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Abstract

The business literature on the causes and consequences of downsizing has grown significantly over the last three decades. A multitude of causes has been identified. Downsizing is sometimes seen primarily as a cost-reducing response to various crises and external factors over which management has little or no control. Others see downsizing as a strategic management initiative in its own right. A considerable body of literature indicates workforce reductions often lead to negative financial and operational outcomes for the downsizing firm as well as negative psychological outcomes for victims, survivors, and executioners. This research paper represents a literature review on the causes and consequences of downsizing. It addresses a diverse body of literature and suggests an integrative framework on the typical causes and consequences of downsizing as well as outlines some challenges ahead for researchers seeking to advance the knowledge of downsizing.
Copyright © eContent Management Pty Ltd. Journal of Management & Organization (2011) 17: 498–521.
JOURNAL OF MANAGEMENT & ORGANIZATION Volume 17, Issue 4, July 2011
498
LITERATURE REVIEW
Causes and consequences of
downsizing: Towards an integrative
framework*
FRANCO GANDOLFI
School of Global Leadership and Entrepreneurship, Regent University, Virginia Beach, VA, USA
MAGNUS HANSSON
Centre for Empirical Research on Organizational Control, Örebro University, Örebro, Sweden
ABSTRACT
The business literature on the causes and consequences of downsizing has grown signifi cantly over
the last three decades. A multitude of causes has been identifi ed. Downsizing is sometimes seen
primarily as a cost-reducing response to various crises and external factors over which management
has little or no control. Others see downsizing as a strategic management initiative in its own right.
A considerable body of literature indicates workforce reductions often lead to negative fi nancial
and operational outcomes for the downsizing fi rm as well as negative psychological outcomes for
victims, survivors, and executioners. This research paper represents a literature review on the causes
and consequences of downsizing. It addresses a diverse body of literature and suggests an integrative
framework on the typical causes and consequences of downsizing as well as outlines some challenges
ahead for researchers seeking to advance the knowledge of downsizing.
Keywords: downsizing, causes, consequences, literature review
INTRODUCTION
The research on downsizing has emerged
largely from the 1980s onward after years of
being a neglected topic in organizational science
(De Meuse & Marks, 2003; Mellahi & Wilkinson,
2004; Whetten, 1980). A multitude of stud-
ies covering a wide range of different aspects of
downsizing in various countries and regions have
been conducted (Gandolfi , 2006a). Studies have
involved various elements and facets drawing
from several academic disciplines, including
Industrial Organization, Organizational Ecology,
Organizational Studies, and Organizational
Psychology (Mellahi & Wilkinson, 2004).
The body of literature on downsizing is sub-
stantial, refl ecting its prevalence in the U.S., the
UK, Canada, Europe, Australia, New Zealand,
and Japan in the 1980s, 1990s, and the early
days of the new millennium (Cameron, 1994;
Cameron, Freeman, & Mishra, 1991, 1993;
*Dedicated to Craig R Littler.
Causes and consequences of downsizing
Volume 17, Issue 4, July 2011 JOURNAL OF MANAGEMENT & ORGANIZATION 499
severance payments (Barker & Duhaime, 1997;
Barker & Mone, 1994; Downs, 1995; Robbins &
Pearce, 1992), failure in reducing costs (Gandolfi &
Hansson, 2010), and decreasing returns on assets
and return on common stock (Cascio, 1991, 1993;
Cascio et al., 1997).
Given the complex and multifaceted nature of
downsizing as a phenomenon and the cumulative
development of the associated literature spanning
over more than three decades, we argue that there is
a need for a review of the literature in order to gen-
erate a picture of what we know and what have we
learned (see also: Cascio, 1993). First, the literature
on downsizing has grown considerably and con-
tinues to expand at a rapid pace while less time has
been spent on capturing and covering the increasing
body of knowledge on this salient topic. Second, we
believe that the continued accumulation of the mul-
titude of fi ndings will support researchers and prac-
titioners in their understanding of the causes and
consequences of downsizing. By doing so, the review
proposes an integrative framework on the causes and
consequences of downsizing (see Figure 1).
This research paper begins by examining the
history, defi nition, and scope of downsizing.
Subsequently, the focus shifts to the causes of
downsizing and the fi nancial, organizational, and
human consequences following the conduct of
downsizing. In the fi nal sections, the paper pres-
ents contemporary downsizing practices, suggests
an integrative framework, and outlines the chal-
lenges ahead for researchers seeking to advance
the knowledge of downsizing.
HISTORY, DEFINITION, AND SCOPE
Where did the term downsizing come from? A
considerable number of management terms have
originated with the automobile industry and, sur-
prisingly perhaps, downsizing nds its origin there
as well. By 1970, the average American family car
weighed 2 tons, stretched over 17 feet long, and
often sported a massive V-8 engine. Big was beau-
tiful, and bigger was better. The oil crisis of 1973
generated the need for smaller family cars with
reasonable performance and economy. Producing
Cascio, 1993; Dolan, Belout, & Balkin, 2000;
Gandolfi & Neck, 2003; Farrell & Mavondo,
2004; Littler, 2000). While downsizing has devel-
oped into a ‘popularist’ term (Littler, 1998) that
has arisen out of managerial press usage (Littler,
Dunford, Bramble, & Hede, 1997), it lacks pre-
cise theoretical formulation (Macky, 2004).
As is evident from the literature, there is a wide
range of downsizing causes, drivers, and driv-
ing forces, yet no single cause seems to be able to
explain and account for the emergence and per-
vasiveness of the phenomenon (Datta, Guthrie,
Basuil, & Pandey, 2010). So-called ‘classical’
causes of downsizing involve cost reducing efforts
(Radcliffe, Campbell, & Fogarty, 2001), ‘failures’,
including failures to adopt to changing technology,
niche dynamics, and insuffi cient management skills
(Mellahi & Wilkinson, 2004), responses to various
types of crises and external factors (Espahbodi,
John, & Vasudevan, 2000), and global competi-
tion (Mirabal & DeYoung, 2005).
Downsizing generates negative performance
outcomes, such as the failure to reduce costs, the
lack of signifi cant increase in return on assets and
return on common stock (Cascio, 1991, 1993;
Cascio, Young, & Morris, 1997), decreased levels
of worker commitment (Cameron et al., 1993) and
commitment (Zatzick & Iverson, 2006), and the
emergence of the ‘dirty dozen’ – a list of negative
attributes associated with organizational decline
(Cameron, 1994). A number of downsizing studies
address the ‘survivor syndrome’ as a cluster of nega-
tive workforce outcomes (Brockner, Davy, & Carter,
1985; Brockner et al., 1986a, 1986b; Brockner,
Greenberg, & Grover, 1988a). Downsizing research
reports decreased employee efforts and adaptability,
increased propensity to leave, and increased resis-
tance to change (Brockner, 1992; Brockner, Grover,
& Blonder, 1988b; Greenhalgh & Rosenblatt,
1984; Littler, Wiesner, & Dunford, 2003). Further,
studies on the fi nancial consequences of downsizing
raise problematic costs associated with downsizing
activities (Atwood, Coke, Cooper, & Loria, 1995).
These include deteriorating shareholder value
(Appelbaum, Everard, & Hung, 1999a), effects of
Franco Gandolfi and Magnus Hansson
JOURNAL OF MANAGEMENT & ORGANIZATION Volume 17, Issue 4, July 2011
500
In the early 1980s, downsizing came into
prominence as a topic of both scholarly and
practical concern. It became the management
‘catch-cry’ of the 1990s which subsequently
became known as the ‘downsizing decade’
(Dolan et al., 2000, p. 34). As a strategic mana-
gerial tool, it has changed tens of thousands of
companies and governmental bodies and the
lives of millions of blue and white-collar work-
ers around the world (Amundson, Borgen,
Jordan, & Erlebach, 2004).
How can downsizing be defi ned? According to
Cameron (1994, p. 192), downsizing is defi ned as:
a set of activities, undertaken on the part
of the management of an organization and
designed to improve organizational effi ciency,
productivity, and/or competitiveness.
these vehicles became known as ‘downsizing’ in
the U.S. auto industry. Thus, the term downsiz-
ing was coined to defi ne the scaling down of car
sizes by automobile manufacturers (Appelbaum,
Simpson, & Shapiro, 1987). In an organizational
setting, the term was fi rst applied to a process
of cutting back employees when business and
government in the U.S. began making major
reductions to their employee bases in response
to recessionary pressures in the 1980s. As a con-
sequence, downsizing became associated with
workforce reduction strategies (Halley, 1995)
and a strategy to streamline, tighten, and shrink
the organizational structure with respect to the
number of personnel employed by the fi rm. As
downsizing became more prevalent, the term was
applied to a broader range of managerial efforts to
improve a fi rm’s performance.
