Customer reactions to downsizing: when and how is satisfaction affected?

Organizational downsizing to cut costs frequently creates new, “hidden costs” that neutralize potential increases in productivity. Customer dissatisfaction is such an overlooked downsizing outcome. Using longitudinal data from the American Customer Satisfaction Index (ACSI), Compustat, and a consumer survey this study analyzes satisfaction outcomes of downsizing. It extends research in this domain to B2C markets and explicitly addresses environmental influences on the downsizing–satisfaction link. Results indicate that there is a negative effect of downsizing on customer satisfaction. It is particularly pronounced for companies (1) with little organizational slack, (2) with high labor productivity, or (3) in industries with high R&D intensity. Moreover, downsizing has a stronger negative impact on customer satisfaction in product categories with (4) high risk importance and (5) low probability for consumer errors as well as (6) low level of brand consciousness. Furthermore, customer satisfaction mediates the effect of downsizing on financial performance. The results provide an explanation for why so many downsizing projects fail and what managers can do to prevent adverse effects of downsizing on customer satisfaction and financial performance.

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