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If You Think Downsizing Might Save Your Company, Think Again



During the Great Recession of 2008, companies around the world downsized their workforces. American firms alone laid off more than 8 million workers from the end of 2008 to the middle of 2010. Even in healthier financial times, such as now, firms often downsize because it is seen as a way to reduce costs, adjust structures, and create leaner, more efficient workplaces. Despite the prevalence of downsizing, researchers and businesspeople alike continue to disagree on the viability of this common organizational practice. We add to this debate with our new research, which indicates that downsizing may actually increase the likelihood of bankruptcy.


Proponents of downsizing argue that it is an effective strategy, with benefits such as increased performance and sales. Detractors, on the other hand, point to negative consequences including performance and productivity declines, decreases in customer satisfaction, and adverse effects on remaining employees, such as increased stress. As the debate continues, high-profile firms continue to downsize, as demonstrated by recent announcements or actions by Victoria’s Secret, Lowe’s, and PepsiCo.


Our team of researchers from Auburn University, Baylor University, and the University of Tennessee, Chattanooga set out to better understand the consequences of downsizing in large, U.S.-based corporations. In our recently published work in the Journal of Business Research, we tested the theory that downsizing could lead to a host of problems that eventually increases the likelihood of bankruptcy. Among these: Downsizing firms lose valuable knowledge when employees exit; remaining employees struggle to manage increased workloads, leaving little time to learn new skills; and remaining employees lose trust in management, resulting in less engagement and loyalty. Many of these effects may have long-term consequences, like reduced innovation, that are not captured in short-term financial metrics. We sought to investigate whether these effects could increase the likelihood that firms would declare bankruptcy.


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