FIGURE 1: TYPICAL CAUSES AND CONSEQUENCES OF DOWNSIZING
External factors:
• Global competition
• Globalization
• Financial crises and econo mic downturns
• Pressure from rival firms
• Poor industry conditions
• Detorioration of micro niche
• Loss of market share
• Changes in demographics
• Exit from international markets
• Mergers and Aquisit ions
• Change in legislation and regulatory frameworks
• Change in technology
Firm level:
Financial:
• Cost reducing efforts
• Decreased financial resourc es
• Shareholder requirements
Manageri al:
• Crisis management
• Failing strategic initiatives
• Change of strategy
• Poor strategic investments
• Make use of human capita l
• Improve efficiency and productivity
• Market signalling
• Management faddism
Causes
Financial
• Return on Assets (ROA) ↓
• Return on Equity (ROE) ↓
• Profitability ↓/↑
• Profit margin ↓/↑
• EBDIT margin ↓/ ↑
•Sales↑
• Operating performance ↑
•Costof sales↓
• R&D expenditures ↓
•Laborcosts↓
• Market-to-book ratio -
• Stock-market price
(short run) ↑
• Stock-market price
(long run) -/ ↓
Organizational
• Innovativeness ↓
• Risk aversion↑
• Politicized climate↑
• Productivity ↓
•Morale↓
•Numberof conflicts↑
• Speed of conflict
• Individualisation ↑
• Level of teamwork ↓
• Employee turnover ↑
• Resistance to change↑
• Distrust towards
management ↑
• Levels of product/
service quality ↓
• Level of learning ↓
• Competence level in
the organization ↓
Human: Executioners
•Stress
•Health
• Guilt ↑
• Self-esteem ↓
•Helplessness↑
•Anxiety↑
• Earning power ↓
• Motivation ↓
• Propensity to leave ↑
•Cynicism↑
•Uncertainty↑
• Level of committment ↓
• Loyalty ↓
Human: Victims
•Stress
•Health
• Self-esteem ↓
• Helplessness ↑
•Anxiety↑
• Earning power ↓
•Cynicism↑
•Uncertainty↑
•Levelof committment↓
•Loyalty↓
Human: Survivors
• Career consciousness ↓
• Organizational involvement ↓
• Organizational comittment ↓
• Level of work quality ↓
• Guilt ↑
• Level of anger ↑
• Level of arousal ↑
•Stress ↑
•Anxiety↑
• Relief ↑
•Jobinsecurity↑
• Job satisfaction ↓
• Motivation ↓
• Propensity to leave ↑
• Resistance to change ↑
• Number of conflicts ↑
• Speed of conflict resolution ↓
• Absenteeism ↑
•Risk taking↓
• Loyalty ↓
• Distrust towards
management↑
Consequences
Downsizing activity
resolution ↓
Causes and consequences of downsizing
Volume 17, Issue 4, July 2011 JOURNAL OF MANAGEMENT & ORGANIZATION 501
contraction of labor resources. Put differently,
companies resort to downsizing when they inten-
tionally eliminate positions or jobs.
Evidently, the majority of downsizing research
has been conducted in the U.S. (Chadwick, Hunter,
& Walston, 2004). Still, the contraction of work-
forces has not been confi ned to U.S. fi rms, but has
occurred throughout the world (Ryan & Macky,
1998). Empirical evidence shows that downsizing
and its many related concepts has been particu-
larly pervasive in North America (Freeman, 1994),
Britain (Thornhill & Saunders, 1998), Canada
(Dolan et al., 2000), Europe (Lamsa & Takala,
2000), Japan (Griggs & Hyland, 2003), Australia
(Gandolfi , 2006b), New Zealand (Macky, 2004),
South Africa (Littler, 1998), and Eastern Europe
(Redman & Keithley, 1998). Downsizing is also
prevalent in countries that are moving from a
state-dominated to a market system, such as coun-
tries in Latin America, Russia, and Eastern Europe,
where privatization often brings about the need
to reduce fi rms’ headcounts (Appelbaum et al.,
1999a,b). Downsizing has even become common
in certain industrialized countries, such as Japan
and Sweden, which have historically displayed
very stable employment practices (Mroczkowski
& Hanaoka, 1997). Cascio (2003) points out that
downsizing has also affected China, which has
become one of the world’s foremost manufactur-
ing hubs. In 2003 alone, over 25 million Chinese
lost their jobs from the transformation and priva-
tization of state-owned enterprises (SOE).
In sum, empirical and anecdotal evidence sug-
gests strongly that the intentional, purposeful
adoption of downsizing as a reactive or proactive
managerial strategy has occurred in all industries
and sectors and impacted businesses, govern-
ments, and individuals (Macky, 2004) around the
world (Mirabal & DeYoung, 2005) over the past
three decades (Gandolfi , 2008).
Research design
The key objective of this paper was to undertake
a comprehensive survey of the downsizing litera-
ture, covering the period from 1985 to 2009, and
Cameron’s defi nition embraces a holistic
approach in an attempt to increase a fi rm’s overall
performance. On the other end of the continuum,
Cascio (1993, p 95) asserts that downsizing is
essentially ‘the planned eliminations of positions
or jobs’. In other words, the primary purpose of
downsizing is not increased organizational perfor-
mance per se, but the reduction of the workforce.
In its narrowest sense, downsizing can be viewed as
a set of activities introduced to make a fi rm more
cost-effective. In its widest sense, downsizing may
be seen as a complete strategic transformation
intended to change an organization’s design, its
work processes, corporate culture, values and atti-
tudes, and mission (Kets de Vries & Balazs, 1997).
Downsizing in its most extreme form may turn
into an across-the-board cut in personnel (Kets
de Vries & Balazs, 1997) or imply a re-focus on
certain core businesses and a disposal of peripheral
ones (Crainer & Obleng, 1995).
A precise conceptual understanding of downsiz-
ing is required to adopt a cumulative approach to
academic research. Hence, four major attributes
have been identifi ed. First and foremost, downsiz-
ing is an intentional set of activities that strongly
implies organizational action. Second, downsizing
frequently involves a reduction in the number of
employees. Third, downsizing concentrates upon
improving the effi ciency of a company in order to
contain or decrease costs, to enhance revenues, or to
increase competitiveness. Fourth, downsizing inev-
itably infl uences work processes and leads to some
kind of work redesign (Cameron, 1998). According
to Mirabal and DeYoung (2005), downsizing con-
stitutes a reactive and defensive or proactive and
anticipatory strategy implemented by management
that inevitably makes a signifi cant impact upon a
company’s size, costs, and work processes, as well
as a fi rm’s shape and culture (Zemke, 1990). While
a single defi nition of downsizing does not exist
across studies, it is clear that downsizing means a
contraction or shrinkage in the size of a fi rm which,
frequently, implies job losses and retrenchments.
For the purpose of this literature review, downsiz-
ing will be referred to as an organizations planned
Franco Gandolfi and Magnus Hansson
JOURNAL OF MANAGEMENT & ORGANIZATION Volume 17, Issue 4, July 2011
502
were subsequently divided into three categories;
namely executioners, victims, and survivors. The
identifi ed and typical categories were derived
from the literature review outlined below.
Finally, this paper’s paradigmatic domicile is
primarily situated within the social action theory
within the functionalistic approach (Burrell &
Morgan, 1979). The social action theory is one
of the paradigmatic domains within the func-
tionalistic paradigm (Burrell & Morgan, 1979).
Within the social action theory realm explana-
tions of the social world must be adequate on the
level of meaning. Explanations to social affairs
must account for the way in which individuals
attach subjective meaning to situations and orient
their action in accordance with their perceptions
of those situations. The social action theory aims
to incorporate idealist and positivist approaches
to the study of society, bounded by the func-
tionalistic border to subjectivistic approaches.
Application of the social action theory consists of
a whole range of ontological, epistemological, and
methodological assumptions (Burrell & Morgan,
1979).
DOWNSIZING CAUSES
Why do fi rms resort to downsizing? From a review
of the downsizing literature it is evident that down-
sizing is a complicated and multifaceted phenom-
enon with a multitude of possible causes. While
scholars have asserted various downsizing causes,
drivers, and driving forces, no single cause can
explain and account for the emergence and perva-
siveness of the phenomenon. Still, there are some
archetypes of causes to a downsizing decision.
Taking Radcliffe et al. (2001) scheme as a starting
point, ‘classical’ causes of downsizing are various
types of cost reducing efforts in response to vari-
ous types of crises and external factors over which
management has little or no control. Frequently
cited examples include global competition
(Mirabal & DeYoung, 2005), pressures from rival
rms (Luthans & Sommer, 1999), poor industry
conditions (Espahbodi et al., 2000), deterioration
of micro niches (Cameron, Sutton, & Whetten,
to provide a coherent and integrated portrait of
the previous research.
In the downsizing literature a variety of terms
have been used including but not limited to:
building-down, compressing, consolidating,
contracting, declining, de-hiring, de-massing,
de-recruiting, dismantling, downshifting, func-
tionalizing, leaning-up, ratcheting-down, ratio-
nalizing, reallocating, reassigning, rebalancing,
rebuilding, redeploying, redesigning, reduction-
in-force, re-engineering, renewing, reorganizing,
reshaping, resizing, restructuring, retrenching,
revitalizing, rightsizing, slimming, slivering, and
streamlining (Cameron, 1994; Gandolfi , 2006b;
Littler et al., 1997). Given the multitude of terms,
this paper focuses on and applies some of the
most frequently used applied terms, such as, orga-
nizational restructuring, downsizing, delayering,
reengineering, and lean production (Cameron,
1994) as the search terms we have applied for
the data collection. Non-published items on the
internet were not included. All references were
abstracted or full copies obtained and subjected
to thematic analysis.
