There are two interesting articles, one I read recently and one some years ago. One in Business Insider which identifies those firms that have engaged in large scale layoffs during COVID. Another piece (some years ago in the WSJ) on innovation in the cork industry and how manufacturers of plastic corks have been able to take a big slice out of the traditional wooden cork industry, an industry where wooden corks were so well entrenched that it was inconceivable to the incumbent firms that things could change. These two articles got me thinking about the mass of layoffs recently and the effect on innovation. In fact, there are a number of relationships between innovation, downsizing and firm performance.
There is a significant relationship between downsizing and organizational performance, but not in the direction you might think. Research by Wayne Cascio, a professor of management at the University of Colorado and an expert on downsizing shows that firms which made the deepest layoffs when compared to their peers delivered weaker performance for as long as nine years after a recession. His work was with firms listed on the S&P 500. Other research with fortune 100 firms shows similar outcomes. Those firms which cut over 10% of their work force performed significantly worse than those firms which made smaller cuts. There are in fact a number of approaches to downsizing, some more effective than others. Those firms that simply lay off people without deep consideration of customer value and the systemic impacts of layoffs (such as worsening morale, decreased productivity, and damaged reputations) are the most vulnerable since the expected cost savings never materialize. The table below highlights a continuum of approaches:
| Downsizing Tactic | Characteristics | Examples |
| Workforce reduction | Aimed at headcount reduction Short term implementation Fosters transition and transformation | Attrition, Transfer and outplacement, Retirement incentives, Buyout packages, Layoffs |
| Organization re-design | Aimed at organization change Moderate term implantation, Fosters transition and transformation | Eliminates functions, Merge units Eliminates layers Eliminates products Redesigns tasks |
| Systemic re-design | Aimed at culture change, Long term implementation, Fosters transformation | Change responsibility, Involves all constituents Foster continuous improvement/innovation Simplification, Downsizing: a way of life |
(Source: Cummings, T. and Worley, J (2001) Organization Development and Change (7ed). Cincinnati, OH: Southwestern College Publishing, Inc. p.297)
The firms which look at systemic re-design in terms of culture change and transformation are the most successful because they think about the market when making changes and use a transparent, communicative and open approach. They are focused on improving value delivered to the customer and not just on internally driven cost savings and retaining exec compensation levels. What research shows is that those firms with a high degree of market orientation deliver higher levels of innovation and performance. One can look at this in two ways from a downsizing perspective. Firstly, administrative innovation in terms of downsizing approach (pure layoffs versus systemic re-design) is directly related to market orientation since firms which are more customer focused and market driven are likely to make smaller cuts and implement them in a systemic manner. Secondly, market orientation and human capital have a direct influence on innovation and performance as a whole. If firms make deep cuts they are effectively losing a portion of their knowledge and such knowledge is crucial to the innovation capability of the firm. What you have is double whammy on the firm’s performance. Since the firm has a low degree of market orientation, they use a simplistic approach to downsizing and resort to mass layoffs, the expected cost savings never materialize. The concomitant negative changes in staff motivation and commitment levels and the lost knowledge of laid off staff all contribute to the decreased innovative capability of the firm. The net result is a firm which was already poorly positioned in terms of delivering customer value becoming even worse through downsizing when they expected profitability to improve. It might sound counter intuitive but a substantial body of research shows this to be the case.
The paradox is that COVID has accelerated trends in many industries (such as the digital impact on business) and these firms are needing to innovate and go through some kind of strategic change. I say this is a paradox because a ‘lean’ or ‘right sized’ organization is often one without slack. Slack has been shown to have a significant impact on innovation and performance. So right at the time when organizations need to innovate to remain viable is right at the time they have the least capacity to do so! This short term thinking is one of the reasons many former public company CEOs are happy to go private again. In her insightful new book (Step Up, Step Back), Elsbeth Johnson demonstrates the role that slack plays in strategic change.
Research conducted in Australia (Farrell, M.A., and Mavondo, F.T (2003) The Effect of Downsizing Strategy and Re-orientation Strategy on a Learning Orientation. Personnel Review, 33(4), pp.383-402) found that those firms which approached downsizing from a lay off perspective had a negative impact on their learning orientation whereas those firms which used a systemic approach had a positive impact on their learning orientation. Learning and knowledge are key to innovation and firm performance yet you wouldn’t believe it based on the indiscriminate downsizing undertaken by many organizations.
Time for firms to stop treating people like disposable assets and start thinking about the big picture and the longer term, and perhaps use some of the money they made during the boom years to keep people on during rougher times!
Strategy & Competitiveness 