Retrenchment strategy

A retrenchment grand strategy is followed when an organization aims at a contraction of its activities through substantial
reduction or the elimination of the scope of one or more of its businesses in terms of their respective customer groups, customer
functions, or alternative technologies either singly or jointly in order to improve its overall performance. E.g: A corporate
hospital decides to focus only on special treatment and realize higher revenues by reducing its commitment to general case
which is less profitable.
The growth of industries and markets are threatened by various external and internal developments !xternal developments "
government policies, demand saturation, emergence of substitute products, or changing customer needs. #nternal $evelopments
" poor management, wrong strategies, poor %uality of functional management and so on.& #n these situations the industries and
markets and conse%uently the companies face the danger of decline and will go for adopting retrenchment
strategies. E.g: fountain pens, manual type writers, tele printers, steam engines, jute and jute products, slide rules, calculators
and wooden toys are some products that have either disappeared or face decline.
There are three types of retrenchment strategies " Turnaround 'trategies, $ivestment 'trategies and (i%uidation strategies.
1. Turnaround Strategies
Turn around strategies derives their name from the action involved that is reversing a negative trend. There are certain
conditions or indicators which point out that a turnaround is needed for an organization to survive. They are)
*ersistent +egative cash flows
+egative *rofits
$eclining market share
$eterioration in *hysical facilities
,ver manning, high turnover of employees, and low morale
-ncompetitive products or services
.is management
An organization which faces one or more of these issues is referred to as a /sick0 company.
There are three ways in which turnarounds can be managed
The existing chief executive and management team handles the entire turnaround strategy with the advisory support of a
external consultant.
#n another case the existing team withdraws temporarily and an executive consultant or turnaround specialist is
employed to do the job.
The last method involves the replacement of the existing team specially the chief executive, or merging the sick
organization with a healthy one.
1efore a turn around can be formulated for an #ndian company, it has to be first declared as a sick company. The declaration is
done on the basis of the 'ick #ndustrial 2ompanies Act '#2A&, 3456, which provides for a %uasi judicial body called the 1oard
of #ndustrial and 7inancial Reconstruction 1#7R& which acts as the corporate doctor whenever companies fall sick.
2. Divestment Strategies
A divestment strategy involves the sale or li%uidation of a portion of business, or a major division. *rofit centre or '1-.
$ivestment is usually a part of rehabilitation or restructuring plan and is adopted when a turnaround has been attempted but has
proved to be unsuccessful. 8arvesting strategies a variant of the divestment strategies, involve a process of gradually letting a
company business wither away in a carefully controlled manner
Reasons for $ivestment
The business that has been ac%uired proves to be a mismatch and cannot be integrated within the company. 'imilarly a
project that proves to be in viable in the long term is divested
*ersistent negative cash flows from a particular business create financial problems for the whole company, creating a
need for the divestment of that business.
'everity of competition and the inability of a firm to cope with it may cause it to divest.
Technological up gradation is re%uired if the business is to survive but where it is not possible for the firm to invest in it.
A preferable option would be to divest
$ivestment may be done because by selling off a part of a business the company may be in a position to survive
A better alternative may be available for investment, causing a firm to divest a part of its unprofitable business.
$ivestment by one firm may be a part of merger plan executed with another firm, where mutual exchange of
unprofitable divisions may take place.
(astly a firm may divest in order to attract the provisions of the .RT* Act or owing to oversize and the resultant
inability to manage a large business.
E.g: TATA group is a highly diversified entity with a range of businesses under its fold. They identified their non " core
businesses for divestment. T,.2, was divested and sold to 8industan (evers as soaps and a detergent was not considered a
core business for the Tatas. 'imilarly, the pharmaceuticals companies of the Tatas9 .erind and Tata pharma " were divested to
:ockhardt. The cosmetics company (akme was divested and sold to 8industan (evers, as besides being a non core business, it
was found to be a non9 competitive and would have re%uired substantial investment to be sustained.
3. Liquidation Strategies
A retrenchment strategy which is considered the most extreme and unattractive is the li%uidation strategy, which involves
closing down a firm and selling its assets. #t is considered as the last resort because it leads to serious conse%uences such as loss
of employment for workers and other employees, termination of opportunities where a firm could pursue any future activities
and the stigma of failure
The psychological implications
The prospects of li%uidation create a bad impact on the company0s reputation.
7or many executives who are closely associated firms, li%uidation may be a traumatic experience.
Legal aspects of liquidation) -nder the 2ompanies Act 346;, li%uidation is termed as winding up. The Act defines winding up
of a company as the process whereby its life is ended and its property administered for the benefit of its creditors and members.
The Act provides for a li%uidator who takes control of the company, collect its assets, pay it debts, and finally distributes any
surplus among the members according to their rights.
The stability grand strategy is adopted by an organization when it attempts at an incremental improvement of its functional
performance by marginally changing one or more of its businesses in terms of their respective customer groups, customer
functions, and alternative technologies " either singly or collectively
E.g: A copier machine company provides better after sales service to its existing customer to improve its company product
image, and increase the sale of accessories and consumables
This strategy may be relevant for a firm operating in a reasonably certain and predictable environment. 'tability strategy can be
of three types "+o 2hange 'trategy, *rofit 'trategy, *ause< *roceed " with " caution 'trategy.