Downsizing - Explained
What is Downsizing?
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What is Downsizing?
Downsizing refers to actions taken by an organization to streamline its operations, often combined with layoffs, in order to cut labor costs by reducing the size of the company.
Reasons for Downsizing?
A downsizing strategy can be considered for 2 main reasons:
- Offensive: Increase a company's profits. This usually occurs when there are other firms in the same industry who are performing better, or when a company wants to reduce excess capacity.
- Defensive. Because of difficult economic circumstances and macroeconomic forces. In this case, a company determines that its workers can no longer profitably produce its output (products and services) at current market prices.
Types and Approaches to Downsizing
The framework considers two important variables:
- 2 Types of Downsizing:
- Proactive Downsizing (~offensive). Implemented to increase long-term Competitive Advantage. This downsizing strategy is aimed at improving efficiencies, taking advantage of new technologies, changing the skills of the work force or restructuring the organization.
- Reactive Downsizing (~defensive). Implemented as a response to a crisis (economic or financial). This downsizing strategy is mainly related to external changes in the marketplace.
- 2 Approaches to Managing Employees:
- Commitment Oriented Downsizing. This downsizing strategy focuses on Empowering Employees to perform their jobs relatively independently using their discretion, according to the company’s goals.
- Control Oriented Downsizing. This downsizing strategy is typically used by organizations that compete with a strategy of Operational excellence focusing on offering low-cost products and services. The aim is to increase the organization's efficiency, notably by reducing direct labor costs