Organizational downsizing strategy and firm performance

In order to survive and prosper in a rapidly changing environment, firms use various strategies to make their organization more competitive. Organizational downsizing has been a popular management strategy in global business since the 1980s (Fisher & White, Reference Fisher and White2000; Sutton, Reference Sutton2009; Datta, Guthrie, Basuil, & Pandey, Reference Datta, Guthrie, Basuil and Pandey2010; De Meuse, Marks, & Dai, Reference De Meuse, Marks and Dai2011). After several years of research and investigation by many researchers, whether organizational downsizing can definitively improve firm performance is still debated (Chadwick, Hunter, & Walston, Reference Chadwick, Hunter and Walston2004; Love & Kraatz, Reference Love and Kraatz2009; Muñoz-Bullon & Sanchez-Bueno, Reference Muñoz-Bullon and Sanchez-Bueno2011). However, whether downsizing is a panacea or paradise lost (Lowe, Reference Lowe1998), organizational downsizing undeniably hurts employees economically, physically, psychologically, and socially. Employees’ families are also negatively affected, to the point of causing social tension (Naumann, Bies, & Martin, Reference Naumann, Bies and Martin1995; Naumann, 1998; Mckee-Ryan & Kinicki, Reference Mckee-Ryan and Kinicki2002). Therefore, organizational downsizing is usually criticized as an irresponsible strategy implemented by a company management team that cares only for the interests of the firm and ignores other stakeholders. Some researchers (Shah, Reference Shah2000; Millward & Brewerton, Reference Millward and Brewerton2002; Sutton, Reference Sutton2009) point out that organizational downsizing causes employees to lose trust in their firm, resulting in a reduction of work satisfaction, organizational commitment, and personal performance (Mckinley, Sanchez, & Schick, Reference McKinley, Sanchez and Schick1995). This is one of the reasons why firm performance does not improve after organizational downsizing. Therefore, a firm that wants to downsize as well as improve firm performance will have to consider their employees’ feelings.

Responsible downsizing strategy

In order to mitigate or solve this important problem regarding organizational downsizing strategy, many researchers have studied this area and had some significant results (e.g., Cameron, Reference Cameron1994; Appelbaum, Everard, & Hung, Reference Appelbaum, Everard and Hung1999; Cascio, Reference Cascio2002). The strategy typology developed by Porter (1980, 1985) is arguably the most recognized and widely used by both business policy and industrial relations researchers (Arthur, Reference Arthur1992). This strategy typology has been applied to the downsizing context and used to evaluate downsizing strategies to determine why they cannot ensure firm performance. Researchers found that if a downsizing strategy is a ‘cost leadership strategy’ (e.g., Cameron, Reference Cameron1994; Freeman, Reference Freeman1999; Cascio, Reference Cascio2002; Rigby, Reference Rigby2002), it could not boost firm performance. Rather, a ‘differentiation strategy’ that emphasizes creating more value is more effective. For example, Cameron (Reference Cameron1994) investigated the automotive industry and discovered that a downsizing strategy that only focussed on cost-cutting caused organizational disability (e.g., loss of revenues, market share, and personnel) and impaired performance. Instead, a successful downsizing strategy must include the comprehensive consideration of approach, preparation, employee participation, leadership, employee care, execution, and post-downsizing performance measurement. Freeman (Reference Freeman1999) and Appelbaum, Everard, and Hung (Reference Appelbaum, Everard and Hung1999) also claim that an organizational downsizing strategy should include both a behavior and strategic thinking. It should not be undertaken just for cost-down measures. Instead, the strategy needs to fully consider the whole downsizing process, from planning to post-downsizing firm performance.

Meanwhile, employees are the key to the downsizing process. Cascio (Reference Cascio2002) studied 6,418 downsizing cases in 500 top companies of S&P during the period from 1982 to 2000 and discussed ‘strategies for responsible restructuring’ that also asserted that a cost-oriented downsizing strategy cannot ensure firm performance. A responsible downsizing strategy should comprehensively consider long-term payoff to firms. He claimed that for those successful downsized companies that must have the ability to improve performance, and must take a reduction in employees as a last resort. In addition, they must continue to invest in the growth of the company as well as ‘park’ the best employees and respect the others. Furthermore, they should provide outplacement assistance such as job training, consulting, and job search assistance to laid-off employees. Strong and continuously growing companies with a strong business model must treat employees as long-term assets. Consolidating the finding from the above research, we can conclude that the responsible downsizing strategy, an employee-oriented strategy, may not only improve firm performance but also reduce harm to employees. Numerous studies support the concept of employee-oriented human resource management (HRM) practices that boosts firm performance (Naumann, Bies, & Martin, Reference Naumann, Bies and Martin1995; Gowing, Kraft, & Quick, Reference Gowing, Kraft and Quick1998; Chadwick, Hunter, & Walston, Reference Chadwick, Hunter and Walston2004). Based upon the literature, further empirical investigation is warranted.

