downsizing and performance

A model to explore the mysterybetween organizations’

downsizing strategies and firmperformance

Integrating the perspectives of organizationalchange, strategy and strategic human resource

management

Cheng-Fei TsaiDepartment of International Business, Wenzao Ursuline College of Languages,

Taiwan, Republic of China, and

Yu-Fang YenDepartment of Business Administration,

National Kinmen Institute of Technology, Taiwan, Republic of China

Abstract

Purpose – Downsizing in organizations is a popular management strategy. However, in the field oforganization change, the question of whether downsizing practices eventually improve performance isfrequently asked and is never satisfactorily answered. The consequences have not always materializedover these years. On the negative side, downsizing harms employees, their families, and at the sametime causes social chaos. The possible answers could be the ignorance of some important mechanismsbetween them. The paper aims to explain this issue.

Design/methodology/approach – The paper applies the dynamic strategy capabilities conceptfrom the strategy research field and strategic human resource management (SHRM) practices conceptfrom the SHRM research field.

Findings – A consolidated model is established to explain the relationships among these variables.

Originality/value – The model is expected to provide significant implications for thought leaders toreflect on the topics regarding organizations’ changes, firm’s strategies and SHRM system and socialissues.

Keywords Downsizing, Human resource management, Organizational structures, Corporate strategy

Paper type Conceptual paper

IntroductionIn order to survive and prosper in a rapidly changing environment, firms have toconsistently use strategies of various types and levels to become more competitive andprofitable. From the 1980s to the present, organizational downsizing has been one ofthe most popular radical management strategies in the world (Fisher and White, 2000;Mckee-Ryan and Kinicki, 2002; Cascio, 2002; Landry, 2004). Although researchers havefocused on the field of organization change for years, the investigations concerningdownsizing have not shown ample supportive proof that downsizing would improvefirm performance. Consequently, organizational downsizing has become a contentious

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Organizations’downsizing

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Journal of Organizational ChangeManagement

Vol. 21 No. 3, 2008pp. 367-384

q Emerald Group Publishing Limited0953-4814

DOI 10.1108/09534810810874831

issue among firms (Chadwick et al., 2004; Landry, 2004). No matter whetherdownsizing is a panacea or paradise lost (Lowe, 1998), it has harmed thousands ofemployees economically, physically, and psychologically. Additionally, it also broughtnegative impacts to numerous families, and even created social tension and chaos(Naumann et al., 1995; Naumann, 1998; Mckee-Ryan and Kinicki, 2002). Specialattention should be paid to this social phenomenon. Possibly, some significantmysteries between downsizing strategies and performance have been frequentlyneglected in both academic and practical management fields. Christensen and Raynor(2003) used to give a warning in their writing: the mechanism between the cause andthe effect was significant to the development of academic theories and the applicationsof firms. Once it was left out, explanations as to the cause and effect could bemisleading. Therefore, after reviewing the literature on organizations’ change,strategy, and strategic human resource management (SHRM), this paper aims toestablish a consolidated model of responsible downsizing strategy. It is expected tocontribute to the future development of downsizing theory and its related topics as wellas having practical applications in management.

After reviewing the literature on organizations’ change, strategy, and SHRM, thispaper aims to establish a consolidated model of responsible downsizing strategy. Inthis model, not only dynamic strategic capabilities and SHRM system are introducedas the important interventional variables between responsible downsizing strategyand firm performance, but we also suggest that stakeholders’ influencing strategiesand workforce performance (employee’s individual level) should be included as theconsiderable variables. It is expected to contribute to the future development ofdownsizing theory and other related topics as well as having practical applications inmanagement.

Responsible downsizing strategyDefinition of downsizingSince the beginning of the 1980s, quite a few scholars, such as Appelbaum et al. (1987),McKinley et al. (2000), and Cascio and Wynn (2004) have defined downsizing inslightly different ways. The term which various scholars used to describe organizations’downsizing has likewise been different. Some termed it downsizing, organizationdownsizing, business downsizing; others called it reorganization, right-sizing, de-layering,restructuring, redundancy, rationalization, redesigning, revitalization, etc.

We synthesize the key points and redefine downsizing as “a set of managerialactions taken by firms aiming to adjust to environmental changes, overcomemanagement difficulties, improve efficiency increase productivity andcompetitiveness.” The means include cost reduction, restructuring and workforcereduction. Nevertheless, workforce reduction was the major way or even used as thelast resort. This was because downsizing was intended to deliberately reduce theorganizations’ workforce (Freeman and Cameron, 1993; Prahald and Hamel, 1990;McKinley et al., 1995; Freeman, 1999).

