A downsizing strategy refers to the planned elimination of positions or jobs in a company as part of a strategic initiative to improve efficiency, productivity, or profitability. In other words, it’s a cost-cutting measure implemented to reduce the size of a company’s workforce.
Downsizing can occur for various reasons, including:
- Economic downturns: If a company is not performing well financially, it may downsize to reduce expenses and remain viable.
- Technological changes: Introducing new technology can sometimes render certain jobs redundant, leading to downsizing. McKinsey & Company estimates that as many as 375 million workers globally (14 percent of the global workforce) will likely need to transition to new occupational categories and learn new skills in the event of rapid automation adoption. If their transition to new jobs is slow, unemployment could rise and dampen wage growth.
- Mergers and acquisitions: When two companies merge, or one Company acquires another, job functions can often overlap, leading to downsizing.
- Organizational restructuring: Companies may choose to restructure their organization to improve efficiency or to shift their strategic focus, which can lead to downsizing.
- Outsourcing: Companies may decide to outsource certain functions, which can lead to the downsizing of the related departments.
Implementing a downsizing strategy is a significant decision usually accompanied by challenges and implications. These can include decreased employee morale, potential harm to the Company’s reputation, and possible legal implications related to layoffs.
Thus, companies must approach downsizing thoughtfully, compassionately, and strategically. It’s often best if done as part of a larger strategic plan for the Company rather than as a knee-jerk reaction to immediate financial pressures.
Types of Downsizing Strategies
Downsizing strategies can be categorized based on different parameters, such as the method, speed, and function of downsizing. Below are a few types of downsizing strategies:
- Attrition: Attrition involves not replacing employees when they leave. This is one of the least disruptive downsizing strategies and can be particularly effective when downsizing is part of a long-term strategy. However, there may be more efficient methods if rapid downsizing is needed.
- Early Retirement: Organizations incentivize older employees to retire early in this approach. The incentive usually comes in the form of enhanced retirement benefits. This strategy can be more palatable for employees, but it might result in the loss of an experienced workforce.
- Termination: This is the most direct form of downsizing, where employees are laid off or fired. While this can quickly reduce costs, it can also significantly affect morale and productivity among the remaining employees.
- Outsourcing: In this approach, certain functions or tasks are contracted to external organizations. This allows companies to focus on their core competencies while potentially reducing costs.
- Reduction in Hours: In some cases, companies might cut costs by reducing the hours that employees work. This can be less drastic than layoffs but can still significantly impact employees’ income and morale.
- Salary Reductions: This involves reducing the salaries of employees. This method can preserve jobs but may negatively impact morale and increase turnover if employees seek higher-paying jobs elsewhere.
- Operational Downsizing: This strategy involves reducing the scale of operations, which can result in a workforce reduction. It might include closing branches or departments or reducing service lines.
- Functional Downsizing: This type of downsizing is specific to a department or organizational function. For instance, if a company decides its marketing function is too large, it might downsize just that department.
The choice of strategy depends on the specific circumstances and goals of the organization, including its financial health, strategic direction, and the characteristics of its workforce. It’s also important to note that downsizing, regardless of the chosen strategy, often significantly affects the remaining employees.
This includes decreased morale, increased workload, and a potential decrease in productivity, so these impacts should be carefully managed.
Examples of Downsizing Strategies
Here are examples of some companies that have implemented downsizing strategies:
- General Motors: In the late 2000s, General Motors underwent significant downsizing due to the global financial crisis and its subsequent bankruptcy. This involved closing several plants and laying off thousands of workers.
- IBM: In the mid-1990s, IBM implemented a major downsizing strategy to cope with increasing competition and a rapidly changing tech landscape. This included significant layoffs and the selling off of certain business units.
- Boeing: In response to the COVID-19 pandemic and the subsequent drastic reduction in global travel, Boeing announced in 2020 that it would cut 10% of its workforce.
- Hewlett-Packard (HP): HP has undergone several rounds of downsizing in the 2000s and 2010s, including a significant restructuring in 2012 that eliminated around 27,000 jobs.
- AT&T: Following its acquisition of Time Warner, AT&T implemented a downsizing strategy that included layoffs and buyouts as it sought to integrate and streamline its new business.
- British Airways: Due to the impact of the COVID-19 pandemic on the travel industry, British Airways announced in 2020 that it would need to cut up to 12,000 jobs from its workforce.
- In 2023, layoffs have yet again cost tens of thousands of tech workers their jobs; this time, the workforce reductions have been driven by the biggest names in tech, like Google, Amazon, Microsoft, Yahoo, Meta, and Zoom.
In each case, the downsizing strategy was chosen in response to significant business challenges, whether economic downturn, technological change, or the impacts of a global pandemic. The specific strategies used varied, with some companies opting for layoffs, others offering early retirement packages, and some closing or selling off parts of their business.
Case Study on Downsizing Strategy
Let’s examine the case of Eastman Kodak, a company with a long history that had to implement drastic downsizing measures as it struggled to adapt to the rise of digital technology.
Background
Eastman Kodak, often simply referred to as Kodak, was a multinational company that produced camera-related products. It was a dominant player in the photographic film market for most of the 20th century. However, the Company struggled with the rapid transition to digital photography in the late 1990s and early 2000s. Despite inventing the first digital camera, Kodak failed to embrace this new technology fully and instead continued to focus on traditional film products.
Downsizing Strategy
As the Company’s profits and market share began to decline, Kodak initiated several rounds of downsizing to cut costs. From the mid-1990s onwards, Kodak started reducing its workforce drastically. In 1988, the Company had 145,300 employees. By 2007, the number had shrunk to 24,400. The reduction was achieved through a combination of layoffs, early retirement offers, and selling off business units.
Consequences
The downsizing helped Kodak stay afloat for a time, but it wasn’t enough to compensate for the Company’s strategic missteps. Kodak’s financial condition continued to worsen, and in 2012, the Company filed for bankruptcy.
The Company emerged from bankruptcy in 2013 as a much smaller entity focused on digital imaging and printing technologies but never regained its former prominence.
Lessons
The Kodak case highlights the risks of using downsizing as a standalone strategy without addressing underlying strategic issues. While downsizing can reduce costs in the short term, it can’t compensate for the failure to adapt to major industry changes. Furthermore, extensive layoffs can damage a company’s reputation and morale, making it harder to attract and retain the talent needed for a successful turnaround.
Ultimately, Kodak’s downsizing strategy could not save the Company from bankruptcy because a successful strategic shift toward the digital imaging market did not accompany it.
Here’s Why Kodak Failed: It Didn’t Ask The Right Question!
