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INNOVATING IN AN ERA OF DOWNSIZING

by Franco Gandolfi and Gary Oster Innovation | July / August 2009 Share on emailEmailShare on twitterShare on TwitterShare on facebookPost to FacebookShare on linkedinShare on LinkedInShare on deliciousSave to DeliciousShare on instapaperSave to Instapaper 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

1999). While there is some evidence of firms reaping positive outcomes (Macky. & Mishra (1991) identified three forms of downsizing. smoother communications. macroeconomic factors. productivity. and survivors. organization design. game-changing innovation is the only reliable method for corporations to deliver extraordinary value to customers.. macroeconomic. and increased levels of employee productivity (Burke & Cooper. rather than reducing the number of employees (Luthans & Sommer. INNOVATION: A LITERATURE SURVEY Continuous. and firm-specific elements. and is considered a way of life (Filipowski. 2003). 1998) remains with the firm after a downsizing activity. 2006) or a discussion of “best practice” (Cascio. 2006. the majority of findings suggests that the adoption of downsizing often falls short of the objectives (Cascio. 2004). industry-specific. The adoption of downsizing is not only expected to generate financial benefits through a direct increase in shareholder value. including lower overheads. 2006). 1997. and products. better. The change management literature suggests that three types of people are impacted by downsizing – executioners. 1998. and human effects (Gandolfi. Davila et.losses and retrenchments (Gandolfi. as more attention was placed on the study of downsizing‟s survivors. while a survivor (Littler. groups. By definition. the vast majority of downsized organizations have failed to reap the anticipated improved levels of efficiency. organizational. retrenchments. 2006). 2008). victims. 2006). How to implement downsizing Studies concerned with how an organization implements downsizing are frequently based on a theoretical model of downsizing approaches (Richtnér & Ahlström. including abolishing functions. and smarter than their competitors. Gandolfi & Neck. 2003. Conceptualizing the reasons for it is problematic and complex. Drew (1994) compartmentalized the causing factors into three categories. and its effects on the entity. 2. and competitiveness (Cascio. no single cause can account for the pervasiveness of the phenomenon. The workforce reduction strategy concentrates on the elimination of headcount through activities such as layoffs. 2006). The human costs of downsizing are described as far-reaching (Burke & Greenglass. The three have been referred to as the downsizing implementation strategies – workforce reduction. and pressures from rival firms constitute the main driving forces. profitability. Freeman. While the research focus was on the victims in the 1980 and early 1990s. less bureaucracy. The key issues are whether to implement downsizing. The organization redesign strategy focuses on eliminating work. technological innovation. to grow faster. The effects of downsizing Downsizing‟s consequences are commonly divided into financial. 2000). faster decision-making. Luthans and Sommer (1999) postulate that global competition. 1998) is an individual entrusted with the conduct of downsizing. an executioner (Burke. Sahdev. and to alter the direction of their industry (Carlson & Wilmot. 1997). divisions. 1993. The systemic strategy focuses on changing the firm‟s intrinsic culture and the attitudes and values of its workforce. a shift occurred in the mid-1990s. 2006). There is an acknowledgement that the adoption of downsizing can be linked to corporate mismanagement and strategic errors (Kets de Vries & Balazs. and buyout packages. al. Victims often receive generous outplacement services and financially attractive packages (Allen. Whether to implement downsizing Downsizing is a multifaceted phenomenon.. 2000). whereas survivors tend to receive very little if any support (Devine et al. 1997). to provide remarkable returns for shareholders. Cameron. a victim is a person who is downsized out of a job involuntarily (Allen. and systemic strategies. Gandolfi. Downsizing research at the organizational and strategic levels has received a great deal of scholarly attention (Richtnér & Ahlström. 2004). Sadly. increased customer influence. how to implement it. Macky. but to produce organizational benefits. the picture of reported financial effects following downsizing is a bleak one (Gandolfi & Neck. While various driving forces have been identified. For the purpose of this . 2003). 1993). 2008). A multitude of studies has demonstrated that while some firms have reported financial improvements from downsizing.

