Downsizing strategies and organizational performance: a longitudinal study

How does downsizing affect long‐ and short‐term organizational performance? The present study aims to address this important question and attempts to extend previous research by examining the effect of both personnel and assets reduction on long‐ and short‐term firm performance.

The paper uses data collected through secondary sources on 196 firms traded on the Tel Aviv Stock Exchange (TASE) between 1992 and 2001.

Econometric analyses indicate the positive impact of a combination of downsizing strategies on short‐term performance, and the negative effect of this combination on long‐term performance and high‐tech industry performance is negatively related to assets and personnel cutbacks. Whereas downsizing affects the short‐term performance of larger and established companies positively, it generally affects long‐term performance inversely.

This study offers a first examination of the effects of simultaneous cutbacks in personnel and assets. This combined strategy goes further than dismissing employees, since layoffs are linked to the sale of such tangible assets as product lines or manufacturing facilities. By so doing, firms downscale their activities commensurate with the reduction in workforce and are less likely to generate excess workload on the remaining employees.