Retrenchment Strategy: What is it, Types of Strategy, Companies that employed it

Mahenoor Mansuri Mahenoor Mansuri
Sep 14, 2021 5 min read
Retrenchment Strategy: What is it, Types of Strategy, Companies that employed it

Businesses run on the three basics, Men, Money, and Machinery. If you are in a situation, facing loss. You will want to keep your head above the water. Devise a good strategy. Take some steps to look for what it is that has got your head into deep waters.

What is it that has made you stand in this position of loss?

You can analyze a lot of factors and make certain important decisions now.

  • What is it that you can let go of?
  • Is this important to you right now?
  • Can this help you improve?
  • Cutting this off will help you get out of this position?
  • Is it effective?

How does an organization cut down costs and increase their revenue?

Cutting down costs on activities that do not profit businesses means also cutting down the number of men in that sector. For example, if there is no longer a need for you as an organization to focus on the clerical department. You will have to eliminate the people working there, which will efficiently reduce the cost. It includes shrinking of a business or a part of it to enhance the overall performance.

The decisions you make have to be realistic and achievable. So, Lets look at What is retrenchment strategy and the companies that employed the retrenchment strategy.

Retrenchment Strategy - What is it, When is it employed and Why is it employed
Types of Retrenchment Strategy
Pros and Cons of Retrenchment Startegy
Companies that employed the Retrenchment Strategy
FAQ

Retrenchment Strategy - What is it, When is it employed and Why is it employed

As it is a matter of finance. Capital and investments are basic that let your organization keep going. Revising the basics: money, machinery, and men.

So, What is a retrenchment strategy?

The strategy includes the desertion of products and services that are no longer needed by the business.

When is the strategy employed?

It is implemented when a company is facing financial issues. It is a corporate strategy, which is done by reducing an organization's expenditure.

Why is the retrenchment strategy employed?

  • To shift focus on activities from where revenue is generated and hence increase profits or simply because the operation, project, the service, product or the product line going on in the organization may not align with the core of the business.
  • To eliminate unnecessary costs that incur.
  • To ensure financial stability in the organization.

Who employs the strategy, and where is it used?

The organizations use it on a linear or a collective basis. It is used in

  • Corporations
  • Startups
  • Companies
  • Businesses

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Types of Retrenchment Strategy

This is also applicable to line extensions, operations, and projects that are being carried out in your business. First, let's take a look at the three main types of retrenchment strategies:

1. Turnaround strategy

Also called as management measurement. The turnaround strategy is used when a business wants to improve its performance and decrease the negative trends.

This strategy is used when the business might be facing:

  • A decline in the market shares.
  • Decrease in profits.
  • The issue of spending more money as an organization during a specified period.
  • Worsening debt equity ratio.
  • Negative cash flow.
  • Decline in sales.

2. Divestiture Strategy

The divestiture strategy is adapted for when the turnaround strategy fails to yield results for a business. The divestment strategy analysis mainly the profit and profile factor. In an organization, the departments, products, its divisions, the services or the divisions are analyzed. Keeping in mind one question: Does this profit us? If not, then the company will let go of it.

This strategy is used when the company might be facing problems like:

  • Not being able to keep up with the competition in the market.
  • Facing negative cash flows.
  • The business started or acquired does not match the core values of the company.
  • When a tech upgrade is needed and the company is unable to do so.
  • It is struggling to survive.
  • The company might be running a business that is not profitable to the company.

3. Liquidation Strategy

This is the arrival of a business at its last stage. When no other options are available, the company sells all of its assets. As ugly as it might be, it involves total shutdown of a firm and will attract negative reactions as it also leads to consequences majorly including unemployment, of the people who worked there. Which also creates a bad reputation for the company.

To understand this more clearly, let's take the Tata group as an example. It is a highly diversified entity with a range of businesses under its umbrella. A lot of which did not align with the identity of their core business.

The businesses that Tata ran for a specified time were soaps, detergents, pharmaceutical companies, and cosmetics. All of which were identified as non-core by the Tata group.

  • TOMCO (Tata Oil Mills Company) was divested and sold to Hindustan Lever Limited. The company was sold to Hindustan Lever, as it was non-competitive and would have required substantial investment for them to sustain it.
  • Tata's Merind were divested to Wockhardt.

Adapting a retrenchment strategy might also be a company's response to a significant reduction in demand for the product, product line, or the service it provides. Which would also include dropping off from the market.


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Pros and Cons of Retrenchment Startegy

Pros

  • It can layer, simplify, and flatten the organization's structure.
  • Prove, cost-efficient, and improve the performance.

Cons

  • It will create a negative image and reputation of a company.
  • Criticism and backlash from the society.

Companies that employed the Retrenchment Strategy

A list of 10 organizations that have adopted the retrenchment strategy for various reasons, overall enhancement and to run the organizations in their companies efficiently are:

  1. Tata Group
  2. Infosys Ltd
  3. Wipro Ltd
  4. Tech Mahindra Ltd
  5. HCL Technologies Ltd
  6. Cognizant Technology Solutions Corp
  7. Capgemini
  8. Air India
  9. Dell
  10. Ford

FAQ

What is a retrenchment Strategy?

A retrenchment strategy is a strategy that includes the desertion of products and services that are no longer needed by the business.

What is retrenchment turnaround strategy?

A retrenchment strategy is when an organization feels that the decision made earlier is wrong and needs to be undone.

What are the three retrenchment strategies?

The three types of retrenchment strategies are Turnaround strategy, Divestiture strategy, and liquidation strategy.

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