corporations must escape the fetters of tradition and find new. Empathic research is qualitative in nature and based upon focused observation. Kelley. Oster. . evaluation. valid. always begins with unreasonable goals (Hamel. corporate metrics must accurately measure those innovation efforts tied specifically to how a company makes money (Charan.. Innovation is fueled by innovative ideas and is more likely to be achieved by a diverse workforce. reliable. and action (Rokeach. and may be taught or influenced by parents. Davila et. fundamental beliefs. Such diversity is intentional (Amabile. companies need employees who have an unusual personality or routinely disagree with company policies or methodologies (Sutton. Methodologies of innovation To thrive in the new turbulent economy. 2002). and experiences. community. culture. Most importantly. religious institutions. 2007). 1973). extraordinary methods to meet customer needs in more cost-effective ways (Hamel. attitude. constraints are temporarily ignored and initial judgment is suspended as all plausible ideas are positively reviewed (Lietdka. Empathic observational techniques. and expansive (Hamel. 1997) and seek to harness the power of divergent viewpoints despite the creative friction between employees that routinely occurs (Hirshberg. However. innovative companies welcome those with personal idiosyncrasies (Bennis & Biederman. 2007. vision. observation. innovation has been defined as the development of a specific product. which are nonetheless aligned with the values. Successful innovation depends upon the active internal sharing of newfound information (Brand. To encourage the innovation that determines corporate viability. or idea with the intent of commercializing it and extracting value or utility from that commercialization (Rogers. work associates. A willingness to venture outside of the organization for plausible answers is a hallmark of an „integrative thinker‟ (Martin. they must formulate and consistently use metrics that are clearly stated.. al. and help firms recognize the incom ing „weak signals‟ of future trends long before their competitors (Gryskiewicz. 2002). 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. 2006). or significant societal events. 1962). and initiation of appropriate metrics (Bennis & Biederman. acceptance of appropriate failure. primarily the use of direct empathic research techniques to gain a thorough understanding of what people want and need in their lives (Suri. Non-linear or radical innovation. personality. al. should be continually monitored using a small number of simple. For companies to succeed in this remarkably competitive worldwide economic environment. and objective metrics. strategy.research paper. 2006). which are allied with a person‟s core or central beliefs (Rokeach. choice. four antecedent activities must have first taken place: values alignment. as opposed to incremental innovation. 1998). 2008). 2007). diversification of thought. Developing and successfully using innovation metrics that support both creativity and value creation are essential to success (Davila et. 1979). Values are constant. meaningful. 2008). and tactics of the corporation. 1998) and must extend far beyond race and gender (Andrew & Sirkin. 2001). friends. collectively called a “world -view”. 2002. Personal values are acquired through education. 2006. 2002). Dew. Successful. These goals. Day & Schoemaker. including those utilizing photos or videos or the insertion of researchers to view the behavior of consumers in action. 2006). 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. 2005. In abductive reasoning. not all beliefs are values. To achieve non-linear innovation. Antecedents of innovation For innovation to take root in an organization. passionate. 1999. Open conversation (Goldsby-Smith. The key to success is customer intimacy. provide a completely different window into customer needs and desires. Corporate employees are the primary element in innovation success (Amabile & Khaire. 2008a). 2007). 1998). service. 1997. that propel the actions of individuals and corporations. 2008) is elemental to this longterm process (Brand. 2006. Research suggests that the alignment of personal and corporate values has much to do with motivating innovation. 1998). companies often reach beyond typical inductive and deductive logic to include abductive reasoning. 2006).

