When deciding to downsize, firm will face many challenges, including:
Survivor syndrome emerges in firm as result of workforce reduction. The rest of the staff may feel their futures uncertain when their colleagues, possibly better than them, are fired. They may always fear their turn to be fired, thereby losing their motivation at work. So, how to effectively manage the rest is a big challenge for firm when implementing downsizing strategy (McKinley et al., 1995; Appelbaum et al., 1997).
Due diligence: the unfair downsizing process in selecting employees and/or SBUs to be eliminated can result in internal conflicts by negatively influencing the relationships between employees, managers and owners in the firm (Cascio, 2002).
Employee retention: Arbitrary downsizing easily leads to the loss of key and competent persons. Also, the rest of key persons can have a mentality of fear, uncertainty about the future and thinking about job rotation. These lead to the undesirable consequence of decline in labor productivity and low performance of the firm (McKinley et al., 1995).
Cultural adjustments: Downsizing can lead to changes in organizational culture, for example disrupting certain cultural aspects, or disrupting the current informal business system of the firm. Therefore, managers should pay attention to cultural reintegration as well as make new strategic decisions appropriate to the post-downsizing context (Parks, 2002).
Communication: Before, during and after downsizing, firm should make communication campaigns to all employees about the current market situation, as well as to shareholders and customers about new strategic directions and visions of the firm. Such communications serve to avoid lack of information or misinformation, which can lead to negative effects and reactions from stakeholders about the downsizing strategy of the firm (Cascio, 2002; Kaye and Greist, 2003).
Restructuring technique: In practice, downsizing is not always the best method of corporate restructuring. Therefore, decisions on any restructuring methods, including downsizing, should be carefully studied and selected (Cascio, 2002).
Hard landings: Labor productivity of firm can seriously decline due to the loss or ineffective exploitation of core competencies because of loss of key persons and work motivation in downsizing. So, firm should accurately identify and protect the core competencies, by promoting the working spirit during and after the downsizing (Nutt, 2004).
Political behaviour and loss of teamwork: In practice, in corporate downsizing, some employees may profit from their personal relationships to strengthen their positions to avoid being fired. Also, any manager tends to focus only on the productivity of his division instead of the general productivity of the firm; so, they base on their relationships and position to promote and favor their own division (Marks and DeMeuse, 2005). These will be the source of internal conflicts between the individuals, and between divisions in the post-downsizing period.
The above challenges require firm to have a strategic vision to overcome for achieving the desired results from the downsizing strategy.