The Impact of Downsizing on Corporate
Stelios C. Zyglidopoulos
The Judge Institute of Management, University of Cambridge, Trumpington Street, Cambridge, CB2 1AG, UK E-mail: email@example.com
This study investigates the impact that downsizing has on corporate reputation. Drawing on the relevant literatures, two hypotheses are developed and tested. The ﬁndings of the study are as follows. First, downsizing has a negative impact on corporate reputation. Second downsizing is more damaging to corporate reputation than ‘downscoping’–the sale of a division.
Downsizing, despite its increasing acceptance by
corporations, has remained a controversial topic.
Empirical evidence fail to support the notion that
downsizing leads to superior ﬁnancial performance in the long run (Baily, Bartelsman and Haltiwanger, 1994; Cascio, Young, and Morris,
1997; De Meuse, Bergmann and Vaderheiden,
1997). Some academics insist that downsizing, if
done strategically, can beneﬁt the ﬁrm (Burton,
Keels and Shook, 1996), while others claim that
downsizing as a strategy for improvement is ‘by
and large, a failure’ (Cameron, 1996). Despite
this lack of consistent evidence, however, managers have continued its practice (McKinley, Mone and Barker, 1998).
Within this context, the downsizing literature
has investigated numerous issues, but has paid
little attention to the impact of downsizing on
corporate reputation. This paper, using data
from Fortune’s ‘America’s Most Admired Corporations (AMAC) survey, addresses this issue by investigating how downsizing impacts corporate reputation, which is important for two reasons. First, a better understanding of the eﬀect of downsizing on corporate reputation assists in the
management of one of the most strategically
important intangible ﬁrm resources, reputation
(Barney, 1991; Dierickx and Cool, 1989; Fombrun, 1996; Roberts and Dowling, 1997). Second, r 2005 British Academy of Management
from a downsizing literature perspective, this
study assists in better understanding the controversy surrounding downsizing.
Downsizing and Corporate Reputation
Although the term ‘downsizing’ has often been
used in the literature to encompass a number of
related activities (Cameron, 1996; Cascio, Young
and Morris, 1997), for the purposes of this study
it refers exclusively to employment downsizing.
There are two criteria used in the literature to
classify a personnel reduction as downsizing.
First, the reduction must be signiﬁcant; Cascio,
Young and Morris (1997) used a 5% reduction as
a cut-oﬀ point. Second, this reduction must be
intentional (Cameron, 1996), but given that signiﬁcant workforce reductions are ‘less likely to be due to attrition’ (Littler and Innes, 2004), it
is suﬃcient to say that a ﬁrm engaging in a
signiﬁcant workforce reduction is downsizing.
But is an employee reduction resulting from the
sale of a division downsizing? Here, ‘downsizing’
is used exclusively to refer to signiﬁcant reductions in personnel as a result of layoﬀs (Burton, Keels and Shook, 1996; Worrell, Davidson and
Sharma, 1991), whereas ‘downscoping’, which
has been used to refer to strategic divestiture
programmes (Hoskinson and Hitt, 1991; Hoskinson, Johnson and Moesel, 1994), refers to signiﬁcant reductions in personnel due to the sale
of a division. In other words, while downsizing
involves employees losing their jobs, downscoping involves employees keeping their jobs but working for diﬀerent owners.
Corporate reputation, ‘the overall estimation in
which a particular company is held by its various
constituents’ (Fombrun, 1996, p. 37), is one of the
most important intangible resources of a corporation. Research in strategic management suggests that a favourable reputation is an important
source of sustainable competitive advantage