Motivation of downsizingSince the end of 1980s, most of the literature concluded that organizations’ decline orloss in profit were the principal reasons for downsizing (Greenhalgh et al., 1988;McCune et al., 1988; Love and Nohria, 2005). As a matter of fact, an organization’s

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decline was not necessarily the only reason for downsizing; for instance, firms hoped toincrease competitive advantages and develop technologies. Under the businessenvironment of global economy, the trends of mergers and acquisitions and the pursuitof scale economies urged firms to execute downsizing since the 1990s (Hirschman,2001; Tsai, 2001). Since 1993, business process reengineering (BPR) was widely usedand also caused the fad of organizations’ downsizing. The new business processesdeveloping from re-engineering would detect the redundant workforce (Champy, 1996).Meanwhile, the internal skills relocation targeting to meet environmental needs,out-sourcing strategy, and the increased frequency of hiring temporary employees hasalso enhanced the popularity of downsizing (Cascio, 2002). However, a group ofresearchers considered downsizing was driven by social factors.

Mckinley et al. (1995, 2000) proposed that downsizing was caused by threeinstitutional external social forces: constraining (downsizing decision from topmanagement), cloning (imitation), and learning (e.g. through MBA courses). Managersimplement downsizing due to the influences of social factors. It is because downsizinghas been perceived as an institutionalized norm with its legitimacy. The followingresearch supports institutionalization as a reason for downsizing: Budros (1999),Lamertz and Baum (1998), Mentzer (1996). Budros (1999) pointed out that someirrational external factors, such as institutionalization, social network (e.g. certainpractices have been commonly perceived as an effective method) and irrational internalfactors such as organizational culture and the traits of leaders also affect the scale ofdownsizing.

In 2000, Mckinley et al. further mentioned the motivations for organizations’downsizing were the results from a socio-cognitive process. They asserted thatmanagers usually agreed that downsizing was an effective and inevitable strategy viacollective socialized process. Consequently, they could possibly end up ignoring thevarious backgrounds of the firms, conditions and the original concepts towarddownsizing. The institutional theory of downsizing has divided the motivation intothree categories, namely, economic, institutional, and socio-cognitive factors. Huangand Tsai (2005) established from downsizing research in Taiwan that stagnancy or adecline in profitability, new management models, and employees who did not offercompetitive advantages were the radical reasons causing firms to downsize. Inaddition, with other institutional factors, such as decisions from top management;downsizing has become a widely recognized paradigm, and firms learn/imitate theactions of benchmark enterprises. An empirical research study by Tsai et al. (2006)demonstrated that the reasons for downsizing mingled with economic, institutionaland socio-cognitive factors. Yet, the economic factor was the major one. On the otherhand, the pursuit of efficiency and efficacy was the basic reason behind theirdownsizing strategies and actions. After all, the main purpose of firms’ downsizingactions was the desire to improve performance.

Downsizing strategiesThe present literature in the organization change field points out that the final results oforganizations’ downsizing are strongly linked to the original downsizing strategies.Rigby (2002) marked that among the firms whose share price increased in the stockmarkets after downsizing, the firms which applied cost reduction as the downsizingstrategy had the least satisfactory results (with only a 2 percent increase in share price).


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On the one hand, the downsizing strategy of synergy creations led to a 9 percentincrease; on the other hand, the strategy of organizations’ reorientation increased by13 percent. In the following, we have summarized the significant types of downsizingstrategies from the literature review.

Hierarchy of workforce reduction strategies. Greenhalgh et al. (1988) proposed amodel of downsizing strategy’s decisive factors. It was a tool to analyze downsizingstrategies. They proposed that firms would select strategies from different levels(i.e. strict to lenient) taking into account the characteristics of redundancy and thebackground factors. The levels of strategies included natural attribution strategy,induced redeployment strategy, involuntary redeployment strategy, layoff strategieswith outplacement assistance, and layoff without outplacement assistance. Hence,downsizing research often uses the above strategies as the basis when exploringvarious downsizing strategies (Cameron, 1994; Freeman, 1999; Cascio, 2002).

