There is no “one size fits all” answer to this question. Downsizing can be a good idea and it can at times be something that is absolutely necessary. However, it is not a panacea and can actually hurt businesses if it is done carelessly or as a knee jerk reaction.
Downsizing tends to be seen as a good option by firms that need to reduce their costs. They reduce the size of their workforce as one way to reduce those costs. Assuming that they can increase productivity among their remaining workers, this is a sound strategy.
However, many studies have shown that firms that downsize do not really do better than firms that retain their employees. There are many reasons for this. For example, there are times when cutting the firm’s workforce leads to lost business opportunities as when fewer salespeople lead to fewer sales. As another example, some downsizing strategies, such as voluntary buyouts, can hurt the firm by giving its best employees incentives to take the firm’s money and then go get another job with a competitor.
Downsizing, then, is not always a sound strategy for growth in a company. Some firms may need to downsize, but even they must do so carefully.