Sutton. 2008. 2008c). control. small. Sutton. the internal infrastructure. 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. and feature abbreviated planning horizons (Wind. Cagan & Vogel. This has been labeled “homosocial reproduction” (Kanter. 2008). knowledge becomes a form of currency and is hoarded by individual employees and departments. 2002). and are therefore much less sanguine about “different” employees and their ideas. Corporations aid and abet innovation antibodies by rewarding employees for their allegiance to the historical past of the company (Pfeffer & Sutton. 1998). and ultimately decimate innovation within the firm by hobbling creativity. Skarzynski & Gibson. One of the less thoroughly researched areas is the impact of downsizing on innovation (Dougherty & Bowman. The success of innovation antibodies intimidates other employees (Dundon. new employees across the organization are chosen who most resemble an ideal archetype.. More useful are metrics that clearly examine innovation outputs. and methodologies of information sharing are oftentimes distorted. During downsizing. Nambisan. Oster. 2005) and numerous studies have been conducted measuring the outcomes and determining the consequences of downsizing (Macky. This is surprising given the understanding among management scholars . In an effort to increase control. Similarly. let us examine the relationship between these two concepts. dynamic partnership (Utterback. and THE average length of time a Potential product languishes at each gate in the corporate innovation stage-gate system (Andrew & Sirkin. What do we know about the relationships between the concepts of downsizing and innovation? This subsection presents and reviews the existing literature. When current employees suspect that additional waves of downsizing may occur soon.” an intr ansigent employee who effectively drowns new ideas in negativity and shortstops corporate innovation (Kelley. 2006. This environment of fear and self-interest encourages an explosion of “innovation antibodies” or “devil‟s advocate. 2006. 1999. INNOVATION AND DOWNSIZING Downsizing has an immediate and severe effect on the innovation activities of companies and ultimately renders them dysfunctional (Pfeffer. including research and development (R&D) budgets. and promoting intellectual balkanization (Amabile. encouraging a shift from radical to incremental innovation. incremental in nature. These are typically few in number. Davila et. al. al. 2001).Intrinsic to the ultimate success of bold aspirations is the ability to devise and conduct numerous. A primary characteristic of post-downsized corporations is a myopic quest for certainty through efficiency. 2006. focused upon numerical inputs. 2000). firms perceive a need for conformity. al. 2002.. 1998. significant changes in line and staff personnel are often initiated. including THE percentage of corporate products that are less than five years old. and ensure harmony and unity of purpose. While in the throes of downsizing. as well as the number of people employed to research and develop innovations. Having examined the literature regarding both downsizing and innovation. and internal harmony.. Davila et. incoming executives often institute new performance measures (Davila et. 2006). 1977. 3. 2002). 2002). 2004). 2006). THE percentage of corporate revenue gained from products less than two years old. Schrage. 2006). The body of knowledge on downsizing is extensive (Gandolfi. Downsized companies often mistakenly measure innovation and its associated risk by measuring inputs. Suri. 1995. 2008). The fervent quest for efficiency may prove to be substantively toxic. in order to ensure universal understanding and acceptance of corporate objectives during and following downsizing. 2001. Simple figures may be seen as the way to approach and counter complex multi-dimensional issues. fast. simple to gather and understand. 1994). Richtnér & Ahlström. 2006. motivation. 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. When organizations downsize. which can be an ongoing. 2000) and sanctioning any change from the earlier corporate trajectory (Griskiewicz.

It was further established that creativity in the downsized firm remained depressed beyond the actual downsizing implementation.that a firm‟s ability to be innovative is crucial for its survival (Bourgeois & Eisenhardt. & Hung. Determined that an organization’s work climate is negatively affected by downsizing and that creativity is markedly diminished during the entire downsizing process. decreased overall skill base. While some scholars have reported that downsizing per seis a product of technological innovation (Appelbaum. As a result. reduced levels of risk-taking. 1991). DOWNSIZING AND INNOVATION –CONCEPTUAL FRAMEWORKS . Reported that downsizing influences innovation through its effects on Fisher & White organizational knowledge. 1999). & Kim Found that downsizing in universities was associated with reduced innovation. others have examined downsizing and determined its direct impact on the innovative capabilities of firms and their employees. and increased levels of fear among employees. (1987) Walsh & Determined that downsizing conflicts with innovation. and a drop in innovation were found in organizations that had engaged in downsizing. a drop in motivation. Everard. It was observed that downsizing may (2000) seriously damage the learning capacity of organizations. Gettler (1998) Lecky (1998) Amabile & Conti (1999) Bommer & Jalajas (1999) Reported that increased employee turnover. 1988. Found decreased levels of risk taking and innovation in post-downsized firms. 1999. Ellwood (1991) Studied the effects of downsizing on product innovation and concluded that Dougherty & downsizing breaksentrepreneurial networking in organizations and disrupts a Bowman (1995) firm’s ability to create innovations. Luthans & Sommer. a decreased willingness to make suggestions. Whetten. Damanpour. Observed four organizational consequences upon the conduct of downsizing. 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. 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. Quite clearly. Studied the impact of downsizing on various components of innovation Richtnér & management and found that downsizing had an overall negative effect on Ahlström (2006) innovation. decreased levels of risk taking. Examined the effects of downsizing and found reduced risk-taking and flexibility Bagshaw (1998) as well as decreasedlevels of innovation among downsizing survivors as direct organizational effects of downsizing. 4. there is a growing plea for deeper insight and a more profound understanding of the relationship between downsizing and its impact on innovation.

