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Downsizing the Company Without Downsizing Morale

S P R I N G 2 0 0 9 V O L . 5 0 N O . 3

R E P R I N T N U M B E R 5 0 3 1 0

Aneil K. Mishra, Karen E. Mishra and Gretchen M. Spreitzer

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SMR310

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Downsizing the Company Without Downsizing Morale

AFTER MORE THAN two decades of research into corporate downsizing, there remains a funda- mental question: “How can managers and employees rethink their organizations even as they confront

the need to downsize?” More specifically, how can organizations support learning, innovation and

creativity while at the same time finding effective ways to improve costs, quality and productivity?

Some might argue that these goals are at odds with one another — that you can’t build a better and a

leaner organization. We disagree. In our 1998 Sloan Management Review article, “Preserving Employee

Morale During Downsizing,” we maintained that strong organizations need to develop resilience so

they could take advantage of new opportunities that arise during periods of economic retrenchment.1

When downsizing is unavoidable, smart managers look for opportunities to improve flexibility, innovation and internal communication to improve trust between managers and employees. BY ANEIL K. MISHRA, KAREN E. MISHRA AND GRETCHEN M. SPREITZER

THE LEADING QUESTION How can man- agers and their employees rethink their organizations as they con- front the need to downsize? FINDINGS ! Rather than focus-

ing on being smaller and more efficient today, the goal should be to become better and more competitive tomorrow.

! The most successful companies focus on building trust and empowerment.

! Front-line managers need to be trained and empowered to become liaisons between top management and employees.

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Our subsequent research, consulting and manage-

ment coaching has reaffirmed our v iew that

downsizing isn’t just about “doing more with less.”

It is also about creating flexibility, innovation and

better communication that lead to increased trust

and empowerment between managers and employ-

ees. (See “About the Research.”)

In our original article, we presented four widely

accepted goals of downsizing: reducing total costs;

increasing labor productivity; improving quality;

and enhancing the efficiency with which capital is

employed.2 As we recommended then, downsizing

programs should take place in four stages:

■ Stage 1: the decision to downsize;

■ Stage 2: planning the downsizing program;

■ Stage 3: making the announcement; and

■ Stage 4: implementing the downsizing program.

For each of these stages, we advocated openness

and honesty about the state of the business, the rea-

sons for downsizing, the process by which the

downsizing program would take place and the fu-

ture of the business. This type of open and honest

communication is essential to building trust and

empowerment among those who have been desig-

nated to leave the organization, but it is equally

important for survivors of downsizing. (See “Sur-

vivor Responses to Downsizing.”)

Following the original publication of our article, we

focused on two key factors that can influence downsiz-

ing success (whether it is measured by psychological

outcomes like commitment or bottom-line results

such as lower voluntary turnover): (1) the survivors’

level of trust in their organization’s leadership during

and after a downsizing, and (2) the survivors’ level of

empowerment.3 Interestingly, we found that while

these factors are fundamental, they often suffer as or-

ganizations undergo the challenges of downsizing.

Moreover, in some settings such as the U.S. automotive

industry, where significant downsizing has occurred in

recent years, we found that the level of trust that top

management had in lower echelon employees was

positively related to the level of empowerment em-

ployees had in decision making. Such empowerment,

in turn, was positively related to labor productivity, in-

novation and employee morale at the business-unit

level.4 In other words, how companies implemented

their downsizing had a significant effect on its success.

