Few studies have examined the impact of downsizing on innovation. This paper synthesizes the bodies of literature on downsizing and innovation and develops two conceptual frameworks that depict a plausible impact of downsizing on an organization’s capacity to innovate. While the paper concludes that more research is required to validate the frameworks, it provides managers contemplating downsizing with extensive resources and valuable information that will help them make the right decision.

Downsizing has been a managerial practice for the past three decades. The major raison d’être of any downsizing endeavor is to make an organizational entity more competitive compared to its rivals (Kets De Vries & Balazs, 1997) and to achieve bottom-line objectives (Richtnér & Ahlström, 2006). While some empirical evidence suggests that downsizing announcements have resulted in positive short-term stock market reactions (Cameron, 1994; Cascio, 2003), the ability of downsizing to generate positive, sustained financial and organizational improvements remains questionable (Macky, 2004; Gandolfi & Neck, 2008). To date, little research has been published on the impact of downsizing on innovation (Richtnér & Ahlström, 2006). This is remarkable, since innovation is seen as a key source of competitive advantage (Zander & Kogut, 1995). How can downsized firms or organizations actively pursuing downsizing strategies remain innovative? The objective of this research paper is to build a preliminary conceptual framework that depicts the relationships between downsizing and innovation.

Section one of the paper briefly reviews the literature of downsizing. Section two presents a synthesis of the literature on innovation. Section three discusses innovation in relation to downsizing and examines the potential impact of downsizing on innovation. Section four presents two conceptual frameworks. Our concluding comments are in the final section.

1. Downsizing – A literature review

The term “downsizing” was first used in the management press (Littler, 2000), and even today it lacks a precise, theoretical formulation (Macky, 2004). Various definitions have appeared. On one end of the continuum, Cameron (1994) defines it as “a set of activities, undertaken on the part of the management of an organization and designed to improve organizational efficiency, productivity, and/or competitiveness” (p 192). On the other end of the continuum, Cascio (1993) claims that downsizing is essentially “the planned eliminations of positions or jobs” (p 95). In other words, the purpose of downsizing is not to increase organizational performance per se, but to cut workforce levels. Downsizing is not to be equated with employee layoffs, which is solely concerned with the individual level of analysis; rather, downsizing is a broad concept covering micro, organizational, industry, and global levels (Pinsonneault & Kraemer, 2002). Employee layoffs are an operational mechanism used to implement a downsizing endeavor (Freeman & Cameron, 1993), while downsizing per se can be seen as a strategic intent, also known as rightsizing (Hitt, Keats, Harback, & Nixon, 1994).

A precise conceptual understanding is required to distinguish downsizing from organizational decline and other related concepts, and to adopt a cumulative approach to the study of downsizing. Thus, four attributes of downsizing have been identified: First, downsizing is an intentional set of activities that strongly implies organizational action (Cameron, 1994). Second, downsizing frequently involves a reduction in the number of employees (Cascio, 2003). Third, downsizing concentrates on improving the efficiency of a firm in order to contain or decrease costs, to enhance revenues, or to increase competitiveness (Gandolfi & Neck, 2003). Fourth, downsizing inevitably influences work processes and leads to work redesign (Freeman & Cameron, 1994). Mirabal and DeYoung (2005) postulate that downsizing represents a reactive/defensive, or proactive/anticipatory, strategy that inexorably impacts an organization’s size, costs, work processes, shape, and culture (Zemke, 1990; Cameron, 1994). While a single definition of downsizing does not exist, it is clear that downsizing reduces the size of a firm, frequently resulting in job losses and retrenchments (Gandolfi, 2006). Downsizing research at the organizational and strategic levels has received a great deal of scholarly attention (Richtnér & Ahlström, 2006). The key issues are whether to implement downsizing, how to implement it, and its effects on the entity.

Whether to implement downsizing

Downsizing is a multifaceted phenomenon. Conceptualizing the reasons for it is problematic and complex. While various driving forces have been identified, no single cause can account for the pervasiveness of the phenomenon. Drew (1994) compartmentalized the causing factors into three categories; macroeconomic, industry-specific, and firm-specific elements. Luthans and Sommer (1999) postulate that global competition, technological innovation, increased customer influence, macroeconomic factors, and pressures from rival firms constitute the main driving forces. There is an acknowledgement that the adoption of downsizing can be linked to corporate mismanagement and strategic errors (Kets de Vries & Balazs, 1997).