Three strategies of downsizing based on organizations’ degree of change. Freemanand Cameron (1993) and Freeman (1994) suggested that downsizing not be misused torepresent negative actions when facing an organizations’ decline or environmentaldifficulties. Most importantly, the effectiveness of the downsizing process, and thesituations of organizational change should be emphasized. They have proposed twokinds of downsizing strategy, convergence and reorientation strategy. Cameron et al.(1993) have further divided the strategies into three categories based on the degree ofchange caused by the downsizing actions. They were termed the workforce reductionstrategy, work redesign strategy, and systematic strategy which eventually changedthe organization to the largest extent. Cameron (1994) additionally suggested that firmscould choose a sole strategy or more than one to execute downsizing; meanwhile,Huang and Tsai (2005) also verified that firms generally used more than twodownsizing strategies. For example, they could reduce the workforce firstly,then redesign the work or change it dramatically and vice versa. Alternatively, theyredesigned or changed dramatically firstly, then cut down the workforce, or did thethree actions simultaneously.

Social institutional downsizing strategy. The institutional theory of downsizing(McKinley et al., 1995, 2000) has shown that due to social factors, many firms approve ofdownsizing as an effective management method. Gradually, managers adopted similardownsizing strategies, such as providing job-seeking consultation, notification to thelaid-off prior to the release of the downsizing decision. From the perspective of theinstitutional theory of downsizing, the institutional factors not only affected the innermotivations of actions, but also the external behaviors. Conclusively, firms operated underthe structure of social norms, values, appropriate structure and economic behaviors. Theentire range of business practices, such as human resource management practices, woulddevelop based on the reality of the social structure and would eventually gainlegitimacy (Oliver, 1997). The institution was a process which formed a rule-like norm via asocialization process, obligations or the practical social mentality and actions(Meyer and Rowan, 1997). The more willing the individuals within organizations wereto accept the shared norms, the more institutionalized they became (Scott, 1987).Meanwhile, firms would conform to social expectations when their isomorphismbehaviors met the social norms. Thereby, the legitimacy of different behaviors, theincrease in resources and survival capabilities would help organizations to survive andsucceed (Carroll and Hanman, 1989; Oliver, 1997; Yeh, 2000). Inevitably, the firms’

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downsizing behaviors would be constrained by external institutions and take similarapproaches. Empirical research from Tsai et al. (2005a) done on Taiwanese firms showedthe comparisons between firms’ downsizing strategies and found there was no significantdifferences between organizations’ downsizing strategies and other strategies aiming tocope with the influences from the stakeholders.

Alternative strategy. Some argued that an alternative strategy of downsizing couldbe more appropriate than downsizing and laying-off directly. The concept wasmentioned since the end of 1980s (McCune et al., 1988; Ulrich and Lake, 1991). Thestrategy was more humane and included the terms previously discussed byGreenhalgh et al. (1988), such as reduction of promotional opportunities, demotions ofsupervisory positions to non-supervisory ones, salary freeze, curtailed working hours,two shared one job, no paid leave, early retirement with preference packages, etc.Cascio (2002) also took Cisco and Motorola as examples to illustrate that when theeconomy was stagnant; firms paid key employees a partial salary and re-allocatedthem to work for non-profitable organizations. In one way, they could continue toserve society, in another way, it was a mutually beneficial alternative strategy.Corporate Finance (2002) used the financial viewpoint to workout the results of thealternative strategy. He successfully to use alternative strategies to reduce costs otherthan downsizing, and eventually was able to keep valuable intellectual employees.

Comprehensive downsizing strategy. After studying the downsizing strategy of thecar manufacturing industry in 1994, Cameron proposed a 30-itemed-prescription forsuccessful downsizing. He suggested an across-the-board, quick-hit, grenade-typedownsizing strategy would cause organizations to lose their abilities and performancewould deteriorate. To sum it up, firms should analyze systematically beforedownsizing, encourage employee participation, communicate clearly and apply higherlevel quality management. These endeavors would lead to more positive final results.A successful downsizing should take every aspect into account, e.g. approaches,preparations, employees’ participations, leadership, taking good care of employees;reduce costs, performance measurements and the process of implementation.

