Concept of Downsizing Strategy in Business

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Table of Contents

Abstract
Introduction
Literature Review
Downsizing and the Effects at the Individual Level
Downsizing and the Impact at the Organizational Level
The Effects of Downsizing at the Group Level
Analyses of the Effects on Downsizing in an organization
Conclusion
Works Cited

Abstract

Most research studies on the effects of downsizing in an organization have focused on various levels and organizational aspects. Downsizing is defined as a move geared at improving productivity, competitiveness, and efficiency via the reduction of the labor force. Despite that this strategy is geared at enhancing effectiveness and competitiveness, many organizations implementing this strategy face the risk of a reduction in the innovation ability coupled with other consequences on the organization’s reputation.

This paper illustrates the impacts of downsizing at the organizational, group, and individual level. The purpose of this research is to provide a clear illustration of the impacts of downsizing on the three levels of an organization. Existing theories have been used to demonstrate the impacts of downsizing at these three levels. In particular, the paper focuses more on the impact of downsizing on the level of creativity and innovation in an organization.

This is because organizational development is measured by the implicated level of innovation and creativity, which has an impact on the reputation of the organization. In this regard, the paper illustrates the impact of downsizing on the individual creativity, the organization’s knowledge capacity, and the group’s knowledge creativity.

The implicated reputation of the organization with regard to the state of these three aspects equally will be examined. Previous studies equally have indicated the role of these three components in shaping innovation alongside various other components in an organization.

Introduction

Faced with increased competition, many organizations are adopting strategies to earn a competitive advantage and at the same time improve efficiency. Initially, organizations would adopt strategies that would result into adaptive changes with minimal consequences. At the moment, most of the available strategies are characterized by negative consequences for the organization and the implicated individuals. Downsizing is apparently a preferred strategy for restructuring organizations.

This strategy is radical and at the same time of significant impact on the individual, group, and entire organization. The shift toward the use of this strategy is shown to have increased in the nineties where it featured among blue-collar employees. At the moment, many organizations are using this strategy when dealing with their workforce at various skill levels (West 113).

This strategy can be achieved via the use of different forms geared at reducing the number of employees. With the current economic struggles, this strategy has had consequences on the affected employees and the downsizing organization. The reasons in favour of this strategy are that many organizations are faced with stiff competition, high costs, technological demands, and strategic issues like outsourcing.

While examining the impacts of this strategy on an organization, many studies have not shown an increase in organizational performance following the adoption of downsizing. Many of such studies have examined the effects of downsizing on an organization’s intangible assets. Similar studies have shown that this strategy has various negative impacts on the implicated assets in an organization (Wagner 1).

For instance, most studies have indicated that a shift toward downsizing results into a reduced organizational knowledge capacity and social capital. Only a few of such studies have examined the impacts of this strategy on the corporate reputation and innovation. These two aspects are very important because they determine an organization’s competitive advantage in a corporate world.

At the moment most research studies seem to focus on the direct and indirect impacts of downsizing on an organization. Most indirect studies examine the effects of this strategy on the innovation and reputation of the organization through other factors in an organization (Stelios 1). A majority of the direct studies examine the effects of this strategy on the reputation and innovation in an organization when other factors are held constant.

Most indirect studies have indicated that if downsizing results into a positive effect on the firm’s financial performance there will be a positive impact on both the innovativeness and reputation of the organization. Empirical evidence clearly has indicated that downsizing does not improve performance at the individual and group level, which basically implies that this strategy has a negative impact on the innovation and reputation of an organization.

Literature Review

Most researchers have indicated that downsizing is a reactive measure in response to organizational crisis. This measure is taken for the organization to achieve corporate renewal, especially with regard to the corporate reputation and innovation. Other studies indicate that downsizing is a proactive measure as opposed to a reactive measure. A particular study done in the 90s established that a large percentage of firms that adopted this strategy earned profitable gains in their operations.

The later may indicate that downsizing is both a reactive and proactive organizational measure geared at reducing various resources but mainly affecting human resources. This measure is taken for the purpose of reducing costs, improving profits, and organization competitiveness. Other benefits of using this strategy include better communication, empowerment of employees, and improved decision making.

Downsizing and the Effects at the Individual Level

The effects of this strategy occur at the organizational, individual, and group, or team level. However, the most severe consequences of this strategy occur at the individual level. With regard to the later, the most affected individuals are those meant to leave. Downsizing basically puts their welfare at stake. A majority of the individuals leaving the organization cause an increase in the struggle for the availability resources in the community.

