The impact of organizational downsizing on corporate and strategic business unit economic performance: An empirical investigation of the role of work force reduction



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Texas Tech University


The relationship between downsizing and performance has not been studied thoroughly, despite the prevalence of downsizing in the U.S. and overseas. The downsizing issue continues to be a topic of interest for the nation and the business world. The streamlining of organizations has become a perceived necessity in gaining a competitive edge in the marketplace; however, it has not been clear whether downsizing does indeed improve profitability. This study addresses the downsizing-performance link, using comprehensive multi-year, multi-industry data, and provides a beginning to understanding the growing (both in occurrence and importance) phenomenon of downsizing.

The study employs multivariate analysis for the inclusion of many specific variables that have an impact on economic performance of an organization. The impact of downsizing (as workforce reduction) on both corporate and strategic business unit (SBU) performance is studied, controlling for market conditions. The study employs both an accounting measure and a hybrid market/accounting measure of performance to investigate, not only the impact of downsizing on organizational profitability, but also on the perceptions of the market.

The study shows that when controlling for other factors that affect organizational performance, downsizing has some negative and some positive effects on SBU and corporate performance, and that these effects persist for a limited period of time. Downsizing appears to have some of the positive effects presented in the anecdotal literature; however, there appear to be important negative ramifications of downsizing as well.



Profit, Industries, Business enterprises, Downsizing of organizations