Downsizing has become a common phenomenon in medium to large scale businesses in almost every industry. There was a time when downsizing was restricted only to blue-collar workers in the manufacturing sector, with advancements in technology and offshore outsourcing, no job, no matter what designation remains secure. Downsizing practices have hurt employees, as job security is always a concern even in large stable corporations. In the 21st century, highly educated and knowledgeable workers, including attorneys, physicians, scientists, and investment bankers, have suddenly found themselves amongst the downsized groups.
Reducing Costs
The primary reason for downsizing is that it is a quick and easy solution in terms of cutting costs to sustain the business. It is observed that during economic recessions, many organizations choose the path of downsizing to try and cut on costs to maintain sufficient levels. Many believe that excess labor costs can eat away at a company’s profitability. Having the right balance of employees and wages is the best way forward to achieve sustainable growth. However, research suggests that employees are a company’s assets, and downsizing may work effectively in the short-term, but it is never a long term solution. Downsizing should only be considered by the organization when all other methods of cost reductions are exhausted.
Most business organizations opt to automate processes by incorporating technological capital rather than labor capital. Automated means often result in increased productivity, efficiency, and minor errors. However, this requires extensive capital investment, and the machines also need specialists when it comes to their operation and maintenance. Raising capital can often mean taking a loan and paying interest, which adds to costs. Furthermore, automated processes are highly specialized and leave little room for flexibility. In some cases, governments can also help subsidize labor costs in areas with high unemployment that can be more cost-effective than purchasing and maintaining heavy equipment. Consequently, the use of high-tech equipment and technology has not asserted the ultimate solution.
Survival in the Industry
For survival, several organizations have merged, while their competitors take others over. Even federal-owned corporations are privatized in the hopes of improving efficiency and productivity. To survive, small businesses may look at existing strategies to sell their business to larger organizations operating in the same industry. This is where downsizing occurs as the merger of two organizations allows for resources to be pooled together. Most organizations have found themselves in a condition where rising demand for fuel and raw materials could not be supplied as almost all the natural resources had been exhausted.
Productivity
Business organizations, at times, downsize to increase productivity. This strategy may seem to be counterintuitive, but in some cases can turn out to be beneficial. For example, suppose a business organization knows that it could increase the individual productivity of its employees while keeping the overall productivity constant. In that case, downsizing could be beneficial for the organization. Also, a business organization could replace human force with automated equipment that could perform the same job promptly.
Value
The downsizing labor force of an organization generally indicates that some changes or restructuring is being conducted. These changes are usually targeted for increasing the profitability of an organization. If shareholders of an organization perceive that some changes will be made to increase profitability, it will increase the value of company stock. This can also result in more shareholders to invest in the company and increase shareholdings in the organization. In this case, downsizing enhances the organization’s perceived value.
Outsourcing
At times, organizations overextend themselves in terms of types and number of services they offer from time to time. By eliminating some products or services from the organization’s product portfolio can also help in improving profitability. Specialization leads to economies of scale and competitive advantage. If specific departments within the organization are not performing as expected, then it might be useful to close that department altogether. In this case, the number of employees needs to be decreased. In this case, the management may decide that outsourcing several activities could be a profitable decision, along with reduced costs.
Conclusion
No organization will choose to downsize unless it makes feasible sense to do so. What most organizations need to understand, however, is that downsizing is NOT the only option when it comes to reducing costs. When to downsize and when not to downsize? It can often be the difference between a successful long-term business and one that is forced to shut down altogether.
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