How to implement downsizing

Studies concerned with how an organization implements downsizing are frequently based on a theoretical model of downsizing approaches (Richtnér & Ahlström, 2006) or a discussion of “best practice” (Cascio, 2003). Cameron, Freeman, & Mishra (1991) identified three forms of downsizing. The three have been referred to as the downsizing implementation strategies – workforce reduction, organization design, and systemic strategies. The workforce reduction strategy concentrates on the elimination of headcount through activities such as layoffs, retrenchments, and buyout packages. The organization redesign strategy focuses on eliminating work, including abolishing functions, groups, divisions, and products, rather than reducing the number of employees (Luthans & Sommer, 1999). The systemic strategy focuses on changing the firm’s intrinsic culture and the attitudes and values of its workforce, and is considered a way of life (Filipowski, 1993).

The effects of downsizing

Downsizing’s consequences are commonly divided into financial, organizational, and human effects (Gandolfi, 2006). Sadly, the picture of reported financial effects following downsizing is a bleak one (Gandolfi & Neck, 2008). A multitude of studies has demonstrated that while some firms have reported financial improvements from downsizing, the vast majority of downsized organizations have failed to reap the anticipated improved levels of efficiency, productivity, profitability, and competitiveness (Cascio, 1993; Sahdev, 2003; Macky, 2004). The adoption of downsizing is not only expected to generate financial benefits through a direct increase in shareholder value, but to produce organizational benefits, including lower overheads, less bureaucracy, smoother communications, faster decision-making, and increased levels of employee productivity (Burke & Cooper, 2000). While there is some evidence of firms reaping positive outcomes (Macky, 2004), the majority of findings suggests that the adoption of downsizing often falls short of the objectives (Cascio, 1998; Gandolfi & Neck, 2008).

The human costs of downsizing are described as far-reaching (Burke & Greenglass, 2000). The change management literature suggests that three types of people are impacted by downsizing – executioners, victims, and survivors. By definition, an executioner (Burke, 1998) is an individual entrusted with the conduct of downsizing, a victim is a person who is downsized out of a job involuntarily (Allen, 1997), while a survivor (Littler, 1998) remains with the firm after a downsizing activity. While the research focus was on the victims in the 1980 and early 1990s, a shift occurred in the mid-1990s, as more attention was placed on the study of downsizing’s survivors. Victims often receive generous outplacement services and financially attractive packages (Allen, 1997; Gandolfi, 2006), whereas survivors tend to receive very little if any support (Devine et al., 2003).

2. Innovation: A literature survey

Continuous, game-changing innovation is the only reliable method for corporations to deliver extraordinary value to customers, to grow faster, better, and smarter than their competitors, to provide remarkable returns for shareholders, and to alter the direction of their industry (Carlson & Wilmot, 2006; Davila et. al., 2006). For the purpose of this research paper, innovation has been defined as the development of a specific product, service, or idea with the intent of commercializing it and extracting value or utility from that commercialization (Rogers, 1962).

Antecedents of innovation

For innovation to take root in an organization, four antecedent activities must have first taken place: values alignment, diversification of thought, acceptance of appropriate failure, and initiation of appropriate metrics (Bennis & Biederman, 1997; Kelley, 2001). Corporate employees are the primary element in innovation success (Amabile & Khaire, 2008). Research suggests that the alignment of personal and corporate values has much to do with motivating innovation. Values are constant, passionate, fundamental beliefs, collectively called a “world-view”, that propel the actions of individuals and corporations. An individual’s core values answer the question “Why do we do what we do?” and serve as constant standards or criteria to guide judgment, choice, attitude, evaluation, and action (Rokeach, 1973). However, not all beliefs are values, which are allied with a person’s core or central beliefs (Rokeach, 1979). Personal values are acquired through education, observation, and experiences, and may be taught or influenced by parents, friends, work associates, religious institutions, community, culture, personality, or significant societal events.

Innovation is fueled by innovative ideas and is more likely to be achieved by a diverse workforce. Such diversity is intentional (Amabile, 1998) and must extend far beyond race and gender (Andrew & Sirkin, 2006). To encourage the innovation that determines corporate viability, companies need employees who have an unusual personality or routinely disagree with company policies or methodologies (Sutton, 2002). Successful, innovative companies welcome those with personal idiosyncrasies (Bennis & Biederman, 1997) and seek to harness the power of divergent viewpoints despite the creative friction between employees that routinely occurs (Hirshberg, 1998).