Davila et. demands visible and easily measurable progress. Oster 2008c. while objectives become increasingly important. As depicted in Table 1. but corporate innovation shows few vital signs. post-downsizing) shows that. 1999.. repetitive waves of downsizing negatively extend the orbit of innovation antecedents and processes even further (Oster 2008c. and prototypes are outside of the innovation process entirely. Leadership may have regained “control” over the organization and stabilized revenues. 2001. Figure 2 (phase 2. studied downsizing practices of Australia‟s six larges t banks. albeit infrequently (Gandolfi. 2008d. Hamel. there is an increasing need for a deeper and more profound understanding of the relationship between downsizing and innovation. Values. 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. 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. Andrew & Sirkin. Downsizing activities designed to save corporate funds and enhance efficiency may have the unintended consequences of fettering innovation‟s essential antecedents and processes. 2006.Downsizing as a process does not explicitly appear in the downsizing literature and there are very few references to downsizing processes or phases. 2008d). whereas the Australian banking industry had not only undergone a significant degree of downsizing but several rounds of downsizing (Gandolfi. upon downsizing. Figure 1: Innovation Antecedents/Process – Phase 1: Pre-Downsizing . Skarzynski & Gibson. Gryskiewicz. and fresh ideas and capable employees barely influence the process. 2006). communication. 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. Without a doubt. Executives have trimmed costs through workforce downsizing and sought to become more innovative at the same time (Dougherty & Bowman. downsizing and process do co-exist. Continuous. al. 1993) had conducted a systematic study of workforce downsizing and examined downsizingrelated processes. 1995). In contrast. 2002). while. thereby jeopardizing the company‟s future. Figure 1 (phase 1. (1991. and compartmentalized the downsizing process into pre. there is some evidence suggesting that the innovative capacity of a firm is likely to be negatively affected by the adoption of downsizing. The intensely hypercompetitive environment over the past few decades has induced at least two forms of restructuring – downsizing and innovation. 2006. Gandolfi (2007) extended their framework. Prototypes and values may become less available to the innovation program. 1998. while objectives take center stage. Still. 2007). the antecedents and processes change in amount and “connectedness” (Hirshberg. Cameron et al. Downsizing shortens the corporate planning horizon. and necessitates efficient and predictable behavior of employees. 2008).

Source: developed for this research Figure 2: Innovation Antecedents/Process – Phase 2: Post-Downsizing Source: developed for this research .

communicate. must make a concerted effort to maintain and promote the key antecedents of innovation in the downsized organization. and significant additional work is needed in this area. and misinterpreted contemporary business phenomena. and generate positive long-term improvements. Empirical evidence strongly suggests that downsizing produces considerable after-effects. They use quick and inexpensive prototypes to seize all plausible opportunities to enhance their conversation with customers.Consequently. 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. Broad diversity within the employee base and acceptance of their abductive thought patterns is essential to corporate viability. This is especially remarkable since innovation is seen as a key source of a firm‟s competitive advantage. they consistently fend off innovation antibodies. Preferring positive action to over-analysis. All innovation should be directed at meeting the near-term needs of customers. In addition. Successful firms interpret. downsizing continues to be one of the most misunderstood. whether planned or unanticipated. Still. little research has been conducted and published on the impact of downsizing on innovation. and deploy new knowledge from internal and external sources. the elements comprising the process of innovation must be intentionally kept alive in a downsized organization. such firms welcome focused failure as an opportunity for valuable corporate learning. cycles of exponential growth followed by rapid downsizing may have negative consequences. Hitherto. We have concluded that the relationships between and effects of downsizing on innovation have yet to be sufficiently studied. Moreover. 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). Downsizing activities aim to increase overall levels of efficiency and effectiveness. those charged with downsizing a firm. Organizations have practiced downsizing for the past three decades with the stated goals of reducing operating costs and making organizational entities more competitive. . Finally. enhance share price valuations. ill-conceived.