Example
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
External developments
government policies,
demand saturation
emergence of substitute products,
changing customer needs.
Internal Developments
poor management,
wrong strategies,
poor quality of functional management and so on.
In these situations the industries and markets and consequently the companies face the danger of
decline and will go for adopting retrenchment strategies.
There are three types of retrenchment strategies
1. Turnaround Strategies,
2. Divestment Strategies
3. Liquidation 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:
Persistent Negative cash flows
Negative Profits
Declining market share
Deterioration in Physical facilities
Over manning, high turnover of employees, and low morale
Uncompetitive products or services
Mis management
An organization which faces one or more of these issues is referred to as a sick
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.
In 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.
2. Divestment Strategies
A divestment strategy involves the sale or liquidation of a portion of business, or a
major division. Profit centre or SBU. Divestment is usually a part of rehabilitation or
restructuring plan and is adopted when a turnaround has been attempted but has
proved to be unsuccessful. Harvesting 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 Divestment
The business that has been acquired proves to be a mismatch and cannot be
integrated within the company. Similarly a project that proves to be in viable
in the long term is divested
Persistent negative cash flows from a particular business create financial
problems for the whole company, creating a need for the divestment of that
business.
Severity of competition and the inability of a firm to cope with it may cause it
to divest.
Technological up gradation is required 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
2