For companies to succeed in this remarkably competitive worldwide economic environment, they must formulate and consistently use metrics that are clearly stated, valid, reliable, and expansive (Hamel, 2002; Davila et. al., 2006). Non-linear or radical innovation, as opposed to incremental innovation, always begins with unreasonable goals (Hamel, 2002). These goals, which are nonetheless aligned with the values, vision, strategy, and tactics of the corporation, should be continually monitored using a small number of simple, meaningful, and objective metrics. Most importantly, corporate metrics must accurately measure those innovation efforts tied specifically to how a company makes money (Charan, 2007). Developing and successfully using innovation metrics that support both creativity and value creation are essential to success (Davila et. al., 2006; Oster, 2008a).

Methodologies of innovation

To thrive in the new turbulent economy, corporations must escape the fetters of tradition and find new, extraordinary methods to meet customer needs in more cost-effective ways (Hamel, 2002). To achieve non-linear innovation, companies often reach beyond typical inductive and deductive logic to include abductive reasoning. In abductive reasoning, constraints are temporarily ignored and initial judgment is suspended as all plausible ideas are positively reviewed (Lietdka, 2006; Dew, 2007). A willingness to venture outside of the organization for plausible answers is a hallmark of an ‘integrative thinker’ (Martin, 2007; 2008). Successful innovation depends upon the active internal sharing of newfound information (Brand, 1998). Open conversation (Goldsby-Smith, 2008) is elemental to this long-term process (Brand, 1998).

Every corporation that is successful in innovating and mitigating corporate risk has a special relationship with current customers and is viscerally obsessed with the real and perceived needs of prospective customers (May, 2007). The key to success is customer intimacy, primarily the use of direct empathic research techniques to gain a thorough understanding of what people want and need in their lives (Suri, 2005; 2006). Empathic research is qualitative in nature and based upon focused observation. Empathic observational techniques, including those utilizing photos or videos or the insertion of researchers to view the behavior of consumers in action, provide a completely different window into customer needs and desires, and help firms recognize the incoming ‘weak signals’ of future trends long before their competitors (Gryskiewicz, 1999; Day & Schoemaker, 2006).

Intrinsic to the ultimate success of bold aspirations is the ability to devise and conduct numerous, small, fast, inexpensive experiments to test elements of the expansive innovation. Very rough prototypes can be provided to potential customers early in the design process and repeated continually to obtain and refine many possible ideas on the path toward a smaller number of useful ideas (Brown, 2008; Schrage, 2000), which can be an ongoing, dynamic partnership (Utterback, 1994).

Having examined the literature regarding both downsizing and innovation, let us examine the relationship between these two concepts.

3. Innovation and downsizing

Downsizing has an immediate and severe effect on the innovation activities of companies and ultimately renders them dysfunctional (Pfeffer, 1998). A primary characteristic of post-downsized corporations is a myopic quest for certainty through efficiency. The fervent quest for efficiency may prove to be substantively toxic, and ultimately decimate innovation within the firm by hobbling creativity, encouraging a shift from radical to incremental innovation, and promoting intellectual balkanization (Amabile, 1998; Suri, 2006; Nambisan, 2008).

While in the throes of downsizing, firms perceive a need for conformity, control, and internal harmony, and are therefore much less sanguine about “different” employees and their ideas. The passion and “unusual” thinking so important to an innovative environment are considered to be arrogant and disruptive in a company bent on efficiency (Horibe, 2001). During downsizing, significant changes in line and staff personnel are often initiated. In an effort to increase control, and ensure harmony and unity of purpose, new employees across the organization are chosen who most resemble an ideal archetype. This has been labeled “homosocial reproduction” (Kanter, 1977; Sutton, 2002).

Similarly, in order to ensure universal understanding and acceptance of corporate objectives during and following downsizing, incoming executives often institute new performance measures (Davila et. al., 2006). These are typically few in number, focused upon numerical inputs, simple to gather and understand, incremental in nature, and feature abbreviated planning horizons (Wind, 2006). Simple figures may be seen as the way to approach and counter complex multi-dimensional issues. Downsized companies often mistakenly measure innovation and its associated risk by measuring inputs, including research and development (R&D) budgets, as well as the number of people employed to research and develop innovations. More useful are metrics that clearly examine innovation outputs, including THE percentage of corporate products that are less than five years old, THE percentage of corporate revenue gained from products less than two years old, and THE average length of time a Potential product languishes at each gate in the corporate innovation stage-gate system (Andrew & Sirkin, 2006; Cagan & Vogel, 2002; Davila et. al., 2006; Skarzynski & Gibson, 2008).

