The Effects of Organizational Downsizing on Product Innovation

This estimate is made by Wayne Cascio in his article “Downsizing: What Do We Know? What Have We Learned?” Academy of Management Executive, 7 (1993): 95–104.

These figures come from Cascio's [ibid.] as well as from “When Slimming Is Not Enough,” The Economist, September 3, 1994, pp. 59–60; and Burke's John “The Pain of Downsizing,” Business Week, May 9, 1994, pp. 60–69.

See Little Arthur D. , “Worldwide Survey on Product Innovation,” (Cambridge, MA: ADL, 1991).

For the negative effects of downsizing in general, see reference 2. See also, Brockner J. Grover S. Reed T. DeWitt R. O'Malley M. , “Survivors' Reactions to Layoffs: We Get By With a Little Help From Our Friends,” Administrative Science Quarterly, 32 (1987): 526–542; Cameron K. Whetten D. Sutton R. , eds., Readings in Organizational Decline (Boston, MA: Ballinger, 1988); Hardy C. , “Strategies for Retrenchment: Reconciling Individual and Organizational Needs,” Canadian Journal of Administrative Science, 3 (1986): 275–289; Walsh J. Ellwood J. , “Mergers, Acquisitions, and the Pruning of Managerial Deadwood,” Strategic Management Journal, 12 (1991): 201–218.

See McKinley W. , “Organizational Decline and Adaptation: Theoretical Controversies,” Organization Science, 4 (1993): 1–9. The author argues that whether downsizing stimulates or hinders adaptation remains controversial. For some idea of the lack of resolution in the debates over downsizing, compare Shleifer Andrei Summers Lawrence , “Breach of Trust on Hostile Takeovers,” in Auerbach A. , ed., Corporate Takeovers (Chicago, IL: University of Chicago Press, 1988) with Jensen Michael , “Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers,” American Economic Review, 76 (1986): 323–329. Shleifer and Summers argue that downsizing violates employee trust and therefore reduces productivity. Jensen claims that downsizing cuts out “fat” like excessive staff and salaries and therefore allows resources to be allocated more productively. Academics are also in conflict over whether or not downsizing inhibits or enhances risk taking. Some say that top managers would be more open to new product ideas when current business is not going well, because their ties to existing businesses would be weakened and because reductions in performance levels increase risk-taking. See Burgelman R. , “Corporate Entrepreneurship and Strategic Management: Insights from a process study,” Management Science, 29, (1983): 1349–1363. Also see Singh J. , “Performance, Slack, and Risk-taking in Organizational Decision Making,” Academy of Management Journal, 29 (1986): 562–585. But Staw et al. argue that a threatening activity (like downsizing) would make people stick to rules more rigidly. Staw B. Sandelands L. Dutton J. , “Threat-Rigidity Effects in Organizational Behavior: A Multilevel Analysis,” Administrative Science Quarterly, 20 (1981): 345–354. See also Cameron K. Whetten D. Kim M. , “Organizational Dysfunctions of Decline,” Academy of Management Journal, 30 (1987): 126–137. Cameron et al. found that downsizing in universities was associated with reduced innovation.

See Baily Martin Bartelsman Eric Haltiwanger John , “Downsizing and Productivity Growth: Myth or Reality?” working paper no. 4741, National Bureau of Economic Research, Cambridge, MA.

A common protocol of questions was followed, although the interviews were open. We also called people on the phone over a period of two years to find out what had happened. Several products had become commercially successful during the two years, but most were in the market but uncertain, or still in development. A few had been cancelled during the two years as well.

A number of studies show that the annual report reflects managerial perceptions, intent, and action, and therefore is a reliable source of data for something like extent of downsizing. See Clapham S.E. Schwenk C. R. , “Self-Serving Attributions, Managerial Cognition, and Company Performance,” Strategic Management Journal, 12 (1991): 219–230; Bettman J. Weitz B. , “Attributes in the Boardroom: Causal Reasoning in Corporate Annual Reports,” Administrative Science Quarterly, 29 (1983): 355–373; Bowman E. , “Strategy and the Weather,” Sloan Management Review (Winter 1976), pp. 49–62; and Bowman E. Haire M. , “A Strategic Posture Toward Corporate Social Responsibility,” California Management Review, 18/2 (Winter 1975): 49–57. For the measure, one of the authors and two management students located and then counted the lines in relevant passages in the letter. Since downsizing occurs over time, the measure was made for three years of annual reports (before, during, and after the interviews were made), and then averaged together. The inter-rater reliability among the coders was .82, which reflects a good degree of reliability given that the coding required judgement.