From the literature (e.g., Cameron, Reference Cameron1994; Freeman, Reference Freeman1999; Appelbaum, Everard, & Hung, Reference Appelbaum, Everard and Hung1999; Cascio, Reference Cascio2002), we found that a responsible downsizing strategy is composed of four main dimensions: (1) management has the mindset of treating employees as long-term assets because employees are sources of innovation and renewal and are key for the firm's long-term profitability; (2) there is a suitable strategy for organization change before a downsizing strategy, management evaluates the long-term payoff and carefully estimates the company's ability to better performance, and then chooses a suitable organization change strategy; (3) management invites employee opinions about the downsizing plan, and the process of choosing laid-off employees is just; and (4) management implements appropriate employee-caring HRM practices, such as providing laid-off employees with legal severance pay and providing outplacement assistance and job training, consulting and job search assistance, etc. Numerous previous studies have supported the above dimensions and can benefit firms performance, and these studies suggested that firms should care about survivors, treat employees as long-term assets (e.g., Brockner, Wiesenfeld, Reed, Grover, & Martin, Reference Brockner, Wiesenfeld, Reed, Grover and Martin1993; Cascio, Reference Cascio1993; Beam, Reference Beam1997; Shah, Reference Shah2000, etc.), select a suitable change strategy (e.g., Cameron, Freeman, & Mishra, Reference Cameron, Freeman and Mishra1993; Cameron, Reference Cameron1994; Cascio, Reference Cascio2002 etc.), keep justice in process of selecting layoff employees (e.g., Brockner et al., Reference Brockner, Wiesenfeld, Reed, Grover and Martin1993; Naumann, Bies, & Martin, Reference Naumann, Bies and Martin1995, etc.), and implement employee-caring HRM practices (e.g., Brockner, Reference Brockner1988; Beam, Reference Beam1997; Shah, Reference Shah2000; Chadwick, Hunter, & Walston, Reference Chadwick, Hunter and Walston2004). However, it is necessary to directly prove the effect of each individual dimension to post-downsizing firm performance. It will be helpful to examine the structure of responsible downsizing strategy to improve the development of this theory. Therefore, we hypothesize:

However, the formation, execution, and performance of organizational strategies are always affected by the leadership of the organization. Can a responsible organizational downsizing strategy (an employee-oriented strategy) fit any leadership style of a downsizing company? In other words, it is worth investigating whether an employee-focussed leadership style can facilitate firm performance during and after the implementation of a responsible downsizing strategy.

Types of leadership style

In organizational leadership behavior research, leadership style is often discussed in a manner of dichotomization. For example, Fleishman in the 1960s categorized leadership behavior into structure and consideration styles. Blake and Mouton (Reference Blake and Mouton1965) also classified leadership behavior into concern for production and concern for people in their theory of managerial grid. Reddin (Reference Reddin1970) divided leadership behavior into task-oriented and relation-oriented styles in his research of leadership behavior and managerial effectiveness. Researchers suggested that leadership behavior patterns are divided into job-centered and employee-centered types (Likert, Reference Likert1979; Battilana, Gilmartin, Sengul, Pache, & Alexander, Reference Battilana, Gilmartin, Sengul, Pache and Alexander2010). Generally, the leaders with a more ‘job-centered’ style will manage employees with a careful direct method and supervise them to complete their tasks in a particular procedure. Moreover, they usually use more legitimate power and reward power to manage subordinates and treat employees as costs rather than assets. On the other hand, leaders with a more ‘employee-centered’ style will allow employees more room to make decisions, obtain promotion, reach personal growth objectives, and earn a sense of achievement. They use a holistic, cooperative process to reach a target. This method inspires subordinates to support their managers. Also, managers are encouraged to treat employees as an asset rather than a cost. This concept of leadership style is similar to studies on behavioral-based ‘transactional leadership’ and ‘transformational leadership’ (Bass, Reference Bass1985; Lowe & Galen, Reference Lowe and Galen1996; Jung, Yammarino, & Lee, Reference Jung, Yammarino and Lee2009; Cho & Dansereau, Reference Cho and Dansereau2010; Walter & Bruch, Reference Walter and Bruch2010). Transactional leadership is close to the ‘task-oriented’ style and transformational leadership is similar to the ‘employee-centered’ style. We used the terms of ‘employee-oriented’ and ‘task-oriented’ styles in this study because this study focussed on the leadership style instead of leader's behaviors.

