The Downside of Downsizing

The reasons for downsizing are usually good ones–the company is losing money, the stock value is way down, market share is dropping.  Of course, it’s brutal for the people who get let go, but it’s supposed to make the company leaner and better able to survive.  But I’ve just read a research article* that shows there’s an unexpected downside to downsizing: product innovation drops dramatically.  And that usually spells more pain down the road, because without innovation no company can save itself.

Why does downsizing reduce innovation?  One guess is that, there are fewer people to have good ideas.  Another guess might be, the creative people in R&D get let go so that the company can focus on making production more efficient.  The real reason is more intriguing, and more surprising, than both of these.  It’s because downsizing blocks the collaborative webs that innovation emerges from.  As the researchers write, new product innovation depends on what they call strategic linking : “linking the product to the firm’s resources, structure, and strategy…. Innovators must compete with other innovations and with established products for money, people, and access to major resources such as time in the plant and space in the salespeople’s bags. New products also need to become part of the organization’s structure, either as a separate venture unit or as part of an existing division.”

Downsizing blocks innovation because it reduces the effectiveness of strategic linking.  In this study of 12 firms, the ones with the least downsizing solved 48% of strategic linking problems; the ones with the most solved only 23%.  As the authors write, “downsizing breaks the network of informal relationships used
by innovators to work out strategic linkages”–what I call the collaborative web.  Successful innovation depends on entrepreneurial networking and after downsizing, networking is blocked because the people that you’d network with are no longer there.

Part of the problem was that in the firms that downsized, management paid almost no attention to product innovation.  The take-home message?  If you have to cut staff, make sure that the network, the collaborative web, stays strong and survives after the layoffs.  “Managers also must keep the network itself alive in the short run, saving as many of the existing pathways as possible.”  This takes hard work and close attention from senior management.

*Deborah Dougherty and Edward H. Bowman, 1995, “The effects of organizational downsizing on product innovation.”  California Management Review, Vol. 37 No. 4, Summer 1995, pp. 28-44.

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