When organizations downsize, the internal infrastructure, motivation, and methodologies of information sharing are oftentimes distorted. When current employees suspect that additional waves of downsizing may occur soon, knowledge becomes a form of currency and is hoarded by individual employees and departments. This environment of fear and self-interest encourages an explosion of “innovation antibodies” or “devil’s advocate,” an intransigent employee who effectively drowns new ideas in negativity and shortstops corporate innovation (Kelley, 2001; Davila et. al., 2006; Oster, 2008c). The success of innovation antibodies intimidates other employees (Dundon, 2002). Corporations aid and abet innovation antibodies by rewarding employees for their allegiance to the historical past of the company (Pfeffer & Sutton, 2000) and sanctioning any change from the earlier corporate trajectory (Griskiewicz, 1999; Sutton, 2002).

What do we know about the relationships between the concepts of downsizing and innovation? This subsection presents and reviews the existing literature. The body of knowledge on downsizing is extensive (Gandolfi, 2005) and numerous studies have been conducted measuring the outcomes and determining the consequences of downsizing (Macky, 2004). One of the less thoroughly researched areas is the impact of downsizing on innovation (Dougherty & Bowman, 1995; Richtnér & Ahlström, 2006). This is surprising given the understanding among management scholars that a firm’s ability to be innovative is crucial for its survival (Bourgeois & Eisenhardt, 1988; Damanpour, 1991). While some scholars have reported that downsizing per se is a product of technological innovation (Appelbaum, Everard, & Hung, 1999; Luthans & Sommer, 1999), others have examined downsizing and determined its direct impact on the innovative capabilities of firms and their employees. Table 1 depicts a non-exhaustive overview of the published studies and their respective findings:

Table 1: The impact of downsizing on innovation

Researchers Findings
Cameron, Whetten, & Kim (1987) Found that downsizing in universities was associated with reduced innovation.
Walsh & Ellwood (1991) Determined that downsizing conflicts with innovation.
Dougherty & Bowman (1995) Studied the effects of downsizing on product innovation and concluded that downsizing breaks entrepreneurial networking in organizations and disrupts a firm’s ability to create innovations.
Bagshaw (1998) Examined the effects of downsizing and found reduced risk-taking and flexibility as well as decreased levels of innovation among downsizing survivors as direct organizational effects of downsizing.
Gettler (1998) Reported that increased employee turnover, decreased overall skill base, decreased levels of risk taking, and a drop in innovation were found in organizations that had engaged in downsizing.
Lecky (1998) Found decreased levels of risk taking and innovation in post-downsized firms.
Amabile & Conti (1999) Determined that an organization’s work climate is negatively affected by downsizing and that creativity is markedly diminished during the entire downsizing process. It was further established that creativity in the downsized firm remained depressed beyond the actual downsizing implementation.
Bommer & Jalajas (1999) Observed four organizational consequences upon the conduct of downsizing; reduced levels of risk-taking, a decreased willingness to make suggestions, a drop in motivation, and increased levels of fear among employees.
Fisher & White (2000) Reported that downsizing influences innovation through its effects on organizational knowledge. It was observed that downsizing may seriously damage the learning capacity of organizations.
Richtnér & Ahlström (2006) Studied the impact of downsizing on various components of innovation management and found that downsizing had an overall negative effect on innovation.

Quite clearly, Table 1 presents a strong underlying tone: empirical evidence suggests that the innovative capability of an organization is likely to be harmed by the adoption of downsizing. As a result, there is a growing plea for deeper insight and a more profound understanding of the relationship between downsizing and its impact on innovation.

4. Downsizing and innovation –conceptual frameworks

Downsizing as a process does not explicitly appear in the downsizing literature and there are very few references to downsizing processes or phases. Still, downsizing and process do co-exist, albeit infrequently (Gandolfi, 2006). Cameron et al. (1991, 1993) had conducted a systematic study of workforce downsizing and examined downsizing-related processes. Gandolfi (2007) extended their framework, studied downsizing practices of Australia’s six largest banks, and compartmentalized the downsizing process into pre, while, and post-phases. This categorization represented an assumption that the adoption of downsizing as a management restructuring strategy could be deemed an “incidental” and “one-off” occurrence, whereas the Australian banking industry had not only undergone a significant degree of downsizing but several rounds of downsizing (Gandolfi, 2007).