Freeman (1999) and Appelbaum et al. (1999) have given a more precise definition ofdownsizing strategies. They proposed a wider definition of downsizing strategies.Freeman (1999, p. 1510) quoted the definition of strategy from Mintzberg (1978). Shedefined strategy as “a pattern of policies and activities with strategic consequences forthe organization.” She additionally explained by referring to Mintzberg and Waters’(1985) development of strategies. She added that it could be either deliberate oremergent. Therefore, Freeman proposed that organizations’ downsizing strategiesincluded both behavioral and ideational aspects. Cascio (2002) published the researchon 6,418 downsized cases between 1982 and 2000 in S&P surveys, and introduced thestrategies for responsible restructuring. He summarized the strategies of successfuldownsizing cases including regarding downsizing as the last resort, continualinvestment in business development, a try to hold on to the best employees, providingoutplacement assistance (i.e. training, consultancy, and job-seeking help), continualinnovation and fostering the capability to change business models, and payingattention to business strategies, markets, the rapid changes of customers and economicenvironments. Cascio and Wynn (2004) stressed that downsizing was supposed to beviewed as part of a managerial plan. It could not be looked at from a purely economicviewpoint; therefore, the downsizing process could not be an indiscriminate one.


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Firms had to formulate various downsizing strategies according to their externalbusiness environment, internal and external resources and strategies, rather than justfollowing institutional downsizing strategies.

Stakeholders management and the concept of organizational support for theemployees. The researchers who advocate comprehensive downsizing strategies alsomentioned one rather important variable which was rarely emphasized by others. Thiswas the effect on stakeholders when downsizing. The harmful and negative impacts onemployees were serious, therefore they will take corresponding reactions when firmswere planning and executing organizations’ downsizing. Employees tended to formstrategies to influence firms’ downsizing strategy. They might possibly, for example,ally with other stakeholders to influence the firm. This would eventually affectdownsizing performance; therefore, it should be managed with special care. Tsai et al.(2005a, b) empirical research pointed out that resource dependency factors andinstitutional factors would influence the strategies which also affect employees and thefirms. Huang and Tsai (2005) further found that the strategies of direct negotiationwith conditional terms, or alternative choices (i.e. outplacement services andjob-seeking consultation) would easily be accepted by employees when firms weredownsizing. The research looking at organizational support of remaining employeesafter downsizing (Naumann et al., 1995; Beam, 1997; Naumann, 1998; Gowing et al.,1998) revealed that once employees perceived they were tended, they would care moreabout the profitability of the firms; evaluate the characteristics of the business and theoperations; adopt the business values and norms, and even believe in the long-termfairness to work harder to create extra performance. Chadwick et al. (2004) research onthe medical industry supported the idea that firms providing employee-care-practiceswhen downsizing would consequently generate better outcomes.

Summarizing the above discussions from the perspective of organization changefield, we found that organizations’ downsizing must be beneficial to businesscompetitive advantages and performance. The harm caused by downsizing should belessened and limited as far as possible. In order to meet the goals mentionedpreviously, a comprehensive downsizing strategy was required. This strategy, wename it as responsible downsizing, should be considered from the viewpoint oflong-term payoff, and should be cautiously evaluated beforehand (especially the abilityto satisfy customers’ needs), the strategy and tactics then be selected to implement.Meanwhile, firms should treat employees well by implementing employee-carepractices. They should also invite employees’ participation and not ignore processjustice when selecting pay-off employees. In sum, the relationships amongabove-discussed variables in organization change field were figured as Figure 1.

Supposedly, there still should be some middle mechanisms in-between the proposedresponsible downsizing strategy and firms’ performance. For example, althoughorganizational capability has been mentioned in Cascio’s strategies, it still has notmaterialized and affected explanations and predictive capability. Besides, according tothose comprehensive downsizing strategy advocates from organization change field,human resource management should be treated as a crucial predictor of firms’performance. In addition to those employee-care HRM practices during downsizing, afirm’s whole human resource management system also needs to re-examine thesuitability of the strategy and the changes in the business environments. Nevertheless,the concrete content of the human resource management system has not been clarified

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in organization change field. For that reason, this paper has reviewed the literatureconcerning strategies and SHRM system to explore these two important mysteriesbetween downsizing strategies and firm performance.

