Business Management: Downsizing Strategies

Downsizing

• Downsizing is a strategy that reduces the scale and scope of a business to improve financial performance.
• Reasons for downsizing:
  • Reduce costs
  • Reduce layers of management to increase decision speed and get closer to the customer
  • Sharpen focus on core competencies
  • Generate positive shareholder reactions to improve valuation of stock price
  • Increase productivity

Downsizing Objectives

• Reduce Cost:
  • Streamline operations
  • Negotiate better rates with suppliers
  • Adopt new technologies for better productivity
  • Reduce energy consumption
  • Outsource tasks to lower cost third parties
  • Minimize overhead
• Replace labor with Technology:
  • Automating processes previously handled by human workers
  • Increases efficiency (machines work faster and more consistently)
  • Lower long-term costs (high initial investment, but reduces costs over time by replacing repetitive tasks)
  • Enhanced accuracy (minimizes human errors, improving quality and reliability of outputs)
  • Scalability (Technology can handle large volumes of work without needing proportional increases in human resources)
• Mergers and Acquisition (M&A):
  • Merger: Two companies combine to form a single entity
  • Acquisition: One company takes over another, which may become a subsidiary or be integrated into the acquiring company.

Downsizing Objectives: M&A Reasons:

• Growth and expansion (entering new markets, gaining new customer bases, expanding product lines)
• Synergies (combining resources to increase efficiency and reduce costs)
• Market power (strengthening competitive positioning and enhancing influence in an industry)

Alternatives To Downsizing

• Employment Changes:
  • Attrition
  • Hiring Freeze
  • Cut Employees
  • Cut Interns
  • Cut Temps
  • Voluntary Time Off
  • Reduced work hours
• Pay/Benefits Changes:
  • Transfers
  • Relocation
  • Job sharing
  • Demotions
  • Pay freeze
  • Cut overtime pay
  • Pay cuts
  • Profit sharing/Variable pay
• Training Policies:
  • Retraining
  • Use vacation and leave days

Downsizing: Involuntary Separations

• Alternatives to Layoffs:
  • Early retirements
  • Voluntary workforce reductions
  • Outplacement

Downsizing Effects

• Overall:
  • Mixed effects on firm performance: Some short-term cost savings, but long-term profitability & valuation are not strongly affected
  • Firm’s reputation as a good employer suffers (e.g., Apple Computer in the 1990s)
  • Forces re-thinking of employment strategy (Lifelong employment policies become less credible after downsizing)
• Employee Morale:
  • Disrupted employee motivation (increase in political behaviors, anger and fear, negatively impacting customer service)
  • Violation of psychological contract, leads to cynicism, lowered work commitment, and fewer "random acts of goodwill"
  • "Survivors" experience more stress due to longer work hours with redesigned jobs, and increased uncertainty about future downsizings
• Workforce Quality:
  • Senior employees often leave due to early retirement incentives, leading to loss of institutional memory
  • Voluntary workforce reductions (buyouts) result in the most marketable employees leaving (“stars”)
  • Early retirements & voluntary reductions often result in too many people quitting and being re-hired as consultants at a higher cost to the firm

Downsizing Strategies

• Works Best When:
  • Changes in strategy, organization structure, and culture accompany job cuts
  • Reductions are focused on weak business units and plant closures, rather than across-the-board cuts affecting all units

Downsizing Techniques

• Attrition: Natural reduction of workforce due to retirement, death, or resignation.
• Voluntary retirement: Encouraging employees to retire early with full or reduced pension benefits.
• Buyout benefits: Offering lump sum payments to encourage voluntary departure.
• Involuntary Separation: Separation from service for involuntary reasons other than resignation (not reflecting discredit on the employee).
• Leave without pay: Employees with reduced benefits, but guaranteed their job upon return.

Survivor

• An employee remaining with an organization after a downsizing

Three Types of Downsizing Strategies

• Workforce Reduction: A short-term strategy to cut the number of employees through attrition, early retirement/voluntary severance packages, and layoffs/terminations.
• Work Redesign: A medium-term strategy focused on work processes, assessing whether specific functions, products, or services should be changed or eliminated.
• Systematic Change: A long-term strategy that changes the organization’s culture, attitudes, and employees’ values with the goals of reducing costs and enhancing quality.

Downsizing Alternatives

• Cutting non-personnel costs: (office supplies, etc.)
• Cutting personnel costs: (salaries, bonuses, overtime pay, pension, benefits, etc.)
• Providing incentives for voluntary resignation or early retirement.
• Hiring Freeze
• Mandatory Vacation
• Reduce Workweek
• Reduce Overtime
• Reduce Salaries
• Facility Shutdowns
• Employee input for alternatives to cutbacks

HRM Role in Downsizing

• Strategic Planning and Execution:
  • Assessment of Workforce Needs: HRM helps determine which positions or functions are redundant and how workforce reductions align with the organization's long-term strategy.
  • Developing a Downsizing Plan: HR professionals collaborate with senior management to create a clear plan outlining the scope, timing, and process of downsizing.
• Communication Management:
  • Transparent Communication: HRM ensures open and honest communication with employees regarding reasons for downsizing, the process, and how decisions will be made.
  • Individual Notifications: HR professionals often handle termination meetings with empathy and respect.