The entire process results into a drop in the income levels of the community making it hard for individuals to obtain their basic needs. For individuals who survive the exercise, various responses are expected. Research studies on individuals who survive a downsizing exercise indicate that a majority of these individuals experience a reduction in their motivation and general performance (Spreitzer and Mishra 767).

The effects of downsizing equally may affect the project leader when focus changes from the goals and objectives of the project to achieving financial gains (Wagner 3). The power to take risky measures subsequently may decline as the leaders of the project resist change. Further studies equally have indicated that downsizing may result into a disappearance of valuable skills, which has a negative impact on the problem-solving ability in an organization. The entire process equally may have negative impacts on the development of team building skills in an organization.

Further studies indicate that majority of those who survive the exercise experience feelings of job insecurity and anger. These effects amount into a reduction in loyalty feared to increase employee absenteeism, which may lower productivity. Downsizing may result into a need to adopt new procedures and processes alongside taking up new responsibilities for the surviving members (Spreitzer and Mishra 769).

This results into changes in relationships as the surviving members struggle to take up responsibilities initially held by those who left the organization following downsizing. Some of the responsibilities may require different skills, which may result in a reduction of the education levels of the surviving employees. The later is feared to result into a decrease in the level of specialization among the surviving individuals.

Because of these negative effects, the wellbeing of surviving individuals equally is affected as they struggle to handle the emerging stressing conditions. These aspects have a negative impact on the organization’s efforts geared at enhancing innovation and attaining a corporate reputation. This is because the implicated negative effects of downsizing equally will affect individual creativity.

Downsizing and the Impact at the Organizational Level

For an organization, measures geared at downsizing are mainly related to the factors driving the need to downsize and how to approach the exercise. Although some studies have indicated that some firms have attained profits following downsizing, many organizations have reported numerous negative impacts following the adoption of this strategy. This has led many researchers into concluding that downsizing has more negative impacts as opposed to the positive impacts.

Innovation is key to the development of a firm’s reputation, which is credited for influencing the competitive advantage (Mirabal and De Young 23). The relationship between an organization’s level of innovation and its reputation in relation to the implicated competitive advantage has been examined in various fields in business literature. The implicated innovation in an organization is a shared responsibility that cuts across the senior management, the individual worker, and the group.

The main aspect of an organization likely to suffer major consequences following downsizing is the management. Because downsizing affects the organization’s workforce, the management is subsequently affected, especially at the middle level where a large percentage of the workforce is thought to be involved. A majority of the individuals laid off may hold vital management skills that determine the success of the organization (West 34).

Following a downsizing exercise, an organization is compelled to work with a minimal stock of competency, which subsequently may have a negative impact of the quality of the management. It is also expected of an organization with a lower stock of competency to rely upon line managers and staff at the operating level to handle corporate functions of the members of staff. Such an organization faces equally the risk of reduced links in communication, which is feared to slow the response to change (Wagner 5).

The organization’s senior management directly determines how individuals will work on their own and in respective teams. The management equally can influence the efficiency of the product concept despite that the individual worker and the team have a greater influence on the product concept (Stelios 3). The management in an organization is held with a key role of ensuring and supporting innovation.

The type of support offered by the senior management in an organization is directly related to the implicated level of innovativeness and the organization’s reputation. The employees in an organization working at an individual and group level receive financial and political support from the senior management to enable them achieve the goals and objectives of the firm. The management in an organization equally is held with the responsibility of appointing team leaders and setting goals for the organization.

The role of an organization’s senior management in spearheading innovation and the reputation of the firm is diverse. If the management deviates from the expected role, the organization is feared to experience a reduction in team performance. Extensive involvement of the senior management with formal controls lowers the autonomy and at the same time wastes product development time.

Downsizing has been shown to have various negative consequences on the reputation and innovativeness of an organization. A study that examined the effect of downsizing on corporate social responsibility indicated that there exists a negative relationship between downsizing and an organization’s social performance.

The later aspect is a measure of the existing reputation index of an organization. It is expected for firms that exhibit constant downsizing to exhibit minimal social responsibility. Such firms equally are characterized by a reduced reputation index. Similar studies have indicated that downsizing has a negative impact on the corporate responsibility of an organization.

The Effects of Downsizing at the Group Level

At the project level where individuals work as a group or team, downsizing has been shown to have various negative impacts, especially on the team spirit. The existence of a group of individuals in an organization working together as a team has been shown to result into improved efficiency and information diversity. In addition, individuals working in a team or as a group equally increase the opportunities for learning.

