Downsizing

Reasons For Downsizing

Changing market conditions

Ultimately, it is the small business owner who must accept responsibility for downsizing his company. There are just so many factors that an owner can control, but changing market conditions isn’t one of them. The market determines the lifecycle of a business, and the small business owner must stay in touch with changing market conditions in order to keep up the pace of growth. But this doesn’t always happen. Market shifts and the introduction of new technology can make a business become obsolete almost overnight. To restructure to meet changing market needs isn’t always possible. No amount of funding will breathe life into a dead horse. There comes a time when you have to let go.

Disaster

A natural disaster can occur swiftly so that there can be little to do but batten down the hatches and wait it out. But a natural disaster on the scale of the hurricanes Katrina and Rita that destroyed thousands of small businesses along the Gulf Coast, can decimate a business and literally wipe it from the face of the earth. Natural disasters occur everywhere, from floods in the Midwest, tornadoes in the central belt, earthquakes in California, to volcanic eruptions in the Pacific Northwest. No area of the country is immune. Insurance can’t cover all the expenses of rebuilding, so a business owner has a choice of rebuilding with less, or letting go and shutting down for good.

Growth Beyond An Entrepreneur’s Vision

A third reason for downsizing is that a business can grow beyond what it was envisioned to be, well beyond the capabilities of the entrepreneur who founded it. This creates a gap between a hands-on operations approach and delegation of management tasks to department heads. The business owner can lose sight of the reasons he founded the business in the first place. The solution is to downsize the business back to a level and size where the entrepreneur can use his skills for daily operations and divest himself of those aspects of the company he prefers not to do. Sales territories can be cut, and ancillary product lines reduced to concentrate on core products that built the company. Outsourcing becomes one alternative of divestiture. But even outsourcing will not offset the damage a business will suffer when it downsizes.

Owner’s Ill Health

This is beyond the control of all business owners. At times when health issues make it impossible to continue, a business owner has but two choices: sell or pass the baton by grooming a family member to take over. An owner knows that selling is the most risky thing he can do for his family of employees. The new owner’s management usually will replace all company managers and eliminate some departments, which makes business sense, considering that a new owner wants to go with those he knows and trusts.

With family member successors, the retiring business owner usually knows the capabilities of the one slotted to take over. But there may be little that can be done to prevent similar layoffs and restructuring, since this family member will have a new vision extending beyond the scope of the original.

Effects of Downsizing

All small business owners know the weighty responsibility of having employees dependent upon him to provide for their families. Despite a popular perceived view, not all business owners are cold-hearted calculating machines caring only for profits at the expense of everyone they step on while rising to the top.

Downsizing also has an economic risk. Shrinking a business reduces market value and reduces its customer base, which can be dangerous if perception of the company views it as unreliable. Growth is always viewed as a positive. Downsizing is not, and doing so will require a good public relations plan to offset negative publicity and customer perceptions.

Another effect is the emotional costs to both owner and employees. Losing a job for any reason is traumatic enough, but losing a job as the result of a business owner’s decision to downsize can be easily misunderstood.