We followed the suggested principles of
Thorpe, Holt, Macpherson, and Pittaway (2005)
in order to adopt a systematic review involv-
ing transparency and a broad coverage. The
review was limited to published journal articles,
conference proceedings, and book chapters.
Comprehensiveness was achieved by cross check-
ing references through, among others for exam-
ple, the social science citation index (SSCI). To
qualify for the analysis, studies must have con-
tained and focused on causes and consequences
related to the strategic initiative of downsizing.
This paper asserts the ambition to outline
an integrative framework of typical causes and
consequences of downsizing activities. Extracted
from the literature review, we sorted explana-
tory factors into different categories. For the
causes of downsizing we distinguished between
external and fi rm-level factors and for the con-
sequences we divided between fi nancial, organi-
zational, and human factors. The human factors
Causes and consequences of downsizing
Volume 17, Issue 4, July 2011 JOURNAL OF MANAGEMENT & ORGANIZATION 503
predominantly white-collar workers, especially
among higher-level white-collar workers, pro-
fessionals, and middle managers, as seen in the
1980s (Littler, 1998; Dolan et al., 2000). Still and
as often argued by managers, fi rms downsize to
make best possible use of their human, capital,
and physical resources. They seek to gain effi -
ciency and productivity – measured in terms of
output per employee (Cascio, 1998; Chadwick
et al., 2004) – and to react to temporary changes
(Anthony, Perrewe, & Kacmaar, 1996). These
rms employ outsourcing (Beylerian & Kleiner,
2003) and the increased use of contingent labor
(Beylerian & Kleiner, 2003) as complementary
drivers to downsizing activities.
Downsizing can also be caused by fi nancial
pressures and fi nancial losses (Cameron et al.,
1988; Cascio, 1991, 1993). These are among the
dominant reasons to downsize and can include
reductions in workforce, investments, and pro-
duction equipment (Appelbaum, Lavigne-
Schmidt, Peytchev, & Shapiro, 1999b; Caulkin,
1995; Marks & De Meuse, 2003). Examples of
nancial and related pressures driving downsiz-
ing activities include decreased fi nancial resources
(Cameron, 1994), demands from shareholders
(Delorese, 1998), effects of mergers and acquisi-
tions (Kets de Vries & Balazs, 1997), privatization
(Allen, 1997), negative profi tability, higher opera-
tion costs, and lowered profi t margins, (Allen,
1997; Hambrick & D’Aveni, 1988), changes in
customer preferences, legislation, and regulatory
frameworks (Lee & Alexander, 1999; Marks &
De Meuse, 2003; Zammuto & Cameron, 1985),
higher administrative costs and the problems of
raising capital, as well as attracting, recruiting,
and retaining highly skilled workers (Aldrich
& Auster, 1986). Also, poor operating and
stock price performance, increased gearing, and
threats from external markets for corporate con-
trol precede employee layoffs (Hillier, Marshall,
McColgan, & Wereman, 2007). However, in
its extreme, long-term, severe forms of fi nancial
pressure, fi nancial losses, inabilities to handle
payments, and different forms of bankruptcy can
1988; Hannan & Freeman, 1988, 1989), shrink-
ing market (Harrigan, 1982), severe loss of mar-
ket shares (Hedberg, Nystrom, & Starbuck, 1978;
Starbuck, Greve, & Hedberg, 1978), change in
demographics (Mellahi & Wilkinson, 2004),
divestments (Montgomery & Thomas, 1988),
exit from international markets (Jackson, Mellahi,
& Sparks, 2005), failing strategic initiatives and
wrong investments (Ghemawat, 1991), and other
types of failures (Mellahi & Wilkinson, 2004).
Downsizing can be the consequence of a man-
agement practice or strategy. Ryan and Macky
(1998) distinguished between downsizing as a
reactive and downsizing as a proactive strategy.
The former strategy, implemented predominantly
prior to the late 1980s, was used to temporarily
adjust to a cyclical downturn or to avoid organiza-
tional demise and bankruptcy. The more versatile
proactive strategy seeks to address a multitude of
organizational situations, including but not lim-
ited to rectifying historical tendencies towards
overstaffi ng, managing cyclical business declines,
introducing new information technology, the use
of automation, shifting business strategies, merg-
ers and acquisitions (M&A), globalization, and
cost-reduction strategies aimed at achieving com-
petitive advantages (Farrell & Mavondo, 2004).
Downsizing is sometimes employed not only to
cut labor costs by shedding labor in the short run,
but also to apply downward pressure on wage
demands from the remaining workforce in the
longer term (Farrell & Mavondo, 2004; Ryan &
Macky, 1998).
Downsizing activities involve temporary
and permanent job cuts (Beaumont & Harris,
2003), plant closings (Allen, Freeman, Russell,
Reizenstein, & Rentz, 2001; Hansson & Wigblad,
2006a, 2006b), site closures (Gandolfi , 2006b),
and layoffs (Macky, 2004). Often, cutting initia-
tives have been aimed at the unskilled blue-col-
lar workers earning an hourly wage (Cameron,
1994), as well as some lower-level white-collar
workers (Freeman, 1994). In some aspects and
type of industries, however, there has been a shift
of job-cutting targets from blue-collar workers to
Franco Gandolfi and Magnus Hansson
JOURNAL OF MANAGEMENT & ORGANIZATION Volume 17, Issue 4, July 2011
504
for fi rms to engage in downsizing; in fact, tech-
nological improvements often resulted in hiring
additional workers. Similarly, Kets de Vries and
Balazs (1997) conclude that it was not the intro-
duction of technology per se, but the administra-
tive impact of the revolutionary transformation
in information and communication technology,
that resulted in downsizing. Still, a chief outcome
of the technological advances in the 1990s was
an increased redundancy of middle management
(Kets de Vries & Balazs, 1997) which resulted in
‘delayering’ (Gandolfi & Hansson, 2010; Littler,
1998).
From a neo-institutional perspective, a number
of empirical fi ndings of drivers and driving factors
that (partially) explain why organizations prac-
tice downsizing activities have been identifi ed:
Downsizing rates are higher among fi rms that
execute many consolidations than among those
that execute fewer ones, and fi rms that make large
investments in labor-saving technologies have
higher downsizing rates than those that make rel-
atively small investments in technologies (Budros,
1999, 2002, 2004). Further, downsizing rates are
higher among fi rms with higher employee com-
pensation levels than among those with lower lev-
els, and larger fi rms have higher downsizing rates
than smaller ones (Budros, 1997, 1999).
Moreover, fi rms with smaller shareholder
values have higher downsizing rates than those
with larger values (Budros, 2004). It is evident
that fi rms under attack from raiders have higher
downsizing rates than those not under attack,
rms in deregulated industries have higher
downsizing rates than those operating in regu-
lated ones (Budros, 1999, 2004), and downsiz-
ing rates increase during economic troughs and
decrease during peaks (Budros, 2004; Cascio,
1993; McKinley et al., 1995). Downsizing rates
are lower among employee-centered fi rms than
among those that are less employee-oriented,
and downsizing rates are higher among fi rms
with CEOs possessing fi nancial backgrounds
than among those where the CEOs came from
other educational and professional backgrounds
cause a complete workforce reduction and non-
continuity of business processes (Altman, 1971;
Aziz, Emanuel, & Lawson, 1988; Chopra, 2006;
Dimitras, Zanakis, & Zopounidis, 1996).
Firm behavior can be meaningfully interpreted
as ‘signals’ to capital markets and stakeholders.
Downsizing activities can serve as a key signal to
capital markets, where executives often think that
a stable or rising stock price constitutes an essen-
tial resource for the company (Littler & Gandolfi ,
2008). Downsizing has been applied as a strategy
in order to yield immediate increases in stock
prices (Appelbaum et al., 1999a, 1999b; Downs,
1995; Fisher & White, 2000). Executives are usu-
ally aware of the positive reaction immediately
following a decision to downsize, which, presum-
ably, could be used as means of achieving short-
term positive stock price movements. Investors
and fi nancial analysts could be expected to view
the announced downsizing programs favorably,
leading to an increase in stock prices (Appelbaum
et al., 1999a, 1999b; McKinley, Sanchez, &
Schick, 1995).
Harrington (1998) attributes downsizing to
surpluses of both employees and facilities, the
direct result of increased competition, increased
effi ciency, reduced need for middle managers
resulting from delayering and employee empow-
erment, and reductions in required maintenance
resulting from improved quality and reliability
of products. In a similar vein, Appelbaum et al.
(1999a, 1999b) view downsizing as one of many
cost-containment strategies, such as total quality
management (TQM), reengineering, transac-
tion processing, and information systems, imple-
mented in order to streamline activities and to
reduce waste and ineffi ciencies.
Downsizing can also be caused by a response to
technological change and advancement (Luthans
& Sommer, 1999). For example, Appelbaum
et al. (1999a, 1999b) asserted that technologi-
cal advancement and innovations resulted in
increased productivity and a decrease in required
workers. In contrast, Littler (1998) contends that
a change in technology was not the primary reason
Causes and consequences of downsizing
Volume 17, Issue 4, July 2011 JOURNAL OF MANAGEMENT & ORGANIZATION 505
effectiveness, productivity, and profi tability
(Cascio, 1993; Gandolfi , 2008; Gandolfi & Neck,
2008; Guthrie & Datta, 2008; Love & Nohria,
2005; Macky, 2004; Sahdev, 2003).