Dynamic strategy capabilitiesDynamic strategy capabilities for sustained competitive advantageThe concept of sustained competitive advantage as the foundation of firm performanceis the major tenet in strategy fields. Scholars in this field keep on searching for the wayin which firms can obtain sustained competitive advantage. Teece et al. (1997, p. 613)have proposed a dynamic capabilities concept, which evolved from Barney’s (1991)resource-based views (RBV) and defined it as “the firm’s ability to integrate, build, andreconfigure internal and external competence to address rapidly changingenvironments.” This ability also needs to acquire the external resource (e.g. strategicalliances), this is one of the significant differences with RBV. Besides, the resources arerequired to be reintegrated and reallocated via these business processes in order to beeffective. After reviewing numerous research, empirical investigations and managerialpractices concerning dynamic capabilities from 1990 to 2000, in the paper of “Dynamiccapabilities: what are they?” Eisenhardt and Martin (2000, p. 1107) defined dynamiccapabilities as “the firm’s specific processes to integrate, gain and release resources – tomatch and even create market change.” These processes are organizational, strategicroutines. Winter (2000, 2003) considered that downsizing was an organizational leveland collective practice which had to be achieved by the whole firm. Wright et al. (2001,p. 715) declared that these processes were embedded on intellectual capital whichincludes human capital, social capital, and organization capital. In the concept of thestrategy map presented by Kaplan and Norton (2004), they were termed as internalprocesses and also embedded on organizational intangible assets (intellectual capital).They are also the pivotal mechanism relating to how to transfer the intangible assetsbetween employees and organizational relationships into the shareholders’ sustainedvalues. These processes are also similar to the concept of “execution” proposed byBossidy and Charan (2003). Since these processes are the strategic ability at anorganizational level, therefore in this paper, we term it as “dynamic strategiccapabilities” should closely link to the context. The dynamic strategic capabilitiesinclude following characteristics.

The processes are the combination of efficient and effective actions fromorganizational level daily routines (Barney and Wright, 1998). They can create profit in

Figure 1.Organization change

perspective

Responsible downsizing strategy• Treat employees as long term asset.• Pre-evaluation on organizational capabilities then select downsizing strategies & tactics• Employee-care HRM practices• Participation & process Justice

• Stakeholders’ Influence strategies

• Employees’ perception of organizational support

FirmPerformance

Motivations ofdownsizing

Firm internal& externalsituation


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rapidly changing markets and environments; for example, developing new productsand new business models which were needed by the markets. Wright et al. (2001) andKaplan and Norton (2004) regard these processes as embedded on a firm’s intangibleassets (Wright et al., 2001; Kaplan and Norton, 2004). The business network isemployed effectively to gain external resources. In order to adjust to dynamicenvironmental changes and tense competition, the business network is employedeffectively to gain internal and external resources which are also critical inimplementing the processes (Teece et al., 1997).

Seeking appropriate strategic alliances is a typical example. Bartlett et al. (2003)point out that due to the increase in R&D expenses, shortened product life cycle, highermarket entry barriers, expanded need for global economic scale, internationalstandardization urging managers to realize the existing manpower, financial capitaland technologies were not sufficient to respond to the challenges. Therefore, they hadto cooperate with other capable firms. During the process of internal and externalresource re-integration and re-allocation, the organizational capabilities which weregenerated from the specific cultural background and complicatedrelationships/behaviors are difficult to understand and imitate. Employees possessthe behaviors for transformation to create values and execute strategies. Employeesare the base of any organization. In order to respond to and execute organizations’strategies, and then to create the expected benefits, employees’ behaviors are a keyfactor; such behaviors were similar to the behaviors for transformation proposed byKaplan and Norton (2004).

Dynamic business strategic capabilities are the most critical mechanism betweenthe business activities to performance and these would create benefits for employees.Blyler and Coff (2003) also suggested the enhancement of dynamic strategiccapabilities would equally benefit shareholders, employees and other relatedstakeholders. Employees would gain more bargaining power from this. It implicatesthat dynamic strategic capabilities may help to mitigate the social issue which causedfrom business downsizing by reducing employee’s negative impact from downsizing.We deposited this and use a figure to show the relationship between dynamic strategiccapabilities and firm performance as Figure 2.

Organizations’ downsizing strategies and the dynamic strategy capabilityAccording to the literature review, inappropriate downsizing strategies would damagefirm’s dynamic strategic capabilities. Cameron (1994) argued that downsizing wouldinfluence the firms’ daily routines. Fisher and White (2000) thought that downsizingand job re-arrangement would change the memory base of a firm, even the existingworking habits, and possibly put the firm at risk. McKinley et al. (1995) found out thatdue to the employees’ dissatisfaction after downsizing, their overall organizationcommitment and performance would decrease, also, employees would take the chanceto leave because the lack of future for the remaining workforce. Coff (1997) mentioned

