Workforce Downsizing and Firm Performance: An Organizational Routine Perspective

While there is an extensive body of work on how organizational routines emerge and evolve over time, there is a scarcity of research on what happens when routines are disrupted or disbanded through the elimination of key individuals involved in them. This study is the first to theorize and empirically examine the relationship between the magnitude of workforce downsizing and firm performance applying an organizational routine perspective. Consistent with prior research on organizational routines, we posit that small‐scale downsizing leads to efficiency improvements without disrupting the existing routines. While larger routine disruptions occur in both medium‐ and large‐scale downsizing, we further argue and find that large‐scale downsizing tends to be more beneficial than medium‐scale downsizing. Building on prior research on routines, we reason that in medium‐scale downsizing employees try to salvage the impaired, partially functioning routines, while large‐scale downsizing requires a more fundamental rethinking and re‐creation of routines leading to more positive outcomes. Our study contributes to downsizing research through the application of the organizational routine perspective to explain the financial outcomes of downsizing. In doing so, we depart from the widely held assumption in the downsizing literature that the relationship between the magnitude of downsizing and firm performance is linear. Our study also extends prior research on organizational routines by highlighting the usefulness of conceiving routines as mindful accomplishments where the pressure to engage in path‐breaking cognitive effort may lead to better results than path‐dependent repairing of routines.