The intensely hypercompetitive environment over the past few decades has induced at least two forms of restructuring – downsizing and innovation. Executives have trimmed costs through workforce downsizing and sought to become more innovative at the same time (Dougherty & Bowman, 1995). Can firms downsize and improve their innovative capability at the same time? This section aims to develop a preliminary conceptual framework depicting the relationships between downsizing and innovation. As depicted in Table 1, there is some evidence suggesting that the innovative capacity of a firm is likely to be negatively affected by the adoption of downsizing. Without a doubt, there is an increasing need for a deeper and more profound understanding of the relationship between downsizing and innovation.

Downsizing activities designed to save corporate funds and enhance efficiency may have the unintended consequences of fettering innovation’s essential antecedents and processes, thereby jeopardizing the company’s future. Downsizing shortens the corporate planning horizon, demands visible and easily measurable progress, and necessitates efficient and predictable behavior of employees. Figure 1 (phase 1, pre-downsizing) depicts the antecedents and processes necessary for fruitful innovation that are often available in the appropriate types and amounts in healthy corporations (Kelley, 2001; Hamel, 2002). In contrast, Figure 2 (phase 2, post-downsizing) shows that, upon downsizing, the antecedents and processes change in amount and “connectedness” (Hirshberg, 1998; Gryskiewicz, 1999; Andrew & Sirkin, 2006; Davila et. al., 2006; Oster 2008c, 2008d; Skarzynski & Gibson, 2008). Prototypes and values may become less available to the innovation program, while objectives become increasingly important. Continuous, repetitive waves of downsizing negatively extend the orbit of innovation antecedents and processes even further (Oster 2008c, 2008d). Values, communication, and prototypes are outside of the innovation process entirely, while objectives take center stage, and fresh ideas and capable employees barely influence the process. Leadership may have regained “control” over the organization and stabilized revenues, but corporate innovation shows few vital signs.

Figure 1: Innovation Antecedents/Process – Phase 1: Pre-Downsizing

Source: developed for this research

Figure 2: Innovation Antecedents/Process – Phase 2: Post-Downsizing

Source: developed for this research

Consequently, those charged with downsizing a firm, whether planned or unanticipated, must make a concerted effort to maintain and promote the key antecedents of innovation in the downsized organization. The goal should be to keep innovation antecedent/processes in roughly the same percentage and relationship as they were prior to downsizing (as per Figure 1). Broad diversity within the employee base and acceptance of their abductive thought patterns is essential to corporate viability. All innovation should be directed at meeting the near-term needs of customers. In addition, the elements comprising the process of innovation must be intentionally kept alive in a downsized organization. Successful firms interpret, communicate, and deploy new knowledge from internal and external sources. Preferring positive action to over-analysis, they consistently fend off innovation antibodies. They use quick and inexpensive prototypes to seize all plausible opportunities to enhance their conversation with customers. Finally, such firms welcome focused failure as an opportunity for valuable corporate learning.

Organizations have practiced downsizing for the past three decades with the stated goals of reducing operating costs and making organizational entities more competitive. Downsizing activities aim to increase overall levels of efficiency and effectiveness, enhance share price valuations, and generate positive long-term improvements. Still, downsizing continues to be one of the most misunderstood, ill-conceived, and misinterpreted contemporary business phenomena. Empirical evidence strongly suggests that downsizing produces considerable after-effects. Moreover, cycles of exponential growth followed by rapid downsizing may have negative consequences. Hitherto, little research has been conducted and published on the impact of downsizing on innovation. This is especially remarkable since innovation is seen as a key source of a firm’s competitive advantage. Can downsized firms – or organizations actively pursuing downsizing strategies – remain innovative? The objective of this research paper was to build a preliminary conceptual framework depicting the relationships between the concepts of downsizing and innovation through a review of the downsizing and innovation literature. We have concluded that the relationships between and effects of downsizing on innovation have yet to be sufficiently studied, and significant additional work is needed in this area.

About the Author

Franco Gandolfi is Professor of Management and Director, MBA/EMBA Programs, Regent University School of Global Leadership & Entrepreneurship, Virginia Beach, Virginia.

About the Author

Gary Oster is Associate Professor of Innovation and Entrepreneurship and Director of the Doctor of Strategic Leadership Program at Regent University, Virginia Beach, Virginia USA.

About the Author

Gary Oster is Associate Professor of Innovation and Entrepreneurship and Director of the Doctor of Strategic Leadership Program at Regent University, Virginia Beach, Virginia USA.