This is because most teams will have individuals with different abilities, which provides an opportunity for learning from one another. The later is highly credited for improving the numbers of informal contacts within an organization. With the existence of a large diversity of information, an organization will highly benefit from the implicated diversity in information, which is a guarantee for improved problem-solving skills.

Downsizing is a threat to the benefits of working at a group level because it reduces the capacity of information and equally deprives the group of skills held by the leaving members (Mirabal and De Young 27). The impacts of downsizing on a group are mainly measured by a reduction in the level of creativity and general work performance. Downsizing results equally in a reduction in effective communication in the organization, which is feared to have negative impacts on the process of attaining the goals of an organization.

Downsizing in particular is responsible for breaking informal relationships in an organization. As a result of a break in communication networks following downsizing, most organizations exhibit reduced innovativeness because of an inevitable reduction in effective communication. Because very few individuals are likely to survive the exercise of downsizing, the ability to shift from one point to the other equally may be affected.

Because downsizing reduces the size of the group, few individuals are left to work on the same task, which makes it hard for the organization to attain the same performance efficiency. In addition, the process of downsizing has been shown to result into a drop in the organization’s stock of knowledge.

Analyses of the Effects on Downsizing in an organization

In understanding the effects on downsizing on an organization, retrospective analysis of studies done in the past was used. These studies provide literature on the effects of downsizing on an organization with regard to the organizational level, the individual level, and the group. A model was created in which knowledge was a key organizing variable.

This is because knowledge is a vital component of the process of innovation, which has an impact on the reputation of an organization (Mirabal and De Young 31). It is held that innovation is a product of the combination of various forms of knowledge in an organization. In this model, it is presumed that downsizing has impacts on innovation and the reputation of an organization via its direct impacts on the level of knowledge.

The implicated model is illustrated in the figure below. The model is made up of the major components that affect innovation in an organization and subsequently contributes to the emerging reputation. In this model, the effects of downsizing to an organization are examined with regard to the organization’s stock of knowledge (Mirabal and De Young 40).

At the individual level, the effects of downsizing are examined with regard to the individual’s creativity, which determines the individual output in task performance. At the group level, the effects of downsizing are examined with regard to the knowledge creation process, which is determined by the contribution of the existing and new knowledge held by the members of a group in an organization.

In the literature examined, an organization’s stock of knowledge refers to the collection of competencies held by the workforce in an organization. This collection is also made up of the formal and informal relationships that occur among individuals in an organization.

Because of the difficulties associated with observing the flow of knowledge, the uniqueness of an organization is determined by the type of knowledge that exists within its premises. This aspect makes it hard to determine the expected impacts of downsizing on the reputation and innovativeness of an organization. This is because every organization is characterized by a unique stock of knowledge (Richner 1).

According to a majority of the theories and content presented in the studies examined, downsizing in an organization has been shown to result into an obvious risk of the reduction in the level of the stock of knowledge (Pinsonneault and Kraemer 191).

The departure of employees from an organization following a downsizing exercise has negative impacts on customer relationships and operations in an organization. For an organization made of groups of individuals characterized by minimal levels of knowledge, a downsizing exercise is likely to slow down the process of product development.

Because of the breakdown of informal relationship vital for developing innovative experiences, downsizing is feared to affect the intangible resources that promote innovation in an organization (Richner 18).

As the importance of the stock of knowledge in an organization increases, it becomes important for organizations to balance between the transfer of knowledge, the innovation, and reputation of their firm. Downsizing is basically a transfer of knowledge from an organization to the external environment, which implies a decrease in the organization’s stock of knowledge.

An efficient way of handling knowledge transfer within an organization is likely to be the transfer of knowledge within the organization as opposed to an external transfer of knowledge as in the case of downsizing (Pinsonneault and Kraemer 208). To attain a competitive advantage, a proper management of the stock of knowledge in an organization is very important.

Most competitive organizations are out to build on their stock of knowledge to sustain a competitive advantage. This implies that a majority of such organizations are characterized by strategies geared at empowering their stock of knowledge by maintaining the current workforce and outsourcing for more talents. In this meta- analysis, the literature examined proposes that downsizing has negative impacts on an organization’s stock of knowledge.

With regard to the individual creativity, a majority of the theories and literature presented indicate that both innovation and the reputation of an organization are highly determined by the creativity of the employees. According to the studies examined, the creativity of individual employees in an organization is key to the development of ideas in an organization (Stelios 18).

Innovation and the reputation of an organization are the main organizational aspects that are affected by a drop in individual creativity following a downsizing exercise. One particular study indicated that downsizing is responsible for the existence of poor risk takers in an organization.

