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Retrenchment Strategies

Retrenchment strategies are actions an organization takes to reduce its operations when facing declining performance or market conditions. These include turnaround, divestment, and liquidation strategies. A turnaround strategy aims to reverse losses and regain market position through improved efficiency. If a turnaround does not work, the organization may pursue a divestment strategy involving selling off certain business units. Finally, if losses cannot be reversed and divestment is not possible, the organization may undertake a liquidation strategy to close down operations and sell assets to pay debts.

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246 views18 pages

Retrenchment Strategies

Retrenchment strategies are actions an organization takes to reduce its operations when facing declining performance or market conditions. These include turnaround, divestment, and liquidation strategies. A turnaround strategy aims to reverse losses and regain market position through improved efficiency. If a turnaround does not work, the organization may pursue a divestment strategy involving selling off certain business units. Finally, if losses cannot be reversed and divestment is not possible, the organization may undertake a liquidation strategy to close down operations and sell assets to pay debts.

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Sid Garg
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Retrenchment Strategies

What is Retrenchment

 When an organization aims at reducing its one or more


business operations
 To cut expenses
 To reach a more stable financial position
 To reduce the scope of current activities
 Done when industry and / or market is declining
Why organizations face retrenchment

External factors such as


1. Upgraded technology
2. New business models
3. Government policies
4. Changing customer needs / taste
5. Demand saturation for products
6. Substitute products availability
Why organizations face retrenchment

Internal factors such as


1. Ineffective top management
2. Functional (departmental) quality issues like marketing issues or
production problems or poor after sales service
3. Stakeholders resistance to change when the situation demands
evolving
4. Cost inefficiency or disadvantage due to location or skill or
knowledge
5. Ineffective organizational design (from top management)
Symptoms of decline

Common symptoms that reflect decline in business:


1. Decrease in profits
2. Decrease in sales
3. Decrease in market share
4. Decrease in credibility or goodwill with financial institutions or
suppliers or creditors
5. Increase in debts
Types of Retrenchment strategies

1. Turnaround strategy

2. Divestment strategy

3. Liquidation strategy
Turnaround Strategy

 When organization’s leadership identifies any symptoms reflecting a


decline in meeting the objectives of the organization, its first effort is
to recover from losses and regain the original position in the market.
This strategy is called a turnaround.

 Reversing a negative trend / turning around the organization from


loss making to profit making is called a turnaround strategy.

 Only when a turnaround strategy does not work, does the company
move to divestment or liquidation.
Methods to implement Turnaround Strategy

 Existing CEO (or top management) + advisory support (an external consultant
specializing in turnaround of failing companies) = improving efficiency and
effectiveness of the organization.

 Existing CEO (or top management) withdraws from their position temporarily.
External consultant works towards improving profitability of the firm by
increasing efficiency and effectiveness. Once the turnaround is successful, the
CEO (or top management) return to their original positions.

 The top management of the firm is replaced by new leaders, or the firm is merged
into another firm (through M&A) to bring about a change in operations.
Action plan for Turnaround strategy

1. Thorough analysis of product, market, internal and external


environments, production processes, competitors etc. to identify
problem areas

2. Clarity on desired product, production systems and market segment

3. Small achievable targets are made with continuous monitoring,


evaluation, feedback and remedial actions
Role of external agencies in turnaround in
India
 NCLT (National Company Law Tribunal) was formed on 1 Dec 2016 by Govt. of India. It
takes care of liquidation or turnaround of sick companies, replacing BIFR (previous govt.
initiative for sick companies’ aid).
 NCLAT (National Company Law Appellate Tribunal) is the court that resolves all appeals
against the decisions made by NCLT.
 RBI co-ordinates with the firm and NCLT to make financial arrangements for revival like
providing loans or rescheduling repayments.
 Declaration of company as sick  NCLT analyses organization’s health and provides
guidance on revival techniques such as:
i. Technological advancements or modernization
ii. Sale or leasing out of the undertaking to another firm
iii. Concessions like tax rebate or exemptions
iv. Amalgamation with another company (which receives tax benefit for reviving a sick unit)
Divestment strategy (Divestiture)
 Only when there is no possibility of revival or turnaround of the firm using
existing funds / skill or leadership

 It is the selling off of a business unit or division or portion of the loss making
business unit.

 Disinvestment – Sale of govt. equity in any public sector organization to another


public sector firm (or even to a private firm, which is then called privatization of
the firm)

 Done in order to streamline a diversified business and bring back the focus on
core competencies. The original parent company may receive stocks from the
new parent company or capital in lieu of the business which is sold off.
Common reasons for Divestment

1. An acquired BU does not gel with the current company, e.g. cultural
gap
2. The SBU has been making losses consistently
3. The firm needs technological advancement or upgrade which
demands unaffordable investment
4. Unable to match competition or identify competitive scope
5. To keep the other SBUs afloat and overall health of the organization
stable
6. To fulfil capital requirement for another lucrative SBU or project or
a better investment
Approaches to Divestment

 Spin-off as an independent company (in which the parent


company may or may not have a stake after spin-off)

 Find a buyer for the SBU who sees the SBU as a strategic
fit with their firm and sell off the SBU
Examples

 Hindustan Unilever (HUL) divested from sea-food processing


business

 Tata sold off its soaps and detergents business to HUL

 Samsung sold off its automobile manufacturing unit to Renault in


2000

 Balmer Lawrie closed down its tea business


Liquidation
 The final or last step when turnaround or divestment is not possible
 Inability to recover from persistent losses
 Divestment  selling off a business unit or a part of the firm to another party, liquidation
 selling off or closing down the entire firm
 Carried out when all attempts at turnaround have failed; divesting only some part of the
business is also not able to revive other sick Business Units
 Firm then closes down its operations and sells off the assets to pay for the pending debts
and dues
 Generally seen in small scale enterprises or single owner proprietorships

 Dissolution – When the legal existence of the firm ends, and its name is removed from
all markets and books of accounts of all stakeholders.
Process of Liquidation

1. Winding up, property administered for creditors and members.


2. Liquidator is appointed who sells off assets and distributes the funds
received from selling assets to repay debts and creditors and
financial institutions etc. (Filing for bankruptcy or going through
liquidation does not free the company from the liabilities of all due
payments).
3. When all assets have been sold and as much liability resolved as
possible, the organization is formally dissolved.
Liquidation

 Compulsorily, on Court’s order

 Voluntarily, to wind up business when it is no more profitable

 Voluntarily, but under the supervision of Court


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