Figure 2.Dynamic strategiccapabilities and firmperformance

DynamicStrategiccapabilities

Competitiveadvantages

FirmPerformance

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especially the loss of employees with firm-specific competencies could not be controlledby firms. However, the social network would be blocked during downsizing andeventually cause the disappearance of the ties. The damage to the memory of operationwould further influence the firms’ innovation and learning abilities (Amabile and Conti,1999; Fisher and White, 2000; Cascio, 2002). Fisher and White (2000) pointed out thatthis was especially true in some industries which were not stable or had to rely on thelearning methods among close relationships. In other words, they had to maintain highdensity and close connections with the organizations’ networks. Hence, the socialnetwork was extremely important to the learning capacity. When the learning networkwas destroyed by downsizing, the learning capacity would decrease. The philosopherHandy (2004) stressed that downsizing would lead to the sacrifice of employees’non-substitutable knowledge and skills, such as being responsible for their owncareers, being able to collaborate with others, solve problems, communicate, innovate,and even bear risks. In short, inappropriate downsizing strategies not only harmedfirms’ human capital, social capital, organizational capital and the business processwhich embedded on intellectual capital, but also caused a decline in performance. Itseemed that a comprehensive downsizing strategy could reduce the damage and evenenhance dynamic strategic capabilities. Enhancing and strengthening the dynamicstrategic capabilities would possibly meet the target proposed by Hamel and Prahald(1994) in the book of Competing for the Future. The contention of this work was thatorganizational restructuring and BPR were not necessarily the only means tosuccessfully transform firms. The establishment and application of new strategies andconcepts would assist firms to compete in the dynamic changing environment andfinally create premium performance in the future. As the evidence of empirical researchby Tsai (2006) proved that responsible downsizing strategy should progress throughdeveloping and enhancing firm’s dynamic capabilities, thus improving firmperformance.

Downsizing strategy, dynamic strategic capabilities and human resource managementpracticesThere was an important covariance between a responsible downsizing strategy anddynamic strategy capabilities. Cascio (2002), Cameron (1994) and Freeman (1999)proposed that the human resource management system was the key to ensure firmperformance after downsizing. After reviewing both strategy and SHRM relatedliterature, Wright et al. (2001) stated that HRM systems influenced both employees’skills/behaviors and firm’s dynamic strategy capabilities. Ulrich (1987) has argued thatHRM systems were the key practices in establishing organizational capabilities. Ulrichand Lake (1991) have further suggested firms gained competitive advantages via themanagement to employees, internal organizational structures and processes. Ulrichand Smallwood (2004) pointed out that organizational capabilities came from theinvestment in HRM systems. After involving these two covariant variables, theFigure 2 was evolved to Figure 3 to show the relationships of responsible downsizingstrategies, dynamic strategic capabilities and human resource management practices.

Furthermore, we found that the HRM practices here should be specifically designedto enhance dynamic strategy capabilities rather then just sets of ordinary HRMpractices. So, we then continue to review literature in the field of strategic HRM.


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Strategic human resources management practicesSHRM practices and firm organizational level performanceSHRM is the fastest growing research field among HRM subjects. It was conceivedafter linking HRM practices and performance (Delery and Shaw, 2001). In the last 20years, many researchers believed that HR differed from other business resources (e.g.financial and technologies) purely because of the distinct characteristics of humanresources (Barney, 1991). Namely, they were valuable, rare, inimitable andnon-substitutable. Ferris et al. (1999) identify three theoretical views on HRM werediscussed:

(1) best practices (or universalistic);

(2) responding to specific strategies and executing certain HRM practices(contingency); and

(3) only selecting the HRM practices which fitted the strategy and emphasizing thehorizontal and vertical fits of HRM practices (configuration).

However, almost all of the SHRM theoretical researches similarly focus on how firmsstrategically manage their HRM practices to create optimal organizational levelperformance. In addition, Wright et al. (2001) asserted that HRM practices wouldchange firm’s dynamic capabilities and further renew its business core competenciesand then improve the existing competitive advantages. The empirical research of Tsai(2006) also supported this concept. He found out that specific HRM practices enhanceddynamic strategic capacities and eventually improved firm performance.

In fact, Jackson and Schuler (1989), Wright and Snell (1991) and Wright et al. (2001)have mentioned that firms’ HRM systems required certain practices to respond to thecorporate strategies. The scholars who supported contingency and configuration alsoproposed that in order to execute the strategies, only specific HRM practices wouldbe selected. Scarbrough and Carter (2000) clarified that if firms aimed to improveknowledge management performance, the downsizing contents and practices shouldbe designed to meet this particular goal. Colbert (2004) similarly suggested currentlySHRM should focus on creativity and adaptability to the environment. Practically,some empirical research has verified such viewpoints. Collins and Clark (2003) provedthat after applying some HRM practices focusing on establishing a top managementteam network, the internal/external network was strengthened and performanceimproved. Chadwick et al. (2004) also showed the application of HR practicesconcerning employees’ morale and benefits would positively affect perceived andactual financial performance after downsizing. HRM systems were created to reach

