innovating in an era of downsizing

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INNOVATING IN AN ERA OF DOWNSIZINGbyFranco Gandolfi andGary Oster

Innovation |July / August 2009

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Few studies have examined the impact of downsizing on innovation. This paper synthesizes the bodies of literatureon downsizing and innovation and develops two conceptual frameworks that depict a plausible impact of downsizing

on an organizations 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 majorraison dtreof 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 (Richtnr & Ahlstrm, 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 (Richtnr & Ahlstrm, 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 REVIEWThe 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 performanceper 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 downsizingper secan 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

organizations 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
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losses and retrenchments (Gandolfi, 2006). Downsizing research at the organizational and strategic levels has

received a great deal of scholarly attention (Richtnr & Ahlstrm, 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 (Richtnr & Ahlstrm, 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 strategiesworkforce 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 firms intrinsic culture and the attitudes and values of its workforce, and is

considered a way of life (Filipowski, 1993).

The effects of downsizing

Downsizings 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 ofdownsizing 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 downsizingexecutioners, 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 downsizings survivors. Victims often receive generousoutplacement 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 SURVEYContinuous, game-changing innovation is the onlyreliable 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


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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 individuals 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 persons 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 orroutinely 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 currentcustomers 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).


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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 devils 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 ofthe 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; Richtnr & Ahlstrm, 2006). This is surprising given the understanding among management scholars


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that a firms ability to be innovative is crucial for its survival (Bourgeois & Eisenhardt, 1988; Damanpour, 1991). While

some scholars have reported that downsizingper seis 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 reducedinnovation.

Walsh &

Ellwood (1991)Determined that downsizing conflictswith innovation.

Dougherty &

Bowman (1995)

Studied the effects of downsizing on product innovation and concluded thatdownsizing breaksentrepreneurial networking in organizations and disruptsa

firms ability to create innovations.

Bagshaw (1998)

Examined the effects of downsizing and found reducedrisk-taking and flexibility

as well as decreasedlevels of innovation among downsizing survivors as direct

organizational effects of downsizing.

Gettler (1998)

Reported that increased employee turnover, decreasedoverall skill

base, decreasedlevels of risk taking, and a dropin innovation were found inorganizations that had engaged in downsizing.

Lecky (1998) Found decreasedlevels of risk taking and innovation in post-downsized firms.

Amabile &

Conti (1999)

Determined that an organizations work climate isnegativelyaffected by

downsizing and that creativity is markedly diminishedduring the entire

downsizing process. It was further established that creativity in the downsized firmremained depressedbeyond the actual downsizing implementation.

Bommer &

Jalajas (1999)

Observed four organizational consequences upon the conduct of

downsizing; reducedlevels of risk-taking, a decreasedwillingness to makesuggestions, a dropin motivation, and increasedlevels of fear among employees.

Fisher & White

(2000)

Reported that downsizing influences innovation through its effects onorganizational knowledge. It was observed that downsizing may

seriously damagethe learning capacity of organizations.

Richtnr &

Ahlstrm (2006)

Studied the impact of downsizing on various components of innovation

management and found that downsizing had an overall negativeeffect 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 CONCEPTUALFRAMEWORKS


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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 Australias 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 bedeemed 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

restructuringdownsizing 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 innovations essential antecedents and processes, thereby jeopardizing the companys

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/ProcessPhase 1: Pre-Downsizing


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Source: developed for this research

Figure 2: Innovation Antecedents/ProcessPhase 2: Post-Downsizing

Source: developed for this research


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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 adownsized 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 sinceinnovation is seen as a key source of a firms competitive advantage. Can downsized firms or organizations actively

pursuing downsizing strategiesremain 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.

innovating in an era of downsizing

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