For the problem-solving approach, see Clark Kim Fujimoto Takahiro , Product Development Performance (Boston, MA: Harvard Business School Press, 1991). The three domains of problems to be solved are developed form Cooper R. , “A Process Model for Industrial New Product Development,” IEEE Transactions on Engineering Management, 30 (1983): 2–11; Dougherty D. , “A Practice-Centered Model for Organizational Renewal,” Strategic Management Journal, 13 (1992): 77–92; Kanter R. M. , “When a Thousand Flowers Bloom,” in Staw B. Cummings L. , eds., Research in Organizational Behavior, Vol 10 (Greenwich, CT: JAI Press, 1988), pp. 169–211; Nord W. Tucker S. , Implementing Routine and Radical Innovations (Lexington, MA: Lexington Books 1987); Roberts E. , “What We've Learned: Managing Invention and Innovation,” Research - Technology Management (January/February 1988), pp. 11–29.

The correlation between degree of downsizing and strategic linking problem solution is -.45 (significant at p=.08).

A Spearman rank order correlation was used. For Table 1, the six high downsizing companies are roughly equivalent to the six low downsizing companies with regard to the degree of innovativeness of the products studied, the length of time the products were in development, and the success status of the products. While this matching was not perfect, the equivalence suggests that these factors are not responsible for the differences we see between the two groups of firms. We also ran a multiple regression on percent of strategic problems solved with all these factors along with degree of organizational downsizing in the model. Individual level data were used to give us more degrees of freedom. While the overall effect size is small, we find that the higher proportion of unsolved strategic problems is still associated with organizational downsizing (p=.072), so our correlation is not spurious. In Table 2, the letters to the shareholders mentioned downsizing in from 1.4 to 4.5 percent of the sentences in the low downsizing firms; and in from 5.9 to 16 percent for high downsizing firms. This 2X2 table has a phi =.667 (measure of association); and the chi square =3.0 (Yates corrected), p=.08, although with only n=12 statistics are suspect.

Starr J. MacMillan I. , “Resource Cooptation Via Social Contracting: Resource Acquisition Strategies for New Ventures,” Strategic Management Journal, 11 (1990): 79–92.

For boundary spanning, see Ancona D. Caldwell D. , “Beyond Boundary Spanning: Managing External Development in Product Development Teams,” High Technology Management Research, 1/2 (1990): 119–136. On championing, see Schon D. , “Champions for Radical New Inventions,” Harvard Business Review (March/April 1963), pp. 77–86; and Burgelman R. , “A Process Model of Internal Corporate Venturing in the Diversified Major Firm,” Administrative Science Quarterly, 28 (1983): 223–244. On sponsoring, see Roberts E. , “Entrepreneurship and Technology,” Research Management (July 1968): 249–266; .

For discussions of how senior managers can overcome the negative effects, see Hardy C. , “Investing in Retrenchment: Avoiding the Hidden Costs,” California Management Review, 29/4 (Summer 1987): 111–125; Hardy C. Pettigrew A. , “The Use of Power in Managerial Strategies for Change,” Research on Technological Innovation, Management, and Policy, Vol. 2 (Greenwich CT: JAI Press, 1985), pp. 11–45; Rosenblatt Z. Rogers K. Nord W. , “Toward a Political Framework for Flexible Management of Decline,” Organization Science, 4 (1993): 76–91.

See reference 13.

See Clark Fujimoto , op. cit.

See Jelinek Mariann Schoonhoven Claudia , The Innovation Marathon: Lessons From High Technology Firms (Oxford: Basil Blackwell, 1990); and Shipper Frank Manz Charles , “W.L. Gore and Associates: 1992,” a case study, West Publishing Company.

See Cusumano Michael Nobeoka K. , “Multi-Project Management: Strategy and Organization in Automobile Product Development,” working paper, MIT Sloan School of Management, 1994.

This and many other examples are described by Day George , Market-Driven Strategy: Processes for Creating Value (New York, NY: The Free Press, 1990). See also Quinn James Brian , “Strategic Change: Logical Incrementalism,” Sloan Management Review, 20 (1978): 7–21. For additional ideas on strategy's importance to innovation, see Jelinek M. Schoonhoven C. , The Innovation Marathon: Lessons From High Technology Firms (Oxford: Basil Blackwell, 1990); Mintzberg H. McHugh A. , “Strategy Formation in an Adhocracy,” Administrative Science Quarterly, 30 (1985): 160–197; Crawford C. Merle , “Defining the Charter for Product Innovation,” Sloan Management Review, 21 (Fall 1980): 3–12; Van de Ven A. , “Central Problems in Management of Innovation,” Management Science, 32 (1986): 590–607.

See Westley Frances , “Middle Managers and Strategy: Microdynamics of Inclusion,” Strategic Management Journal, 11 (1990): 337–351.