RETRENCHMENT STRATEGIES

RETRENCHMENT STRATEGIES

Retrenchment is a short-run renewal strategy designed to overcome organizational weaknesses that are contributing to deteriorating performance. It is meant to replenish and revitalize the organizational resources and capabilities so that the organization can regain its competitiveness. Retrenchment may be thought as a minor surgery to correct a problem. Managers often try a minimal treatment first-cost cutting or a small layoff-hoping that nothing more painful will be needed to turn the firm around. When performance measures reveal a more serious situation, more drastic action must be taken to restore performance.

Retrenchment strategies call for two primary actions:

1.   Cost cutting and

2.   Restructuring.

One or both of these tools will be employed more extensively in turnaround situations, because the problems are deeper there than in retrenchment situations. A cost cutting program should be preceded by careful thought and analysis. Rarely is it wise to use a simplistic “across-the-board” cost cutting program. Some departments or projects may need additional funding, while others need modest cuts, and still others need drastic cuts or need to be eliminated altogether. If cost cutting is a part of the strategy implementation, then the plan of implementation should clearly specify how it will be applied across the organization and why is it being proposed.

Retrenchment strategy alternatives include shrinking selectively, extracting cash for investment in other businesses, and divestment. While these strategies result in generating cash, they differ in terms of their intentions. Divestment of the whole business is an “end game” strategy and it may be done via selling or liquidation of business. Under the strategy of extraction of cash for investment in other business, cash is generated from the troubled business mainly via budget and cost contraction. In both strategies, the intention of management is to quit the troubled business.

In the shrinking selectively strategy (SSS), cash is generated via downsizing (contraction of size or divesting some operations. The strategy of shrinking selectively involves retrieving the value of investments in some parts of the market while reinvesting in others because in some niches’ demand will continue to be grow while in others the demand shrivels. The objective is to capture the desirable niches. A firm, which chooses the shrink selectively strategy, should have some internal competitive advantages, which it hopes to preserve. Thus, it may prefer to retain some part of its former businesses by shrinking rather than divesting, because of the possible advantages it had built up through the years.

Shrinking selectively as a repositioning strategy (i.e., matching market niche with distinctive competence) often results in renewed strength. For example, the TATA group continued concentrating on its various business including steel, automobile manufacturing, etc while selling Tomco, which did not share a synergistic relationship with its current portfolio of businesses. Similarly, the LTV steel company’s decision (after filing in 1986) to concentrate on “flat rolled” steel products, while divesting other steel operations, reflects the intent to maintain a leadership position in production of high-quality, value-added steel for critical engineering application.

In essence, restructuring involves an organization refocusing on its primary business. During the 1970s, many firms diversified into businesses they knew little about. Management teams thought this conglomerate diversification would spread their firms’ risks. If the fortunes of one business declined, the others in its business portfolio would protect earnings. Quite often, companies struggled to compete well in the business lines they knew little about. Many of the mergers of the 1980s occurred because these firms restructured their businesses by trying to sell off these businesses and refocus their efforts in their original lines.

Variants of Retrenchment Strategy:

The three major variants of retrenchment strategy are -

1.   Turnaround strategy,

2.   Survival strategy and

3.   Liquidation strategy.