Retrenchment strategy is a grand strategy implemented when a company aims to limit its activities by substantially reducing or removing any of its business. Any business concerning its specific customer groups, customer function, or alternative technology, either individually or in conjunction, enhances its overall performance. In the next sections, you will know the reasons and types of retrenchment strategy.
Retrenchment strategy, when used in personnel management, refers to the separation of employees because of decreased work due to recession or reorganization. The same concept is utilized in strategic management but with the emphasis being slightly different since the retrenchment process only sometimes requires a complete exit from the company.
A retrenchment plan is one that an organization can pursue if it chooses to increase its performance to achieve its goals by:
- Concentrating on improvement in functionality and reducing costs,
- Reduce the number of tasks it performs by turning into an in-house company or
- Reduce the number of markets and products it serves, up to and liquidating the company.
Therefore, a retrenchment strategy plan can provide a range of alternatives that an organization could choose to adopt. The options include cutting back and a turnaround strategy investment strategy, a liquidation strategy and a divestment strategy.
Top 5 Reasons for Retrenchment Strategy
The motives for retrenchment strategy are:
1. Poor Performance
Suppose a business is experiencing low performance in terms of fewer profits and earnings and needs to improve its financial position through other means. In that case, it might be forced to close down sections or units of the business that are dragging on overall performance.
2. Threat to Survival
Suppose the future of a business is in doubt due to unanticipated issues in the product market. In that case, management might be under the pressure of employees and shareholders to increase performance using any means, including a reduction in operations.
3. Redeployment of Resources
Suppose alternatives to an investment offer greater returns. In that case, a portion of current business units or activities could be eliminated and the resources released can be used to boost profitability and increase growth.
4. Insufficiency of Resources
It might be necessary to invest large amounts of financial resources to ensure an adequate earning capacity in a market in the future. If the company needs to be in a position to provide enough funds for this purpose, then the best option is to sell the specific product to make better use of the money released.
5. To Achieve More Efficient Management and Improve Efficiency
It might be necessary to reduce some of the current activities to streamline the scope of activities of the enterprise and increase the efficiency of operations.
Types of Retrenchment Strategy
The types of retrenchment strategy are:
1. Turnaround Strategy
Strategies for turning around derive their name from reversing the negative trend. The main goal of a turnaround strategy is to bring an unprofitable or troubled business to its normal state in terms of an acceptable level of profit, solvency, liquidity and cash flow.
The turnaround strategy is described by describing how the strategies for managing the turnaround process, including the funding crisis, stabilizing it and resolving an underperforming or financially distressed business, are applied throughout the normal stages of a turnaround. It is one of the types of retrenchment strategy.
The turnaround strategy has to stop the cause of distress and deal with that financial crisis to achieve its goals. They can achieve rapid financial efficiency improvements, get stakeholders’ support, and overcome internal obstacles and undesirable industry characteristics.
In the words of Ansoff, “Turnaround strategy is in reality a mix of external actions in relation to markets, creditors and so on. as well as internal actions that are related to operations, resources and specific nature of the threats to the company from within or out”.
Suppose a company in an unfavorable position is not able or unlikeable to achieve success through the help of a turnaround or a company-wide strategy that is captive. In that case, there are only options for a purchaser or selling the company. Divestment sells or liquidates part of the business or an entire division profit centre or SBU. It is one of the types of retrenchment strategy. Divestment is often a part of a restructuring or rehabilitation plan and is used after a turnaround plan has been unsuccessful or proven ineffective. The possibility of a turnaround could be discarded when it becomes clear that divestment is the sole solution.
A divestiture strategy is selling a business or a major part of a company—for instance, Sara Lee Corp. (SLE). Sara Lee employed an approach of conglomerate diversification to create a massive collection of brands. It offers everything from Wonderbras and Kiwi shoe polish to Endust furniture polish, nuts, and coffee. The newly appointed president, C. Steven McMillan had to contend with declining revenues and profits.
McMillan utilized the funds through asset disposals to buy up brands that boosted Sara Lee’s standing in important sectors, such as the $2.8 billion acquisition of the St. Louis-based bread maker Earth grains Company to quadruple Sara Lee’s bakery business. He streamlined, condensed and refocused the business on its primary categories of food underwear, household, and food products. He sold 15 companies, including coach leather items, that accounted for more than 20 percent of the company’s total revenue, and laid off 13,200 employees, a staggering 10 percent of the company’s workforce.
Prospective buyers need to be convinced that they can expect profit from the acquisition due to their capabilities and resources or due to the firm’s synergy with existing companies. If reduction does not result in the desired transformation like in the Goodyear situation, or if an unintegrated business venture achieves an extraordinary market value, the strategic managers typically decide to sell the company. But, since the goal of selling is finding a purchaser who is willing to pay the price higher than the value of the going firm’s fixed assets, the term “marketing for sale” is usually more appropriate. It is one of the types of retrenchment strategy.
Corning made a change that began with retrenchment and divestitures. The year 2001 was the time when Corning was in an economic downturn for its main product, fibre-optic cables. The company had to devise an approach that would allow it to reverse its sales decline and increase its growth. It started with the reduction of employees. Corning cut 12,000 employees in 2001, and personnel management laid off an additional 4,000 in 2002. Corning also started disposing of non-core assets, including its non-telecom operations and its photonics business, which is losing money to improve its financial condition so it could start its recovery.
The reasons behind divestitures vary, but they usually result from mismatches between the acquisition company and the parent company. A few parts that match cannot integrate into the company’s core activities and must be separated from the main business. Another reason could be due to corporate financial requirements. Sometimes, management can significantly improve the company’s cash flow or financial stability if companies with a high market value are sold off. It is one of the types of retrenchment strategy.
The outcome could be an appropriate balance between equity and risk in the long term or loans to minimize the capital cost. It is one of the types of retrenchment strategy. Another less common reason to divest is the government’s anti-trust law enforcement action when a business is believes to monopolize or unfairly dominate a certain market.
The examples of divestitures as a great strategy are numerous. CBS Inc. provides an exceptional illustration. Over two years, the marketer once sold off a diverse publishing and entertainment company, its Records Division to Sony, its magazine publishing division to Diamandis Communications, its book publishing business to Harcourt Brace Jovanovich, and its music publishing division sold to SBK Entertainment World. Other companies that have employed this kind of strategy include Esmark and Swift & Company, which sold Swift & Company, and White Motors, which divested White Farm.
If a business has been unsatisfactory or lacks any of the previous three strategies available, an alternative is liquidation, which usually involves bankruptcy. There is a benefit of uninvolved bankruptcy liquidation in that the top management and the board take the decision instead of giving it to a judge that often disregards shareholders’ rights.
When liquidation is the primary strategy, business is sold in part but rarely as a whole to increase the customer value of tangible assets rather than as a running concern. When they decide to liquidate, the owners and managers of a company acknowledge failure and realize that this decision could cause immense hardships for them and their employees. Because of this, liquidation is generally regards as one of the least appealing of all the strategies. It is one of the types of retrenchment strategy.
As a long-term approach, it reduces the losses of all of the firm’s shareholders. In the event of bankruptcy, the liquidating company typically tries to devise an organized and planned process that yields the highest possible returns and cash conversion when the company gradually loses the market shares it holds.
The idea of liquidation in the future can be profitable. For example, Columbia Corporation is a multi-faceted company with a market capitalization of $130 million. The company sold its assets for more than the worth of its shares.
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