The Downsides of Downsizing - Does Retrenchment Work?

Some good evidence in this HBR blog article about downsizing - a term commonly associated with the strategy of retrenchment.  The article refers to a recent piece in the Wall Street Journal predicting that many already “lean” and successful firms are considering further retrenchment as they aim to cut costs and streamline their operations.

The HBR blog outlines some possible downsides of such retrenchment. These are good arguments to use in an essay when analysing and evaluating whether retrenchment is the right strategy for a firm that is struggling.

The key points are:

- Downsizing often leads to worse, not better, financial performance

- Downsizing damages the working environment in the firm, adversely affecting the morale and motivation of those left behind, which in turn can lead to lower productivity and creativity.

- Employees who are retained (i.e. not laid off) have lower loyalty to the business, resulting in a risk of higher staff turnover amongst employees that the business wants/needs to keep

A similar argument to the above is made by Freek Vermeulen of the London Business School.

http://www.businessweek.com/managing/content/may2009/ca2009051_612010.htm

Vermeulen quotes from Fortune Magazine which commented firms that downsize, who:

“rather than becoming lean and mean, often end up lean and lame.”

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