Organizational Downsizing: Definition, Strategies & Business Impacts

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  • 0:06 Organizational Downsizing
  • 2:14 Preparing for Downsizing
  • 4:48 Problems after Downsizing
  • 6:22 Lesson Summary
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Lesson Transcript
Instructor: John McLaughlin
In this lesson, you will learn why organizations choose to downsize their operations and about the implications that organizational downsizing has on organizational members.

What is Organizational Downsizing?

Hal Hudson owns a hot dog stand, known as Hal's Hot Dogs, which serves customers inside the Pelican's Baseball Stadium in Palm Beach, Florida. So that Hal can serve the maximum number of customers in the shortest amount of time, he structured his organization with a high level of work specialization. Eleven employees work at the stand and each has a very specialized job.

For instance, there is one worker whose only job is to put onions on the hotdogs and a different worker whose job it is to add relish. Hal's business was doing great when the season started, but the Pelicans have been on a losing streak lately, and fewer customers are coming to the ballpark and buying hot dogs.

Hal's hotdog stand has started losing money, and in order to continue operations, Hal will have to make some difficult decisions regarding the structure of his organization. What will Hal do? Before we learn how Hal Hudson handles his hotdog hardship, let's define organizational structure. Organizational structure defines how tasks are divided, grouped and coordinated in organizations.

When the management of an organization determines that their organization is not operating at peak efficiency, they typically look for ways to make the organization more productive. This is frequently accomplished via organizational downsizing, which is a reduction in organizational size and operating costs implemented by management in order to improve organizational efficiency, productivity and/or the competitiveness of the organization.

Organizational downsizing affects the work processes of an organization since the end result of the downsizing is typically fewer people performing the same workload that existed before the downsizing took place. The act of downsizing results in two categories of people: Victims, the people who involuntarily lose their jobs due to organizational downsizing, and survivors, the employees who remain after organizational downsizing takes place.

Preparing for Downsizing

In order for an organizational downsizing to be most effective, management must communicate openly and honestly with their employees regarding the reason for the downsizing and the downsizing plan. Managers also need to listen to employees and provide comfort when necessary in order to keep the morale high among the survivors of the downsizing.

When Hal's customers first began to decrease, he realized that he could no longer afford to pay 11 workers to work at his hot dog stand due to the declining profits. Before talking to his workers, Hal developed a downsizing plan to eliminate the workers who had been with him for the least amount of time.

Hal explained the situation to his workers and told them that due to decreasing sales, he was going to have to let the three newest employees go. This downsizing resulted in changes to the work process at the hot dog stand. Hal reduced the amount of work specialization and combined tasks among the survivors so that each worker was now responsible for more than one task. For example, the worker who used to put onions on the hot dogs was put in charge of onions, relish and sauerkraut.

In order to successfully downsize an organization, it is also important that management take steps to prepare the workforce in advance of the downsizing. Proper planning includes outplacement strategies, which is the process of assisting former employees in finding new employment and training and re-skilling the remaining workers into their new jobs. By treating the victims of downsizing fairly and compassionately, the survivors of the downsizing are more likely to remain loyal to their organization.

Hal's initial downsizing reduced the amount of money his hotdog stand was losing, and he expected that lowering his labor cost would make him more profitable. Unfortunately, the Pelicans kept losing, customers continued to stay away and Hal soon realized he would need further downsizing in order to bring his hotdog stand back to profitability.

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