Figure 3.Dynamic strategiccapabilities perspective

DynamicStrategiccapabilities


FirmPerformance

HRMpractices

Responsibledownsizingstrategy

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vertical fit between strategies and the horizontal fit between consistency and synergy.The HRM systems implemented after downsizing were necessarily a set of HRMpractices targeting an increase in the firms’ dynamic strategy capabilities; we suggestcalling it dynamic strategy capabilities human resource management (DSCHRM)practices.

SHRM practices and employee individual-level performanceSHRM was defined to explore organizational level performance rather thanindividual-level performance (Delery and Shaw, 2001). Nevertheless, individual-levelperformance aggregates to organizational level performance. Delery and Shaw (2001)and Becker and Huselid (1998) argued that the complicated interactions among HRMpractices would strengthen the workforce characteristics, eventually improvingworkforce performance and giving more value to the core competencies. The inimitableadvantages were developed via the processes and hence performance was improved.The workforce characteristics included employees’ knowledge and skills, as well asmotivations and empowerment. Workforce performance was defined as theperformance at an individual level, such as productivity, the behaviors meetingbusiness needs, organizational commitments. Yet, employees’ individual performance(e.g. behaviors, commitments, and job satisfaction) could also be the mystery betweendownsizing strategies and performance. The job satisfaction among individual-levelperformance and continuance commitment revealed an intersectional influentialrelationship. Tsai et al. (2005a, b) researched employees’ job satisfaction andcontinuance commitments in the post-downsizing era. They verified that some specificitems in job satisfaction would significantly influence the remaining employees’willingness to remain at the downsizing firm. This may influence firm’s competitiveadvantage and performance after downsizing.

Therefore, by integrating above literature review from SHRM field, we couldconclude that HRM practices should enhance both organizational level capabilities andemployee individual-level workforce performance, and firm performance could be thenincreased via renew firm’s core competencies. Figure 4 shows the relationships amongthese related variables.

After reviewing and exploring the literature on strategy and SHRM, two importantmechanisms were found. These two mechanisms including dynamic strategiccapabilities and the strategic HRM practices for specifically enhancing dynamic

Figure 4.Strategic HRM perspective

Workforce performance. Productivity. Behaviors fit organizational needs . Organizational commitments & job satisfaction (Individual level)

SHRM systemSpecific HRM practicesfor enhancing firm’sdynamic strategiccapability (DSCHRM

practices)


Core competenciesFirm

Performance

Dynamic Strategiccapabilities (Organizationallevel)


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strategic capabilities will be great helpful for solving the controversy in organizationalchange field why the relationship between downsizing strategies and firm performancecannot be always materialized. Therefore, we need to establish a comprehensive modelto include all related variables. Take all variables into account in order to depict acomprehensive model of downsizing strategies. This comprehensive model of thedownsizing strategy will stand on a broader, systematic viewpoint to look at the wholedownsizing strategies which includes the cause, the process and the effect.

Comprehensive model of responsible downsizing strategyWe use the linkages of three key variables, responsible downsizing strategy, dynamicstrategic capabilities and SHRM practices to integrate Figures 1, 3, and 4 as a wholemodel as Figure 5. And add some supplementary concepts to make the model morecomprehensive.

Figure 5.The comprehensive modelof a responsibledownsizing strategy

Participations and communications

Firm’s internaland externalsituation

Businessstrategies

• Economic

Motivations ofdownsizing

• Institutional• Socio-cognitive

Responsibledownsizing strategy• Treat employees as long term asset.• Pre-evaluation on organizational capabilities then select downsizing strategies & tactics• Employee-care HRM practices• Participation & Justice in process

• Stakeholders’ Influence strategies

• Employees’ perception of organizational support

SHRM system

Specific strategic HRMpractices for enhancingfirm’s dynamic strategiccapabilities.( (DSCHRM practices which includeshiring, motivation, training &development, performancemanagement, ...etc.)