This is because the surviving employees experience feelings of fear and job insecurity that affects their ability to make fast and effective decisions. Most of the surviving employees will have the fear of being victimized on the basis of their decisions. A majority of these employees will therefore not voice their opinions even in the event of a problem that requires urgent solving skills.

The individuals who survive a downsizing exercise are most likely to exhibit a greater amount of fear, which reduces their ability to communicate and act in a professional manner in the event of a problem (Pinsonneault and Kraemer 202). Downsizing equally is responsible for decreasing the motivation to work among the individuals who survive the exercise.

Among the organizational aspects greatly affected by downsizing is creativity. At the individual level, creativity is directly related to the level of innovation. Most of the literature examined for this purpose indicates that the innovativeness of an organization is highly threatened by a decrease in individual creativity.

This literature proposes that downsizing has a negative impact of individual creativity, which in turn affects the innovativeness of an organization and further threatens the organization’s reputation (Richner 19).

With regard to the process of knowledge creation at the group level, the literature examined indicates that knowledge creation is central to the process of innovation (Spreitzer and Mishra 777). According to this literature, the goods, and services offered by an organization are highly determined by the organization’s knowledge creation process. The process of knowledge creation is vital for connecting the other components of the model illustrated in this study.

The studies examined indicate that employees in an organization make use of their creativity to enhance the organization’s stock of knowledge. At the same, individuals make use of their creativity to develop the goods and services in a firm. The later is of impact on the reputation of an organization because the nature of goods and services common to an organization determine its market share and competitive advantage.

The process of knowledge creation is described as the ability to transfer knowledge within an organization and this process has been shown to occur in a continuous process. Effective transfer of knowledge highly depends of socialization. Because the process of downsizing limits the socialization of individuals in an organization, this process affects equally the transfer of knowledge.

The effective sharing of vital experiences is affected by the process of downsizing and the literature examined in this regard clearly proposes that downsizing has a negative impact on the process of knowledge creation (Caruana, Cohen, and Krenter 429).

Conclusion

Despite that many organizations adopt downsizing as a strategy of improving efficiency and reducing costs, the model used in this study indicates that downsizing has more negative effects than the positive gains. The impacts of this strategy are more severe on the innovativeness of an organization and the reputation. Previous studies indicate the existence of a negative relationship between downsizing and the innovativeness of an organization.

However, only a few of such studies have examined the negative effects of this strategy on both innovation and the reputation of an organization. This explains why it was important to establish the relationship between downsizing and the reputation and innovativeness of an organization in this study while focusing at the three levels. The model used in this study was drawn from the existing theory on the management of innovation, the organization’s reputation, and knowledge management.

Previous research had indicated that these three components suffer the bulk of consequences following a downsizing exercise. The model used here is conceptual and may require further research for validation. The innovativeness and reputation of an organization are important tangible assets of an organization.

These two aspects are an organization’s source of a long-term competitive advantage. Downsizing has been shown to threaten these two intangible assets and is feared to have a negative impact on employees and other stakeholders in the organization. In this paper, the literature depicted and the model used in the analysis provide an indication of the various ways in which downsizing affects an organization at the individual, group, and organizational level.

Works Cited

Caruana, Albert, Charlene Cohen and Kathleen Krenter. “Corporate reputation and shareholders intention: An Attitudinal perspective.” Brand Management 13.6 (2006): 429-440. Print.

Mirabal, Neil and Robert De Young. “Downsizing as a Strategic Intervention.” The Journal of American Academy of Business 1.1 (2005): 23-47. Print.

Pinsonneault, Alain, and Kenneth Kraemer. “Exploring the Role of Information Technology in Organizational Downsizing: A Tale of Two American Cities.” Organization Science 3.2 (2002): 191-208. Print.

Richner, Anders. “Organizational Downsizing and Innovation.” Journal of Business Administration 1.1 (2006):1-22. Print.

Spreitzer, Gretchen and Aneil Mishra. “To Stay or to Go: Voluntary Survivor Turnover Following an Organizational Downsizing.” Journal of Organizational Behaviour 23.8 (2002): 767-779. Print.

Stelios, Zyglidopoulos: “The Impact of Downsizing on Corporate Reputation.” British Journal of Management 16.1 (2005):1-30. Print.

Wagner, Jerry. “Downsizing Effects on Organizational Development Capabilities at an Electric Utility.” Journal of Industrial Technology 6.3 (2008):1-7. Print.

West, Gladys. The Effects of Downsizing on Survivors: a Meta-Analysis. Blacksburg, VA: Virginia Polytechnic Institute and State University, 2000. Print.

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