From the literature review, a set of common
denominators can be identifi ed. This is presented
in Table 1 as a chronological, non-exhaustive
account of some representative studies on the
nancial consequences of downsizing activities.
First, it is obvious that researchers have applied
diverse measures for their analyses. The results
vary among studies as some researchers indicate
positive fi nancial consequences, while others have
reported negative outcomes. For instance, there
are some contradictory outcomes on the return
on asset ratio (ROA) and return on equity ratio
(ROE). Indeed, a number of studies indicate
that both employee and asset downsizers as well
as employment ‘upsizers’ reduce ROA and ROE
levels, while other studies do not fi nd any signifi -
cant relationships (Cascio et al., 1997; Dawkins,
Littler, Valenzuela, & Jensen, 1999; De Meuse,
Bergmann, Vanderheiden, & Roraff, 2004; De
Meuse, Vanderheiden, & Bergmann, 1994).
Furthermore, asset downsizers have proved more
effective than employee downsizers when it comes
to the outcomes on the return on stock (ROS;
Cascio et al., 1997; Worrell et al., 1991).
Second, regarding the profi tability, profi t mar-
gin, and EBDIT margin of downsized fi rms, there
remains to be limited empirical data to support
the notion that downsizing produces improved
nancial outcomes (Dawkins et al., 1999; De
Meuse et al., 2004; Macky, 2004; Morris, Cascio,
& Young, 1999).
Third, following downsizing activities, operat-
ing performance seems to improve signifi cantly
in conjunction with reductions in cost of sales
and labor cost, as well as capital and research and
development (R&D) expenditures (Espahbodi
et al., 2000). Sales generally have a tendency to
increase following downsizing, while the costs of
sales and market-to-book ratio have no signifi cant
relationship with downsizing activities (Chalos
& Chen, 2002; De Meuse et al., 1994). It has
(Budros, 1999, 2004). Downsizing rates are
higher among fi rms with many interlocks with
past downsizing activities than among ones with
fewer interlocks with downsized fi rms (Budros,
1999, 2004). In addition, downsizing rates are
higher among fi rms that act in a network (e.g.,
industry) within which downsizing rates, among
participating fi rms or organizations, are high or
increasing. Finally, downsizing rates are higher
in industries that are highly competitive than
in industries that are less competition-oriented
(Budros, 1999).
In sum, a great multitude of downsizing causes
has appeared in the literature. To put a single
downsizing cause forward is problematic and
underrates the sheer complexity of the down-
sizing phenomenon. While some of the more
frequently cited driving forces include globaliza-
tion, increased foreign competition, M&A activi-
ties, deregulation, and the introduction of new
technologies, it must be understood that each
downsizing decision represents a combination
of various factors. Having established the causes,
the following section examines the outcomes and
consequences of downsizing.
DOWNSIZING CONSEQUENCES
Downsizing generates profound overall conse-
quences, as noted in the management literature as
well as in the business press. A close study of the
extensive body of literature on the consequences
of downsizing presents a complex yet rich picture.
Despite the large body of research, there is scant
evidence for the overall success, effectiveness,
and effi ciency of this strategy when assessed from
nancial, organizational, and human resource per-
spectives (Burke & Greenglass, 2000; Gandolfi ,
2009; Littler & Gandolfi , 2008).
Downsizing produces a range of nancial con-
sequences. A multitude of studies – cross-sectional
and longitudinal, North American and inter-
national – have demonstrated that while some
organizations have reported fi nancial improve-
ments, the majority of downsized fi rms have not
been able to reap improved levels of effi ciency,
Franco Gandolfi and Magnus Hansson
JOURNAL OF MANAGEMENT & ORGANIZATION Volume 17, Issue 4, July 2011
506
TABLE 1: FINANCIAL CONSEQUENCES OF DOWNSIZING
TABLE 1: FINANCIAL CONSEQUENCES OF DOWNSIZING
Author/s and title Methodology Dependent variable/s Result/s
Love, E. G., &
Nohria, N. (2005).
Reducing Slack:
The Performance
Consequences
of Downsizing by
Large Industrial
Firms from
1977–1993.
Method/s: Pooled time-series analysis
with the unit of analysis the fi rm-year.
Examination of fi nancial data. Analysis
of retrospective data.
Sample: Panel data of 100 large
industrial fi rms in USA
Period measured: 1977–1993
Industry: Multiple
Limitations: Only focus very large
industrial fi rms who were in a period
of relative decline. Results may not be
generalizable to other industries, high
growth sectors, or smaller fi rms
High/low absorbed
slack (HAS/LAS). Shows no evidence for the main effect of downsizing on
performance in post-downsizing fi rm-years. Distinguishing
high/low absorbed slack (HAS/LAS), scope and timing.
HAS fi rms were most likely to achieve performance
improvements. LAS fi rms that downsized reactively and
focused narrowly on employee reductions were least likely
to see performance improvements.
De Meuse, K. P.,
Bergmann, T. J.,
Vanderheiden,
P. A., & Roraff,
C. E. (2004).
New evidence
regarding
organizational
downsizing and
a fi rm’s fi nancial
performance: a
long-term analysis.
Method/s: Longitudinal analysis.
Sample: Fortune Magazine’s Annual
Survey of largest 100 US corporations.
Period measured: 1987–1998
Industry: Multiple
Limitations: Small sample size; large
rms only.
Profi t margin; Return
on assets (ROA); return
on equity (ROE); asset
effi ciency; market-to-
book ratio.
It was found that downsized fi rms performed signifi cantly
poorer up to two years following the announcement.
Beginning with the third year, none of the differences
reached statistical signifi cance. When analyzing the
magnitude of downsizing, the data revealed that fi rms that
had downsized a small number of employees (i.e., up to
3%) performed signifi cantly better in the announcement
year, while fi rms that downsized more than 10% of the
workforce signifi cantly underperformed fi rms laying off less.
Chalos, P., &
Chen, C. J. P.
(2002). Employee
Downsizing
strategies: market
reaction and post
announcement
nancial
performance.
Method/s: Multiple regression analysis.
Sample: 250 fi rms from Fortune 500 list.
Period measured: 1993–1995
Industry: Multiple
Limitations: Primarily focusing large
US fi rms, covering a three year period.
Only considering aggregated fi nancial
measurements.
Sales; Return on assets
(ROA); cost of sale
(COS)
Over a three year period, 365 downsizing decision led
to employee layoffs of 915,546. Suggest that layoff
announcements that disclose strategic plans for refocusing
lines of business resulted in signifi cantly positive market
returns. Indicate positive IAFP for operating cash fl ow, sales
and (ROA). Cumulative abnormal returns, signifi cant. COS
did not improve signifi cantly. Sales and ROA did improve
for downsizing cost cutting fi rms.
Causes and consequences of downsizing
Volume 17, Issue 4, July 2011 JOURNAL OF MANAGEMENT & ORGANIZATION 507
(continued)
Espahbodi, R.,
John, T. A., &
Vasudevan, G.
(2000). The effects
of downsizing
on operating
performance.
Method/s: Wilcoxon signed-rank tests
and parametric t-tests, regression
analysis.
Sample: 118 downsizing fi rms
Period measured: 1989–1993
Industry: Multiple
Limitations: Reliance of secondary data
and a limited data set.
Operating
performance. Downsizing fi rms experienced decline in operating
performance, prior to the downsizing announcement.
Operating performance improved signifi cantly following the
downsizing.
Reduction of the cost of sales, labor cost, capital
expenditures and R&D expenditures.
Increase in assets following the downsizing.
Dawkins
et al. (1999).
Downsizing and
rm performance
(Chapter 6).
Method/s: Secondary data analysis from
the IBIS fi rm data base, Regression,
bivariate and Multivariate analyses.
Sample: 592 Australian fi rms (Classifying
organization dependent of level of
diversifi cation, size and change in
employments).
Period measured: 1990–1993
Industry: Multiple
Limitations: Broad set of industries
among investigated fi rms. Limited
data set, covering data for 1990 to
1993. Takes into account level of
diversifi cation, fi rm size, changes in
profi tability and employment.
Return on assets (ROA);
Return on equity (ROE);
EBDIT margin.
36% of fi rms were found to be highly focused, 43% were
somewhat diversifi ed and 22% were highly diversifi ed.
34% of non-benchmarking fi rms made substantial
improvements in labor productivity after they downsized,
while 48% of benchmarking fi rms did so.
Both upsizers and downsizers reduced their return on
equity (ROE), and similar patterns for return on assets
(ROA) and EBDIT margin (EBDITM). Effects were stronger
for fi rms that upsized or downsized the most. Small to
medium size fi rms had an 80% chance of having reduced
profi t ability a year or two down the track if they did not
change their employment size. Over 80% considered
that they achieved some increase in labor productivity as
a result, about half of which said that they had achieved
it to a great extent. Failed to fi nd any clear evidence of
downsizing leading to improved rates of profi t. Inferred as
a general rule, reduced employment per se did not provide
the key to higher profi tability
Appelbaum,
S. H., Everard,
A., & Hung, L.
