Forgetting-relearning cycles in organizational downsizing strategies

Abstract

When firms seek to reduce costs and increase productivity, they often view downsizing as a viable strategy. However, research on downsizing outcomes is not conclusive. Recent studies describe several counterproductive consequences of downsizing, which include, among others, loss of motivation, decreased innovation capacity, the appearance of a short-term mind set, the rise of organizational conflicts, and the loss of product or service quality. From the knowledge-based-view of the firm, downsizing strategies may involve critical loss of organizational knowledge. Given the social complexity of firms, downsizing practices may damage the organizational knowledge base in ways that go beyond simply losing the individual knowledge of people leaving the organization. In this sense, firms reducing staff may do so in a way that involves the loss of organizational knowledge and skills. The aim of this study is to understand the impact that downsizing strategies have on the knowledge base of firms and its consequences for firm performance. To do so, this paper develops a longitudinal study using quasi-experimental analysis. Our results show that changes in firm size affect the knowledge base and labour performance. However, the effects of downsizing on a firm’s knowledge base might not become evident in the short term. Negative effects appear in the mid- and long term when firms aim to develop new growing strategies but are not able to perform as they did in the past unless they undertake relearning processes.