Firm post-downsizing performance

Since firms (even those in the same industry) have different downsizing strategies and expectations for their post-downsizing performance owing to different business conditions and resource bases (Cascio & Wynn, Reference Cascio and Wynn2004), the self-comparison approach rather than objective performance is therefore considered in this study. We asked senior executives to assess the average firm performance within 3 years after downsizing by comparing with their pre-downsizing performance in the areas of (1) the extent that the firm had improved in cost structure, (2) the extent that the firm had increased in asset utilization, (3) the extent that the firm had expanded in revenue opportunities, (4) the extent that the firm had promoted the customer value of products and services, and (5) the extent that the firm had improved in employee productivity (7-point Likert scale ranking from 1=‘extremely below expectation’ to 7=‘extremely exceeded expectation’ and 4=‘met expectation’). The Cronbach's α for the scale is 0.92.

Responsible organization downsizing strategy

We adopted scale developed by Tsai and Shih (Reference Tsai and Shih2013). The HRM department heads were asked to rate, on a 7-point Likert scale (ranking from 1 = ‘strongly disagree’ to 7 = ‘strongly agree’), the extent to which their firms had implemented a responsible downsizing program. The scale contained three items for mindset of employee as long-term assets (α = 0.77), three items for strategy for organization change (α = 0.83), three items for employee participation and justice in process (α = 0.77), and three items for employee-caring HRM practices (α = 0.73). Results of confirmatory factor analysis suggested the model fit all fall within acceptable ranges (χ² = 247.78 [df = 108, p < .01], confirmatory factor analysis = 0.90, non-normed fit index = 0.88, root mean square error of approximation = 0.09, and standardized root mean square residual = 0.07) (Hu & Bentler, Reference Hu and Bentler1998), except for the significance of χ² value, which was known to be sensitive to sample size and thus comparatively unreliable.

Moderating variables: The employee-oriented leadership style

Leadership style in this study is defined as the general leadership style that most of the leaders of a firm adopt, rather than a specific personal leadership shown by an individual leader. HRM department heads were provided with descriptive statements regarding employee-oriented leadership style (e.g., provide more empowerment, reach personal growth objectives, etc.) and task-oriented leadership style (e.g., supervise in a particular procedure, use more legitimate power, etc.). According to the descriptive statements on leadership, they were asked to evaluate their CEO's leadership style to be employee-oriented (coded 1) or task-oriented (coded 0). In our sample, 78% of firms identify themselves as employee-oriented leadership style and 22% of firms as counterparts.

Control variables

According to previous studies, we controlled firm size (measured by annual revenue) for downsizing strategy (Budros, Reference Budros1999; Filatotchev, Buck, & Zhukov, Reference Filatotchev, Buck and Zhukov2000), industry (measured by high-tech, manufacturing, and service), and stage life cycle during downsizing (measured by categorical choices of start-up, high growth, matured and declining stage) for firm performance (Filatotchev, Buck, & Zhukov, Reference Filatotchev, Buck and Zhukov2000; Cascio, Reference Cascio2002; Tsai & Shih, Reference Tsai and Shih2013).

Scale validation and hypotheses tests

The study used Cronbach's α coefficient for scale validation to examine the internal consistency of the measures and conducted confirmatory factor analysis to evaluate construct validity and model fitness of the scale. To test the hypothesis, the study employed correlation coefficient analysis to examine the correlation among variables in order to exclude irrelevant variables. Afterwards, we conducted hierarchical moderated regression analysis to examine the interactive effects of leadership style and responsible downsizing strategy on firm performance. Variables involved with interaction terms were centered to reduce multi-collinearity before creating the product terms (Aiken & West, Reference Aiken and West1991).

Focus group interview

Statistical analysis can only see the phenomenon of the numeral presentation and makes it difficult to interpret the complicated causal relationship in interpersonal behaviors. Sherer and Leblebici (2001) suggest that qualitative research can distinguish the particularity and reason of creation of a HRM practice. In addition, the integration of qualitative and quantitative research methods should be able to avoid oversimplification and narrow reasoning, which can result from a structured questionnaire and objectivity of statistical analysis (Chien, 1994). Therefore, after the quantitative analysis, this study conducted focus group interviews, respectively, with three major stakeholder groups in the downsizing to seek critical information that would be helpful in interpreting the results of the statistical analysis. These three focus groups consisted of top leaders of labor unions, human resources managers, and senior executives. Generally, the leaders of labor unions and senior executives had opposing viewpoints, while human resources managers had neutral viewpoints. They all satisfied the conditions of power, ability, and motivation to be qualified sources of key information (Delery & Shaw, 2001). There were between six and eight participants in each focus group interview. Also, the format of this research involved all focus group interviews discussing the themes before the meeting and agreeing to a conclusion at the end, according to the view of Krueger and Casey (2000). The triangulate relationship of the three stakeholder groups is shown in Figure 2.

Figure 2

The stakeholder's triangle comparison