(1999a). Strategic
downsizing:
Critical success
factors.
Method/s:
Sample: 16 American fi rms
Period measured: 1982–1988
Industry: Multiple
Limitations: Does not differentiate
between fi rms with single and/or
multiple-rounds of downsizing.
Stock market price. Appelbaum et al. (1999a) cited a Mitchell & Co. study of
16 North American fi rms that had cut more than 10% of
their respective workforces between 1982 and 1988. It was
shown that two years after the initial stock price increase,
ten of the 16 stocks were quoting below market by 17–48%
and 12 were below the comparable companies in their
industries by 5–45%. Concluded that such results depicted
the ‘true’ fi nancial impact of downsizing on fi rms.
Franco Gandolfi and Magnus Hansson
JOURNAL OF MANAGEMENT & ORGANIZATION Volume 17, Issue 4, July 2011
508
Morris, J. R.,
Cascio, W.
F., & Young,
C. E. (1999).
Downsizing after
all these years:
Questions and
answers about
who did it, how
many did it, and
who benefi ted
from it.
Method/s: Secondary data analysis
from the Standard & Poor’s 500
list, descriptive statistics, regression
analyzes.
Sample: 5,479 observations.
Period measured: 1981–1992
Industry: Multiple
Limitations: Primarily North American
rms, no international comparison, focus
on descriptive statistics.
Profi tability; Stock
market price. Studied the fi nancial performance of the Standard and
Poor’s 500 index subsequent to changes in employment.
The tabulation showed that fi rms with stable employment
consistently outperformed companies with employment
downsizing. Also, fi rms that ‘upsized’ (i.e., employment
increases exceeded 5%) generated stock returns that were
50% higher than those of stable and downsized fi rms in
the year that they upsized, and cumulative stock returns
that were 20% higher over a period of three years. A
consistently positive correlation between downsizing and
improved fi nancial performance could not be established.
Rather, empirical evidence suggested that downsizing
was unlikely to lead to improvements in a fi rm’s fi nancial
performance.
Cascio, W. F.,
Young, C. E.,
& Morris, J. R.
(1997). Financial
consequences
of employment
change decisions
in major U.S.
corporations.
Method/s: Multiple regression analysis
between profi tability and change in
employment.
Sample: All companies included in the
Standard & Poor’s (S&P) 500 list, equal
to 5,479 occurrences of changes.
Period measured: 1981–1992
Industry: Multiple
Limitations: Data set covering fi ve years,
studying annual changes in employment
rather than announcements of changes.
Does not take in to account the long-
term consequences/effects.
Change in employment
(Relationship between
profi tability and change
in employment); return
on assets (ROA; return
on stock, ROS).
The largest changes in employment (both up and down),
occurred in conjunction with major asset restructuring. The
downsizers were, on the average, less profi table compared
to stable employers or upsizers. Apparent decline in return
on assets (ROA) for the employment downsizers, and
increase in ROA for asset downsizers. Stable employers
remain stable in the Return on stock (ROS). Employment
downsizers show a slight increase in ROS. Asset downsizers
show a signifi cant increase in ROS.
De Meuse, K. P.,
Vanderheiden, P.
A., & Bergmann,
T. J. (1994).
Announced
layoffs: Their
effect on
corporate fi nancial
performance.
Method/s: Secondary data analysis,
regression analyses
Sample: Top 100 fi rms in Fortune’s 1989
listing.
Period measured: 1987–1991
Industry: Multiple
Limitations: Does not differentiate
between fi rms with single and/or
multiple-rounds of downsizing.
Five fi nancial indices:
Profi t margin; return
on assets (ROA); return
on equity (ROE); asset
turnover; market-to-
book ratio.
No signifi cant positive relationships for any of the fi nancial
variables. The empirical evidence did not support the
contention that downsizing leads to improved fi nancial
performance.
TABLE 1: (CONTINUED)
TABLE 1: (CONTINUED)
Author/s and title Methodology Dependent variable/s Result/s
Causes and consequences of downsizing
Volume 17, Issue 4, July 2011 JOURNAL OF MANAGEMENT & ORGANIZATION 509
Worrell, D. L.,
Davidson, W. N.,
& Sharma, V. M.
(1991). Layoff
announcements
and stockholder
wealth.
Method/s: Secondary data analysis
based on the DIALOG System of
National Newspaper Index.
Sample: 194 fi rms
Period measured: 1979–1987
Industry: Multiple
Limitations: Study did not test the
reaction of the stock market to actual
layoffs, but to their announcement in the
nancial press.
Return on stock (ROS) Stock returns of companies for the period from 90 days
prior to the announcement of the downsizing to 90 days
after the announcement. There was a signifi cantly negative
market reaction to the announcements with the cumulative
loss in stock value being about 2% of the value of the
equity of the fi rms. For fi rms that provided restructuring
and consolidation as the reason for the layoffs, there was a
3.6% increase in stock value over the 180-day test period,
while among fi rms citing fi nancial distress as the reason for
downsizing, stock values declined an average of 5.6% over
the same period.
Source: Developed for this paper.
also been reported that, in the long run, fi rms
embracing asset and employee downsizing have a
less positive stock market price development than
rms adopting upsizing activities (Hillier et al.,
2007; Morris et al., 1999).
Admittedly, some companies have reaped
nancial benefi ts following downsizing. In fact,
there can be a healthy side to the restructuring
and downsizing of organizations. For instance,
some fi rms become bloated and, thus, require
‘rightsizing’ in order to bring workforce levels
into alignment with the entire organizational sys-
tem (Hitt, Keats, Harback, & Nixon, 1994). This
can be achieved by eliminating unnecessary and/
or redundant work. For instance, in a Canadian
study of 1,034 downsized fi rms, Axmith (1995)
found that the majority of surveyed compa-
nies reported improved levels of earnings,
employee productivity, and customer service,
as well as decreased overall costs. However, the
vast majority of evidence suggests that downsiz-
ing activities fall short of meeting fi nancial and
organizational objectives (Cameron, Whetten,
& Kim, 1987; Cascio, 1998; Gandolfi & Neck,
2008). Nonetheless and perhaps surprisingly,
despite its dismal track record to date, downsizing
has remained a most popular strategy of choice
(Farrell & Mavondo, 2004; Gandolfi & Hansson,
2010; Littler & Gandolfi , 2008).
Downsizing generates a range of organiza-
tional consequences. Downsizing consolidates
decision-making at higher levels of organiza-
tional hierarchy, and often produces a crisis
mentality focused on immediate needs at the
expense of long-term planning (Cameron,
1994). Further, downsizing generates a loss of
innovation with less tolerance for risk and fail-
ure associated with creative activity (Richtnér
& Ahlström, 2006). Ironically, although overall
communication becomes restricted, the orga-
nizational climate becomes more politicized as
special interest groups organize and become
more vocal (Burke & Cooper, 2000; Littler
& Hansson, 2007). Other negative conse-
quences following downsizing activities include
Franco Gandolfi and Magnus Hansson
JOURNAL OF MANAGEMENT & ORGANIZATION Volume 17, Issue 4, July 2011
510
victims’ careers (Cameron et al., 1991; Dolan
et al., 2000). Victims have also reported a loss of
earning power upon reemployment (Konovsky
& Brockner, 1993). Studies further suggest that
victims have encountered feelings of cynicism,
uncertainty, and decreased levels of commitment
and loyalty that carry over to the next job (Macky,
2004).
Survivors
Scholars have studied extensively the emotions,
behaviors, and attitudes displayed by survivors
during and after downsizing activities. These
symptoms have come to be known as survivor
‘sicknesses’ (Appelbaum & Donia, 2001). One
dominant stream of the downsizing research has
focused on the survivor syndrome as a cluster of
negative workforce outcomes (Appelbaum et al.,
1997; Brockner, 1988; Brockner, Grover, Reed,
& DeWitt, 1992; Brockner, Grover, Reed,
DeWitt, & O’Malley, 1987). These psychologi-
cal outcomes generate, for example, ‘new’ psy-
chological contracts (Barker & Duhaime, 1997;
Barker & Mone, 1994; Guest, 1998; Robbins &
Pearce, 1992; Rousseau & McLean-Parks, 1993;
Sparrow, 1998), reduced career conscious-
ness (Freeman, 1994; Freeman & Cameron,
1993), decreased organizational involvement
(Brockner et al., 1988a,b), decreased levels of
work quality (Makawatsakul & Kleiner, 2003),
and reduced organizational commitment
(Brockner et al., 1987; Freeman, 1994; Freeman
& Cameron, 1993; Littler, 1998; Littler et al.,
2003; Rousseau & McLean-Parks, 1993).