(See “Views From the Trenches,” p. 42.) As Bob Lintz,

the plant manager of General Motors Corp.’s Parma

stamping plant, in Parma, Ohio, who we profiled in

our 1998 SMR article, reflected recently:

When we started the transformation in the

1980s and 1990s, we were leveraging off a sig-

nificant emotional event mentality, i.e., either

make significant improvements or we’re not

going to survive. That worked for all of us to cre-

ate a culture of mutual trust and respect for one

another. Today, it might look as though the en-

tire organization operates as if every day is a

significant emotional event. But in today’s

global economy, that’s actually not a bad way to

look at things because now that’s precisely the

case. Looking back, I am extremely proud of the

process of openness and trust that the union and

management leaders developed.5

The New Imperatives In the last decade, we have continued to follow the

organizations we profiled in our original article and

have started studying additional organizations that

have undergone significant change, including

downsizing. We have conducted scores of addi-

tional interviews with top executives, surveyed

hundreds of employees and collected performance

data. We have also coached managers whose orga-

ABOUT THE RESEARCH All three authors have spent the past two decades studying manufacturing and service companies, focusing on understanding how trust and empowerment are built during both tough and favorable economic conditions. Our research has integrated both quantitative and qualitative methods, utilizing scores of in-depth interviews with leaders and their fol- lowers, publishing several case studies of exemplary organizations and conducting survey research with thousands of employees to examine how trust and empowerment influence a number of related outcomes, including employees’ commitment to the organization, job performance and voluntary turnover.

We have followed several organizations for more than a decade, focusing on leadership and its psychological and behavioral effects on employees as well as organizational perfor- mance. We have continued to follow one organization, the General Motors stamping plant in Parma, Ohio, profiled in our original SMR article, as it has downsized from more than 5,000 employees in the 1980s to fewer than 1,500 today. In recent years, we have begun studying companies in aerospace, financial services, food products and transportation industries.

For most of the organizations we have studied, we have adopted a form of action re- search in which we have disseminated findings from each phase of our studies with the participant organizations, offering recommendations where appropriate. However, we have not actively participated in any of the change efforts that have taken place within these organizations. Our methodology has required us to build a considerable amount of trust with each organization in order to obtain frank and honest perspectives and to collect confidential employee turnover data and proprietary organizational performance metrics.

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nizations have initiated downsizings as part of their

global outsourcing efforts. Through these efforts

we have identified three additional success factors

that are important to successful downsizing: (1)

Organizations must become more flexible; (2) they

must become more innovative and creative; and (3)

they must improve their communications with

stakeholders who are increasingly skeptical of

downsizing efforts. The emphasis on flexibility, in-

novation and communications will require even

greater levels of trust and empowerment.

Develop Greater Flexibility The importance of

organizational flexibility has grown as business en-

v ironments have become more unstable and

unpredictable. Flexibility can take many forms, in-

cluding asking individuals to perform a wider

variety of tasks and expanding management ability

to mobilize organizational resources (human, fi-

nancial and technological). Such flexibility permits

organizations not only to respond more rapidly in

declining environments but also to take advantage

of opportunities where environments are changing

less dramatically.6

Greater organizational flexibility can enhance

human capital. This can be achieved by having em-

ployees cross-train one another as well as by

engaging in regular cross-training assignments

with customers and suppliers.

For example, as a response to a decline in overall

demand during the early 1990s, Rhino Foods Inc., a

dessert manufacturer in Burlington, Vermont, was

able to leverage its relationships with its customers.

Ted Castle, the president, asked his best employees

to volunteer for assignments outside the company,

promising them their regular jobs back when con-

ditions improved. Sending the best people not only

built trust with the other companies; it empowered

employees who remained at Rhino Foods to learn

new skills and abilities so they could step in for their

reassigned colleagues.7 In recent years, Rhino Foods

has continued using this program, and it currently

has five partnering companies that have been will-

ing to hire its employees during the slow-demand

months of the year. While the program to date has

involved hourly production and shipping and re-

ceiving employees, Rhino Foods is considering

extending it to salaried employees; an employee in

marketing or finance, for example, might work 32

hours a week at Rhino and eight hours at a partner-

ing company.8 We would argue that this approach

also enhances organizational flexibility: As new tal-

ents are discovered, less important talents are set

aside or outsourced, and key talents, skills and

knowledge are retained for whenever business con-

ditions improve and growth can be pursued again.