Dynamicstrategiccapabilities

Firm performance

• Financial• Markets• Social • Innovative

Corecompetencies


Workforce performance:

• Productivity• Behaviors fit organizational needs• Organizational commitments & job satisfaction

(Individual level)

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Supplementary conceptsFirst of all, in strategic HRM field, Wright and Snell (1998) advocated that employeeparticipation and communication are the infrastructure for all human resourcesmanagement practices to enhance firm’s performance. Here, we suggested that thewhole model would be more solid by including the factors of the starting point ofsetting business strategies, downsizing motivation, DSCHRM practices, dynamicstrategic capabilities, employee workforce performance, core competencies, andcompetitive advantage. Secondly, according to the empirical research from Tsai (2006)has proved that responsible downsizing strategies would positively affect DSCHRMpractices after downsizing. Third, regarding firm performance, Carpenter et al. (2004)proposed that in addition to financial and market performances, social andinnovative performance were equally important. The downsizing strategies mightcause social problems; therefore the stakeholders should pay attention to and takeactions to influence firm’s downsizing implementation. Thus, firm must carefullymanage this to ensure the social reputation. When faced with a rapidly changingenvironment, new product/service innovations seem to be critical (Subramaniam andYoundt, 2005), that is the reason why Cascio’s responsible downsizing strategies alsoaimed to invest in employees in the long term, continually innovate, and cultivate theability of changing business models.

Implications and future researchImplicationsThis paper identifies several implications which might be useful for both academicresearch and practical business management.

Firstly, the model is similar to a map. It will be a useful tool to predict and lead thedevelopments of mediating or moderating variables between downsizing strategiesand firm performance. The research concerning responsible downsizing strategy,strategic HRM practices, dynamic strategic capabilities and performance could act asthe base of this model. Besides, it would clarify the contextual mysteries betweenresponsible downsizing strategy and firm performance and strengthen thedevelopment of downsizing and its relevant theories.

Owing to the continual emphases on the acquisition and application of externalresources, the importance of intellectual capital and the concern about corporate socialresponsibility, more concepts relating to social capital, social issues and public policywould be introduced to the research in building responsible organization downsizingstrategy.

The model reminds managers to focus on the mediating mechanism betweendownsizing strategies and the expected performance. It also encourages firms tomanage business with appropriate ability of execution and responsiveness (Bossidyand Charan, 2003). It also contributes to the vitalization of organizations’ downsizing(especially firms’ dynamic strategic capabilities), to SHRM practices and theperformance at the individual employee level. Most importantly, employees musttransform their behaviors to meet firm’s requirements for enhancing organizations’dynamic strategic capabilities. Then, employees would be stable within firms, and thesocial problems caused by downsizing could be avoided.

Dynamic business strategic capabilities are not only the most critical mechanismbetween the business activities to performance but also would create benefits


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to employees. Blyler and Coff (2003) suggest that enhancement of dynamic strategiccapabilities would equally benefit shareholders, employees and other relatedstakeholders. Employees would gain more bargaining power from this. It bringsthe implication that dynamic strategic capabilities may also helps to mitigate the socialissue which caused from business downsizing due to reducing employee’s negativeimpact from downsizing.

Future research challengesResearch designs and analytical issues. The model included performance on bothindividual and organizational levels and the aggregation individual-level performancewas the foundation of organizational level performance. Therefore, the design of theanalytical level must be particularly carefully treated in order to provide betterexplanations and reasonable results. Besides, Delery and Shaw (2001) pointed out anillogical phenomenon, that a lot of empirical research merely measured HRM practicesto performance by the only new indicator. It missed the mutual interactions and evenignored many important aspects among HRM practices.

Empirical issues. The downsizing strategies have been regarded by firms asextremely sensitive and confidential issues. Apart from the already open secondarydata, they were reluctant to provide critical data of downsizing. This would be thebiggest barrier when conducting an in-depth research.

ConclusionDownsizing strategies have become common and popular practices for firms and theyare also deemed as natural processes within an organization’s life cycle. However, therelationship between downsizing strategies and firm performance still remainsmysterious. These mechanisms between the cause and the effect are significant to thedevelopment of academic theories and the applications of firms. That is why theconsequences of downsizing strategies to firm performance have not been materializedover these years. This paper applies dynamic strategic capacities concept from thestrategy field, and SHRM practices in the SHRM field to explore the issue. It alsoestablished a comprehensive model to explain the relationships among these variables.Especially, for those newly brought in variables such as stakeholders’ influencestrategies, dynamic strategic capabilities and SHRM practices. The final purpose is toguide academic research and managers to discover more responsible andcomprehensive downsizing strategies which would improve both organizationsperformance and employees’ welfare, and also reduce the social tensions caused bydownsizing.

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Corresponding authorYu-Fang Yen can be contacted at: [email protected]

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