Other negative outcomes of downsizing include
guilt (Allen, 1997; Devine, Reay, Stainton,
& Collins-Nakai, 2003), positive inequity
(Brockner et al., 1986a, 1988a, 1988b), anger
and arousal (Cutcher-Gershenfeld, 1991), stress
(Sverke & Hellgren, 2001), anxiety (Staw,
Sandelands, & Dutton, 1981; Shaw & Barrett-
Power, 1997), relief (Allen, 1997; Schweiger,
Ivancevich, & Power, 1987), and increased job
insecurity (Brockner et al., 1985, 1986b, 1987,
1988a, 1988b; Hansson, 2008a).
decreased morale (Wagar, 1998), decreased pro-
ductivity (Budros, 1997; Yoo & Mody, 2000),
and an increased number of confl icts, slower
confl ict resolution, and a loss of trust (Cameron,
1994; Cutcher-Gershenfeld, 1991; Hansson,
2008a,b; Littler & Hansson, 2007). Increased
levels of individualism and disconnectedness
have shown to hinder teamwork, while poor or
lack of leadership and an increased level of resis-
tance to change generate conservatism and a
threat-rigidity response, leading to a protection-
istic stance (Cameron, 1994; Hansson, 2008a;
Shaw & Barrett-Power, 1997).
On the other hand, some studies have unveiled
positive organizational outcomes, including lower
overhead costs, less bureaucracy, faster decision-
making, smoother communication, greater entre-
preneurship, and increased levels of employee
productivity (Burke & Cooper, 2000).
Downsizing generates a range of human con-
sequences. It has been reported that the human
costs of downsizing are immense and far-reaching
(Brockner, 1988, 1992; Brockner et al., 1988a,
1988b; Burke & Greenglass, 2000). From the
extant literature, it is possible to distinguish
between three categories of people directly
impacted by downsizing; victims, survivors, and
executioners (Allen, 1997; Downs, 1995; Kettley,
1995; Littler, 1998). The following sections pres-
ent a non-exhaustive account of some representa-
tive studies on the identifi ed human consequences
of downsizing activities:
Victims
Research depicts strong evidence of adverse
psychological effects resulting from job loss,
including psychological stress, ill health, family
problems, marital problems, reduced self-esteem,
depression, psychiatric morbidity, helplessness,
anxiety, and feelings of social isolation (Dolan
et al., 2000; Gandolfi , 2007; Greenglass &
Burke, 2001; Havlovic, Bouthillette, & Van der
Wal, 1998). There is some evidence suggesting
that job loss caused by downsizing has the pro-
pensity to generate permanent damage to the
Causes and consequences of downsizing
Volume 17, Issue 4, July 2011 JOURNAL OF MANAGEMENT & ORGANIZATION 511
anger (Allen, 1997; Cameron et al., 1991; Noer,
1993). Survivor guilt tends to arise when survi-
vors perceive that their own performance merited
no better treatment than that accorded down-
sized victims (Littler et al., 1997). Scholars have
learned it is not the terminations per se that cre-
ate hostility, anger, bitterness, and survivor guilt
but the manner in which the terminations are
handled (Schweiger et al., 1987). Moreover, bit-
terness, anger, and disgust regarding the layoffs of
co-workers may potentially result in survivor guilt
(Appelbaum et al., 1999a, 1999b).
In addition, survivor envy refl ects a survivor’s
feelings of envy towards the victims (Campbell-
Janison et al., 2001; Kinnie et al., 1998; Littler,
1998). Research suggests that the focus in most
downsized fi rms is on the downsizing victims,
who are deemed most in need of counseling,
support, help, and re-training (Amundson et al.,
2004). Victims frequently receive generous ben-
efi ts (Gandolfi , 2006a), including personal assis-
tance like outplacement support, personal and
family counseling, and retraining, plus fi nancial
compensation, such as severance pay, relocation
assistance, and various benefi ts packages (Allen,
1997). Survivors presume victims will obtain
either generous retirement incentives or new
jobs with more attractive compensation. It is not
surprising that Littler (1998, p. 14) found that,
at times, ‘survivors start to feel that they are the
unlucky ones, the poor idiots left behind to clean
up the corporate mess with reduced resources’.
Executioner
A downsizing executioner or executor is an
employee, manager, or consultant entrusted with
the planning, execution, and evaluation of a
downsizing activity (Downs, 1995). To date, little
research has explored the emotional responses and
reactions of the subjects implementing downsiz-
ing (Gandolfi & Neck, 2008). Nonetheless, there
is some empirical evidence suggesting that the
implementers of downsizing suffer from similar
psychological and emotional effects as the victims
and survivors (Gandolfi , 2007) in that bearing
Survivors tend to display dysfunctional work
behaviors and attitudes, such as decreased moti-
vation (Kinnie, Hutchinson, & Purcell, 1998),
decreasing morale (Cameron, 1994; Smeltzer
& Zener, 1994), increased propensity to leave
(Appelbaum et al., 1997; Littler et al., 2003),
lowered commitment (Beylerian & Kleiner,
2003), decreased satisfaction (Redman &
Keithley, 1998), increased resistance to change
(Macky, 2004), increased level of confl icts, and
lowered speed of confl ict resolution (Cutcher-
Gershenfeld, 1991; Hansson, 2008b).
Further survivor sickness pathologies include
increased levels of absenteeism (Campbell-
Janison, Worrall, & Cooper, 2001; Gandolfi ,
2005), increased employee turnover (Brockner,
1988), decreased employee involvement
(Beylerian & Kleiner, 2003), reduced risk tak-
ing (Allen, 1997), decreased levels of innova-
tion (Cascio, 1993; Gandolfi & Oster, 2009),
decreased employee commitment (Mirvis &
Marks, 1992), decreasing morale (Lecky, 1998),
and distrust towards management (Cascio, 1993;
Greenhalgh & Rosenblatt, 1984). Along the
same lines, researchers have documented low-
ered productivity (Estok, 1996; Kinnie et al.,
1998), decreased work performance (Beylerian
& Kleiner, 2003), reduced effi ciency (Lee, 1992),
reduced job performance (Cameron et al., 1993;
Littler, Bramble, & MacDonald, 1994; Littler &
Innes, 2003), decreased levels of product and ser-
vice quality (Fisher & White, 2000), decreased
level of learning (Sahdev, 2003), and deteriorated
levels of competence in the organization (Gettler,
1998).
Gettler (1998) observed similar symptoms
among survivors in New Zealand, Australia,
and South Africa suggesting the fi ndings were
in line with data from the U.S. and Europe
(Amundson et al., 2004; Beylerian & Kleiner,
2003; Makawatsakul & Kleiner, 2003).
Compounding the survivor syndrome is the
survivor guilt represented by the victim’s sense of
responsibility or remorse for some offence, and is
often expressed in terms of depression, fear, and
Franco Gandolfi and Magnus Hansson
JOURNAL OF MANAGEMENT & ORGANIZATION Volume 17, Issue 4, July 2011
512
chosen as a reactive measure to economic crises.
Since the mid-1980s, however, downsizing or
rightsizing has manifested itself as a proactive
human resource strategy (Chadwick et al., 2004;
Hitt et al., 1994) and a strategy of choice (Burke
& Greenglass, 2000). Thus, downsizing has
become decoupled from the business cycle (Littler
& Gandolfi , 2008), and the decision to embrace
downsizing is no longer determined by fi nan-
cial success and failure (Mellahi & Wilkinson,
2004). This fundamental change connotes that
downsizing has attained the status of a restruc-
turing strategy (Cameron, 1994) with the intent
of achieving a new organizational structure and a
new level of competitiveness (Littler et al., 1997).
Consequently, the 1990s saw the elevation of the
downsizing strategy as a way of life (Filipowski,
1993) and a corporate panacea (Nelson, 1997).
Paradoxically, this development took place despite
the absence of downsizing successes.
The active adoption of downsizing has enjoyed
continued popularity in the fi rst few years of this
new millennium despite the many lackluster
results reported in the 1980s and the 1990s. From
a change management perspective, the 1990s did
not end in 1999, but culminated in the technol-
ogy-induced fi nancial markets downturn in 2001
(Littler & Gandolfi , 2008), as well as frequently
reported multiple layoffs following the current
global fi nancial crisis (Sowjanya & Vasanthi,
2009). There is strong empirical evidence demon-
strating that downsizing practices have remained
fashionable in this new decade (Gandolfi & Neck,
2008; Macky, 2004; Mirabal & DeYoung, 2005).
As in the previous two decades, downsizing-
related synonyms and euphemistic terms have
appeared in abundance in both the business press
and academic literature (Story & Dash, 2008;
Weiss, 2008).
Large fi rms, in particular, have continued
to downsize and embark upon extensive non-
selective (i.e., across-the-board) job cutting since
2001 (Littler & Gandolfi , 2008). This is evident
in the downsizing announcements and plant clo-
sures in the U.S. and elsewhere over the past three
downsizing responsibilities is emotionally taxing
and professionally challenging (Clair & Dufresne,
2004).
In sum, a multitude of fi nancial, organiza-
tional, and human consequences of downsizing
has appeared in the literature. To put a single
downsizing consequence forward is problematic
and underrates the complexity of the phenom-
enon. Some frequently reported consequences of
downsizing include decreased levels of organiza-
tional effi ciency, effectiveness, productivity, and
profi tability. Furthermore, downsizing has also
shown to produce decreased morale and job sat-
isfaction, increased number of confl icts, slower
confl ict resolution, and a loss of trust as well as
increased levels of individualism and percep-
tions of disconnectedness generating a range of
psychological outcomes for downsizing victims,
survivors, and executioners.