Dennis Quaintance, CEO of Quaintance-Weaver

Restaurants and Hotels, based in Greensboro, North

Carolina, has also benefited from reservoirs of trust

and empowerment. He has managed to create a

flexible work force that allows people to move back

and forth across different units within the organi-

zations. For example, when Quaintance decided to

close one of his Lucky 32 restaurants, the manner in

which he informed employees served to reinforce

the trust and empowerment he had built over time;

16 of the employees requested and received trans-

fers to other company locations rather than going

to work for a competitor.

SURVIVOR RESPONSES TO DOWNSIZING We identified four archetypes of survivor responses to downsizing.i Survivors who have a low degree of trust in their managers and who feel disempowered will exhibit fearful responses, withdrawing from work because of worry and a sense of helplessness. If survivors have a high degree of trust in management but aren’t empowered, they will obligingly go along with whatever they’re told to do but refrain from taking any initiative on their own. If survivors have a high degree of empowerment but a low degree of trust in management, they will be cynical, angry and even outraged, and exhibit retaliatory behaviors. We have found that only if survivors have a high degree of both trust and empowerment are they apt to be hopeful, optimistic and willing to engage actively in solutions to improve the organization.

Constructive High trust

in management

Destructive Low trust

in management

Passive Survivors disempowered

Active Survivors

empowered

Obliging Responses • Calm, relief • Committed, loyal • Following order,

routine behavior “Faithful followers”

Hopeful Responses • Hope, excitement • Optimism • Solving problems,

taking initiative “Active advocates”

Fearful Responses • Worry, fear • Anxiety, helplessness • Withdrawing,

procrastinating “Walking wounded”

Cynical Responses • Anger, disgust • Moral outrage,

cynicism • Badmouthing,

retaliating “Carping critics”

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Foster Innovation and Creativity Improvements

in cost, quality and the bottom line may have consti-

tuted successful downsizing in the past. But in the

future, innovation will also be necessary.9 Unfortu-

nately, innovations require trust and empowerment

— the very qualities that often suffer during corpo-

rate downsizings. As Jeff DeGraff, clinical professor

of management and organizations at the University

of Michigan’s Ross School of Business and a leading

expert on innovation in organizations, told us, “A

winning culture and competencies are what create

the unique value propositions of firms. These take

years to develop because they grow through the in-

teractive work of leaders. Conversely, they can be

quickly undone by downsizing and the obligatory

clumsy treatment of hard-won talent.”

In order for innovation to take hold during down-

sizing, managers must instill hope and craft a credible

vision of the future. In our 1998 article, we argued that

managers need to lay out a credible vision of the fu-

ture in order for employees to trust their competence

and to give employees a greater sense of empower-

ment amidst uncertainty and ambiguity. Today, we

would emphasize the word “hope” as much as “credi-

bility,” and we would include customers and suppliers

more explicitly in the set of stakeholders that must be

attended to. Although a credible vision of the future

will help others see how the organization will survive

and even improve as a result of downsizing, instilling

hope will help stakeholders (survivors, customers and

suppliers) see that there is a viable path forward. The

hopeful message should be neither glib nor naïve but

incorporate present realities (for example, “We will

have to work harder in the short term”) with future

benefits (“We will work smarter and create profes-

sional and personal opportunities that don’t exist

presently”).10 Survivors need to believe that managers

are reliable, open and competent, and that they can be

trusted to lead the downsizing effort. All stakeholders

must believe that their managers are compassionate

and willing to balance short-term bottom-line neces-

sities with the welfare of everyone who is vital to the

long-term welfare of the enterprise.

