Purpose - A subject of continuous debate in the field of organizational change research and management practices is on whether downsizing strategies result in improved firm performance. The purpose of this paper is to propose and empirically examine dynamic firm capabilities as a major missing mechanism of firm performance. Design/methodology/approach - This study uses the data of 154 Taiwanese firms that employed an organizational downsizing strategy as the sample for testing the research question. Findings - The results indicate that a responsible downsizing strategy can result in greater firm performance for the development and enhancement of dynamic firm capabilities. Originality value - This research introduces dynamic capabilities into the downsizing context, and the empirical results provide new theoretical insight into downsizing and dynamic capabilities research, suggesting that downsizing should be regarded by management as resource management rather than a cost-cutting action.
These negative effects that the surviving workforce often experience after a major organizational change such as downsizing is known as survivor's syndrome. Survivors miss their departed colleagues and are frequently angry with management for having caused the layoff and for having mishandled the layoff process. A study conducted by Carlson Marketing Group and the Gallup Organization found that of the major organizational changes companies face, managers said that downsizing had the most negative effect on employee morale. Four of five respondents whose companies had downsized in the past five years said the process resulted in a lower workplace morale (Salopek, 2000). In addition to low workplace morale, downsizing also creates low productivity (Koonce, 1991). It is, therefore, necessary for organizations implementing downsizing initiatives to adequately and effectively address the people issues throughout the process as it relates to separating and surviving employees. To address the people issues, the author proposes that HR leaders must take a holistic approach to increase the chance of organizational success after downsizing.