CONTEMPORARY DOWNSIZING
PRACTICES
As described in the previous section, it is possible
to state that downsizing has largely failed to pro-
duce the widely anticipated fi nancial and organiza-
tional gains, while profound human consequences
have emerged among all constituencies within the
downsized fi rm. There is some acknowledgment
within the business community that downsizing
has been destructive (Zyglidopoulos, 2003), yet
there is considerable empirical and anecdotal evi-
dence suggesting that the execution of downsiz-
ing has continued well into the new millennium
(Gandolfi , 2009; Hansson, 2008a,b; Macky, 2004;
Mirabal & DeYoung, 2005). In addition, there are
widespread expectations that fi rms will continue
to resort to downsizing activities (Gandolfi &
Hansson, 2010; Littler & Gandolfi , 2008).
Prior to the mid-1980s, downsizing was
adopted in situations where employee reductions
were undertaken in response to external events
and short-term needs (Kozlowski, Chao, Smith,
& Hedlung, 1993). This strategy, which was con-
sidered reactive downsizing, is intrinsically cor-
related with the business cycle and purposefully
Causes and consequences of downsizing
Volume 17, Issue 4, July 2011 JOURNAL OF MANAGEMENT & ORGANIZATION 513
employees were typically dismissed en masse
(Story & Dash, 2008).
CONCLUDING REMARKS
This research paper has shown that downsizing
remains a complex, multifaceted business phe-
nomenon (Datta et al., 2010). While the down-
sizing literature is extensive and many valuable
insights have been gained over the past three
decades, the reactive and strategic adoption and
practice of downsizing has continued unabated
despite its dubious track record (Gandolfi &
Hansson, 2010).
In order to develop a more in-depth under-
standing of downsizing, the authors believe that
it is necessary to determine and understand the
driving factors causing downsizing activities
and the ensuing consequences of such endeav-
ors (Datta et al., 2010). As a result, an integra-
tive framework has emerged depicting the causes
and consequences that are typical and most fre-
quently cited in the literature. This integrative
framework is shown in Figure 1 and purports to
lay out the foundations for a more comprehensive
understanding of the most typical causes and con-
sequences of downsizing than any single explana-
tion by itself.
Accordingly, downsizing activities can be
driven by either external factors, such as fi nancial
crises, competition, and other types of change
that infl uence an organizations realm of action,
or internal fi rm-level factors, namely fi nancial
and managerial actions. Interactions between the
external and fi rm-level factors are in most cases
driven from changes in the external environment
generating various implications and management
action on the fi rm level, often including downsiz-
ing (see dotted arrow in causes as per Figure 1).
A downsizing activity per se is a deliberate action
within the organization and initiated by man-
agement. How and to what extent external fac-
tors generate management actions resulting in
downsizing activities is an empirical question.
In line with Mellahi and Wilkinson (2004), we
argue that future studies should compare and
years. In 2007, for example, large pharmaceuti-
cal fi rms, such as AstraZeneca, Bayer, Johnson &
Johnson, and Amgen announced plant closures
and closings of research centers, thereby practic-
ing employee layoffs on a large scale (Martino,
2007). During the same time period, high-tech-
nology companies cut their employee levels; for
example, Dell shed 8,800 jobs (Ogg, 2007) and
Motorola released 10,000 employees (Deffree,
2007). Most recently, the global fi nance industry
has been severely impacted by the global credit
squeeze (Elstein, 2008). In the wake of the on-
going U.S. subprime mortgage crisis and its after-
math, many fi nancial rms have been forced to
make deep personnel cuts (Story & Dash, 2008).
At present, signifi cant employee cutbacks are
occurring in the global fi nance industry and pro-
jections of hundreds of thousands of job losses in
the U.S. fi nance industry in the wake of the cur-
rent economic fallout have surfaced (Read, 2008).
Downsizing can appear in different shapes and
forms. For instance, stealth downsizing, seen by
some as a current management fad (Weiss, 2008),
has emerged as a current layoff practice. Under
the stealth approach, managers are not permitted
to discuss downsizing and downsizing-related lay-
offs openly in meetings, memos, or e-mails out of
fear that negative publicity may ensue (Richtmyer,
2002). Firms engaging in such practices attempt
to avoid negative press coverage at all costs, yet
they are likely to create an atmosphere of distrust
and unease among employees leading to lower
levels of workforce morale and motivation as
well as defections of talented people (McGregor,
2008). As a result, fi rms reduce employee levels in
a surreptitious manner (Demerjian, 2005; Krane,
2002; Weiss, 2008).
The current downsizing-related layoffs in the
nance industry can be characterized as stealth
downsizing (Story & Dash, 2008). In the past,
non-selective, across-the-board (mass) layoffs in
the fi nance industry were typically conducted
with sudden, deep employee cuts. This was exem-
plifi ed in both the 1987 U.S. stock market crash
and the global fi nancial upheaval in 1998, where
Franco Gandolfi and Magnus Hansson
JOURNAL OF MANAGEMENT & ORGANIZATION Volume 17, Issue 4, July 2011
514
provide a mapping of downsizing with guidelines
for theory-consistent empirical research (Luft &
Shields, 2003). Rather, this framework merely
provides an overview and depicts the majority of
factors reported in previous research on downsiz-
ing. Such a task is challenging and can be a useful
source for future research. Second, the frame-
work is also limited to the extent that it does not
take into account the type of downsizing activ-
ity employed. However, the majority of studies
focuses on workforce reduction as a downsizing
strategy even if there are some studies that take
into account divestments as strategic transforma-
tions intended to change a fi rms design, work
processes, corporate culture, values and attitudes,
and mission (Kets de Vries & Balazs, 1997).
Finally, this paper has reviewed contributions
from the downsizing literature. It has been the
authors’ intention to make a widely scattered,
multifaceted, and notably diverse fi eld of research
much more readily available to scholars and busi-
ness professionals. As previously noted, the vast
majority of the downsizing literature is paradig-
matically situated within the social action theory
within the functionalistic approach consisting of
a whole range of ontological, epistemological, and
methodological assumptions (Burrell & Morgan,
1979). Still, within the social action theory
realm, explanations of the social world must be
adequate at the level of meaning. Explanations of
social affairs must account for the way in which
individuals attach subjective meaning to situa-
tions and orient their action in accordance with
their perceptions of those situations. This has not
been clear within the previous research. Thus, the
authors argue that future research should take
into account such aspects in order to combine
theoretical richness and methodological rigor.
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Received 28 April 2010 Accepted 19 February 2011
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... A common assertion is that downsizing leads to negative socioemotional outcomes among employees because it induces a perception of violation of the psychological contract which makes employees withhold contributions (Lester et al., 2003). However, the normalisation of downsizing as an organisational strategy (Gandolfi and Hansson, 2011) has changed employee expectations of the job relationship (Zatzick et al., 2015). Job security and long-term employment have become less relevant; the 'new employee' is more concerned with keeping their skills marketable and their employability high (Kanter, 1989). ...
... However, it is often demographic characteristics, such as ethnicity, age and organisational tenure (Brand et al. 2008;Dwyer and Arbelo, 2012), and not performance that inform layoff decisions. Nevertheless, previous research has indicated that layoffs often generate negative performance outcomes, such as lowered productivity (Gandolfi and Hansson, 2011;Gandolfi, 2013). ...
... The unique features of each workforce reduction method generate different emotional reactions, because they are perceived as distinct work events, some with positive connotations and some with negative ones. This research provides evidence of the positive effect of some downsizing methods on commitment which contradicts the dominant views in both the downsizing (Gandolfi and Hansson, 2011) as well as the closedown bodies of literature (Hansson, 2017). Furthermore, the effect of downsizing on employees' commitment varies depending on their contextual proximity to the downsizing event as shown in Figure 2. Contextual proximity refers to the degree of similarity between features of the environment of employees and the environment of units targeted for reductions. ...
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... This thesis will focus on specific consequences of downsizing and the options for leaders to do something about it. It has been widely acknowledged that the situation of downsizing puts additional demands on employees (Gandolfi & Hansson, 2011), which may cause adverse changes in work attitudes and health (Kivimäki et al., 2001). For ailing organizations high additional costs resulting from sickness absence and occupational disability could be the knock-out blow. ...
... Downsizing can be defined as the planned elimination of jobs in an organization (Cascio, 1993). As already mentioned, downsizing usually puts additional demands on employees (Gandolfi & Hansson, 2011) and it tends to cause adverse changes in the work environment, work attitudes and health (Kivimäki et al., 2001). ...
... The widespread use of downsizing in the organizational sense emerged in the late 1970s and early 1980s. With the economic recession experienced during this period and the effect of privatization that started in the United Kingdom that affected almost all economic systems, businesses resorted to reducing the number of employees under their control (Gandolfi and Hansson, 2011). This period can be defined as the early years of downsizing. ...
Chapter
The Pandemic leads to different changes in the daily life such as eating, smoking behavior. The study mainly focused to comparatively analyze the change of eating and smoking behavior during lockdown among the people of Gujranwala, Mumbai and New York and also highlight what significant changes come in life due to pandemic. The study is cross national study and quantitative in nature. The survey method was used for data collection. The data was collected through Google survey from. The population of this study was people who belong to Gujranwala, Mumbai and New York and sample sized of 450 people were selected by using convenience sampling technique. The study results showed that participants of these three cities recorded changes in their eating and smoking behavior during pandemic. Most of the respondent’s weight were observed increased. They started eating extra food against their normal routine. The study results also noted that people have also changed their smoking behavior. They increased the frequency of smoking per day in confinement. The study also found that people spent more time with their family after the pandemic, because government of these three countries imposed a lockdown. The study concluded that Covid-19 effect on smoking and eating behavior negatively.
