What is Downsizing?

Downsizing is a strategy used to reduce the size and scope of a business in order to improve its financial performance, usually by laying off employees or closing less-profitable divisions.

How Downsizing Works

Downsizing often takes place as part of a larger restructuring program at a company. Although it's usually thought of as a strategy companies use to become smaller, downsizing can also be the result of company mergers, acquisitions, and takeovers.

Its most common form comes in employee layoffs, which reduce payroll costs for the company. Downsizing may also involve shuttering some operations or offering certain employees early retirement.

Why Downsizing is Important

Downsizing is typically implemented during economic downturns in order to improve efficiency and maintain profitability. However, if too many companies cut payrolls, it can exacerbate the downturn and lead to higher unemployment.

On the other hand, companies may downsize in order to improve their attractiveness to potential acquirers, and their cost-cutting moves could result in a buyout offer.