Improve Communications with Stakeholders

Communicating effectively during downturns is also

increasingly important for building critical relation-

ships that harness the enthusiasm, loyalty11 and trust12

of an organization’s employees by creating shared val-

ues. Research shows that internal communications

affect the degree of trust between employees and man-

agers.13 The process of creating trusting relationships

between management and employees depends on

openness and meaningful exchanges.14

We define effective communications in such con-

texts as being highly transparent, integrated consistently

across the organization’s various stakeholders and par-

ticipative. Transparent communication is promoted

through honesty and cooperation. When managers are

able to tell employees and other stakeholders as much

VIEWS FROM THE TRENCHES How does it feel to be in the middle of downsizing initiatives? We invited former students and research subjects to reflect on their experiences. Here is a sampling of responses:

Ours is a small business with 42 employees, so when downsizing occurs it is very difficult for us, as I imagine it is for all small businesses. We view layoffs as something of a last resort. In November of last year, we in fact mandated a no-overtime policy and reduced the work schedule for all hourly employees. We positioned this to our hourly employees as “would you rather have a job that has great benefits, or potentially be laid off and have no job at all?” With this approach, it is like everyone is taking one for the team, rather than eliminating team members. We fully expect business to pick up, and we would rather keep everyone rather than lose anyone. If a layoff becomes necessary, our foremost goal is to turn a negative into a positive. Laying off employees requires us to rethink our strat- egy, identifying efficiencies that can be gained through a reduced work force, reallocating resources to where they are most advantageous and assessing the impact of the layoff on the remaining employees, all of which takes time. — BEN HOLCOMB, CFO, Green Resource LLC, Colfax, North Carolina

I have spent many minutes of every day reliving the eight-year period that began in September of 1984 when I had to phase 17,000 fine individuals out of jobs and close six million square feet of manufacturing floor space. The leader of a downsizing effort must spend far more time managing down the organization chart than up the organiza- tion chart. Failing to do so will only alienate the work force; far better to maintain the trust of the work force than spending time maintaining good political relationships with one’s superiors. The “worker bees” will remember forever, the “brass” for a nanosec- ond. More than a decade later, I still receive more compliments from members of the work force I led than from the managers I reported to at the time — and this is the way I would wish things to be. — CRAIG PARR, former plant manager, General Motors, Detroit, Michigan

The leaders of our business units now hold quarterly all-hands briefings, where workload is a regular agenda item. Gaps in orders are clearly visible, and employees can make their own decisions about their prospects. The briefings also cover other key indicators such as company financial health, pay and benefit changes and operational metrics. We have also implemented Employee Concerns Boards, which are standard whiteboards located throughout our facilities — in work centers, near time and attendance stations and break rooms. They provide our 3,000-plus employees the opportunity to write concerns of any kind on the boards — for all to see. Each concern is logged and responded to by manage- ment within a certain period of time, with the response entered on the board — for all to see. A Concerns Board is also posted on our intranet. While simple, these communica- tion techniques have gone a long way in demonstrating transparency and stabilizing our work force. We have now sown the seeds of trust through focused attention to employee communication. — RICK SALANITRI, President, TIMCO Aerosystems Inc., Greensboro, North Carolina

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as possible as soon as possible, it reduces the stress and

anxiety that accompany a downsizing event.15

In addition, it is important that information be

consistent across different sets of stakeholders,

since the roles of an organization’s various publics

are often overlapping (for instance, both employees

and investors may be activists).16 Finally, managers

must find a way to make the communications two-

way. Employees and other stakeholders want to

hear transparent and consistent information from

their managers, but they also want an opportunity

to ask questions, share feedback, clarify the situa-

tion and prepare for the future. Communication

between a company and its employees is not par-

ticipatory or effective unless it is interactive.17

Face-to-face communication is the best method

for communicating about downsizing. But in the age

of electronic communication, managers need to un-

d e r s t a n d h ow to u t i l i z e m a ny m e t h o d s o f

communication in order to facilitate an ongoing dia-

logue with employees and other stakeholders, as well

as how to be proactive about sharing company infor-

mation to minimize the surprise element that

characterizes most downsizing announcements. How

will electronic communication impact the speed with

which company information about downsizing is

transmitted? Although electronic communication

can be a tool for sharing information quickly, it can

also be intercepted by outsiders who may not have

the ability to put the information in proper context.

