We’re living in a time where businesses and companies are developing policies and organizational structures to decide what suit their interest. When a tough time hits the trades, businesses cut down the business’s redundant departments to ensure financial stability and profitability to the company.
Today we’ll discuss retrenchment strategy, its meaning, and types with examples.
Table of Contents
What is Retrenchment Strategy?
Retrenchment strategy is a process through which you cut down all of those products and services that aren’t profiting your business to achieve financial stability. It also means leaving the market where your business can’t sustain itself. It usually results in the form of the sale of assets like product line and firing employees.
Types of Retrenchment Strategies with Examples
Some of the main types of retrenchment strategies are as follows;
Turnaround strategy is a tool/measure that minimizes the negative trends that impact the company’s performance. It also goes by the name of management measure that could transform the sick business into a healthy position.
The measure also reverses the negative trends like decreasing market share, increasing material cost, lower sales, widening debt-equity ratio, less profitability, working capital issues, negative cash flows, and many other problems. The way businesses follow this strategy; varies from situation to situation.
For instance, Dell Technologies stated in 2006 that the company would follow the cost-cutting strategy by directly selling its products to the customers. The direct sale didn’t work out, and the company faced a tremendous financial loss.
Dell turnaround and pulled out from direct sale strategy in 2007. The brand started selling computers through outlets and retailers. Nowadays, Dell is the 2nad largest world’s retailers in the computer industry.
A large company that has attained many assets, departments, and product divisions analyzes various divisions and departments’ profitability. Whether they’re contributing to the company’s strategy, or they aren’t. If they aren’t achieving the required results, then you cut them loose.
In other words, divestment strategy means the sale of a portion of your business, asset, and division. Companies apply divestment strategy when turnaround strategy has already failed.
Businesses and companies follow the divestment strategy for many reasons like merger plans, creating resources, availability of alternative investment plans, tech up-gradation, persistent issues, negative cash flows, and mismatched assets.
For instance, TATA Group of Companies has got a lot of businesses working under its umbrella. They examine their business now and then; if they find any business out of the company’s core ideology, they divest it.
TATA divested TOMCO and sold it to Hindustan Levers because it thought detergents and soaps weren’t the company’s core business.
Liquidation strategy is the extreme level in the retrenchment strategy where you permanently shut down the business and sell all of your assets. Liquidation is the final option of the problems of any business because it has serious outcomes. It results in the form of saying no to every potential opportunity and firing all the employees.
Small businesses usually liquidate. Large companies like suppliers, creditors, trade unions, financial institutions, and government departments don’t liquidate.
For instance, online e-commerce is losing traffic on its store daily. The expenses are increasing than the store’s total earning. The management has no other choice but to liquidate the store and pay off the debt.
Reasons for Adopting Retrenchment Strategy
Businesses and companies follow the retrenchment strategy usually because of economic, technological, and structural reasons. They’re as follows;
The economic reason is that the businesses follow the retrenchment strategy to raise funds to start projects and operations.
Adopting the latest technology, electronic systems, computer package, equipment, and chemical formula would lower the demand for more workforces.
The structural reason would require the management to move from a corporate functional strategy to a project-based structure system by reducing the management levels.
How to Implement Retrenchment Strategy
You can implement the retrenchment strategy by following these six steps, and they’re as follows;
- Selection. The management should keep the process of retrenchment process transparent. They should keep the productive employees instead of providing favoritism.
- Appropriate Timing. The management should break the news on Tuesday rather than on Friday. At the beginning of the week, they would be able to support service in difficult times.
- Face to Face. Please give them the news personally rather than employing any other means. It would allow you to have an open discussion with them.
- Accept the Results. People would react differently when they receive tragic news. You should be ready to accept all types of responses.
- Fact & Figures. You have to persuade them with facts and figures that this is happening and the company has no other choice. The career transition is a part of their life.
- Coaching. You should also offer them the service of career coaching to make a successful career transition.
Advantages of Retrenchment Strategy
You may disagree and dislike the process of retrenchment strategy, but it provides you cost-efficient. Businesses have got a lot of various resources scattered in different divisions. It helps them to pull them back together.
When companies are going through the difficult phase of tight finances, the retrenchment helps them meet the expenses. The cost efficiency allows them not to take debt from the financial institutions.
When the company is going through the retrenchment phase, then all the employees would start behaving better. Their performance would continue to improve because they don’t want to give the employer any reason for firing them. The overall productivity of the company would also improve.
Disadvantages of Retrenchment Strategy
Losing Good Employees
It doesn’t matter how transparent the retrenchment process, you can’t see through any person’s inner capabilities. Losing the hardworking employees is a significant loss to the company. The management realizes their importance once they’re gone.
The public’s reaction and their families’ hatred towards the company would also appear on social media. It may last for few days to few months; it depends on how management handles the situation. People want someone to blame for it.