... Downsizing refers to layoffs that may or may not be accompanied by systematic restructuring programs such as staff reductions, departmental consolidations, office closings, or other forms of reducing payroll expenses [3]. Institutional downsizing is the conscious use of personnel reductions when faced with difficult economic conditions [4], and these changes were described by Lawson and Angle [5] as "trigger events", which initiated knowledge shifts and stir up feelings and emotions that elicited different reactions because the effort of many educational tertiary institutions goes into separation packages and support for lay off employees as a result of downsizing with little attention given to the retained employees who are remaining in educational institutions [6]. ...
... Furthermore, as the reliance on temporary and part-time contracts may provide flexibility during demand fluctuations in terms of employment adjustment, we control for Temporary workers ratio (ratio of temporary workers over total workforce) and Part-time workers ratio (ratio of part-time workers over total workforce) (Muñoz-Bullón & Sánchez-Bueno, 2014). Since downsizing may result from the competitive pressure of rival firms (Gandolfi & Hansson, 2011), we control for the number of competitors in the main market of the company (Competitors). Rural areas are regarded as localities particularly rich in terms of social capital where family and community networks result in localization advantages for family firms (Backman & Palmberg, 2015). ...
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This study explores the downsizing propensity of family and non-family firms by considering their territorial embeddedness during both periods of economic stability and financial crisis. By drawing on a panel dataset of Spanish manufacturing firms for the period 2002–2015, we show that, all things being equal, family firms have a lower propensity to downsizing than non-family firms. When considering the effect of territorial embeddedness, we found that territorially embedded family firms have an even lower propensity to downsizing than their non-family counterparts. Furthermore, the concern of territorially embedded family firms for their employees’ welfare was particularly pronounced during the years of the global financial crisis. This result is explained by the existence of socially proximate relationships with the firms’ immediate surroundings, based on similarity and a sense of belonging, which push deeply rooted family firms to treat their employees as salient stakeholders during hard times. Overall, our study stresses the importance of local roots in moderating the relationship between family firms and downsizing.
... These actions have downstream effects to stakeholders, and their decision-making abilities are judged in part by real-life consequences to these stakeholders. Downsizing generates profound consequences in financial, organizational, and human resource realms (Gandolfi & Hansson, 2011). The collective ability of the management team to participate in open information exchange and produce collaboratively based solutions and decisions predicts, in part, the process and perceptions of organizational decline (Carmeli & Schaubroeck, 2006). ...
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Decline and downsizing often create organizational conditions that are tension-filled, problematic, disruptive, and prone to unethical behaviour. It is common for educational organizations to face discontinuity of services and reduction of personnel; therefore, it is important to understand the relationship between declining organizations and the ethical behaviour of educational leaders under these circumstances. In this article, we provide a general description of organizational decline, typical responses to such decline, and highlight the phenomenon of personnel downsizing, with particular attention to the Canadian education context. We offer descriptions of various in situ strategies from several Canadian educational superintendents to illustrate implications for how we might better understand personnel reductions in relation to ethics. We conclude with suggestions concerning ways we might upgrade downsizing with wise judgment and ethical decision-making.
... These actions have downstream effects to stakeholders, and their decision-making abilities are judged in part by real-life consequences to these stakeholders. Downsizing generates profound consequences in financial, organizational, and human resource realms (Gandolfi & Hansson, 2011). The collective ability of the management team to participate in open information exchange and produce collaboratively based solutions and decisions predicts, in part, the process and perceptions of organizational decline (Carmeli & Schaubroeck, 2006). ...
Article
This study investigates whether and how organizations change their use of management accounting during crisis. The study is important because organizations regularly face significant challenges such as crisis during which the role of management accounting is not well understood. Based on interviews and observation in five private sector organizations and one in the public sector, I find that executives in organizations facing crisis due to a discontinuous and unpredictable environmental change leverage management accounting during the crisis. In contrast, executives in organizations facing crisis due to a continuous and predictable environmental change question the truth and value of their management accounting practices and, as a result, do not change their use of management accounting to manage the crisis. For those organizations that do leverage management accounting, I rely on conceptual and empirical insights from the literature examining the decision‐facilitating role of informal management accounting to examine how they adapt or develop new management accounting tools and practices to manage crisis. I find that executives first engage in a comprehensive review of their management accounting systems and reports to convince themselves that they can be relied on. Following this process, they leverage accounting to understand the past, develop metrics intended to reach all employees, and institute various forms of accountability to support the management of crisis. The use of these informal management accounting tools and practices enables organizations to develop a new language for understanding and managing crisis. The primary contribution of my study is that it conceptualizes and theorizes informal management accounting tools and practices as a mechanism that facilitates response to crisis. These tools and practices are low‐cost and easy to implement, which are favorable given the challenges associated with crisis. This article is protected by copyright. All rights reserved.
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Despite redundancies having far reaching consequences for organisations, relatively limited attention has been paid to the conflicting experiences of those implementing the redundancy process; the redundancy envoys. By drawing on theories of cognitive dissonance and ‘dirty work’ we explain how individuals implementing redundancies can experience a disconnect between their outward and inner emotions. We reconceptualise redundancy envoys as quasi-dirty workers as they intermittently perform ‘dirty work’ tasks that may be perceived as morally tainted, whilst recognising their conventional role incorporates tasks perceived as contrary to that of ‘dirty work’. Our study draws on insider research access to redundancy envoys over a five-year period during the implementation of four consecutive redundancy programmes, providing the opportunity to observe decisions and actions in ‘real time.’ We offer a contemporary reconceptualisation of the redundancy envoywhich permits a deeper understanding of the negative impact on redundancy envoys and offers opportunities to examine how this can be reduced. In addition, it is anticipated that the results of this study will offer support to HR functions in reducing the stigma of ‘dirty work’ for redundancy envoys with the intention of enhancing the management of redundancy implementation.
Article
When firms face pressures to reduce costs, evidence from the field suggests that they often reduce labor costs (i.e., wages, benefits, payroll taxes). Because of the prevalence of labor cost reduction in the field, academic research has begun to investigate the consequences of management's decisions to reduce labor costs. I provide a structured literature review on the employee-level consequences of three labor cost reduction practices: employee downsizing, furloughs, and pay cuts. My literature review synthesizes the labor cost reduction research through a lens of a discretionary management accounting decision to reduce costs and highlights opportunities for management accounting researchers to explore the consequences of labor cost reductions on employees’ attitudes and behaviors. To synthesize the literature on labor cost reduction, I develop a model that proposes that management's labor cost reduction decisions, which include features of the implementation and contextual factors, influence employees’ perceptions of management's and employees’ attitudes and behaviors. Consistent with my model, my synthesis of the literature shows that labor cost reduction generally has negative employee-level consequences. However, features of management's implementation of the labor cost reduction practice and contextual factors can alter employees’ perceptions and mitigate these negative consequences. This article is protected by copyright. All rights reserved.
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While downsizing has become an increasingly popular organizational tool in the achievement and/or maintenance of competitiveness and increased productivity, the negative side effect known as survivor syndrome continues to plague many post-downsizing organizations. This two-part article examines the full spectrum of research, with the goal of producing a model. The model is based upon the problems survivors experienced and modeled after the John Wanous realistic job preview (RJP). The realistic downsizing preview (RDP), which can be effectively used before the downsizing, is implemented to prevent survivor syndrome in the aftermath of the downsizing. The foundation of the RDP model is that by addressing issues that have been observed as survivor syndromes prior to a downsizing, the negative outcomes can be minimized. Part I considers downsizing, its effects on survivors and their needs, and the importance of good communication and perceived fairness within the process.
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Large Australian and Swiss banks have been trimming their workforces since the mid-1990s. With further rounds of downsizing activities predicted, this study sought to identify, examine, and compare the adopted organizational downsizing implementation strategies. The primary purpose of this cross-cultural study was to determine how large Australian and Swiss banks implemented downsizing in their most recent endeavors. The research has revealed three key findings. First, Australian banks primarily adopted workforce reduction strategies, whereas Swiss banks employed a mixture of organization redesign, workforce reduction, and systemic strategies. Second, Australian banks had considerable depth in their downsizing, whereas Swiss banks had more breadth in their overall strategies. Third, Australian banks favored reorientation approaches, whereas Swiss banks embraced reinforcement approaches. It remains unclear as to why large Australian and Swiss banks differed in the selection of implementation strategies and why they diverged in their overall approaches to downsizing. Further research is required to explore aspects that are likely to influence the adoption of downsizing strategies in both Australia and Switzerland.
Chapter
The costs of human resources vary across industries, but in knowledge organizations, they typically comprise more than half of total operating costs. The costs of benefits and overhead easily can add another 75 percent to base pay. Although organizations incur HR costs in a number of key areas, one of the most common ones is employee absenteeism. The total cost absenteeism is comprised of three broad categories of costs: those associated with absentees themselves, the costs of managing absenteeism problems, and all other relevant costs. Free, Web – based software is available to do these calculations.