In addition, effective communication must provide a

mechanism for employees to have dialogue and share

feedback. We believe that this is a fruitful area for re-

search and further exploration.

Empower Managers as Organizational Linking Pins Are top managers doing enough to empower their

front-line managers who are the linking pins of the

organization?18 If top management trusts and em-

powers these managers effectively, they can provide

the flexibility to move across and between the various

stages of downsizing. To the extent that front-line

managers are the links between the downsizing strat-

egy and those who execute it, top management must

train managers to communicate the organization’s vi-

sion and mission. Front-line managers are also crucial

in conveying the compassion that top management

should be articulating. Have these managers been

trained in the art of two-way communication? How

well prepared are they to help reduce uncertainty and

anxiety among their employees? We are continuing

our research to answer these questions, but already in

our follow-up work with Bob Lintz, the GM plant

manager who has been downsizing continually over

the past two decades, we have learned how critical it is

to empower front-line managers. In the 1980s, Lintz

empowered his hourly employees through an open-

door policy in which they could meet with him to

discuss any issue that they felt was important.

One unintended consequence of the policy was

that the salaried supervisors and managers felt that

allowing hourly employees to go over their heads to

Lintz undermined their authority. The salaried em-

ployees lacked the job protection or benefits of

UAW-represented employees and faced a greater

threat from downsizing. Once Lintz became aware

of this concern, he focused his efforts on building

trust with his management and supervisory em-

ployees. Even though he couldn’t promise them the

same type of job security, he initiated several im-

portant training initiatives, including a Supervisors

College, which allowed supervisors to enhance

their skills, made them feel part of the Parma team

again and removed barriers between hourly and

salaried employees at levels below Lintz.19

Lintz realized he was disempowering his front-

line managers only after reading a case study we

wrote about his organization and the perspectives

of the supervisors and managers we interviewed.20

As a result, he initiated efforts to provide front-line

managers with specific training and leadership re-

sponsibility so that they felt included in the ongoing

change effort. We maintained an ongoing dialogue

with Lintz over the next decade as he continued to

reshape the work force of the stamping plant. The

plant, which had been scheduled to shut down in

the 1980s, today is a billion-dollar operation, and is

recognized as the highest quality, most productive

automotive stamping plant in North America.

Downsizing is not a fad. Managers will continue

to use downsizing because the impact can be large

and immediate. But even as companies seek ways to

reduce costs, managers must remember the human

costs of downsizing and consider alternatives.21

Business schools and academics have their own roles

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to play in helping organizations and individuals

adapt — not only in assessing the effectiveness of

different approaches but also in advancing hands-on

solutions. Since we began teaching in 1992, we have

built a database of former students from each school

at which we have taught. We now have a network of

more than 1,000 people we can contact when indi-

viduals are in the job market again. This provides an

opportunity for colleges and universities to leverage

their own human and social capital to help their stu-

dents and alumni in difficult economic times.

Aneil K. Mishra is a visiting associate professor of management at Duke University’s Fuqua School of Business in Durham, North Carolina. This summer he will join Michigan State University, in East Lansing, as a professor and associate director of executive edu- cation. Karen E. Mishra is an assistant professor at Meredith College in Raleigh, North Carolina, and will join the faculty of Michigan State University this fall. Gretchen M. Spreitzer is a professor of management and organizations at the University of Michigan’s Stephen M. Ross School of Business. Comment on this article or contact the authors at [email protected].

REFERENCES

1. K.E. Mishra, G.M. Spreitzer and A.K. Mishra, “Preserv- ing Employee Morale During Downsizing,” Sloan Management Review 39, no. 2 (January 1998): 83-95.

