The Retrenchment Strategy is implemented when an organization intends to scale back one or more of its business operations in order to minimize costs and achieve a more stable financial position. In other words, the approach adopted when a company decides to terminate its activities through a significant reduction in its business operations, in terms of customer groups, customer functions, and technological alternatives, either separately or combined, is known as Retrenchment Strategy. In order to restore its financial standing, the company can either rearrange its business operations or cease them.
What does Retrenchment Strategy mean?
In order to attain financial stability, a retrenchment strategy entails the elimination of all non-profitable products and services. It also necessitates exiting markets where your business cannot survive. Typically, it culminates in the sale of assets, such as a product line, and the termination of employees.
Examples of retrenchment strategy techniques
Several of the most prevalent forms of retrenchment tactics are as follows:
A turnaround strategy is a method or measure that mitigates the performance-harming trends of a corporation. It is also known as a management measure that could heal a sick company.
In addition to reversing negative trends such as declining market share, rising material costs, declining sales, a widening debt-to-equity ratio, diminishing profitability, working capital challenges, and negative cash flows, the measure resolves a multitude of additional issues. Situation-dependent implementation of this method by businesses.
For example, Dell Technologies announced in 2006 that the corporation would pursue a cost-reduction approach by selling its goods directly to customers. The direct sale was unsuccessful, resulting in a massive financial loss for the business.
In 2007, Dell reversed its direct sales strategy and withdrew from the market. The company began selling laptops through stores and outlets. Currently, Dell is one of the world’s largest computer industry sellers with a robust financial position.
A major business with several assets, departments, and product divisions assesses the profitability of its various divisions and departments. They either contribute to the company’s strategy or they do not. If they are not producing the desired results, you must let them go. In other words, divestment strategy refers to the selling of a portion of a company’s assets, division, and/or business. When a company’s turnaround strategy fails, it implements a divestment strategy.
Businesses and corporations employ the strategy of divestiture for a variety of reasons, including merger plans, the creation of resources, the availability of alternative investment plans, tech upgradation, chronic challenges, negative cash flow, and mismatched assets.
Under the umbrella of the TATA Group of Companies, for example, are a number of firms. They periodically assess their firm, and if they discover any businesses that contradict their core beliefs, they divest them.
Because detergents and soaps were not the company’s core business, TATA divested TOMCO and sold it to Hindustan Levers.
The liquidation strategy is the final stage of the retrenchment strategy, in which the business is permanently shut down and all of its assets are sold. Because it has severe repercussions, liquidation is the last resort for any business with troubles. It culminates in saying no to every possible opportunity and terminating all staff. Small enterprises frequently liquidate. Large enterprises like suppliers, creditors, trade unions, financial institutions, and government departments don’t liquidate. Daily, online e-commerce loses customers to its storefront. The store is incurring greater expenses than it is earning. The management is compelled to liquidate the store in order to pay off the debt.
Justifications for Adopting Retrenchment Strategy
Due to economic, technological, and structural factors, businesses and corporations typically choose a retrenchment strategy as listed below:
- The economic explanation is that corporations employ the retrenchment approach in order to acquire capital for the launch of new initiatives and operations.
- Adopting the most up-to-date technologies, electronic systems, computer packages, equipment, and chemical formulas would reduce the need for additional labor.
- The structural rationale would necessitate that management transition from a corporate functional strategy to a project-based structure system by lowering the number of management levels.
How to Execute Retrenchment Strategy
You can implement the retrenchment method by following the six stages listed below:
- Selection: The process of layoffs should be kept transparent by the administration. Instead of showing bias, they should retain the productive personnel.
- Best Timing: that is opportune Instead of announcing the news on Friday, the management should do so on Tuesday. They would be able to help service during challenging moments at the start of the week.
- Personal Interaction: Please deliver the news to them in person as opposed to using another method. It would permit you to have an open dialogue with them.
- Acknowledge the Outcomes: When bad news is received, people might respond differently. You must be willing to accept any form of reaction.
- Fact & Figures: You must persuade them with data that this situation is unavoidable and that the corporation has no other option. Their lives includes the career transition.
- Coaching: You should also offer them professional coaching to assist them in making a successful shift.
Retrenchment Strategy Advantages
You may disagree with and despise the approach of retrenchment, but it provides you with cost-effectiveness. Numerous diverse resources are dispersed across numerous divisions in businesses. It facilitates their reunification.
When businesses are through a difficult financial period, retrenchment helps them pay their obligations. They are able to avoid borrowing from banking institutions due to their cost effectiveness.
When the organization undergoes a period of retrenchment, all employees will begin to behave more appropriately. Because they do not want to offer their employer an excuse to fire them, their performance will continue to improve. Additionally, the company’s overall productivity would rise.
Retrenchment Strategy Disadvantages
Good Employees Being Lost
No matter how open the redeployment procedure is, it is impossible to discern the inner capacities of any individual. The organization will suffer a big loss if its hardworking staff leave. After their departure, management recognizes their value.
The reaction of the public and their families’ animosity towards the firm would also be visible on social media. It may endure a few days to a few months, depending on how management handles the situation. People desire a scapegoat for the problem and very negative public criticism could cause bad publicity and hurt the company’s brand image.