Which of the following best describes the difference between downsizing and rightsizing?

What Is Downsizing?

Downsizing is the permanent reduction of a company's labor force through the elimination of unproductive workers or divisions. Downsizing is a common organizational practice, usually associated with economic downturns and failing businesses. Cutting jobs is the fastest way to cut costs, and downsizing an entire store, branch or division also frees assets for sale during corporate reorganizations.

Inhaltsverzeichnis Show

What Is Downsizing?
Key Takeaways
Understanding Downsizing
Consequences of Downsizing
Example of Downsizing
Learning Outcomes
Reasons to Downsize
Tough Economic Conditions
Merger or Acquisition
The End of a Product or Service
PRactice Question
What Is Rightsizing?
Is Downsizing Effective?
Contribute!
What is the difference between rightsizing and downsizing?
What is the difference between downsizing and layoff?
Which set of words best describe downsizing?
What is downsizing and resizing?

Key Takeaways

Downsizing is the permanent reduction of a company's labor force by removing unproductive workers or divisions.
While it is generally implemented during times of stress and a decline in revenues, downsizing can also be used to create leaner and more efficient businesses.
Downsizing is not always positive and can have an adverse long-term impact on a company's bottom line.

Understanding Downsizing

Downsizing is not always involuntary. It is also used at other stages of the business cycle to create leaner, more efficient businesses. Eliminating any part of an organizational structure that is not directly adding any value to the final product is a production and management philosophy known as lean enterprise.

According to the production principles of lean enterprise, any component of a business enterprise that fails to directly benefit a final product is superfluous. What is valuable (and conversely, what is not valuable) is determined by the customer based on the amount they are willing to pay for a good or service.

Downsizing can also be carried out to align the firm's skill and talent with the broader market. For example, a company may pursue downsizing to weed out employees with obsolete skills that may not be useful in its future direction.

Consequences of Downsizing

However, there is evidence that downsizing can have adverse long-term consequences that some companies never recover from. Downsizing may actually increase the likelihood of bankruptcy by reducing productivity, customer satisfaction, and morale. Firms that have downsized are much more likely to declare bankruptcy in the future, irrespective of their financial health.

Losing employees with valuable institutional knowledge can reduce innovation. Remaining employees may struggle to manage increased workloads and stress, leaving little time to learn new skills—which can negate any theoretical gain in productivity. Losing trust in management inevitably results in less engagement and loyalty.

Because severe long-term consequences can outweigh any short-term gains, many companies are wary of downsizing, and often take a gentler approach, by cutting work hours, instituting unpaid vacation days, or offering employees incentives to take early retirement. Some companies also offer employees the chance to retrain themselves by subsidizing part of their tuition costs. In some cases, they also rehire laid-off workers after revenues stabilize.

Example of Downsizing

In the wake of the 2020 economic crisis and lockdown, many companies downsized their workforces due to the economic impact of government-ordered business shutdowns that were intended to slow the spread of the virus.

The airline and hospitality industries were particularly impacted, as people were confined to their homes and discretionary travel was all but halted for several months. After announcing in April 2020 that it would eliminate 10% of its worldwide workforce of 160,000—reportedly through voluntary layoffs, natural turnover, and involuntary layoffs—Boeing eliminated more than 12,000 U.S. jobs, including 6,770 involuntary layoffs, in May 2020. Boeing also announced that it had plans to layoff several thousand more employees, although it did not disclose when this would occur.

Boeing is one of the largest American plane makers, but it has been forced to restructure in the face of the 2020 economic crisis. In addition to the crisis, one of Boeing's jets—the 737 MAX—had been grounded in 2019 after a second fatal crash. In April 2020, the company recorded zero orders for the second time in 2020, and customers canceled another 108 orders for the 737 MAX. These two factors compounded created its worst start to a year since 1962.

Learning Outcomes

Describe the effects of downsizing

Downsizing

Downsizing is when a company terminates a number of employees at the same time. Downsizing occurs for a number of reasons, most often to save money. Termination as a result of downsizing is unique in the sense that the employee is not responsible for their termination. Traditionally, employees are terminated for their conduct, behavior, or breach of contract. However, in a downsizing situation, termination is not prompted by employee behavior but instead is a business decision made to cut costs.

Reasons to Downsize

Before we can understand the effects of downsizing, we need to first better understand the reasons behind downsizing. Companies downsize for a variety of reasons including less than stellar economic conditions, a company merger or acquisition, or when a product or service is cut. Let’s learn more about each reason.

Tough Economic Conditions

When economic conditions are poor, sales and profitability can suffer. When sales and profitability are down, some companies may need to make drastic cuts in order to stay in the green. In some situations, downsizing is a good option for cutting costs.

Merger or Acquisition

When two companies merge together, the companies need to restructure in order to meet their new needs. Restructuring may include eliminating certain roles altogether or reducing the workforce in certain departments. Companies that acquire another company may also downsize in order to meet the new needs of the company.

The End of a Product or Service

If a company is well staffed for a particular product or service that is then discontinued, they may need to downsize since there is no longer a need for such a large staff.

PRactice Question

What Is Rightsizing?

Another term associated with downsizing is streamlining or rightsizing. While downsizing and rightsizing essentially mean the same thing, there are a few nuances used to differentiate between the two. First, rightsizing is considered a restructuring of an organization which may include layoffs, whereas downsizing is specifically intended to reduce the size of an organization. In addition, the term “rightsizing” sounds more appealing than “downsizing.” Therefore, companies may use the term rightsizing to sugarcoat impending layoffs. Regardless of whether or not a company refers to it as downsizing or rightsizing, each term effects organizations in similar ways.

Is Downsizing Effective?

Do you believe downsizing is effective? Do you think the short-term benefits of downsizing are worth the long-lasting impact it can have on an organization? While the financial benefits of cutting costs is clear, the impact large layoffs have on the workforce is sometimes less than desirable. Some argue that downsizing has more negative consequences than positive ones. In fact, researchers from Auburn University, Baylor University, and the University of Tennessee, Chattanooga conducted research to determine if there was a correlation between companies that downsized and companies that filed for bankruptcy. Their research found that downsizing firms were twice as likely to declare bankruptcy than those who did not downsize[1]. This study confirms how important it is to weigh all of the options before making a decision. It is vital for companies to compare possible short-term consequence with possible long-term consequences before deciding whether or not to downsize. Unfortunately, there is no easy answer or black and white solution. Each organization is unique and needs to consider downsizing within the perimeters of their current situation.

Sources

Doyle, Alison. “What Is Downsizing?” The Balance Careers. The Balance Careers, June 25, 2019.

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What is the difference between rightsizing and downsizing?

The difference between downsizing and rightsizing is that where the former entails reducing the workforce, rightsizing entails simply adjusting the workforce to the appropriate size - which could also involve increasing the number of employees (in a rare case).

What is the difference between downsizing and layoff?

Layoffs were used as a way of increasing profits, but downsizing employees alone itself does not yield profit. As per Wayne Casio's Research, companies which produce new revenue by expanding staff and other assets earn more profit than those who follow the layoff strategy.

Which set of words best describe downsizing?

Other terms used to describe downsizing include right-sizing and reduction in force (RIF).

What is downsizing and resizing?

Rightsizing is a process of bringing an organization to an optimal size. The main purpose of rightsizing is to minimize the company's cost to optimize its profits. Downsizing gives a chance to the company for scaling its operations down to a more realistic and manageable size.