2. Ibid.

3. Ibid.; G.M. Spreitzer and A.K. Mishra, “To Stay or to Go: Voluntary Survivor Turnover Following an Organiza- tional Downsizing,” Journal of Organizational Behavior 23, no. 6 (September 2002): 707-729; J. Brockner, G.M. Spreitzer, A.K. Mishra, W. Hochwarter, L. Pepper and J. Weinberg, “Perceived Control as an Antidote to the Negative Effects of Layoffs on Survivors’ Organizational Commitment and Job Performance,” Administrative Science Quarterly 49, no. 1 (March 2004): 76-100. We define empowerment as a personal sense of control in the workplace as manifested in four beliefs about the person-work relationship: meaning, competence, self-determination and impact. See G.M. Spreitzer, “Psychological Empowerment in the Workplace: Dimensions, Measurement and Validation,” Academy of Management Journal 18 (1995): 1442-1465.

4. G.M. Spreitzer and A.K. Mishra, “Giving Up Control Without Losing Control: Trust and Its Substitutes’ Effects on Managers’ Involving Employees in Decision Making,” Group and Organization Management 24, no. 2 (1999): 155-187.

5. Phone interview with Bob Lintz, Jan. 9, 2009.

6. A.K. Mishra and K.E. Mishra, “Trust is Everything: Become the Leader Others Will Follow” (Chapel Hill, North Carolina: Lulu Press, 2008). In this book, we pro- file several leaders who created high levels of trust and empowerment before they needed to downsize their

organizations. After 20 years of studying trust through scores of interviews and several thousand surveys, we have found that trust is made up of four components: reliability, openness, competence and compassion. We call this the ROCC of Trust.

7. Mishra, “Trust is Everything.”

8. Phone interview with Ted Castle, Jan. 23, 2009.

9. S. Mahroum, “Innovate Out of the Economic Down- turn,” Business Week, Oct. 27, 2008. www. businessweek.com.

10. Mishra, “Trust is Everything.”

11. F.F. Reichheld, “The Loyalty Effect: The Hidden Force Behind Growth, Profits, and Lasting Value” (Cambridge: Harvard Business School Press, 1996).

12. A.K. Mishra and K.E. Mishra, “Trust From Near and Far: Organizational Commitment and Turnover in Fran- chise-Based Organizations” (paper presented at the 65th Annual Meeting of the Academy of Management, Hono- lulu, Hawaii, Aug. 5-10, 2005).

13. M.B. Gavin and R.C. Mayer, “Trust in Management and Performance: Who Minds the Shop While the Em- ployees Watch the Boss?” Academy of Management Journal 48, no. 5 (2005): 874-888.

14. A.J. DuBrin, “Applying Psychology: Individual & Organizational Effectiveness” (Upper Saddle River, New Jersey: Prentice Hall, 2000).

15. Mishra, “Trust is Everything.” A good example of this can be found in the e-mail Princeton University president Shirley Tilghman sent to alumni/ae on January 8, 2009, in which she wrote: “Our planning is guided by the goal of preserving the ‘human capital’ that is so essential to the quality of the University — its students, faculty and staff.”

16. A. Gronstedt, “The Customer Century: Lessons from World-Class Companies in Integrated Marketing and Communications” (New York: Routledge, 2000).

17. S.A. Deetz, “Democracy in an Age of Corporate Colo- nization: Developments in Communication and the Politics of Everyday Life” (Albany: SUNY Press, 1992).

18. R. Likert, “The Human Organization: Its Management and Value” (New York: McGraw-Hill, 1967).

19. Mishra, “Trust is Everything,” 59-60.

20. A.K. Mishra, K.E. Mishra and K.S. Cameron, “Power or Empowerment at General Motors?,” in “Managing Organizational Behavior,” 9th ed., ed. J.R. Schermerhorn, Jr., J.G. Hunt and R.N. Osborn, (New York: John Wiley & Sons, 2005), W58-W60.

21. F. Gandolfi, “Learning From the Past — Downsizing Lessons for Managers,” Journal of Management Re- search 8, no. 1 (April 2008): 3-17.

i. A.K. Mishra and G.M. Spreitzer, “Explaining How Survivors Respond to Downsizing: The Roles of Trust, Empowerment, Justice and Work Redesign,” Academy of Management Review 23, no. 3 (July 1998): 567-588.

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