminate analysis paralysis, a

standard feature of heavily staffed firms. The firm will become more action-oriented with a

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minimized chain of command. When the layers of management are lesser, power and

authority then revert to the managers who are closest to the staff and customers. It gives the

organization the unique advantage of adapting to changes. When senior managers delegate,

they are left with more time to spend on actualizing the big picture through strategy

formulation instead of overseeing the daily running of the business.

Technology

Downsizing is vastly different from decline since it does not only happen during a

crisis. Some companies will use it proactively to enhance their operational efficiency. Firms

will often downsize in response to investment in new technology. The question of

technological advancement in businesses has raised diverse views since some people view it

as an impediment to increased employment opportunities. Others consider technology as a

way of increasing efficiency in our organizations. When companies replace workers with a

particular technology, they save on the cost of labor. However, the management must weigh

the cost-effectiveness of a specific piece of machinery against the cost of paying workers.

In cases where machines replace people, it ends up improving the performance of the

company. The capital expenditure on information processing technology went up 310% from

1990-2010 (Cooper et al. 60). The figures show that there is a universal uptake of new

technology in many companies, which is replacing employees. Therefore, many companies

find it cheaper to spend on machinery than labor costs. Empirical evidence shows that firms

that downsize the most are the principal investors in workplace technologies. The long-term

sustainability of companies requires them to keep pace with evolving technology.

Downsizing in this context will cause the firm to lose workers and become more efficient.

Evidence has also shown that technology creates more new opportunities than the ones it

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destroys. One strategy that the workforce uses to keep up is continuous education to gain new

skills that are compatible with the latest technology. The world is becoming increasingly

digital, and it is incumbent upon organizations to shift their strategies accordingly.

Surviving Employees

When companies consolidate and eliminate specific posts, remaining employees are

required to take up more duties. The increased roles will make the workers more involved in

the daily operations of the firm than before. Being involved in multiple business processes

will give them a deeper understanding and connection with the strategic objectives of the

company. When carried out correctly, downsizing offers more advantages than merely saving

the costs of wages. Many schools of thought have explained that work redesign and layoffs

leave the remaining workers in a state of shock and risk averseness. Management can see the

big picture that necessitates a downsizing, but the employees do not. The remaining people

need to understand how the exercise relates to the long-term survival of the firm. The

business runs more efficiently when the remaining employees are aware of their roles and

their relation to the strategic objectives. Leaders must continuously address the benefits of

any downsizing move to allay any ill feelings, and bring in clarity in the situation ("Managing

the Organization Dynamics of Downsizing" n.p.). Workers feel like they are part of

something important hence they become more engaged in the company matters.

Downsizing is a necessary exercise veered towards the future operability of the

organization. When employees are well informed, treated reasonably, and adequately

compensated, the adverse effects of downsizing are alleviated. Perceived fairness in the

exercise is directly related to organizational commitment and increased job satisfaction that

results in more efficiency. The good intentions of downsizing could be eroded by the stale

environment that remains after workers have left. The remaining employees may experience

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severe loss of motivation, making the whole exercise counterproductive. It is essential for

managers to design a plan of execution that builds the company for the future. It is a time to

support those who are leaving with dignity and strengthening the skills, responsibility,

understanding, and morale of the remaining staff members. Companies downsize to remove

all unnecessary employees, and the remaining team becomes better suited for driving the

enterprise into the future ("Managing The Organization Dynamics Of Downsizing").

Company Value

Different reasons influence the decision making of investors towards a firm.

Downsizing has emerged as one of the avenues of capturing the attention, and money of

shareholders (Cooper et al. 60). When companies decide to downsize, it has a ripple effect on

the reasoning of other people. This move sends signals to interested parties that some

restructuring is underway to increase the efficiency of the firm. If investors perceive that the

company is making deliberate efforts to improve the profitability, they are likely to make

investments. Current shareholders increase their holdings, or new ones come in resulting in

increased value for the business. The organization is now in the right place to leverage on

future growth. Additionally, studies based on institutional theory suggests that corporations

will downsize as a result of a similar move from recognized players. The theory suggests that

firms will respond to the influences from within their field and conformity is the only way to

acquire compliance with the group. When management opts to adopt the prevailing practices,

it signals that they are in tune with the industry requirements and trends. Interested investors

could gravitate towards placing their money in the organization since the leadership is

moving in the ‘right' direction. When competitors reduce wages and cut jobs, they operate at

higher profit margins and earn more for their investors. Managers of referent organizations

will follow suit to gain a similar competitive advantage in the industry.

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Conclusion

Downsizing is a common strategical choice for many companies amidst increased

global competition. Globalization has led to a proliferation of firms from all over the world,

bringing different ideologies and business outlooks. The recent global recession has

necessitated organizations to dig deep in search of cost-cutting measures. In most cases, the

solution has been to downsize, and outsourcing is sometimes used as the vehicle to execute

the strategy. Despite the voices calling out against downsizing, it is evident that there are

actual advantages that improve the performance, and future bearing of organizations. Some

downsizing moves are made as a reaction to weak performing economies and declining

industries. Others happen proactively as companies attempt to increase their margins and

value for their investors. It is clear that downsizing is not all about reducing the headcount to

save on salary expenses (Hornstein n.p.). The results of downsizing are meant to leave the

company in a position of improved operational efficiency to keep up with the competitive

business landscape.

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WORKS CITED

Cooper, Cary L et al. Downsizing: Is Less Still More? New York, Cambridge University

Press, 2013.

Hornstein, Henry. "DOWNSIZING ISN’T WHAT IT’S CRACKED UP TO

BE." Iveybusinessjournal.Com, 2009,

https://iveybusinessjournal.com/publication/downsizing-isnt-what-its-cracked-up-to-

be/.

"Managing the Organization Dynamics of Downsizing." Oliverwyman.Com, 2011,

http://www.oliverwyman.com/content/dam/oliver-

wyman/global/en/files/archive/2011/OWD_Managing_the_Organization_Dynamics_

of_Downsizing_WP_0111.pdf.

Robertson, Sarie. "Effective Downsizing Methods." Bright Hub, 2011,

http://www.brighthub.com/office/human-resources/articles/122476.aspx.

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