Retrenchment is a corporate-level strategy that seeks to
reduce the size or diversity of an organization's
operations. Retrenchment is also a reduction of
expenditures in order to become financially stable.
Retrenchment is a pullback or a withdrawal from offering
some current products or serving some markets.Retrenchment
is often a strategy employed prior to or as part of a
typical retrencment strategies include
1. harvesting, this is to maximise short term profits and
cash flow while maintaining investment in a product flow.
2. turnaround, attempting to restructure operations to
restore earlier perfomance levels
3. divesture, selling off one or more units of an
enterprise to raise cashor concertrate on core activites
4. liquidation, the decision to ease business and dispose
of all assets.
refer Kenneth lysons & Brian Purchasing & Supply Chai
Management7th edition (1981)
This is the first strategic action taken by an organization when it tries to sustain its position or consolidate its position in view of the unfavorable situation. Retrenchment strategies involved cutting costs of its operations and or assets owned, thereby making a turnaround of the organization. Retrenchment may involve selling off assets to raise the needed cash, cut product lines, closing unprofitable or low margin businesses, institute costs control system, and possibly reducing the number of employees in the organization. In the year 2001 and 2002 when the financial industry in Malaysia exercised its restructuring in the banking sector, many employees were retrenched or laid off. Similarly, when the demand for electronic chips declined, many production workers in the electronics organizations were retrenched. This strategy is adopted by organizations when an organization realizes that it is in weaker position in the industry. This strategy is also adopted when an organization is plagued by inefficiencies, low productivity, low morale and low profitability or losses. Thus, to improve the situation, the organization may resort to several cost cutting measures before the situation worsen. In other words, the organization will use all the available strengths it could gain to improve the weaknesses and take any potential opportunities available in the market.
Different Types of Retrenchment Strategies of Business are given below:
Retrenchment can be divided into the following categories:
1. Turn around Strategies
Turnaround strategy means backing out, withdrawing or retreating from a decision wrongly taken earlier in order to reverse the process of decline.
There are certain conditions or indicators which point out that a turnaround is needed if the organization has to survive. These danger signs are as follows:
a) Persistent negative cash flow
b) Continuous losses
c) Declining market share
d) Deterioration in physical facilities
e) Over-manpower, high turnover of employees, and low morale
f) Uncompetitive products or services
2. Divestment Strategies
Divestment strategy involves the sale or liquidation of a portion of business, or a major division, profit centre or SBU. Divestment is usually a restructuring plan and is adopted when a turnaround has been attempted but has proved to be unsuccessful or it was ignored. A divestment strategy may be adopted due to the following reasons:
a) A business cannot be integrated within the company.
b) Persistent negative cash flows from a particular business create financial problems for the whole company.
c) Firm is unable to face competition
d) Technological up gradation is required if the business is to survive which company cannot afford.
e) A better alternative may be available for investment
3. Liquidation Strategies
Liquidation strategy means closing down the entire firm and selling its assets. It is considered the most extreme and the last resort because it leads to serious consequences such as loss of employment for employees, termination of opportunities where a firm could pursue any future activities, and the stigma of failure.
Generally it is seen that small-scale units, proprietorship firms, and partnership, liquidate frequently but companies rarely liquidate. The company management, government, banks and financial institutions, trade unions, suppliers and creditors, and other agencies do not generally prefer liquidation.
Liquidation strategy may be unpleasant as a strategic alternative but when a "dead business is worth more than alive", it is a good proposition. For instance, the real estate owned by a firm may fetch it more money than the actual returns of doing business.
Liquidation strategy may be difficult as buyers for the business may be difficult to find. Moreover, the firm cannot expect adequate compensation as most assets, being unusable, are considered as scrap.
Reasons for Liquidation include:
(i) Business becoming unprofitable
(ii) Obsolescence of product/process
(iii) High competition
(iv) Industry overcapacity
(v) Failure of strategy