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written by khatabook | August 25, 2022

What is Retrenchment Strategy? Types, Advantages, and Disadvantages

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Organizations usually adopt a business budget at the beginning of every financial year. To comply with that budget, they must increase or decrease the number of employees. The steps taken by the organization to cut down its expenses to reach a better and stable financial position are done through a retrenchment strategy. 

First, it is important to understand what is retrenchment strategy. The Retrenchment Strategy is used when a company wants to scale back one or more company operations to save costs and improve its financial situation. In other words, the strategy used when a company discontinues its operations through a significant reduction in its business operations is known as the retrenchment strategy. This can be applied to customer groups, customer functions, and technology alternatives individually or collectively.

To achieve financial stability, a retrenchment strategy entails eliminating all the goods and services that aren't profitable for your company. It also entails removing your company from a market where it can no longer survive. Typically, it leads to the sale of assets like product lines and the dismissal of personnel. 

Did you know? 

Even before the consultation begins, a written notice of all pertinent facts on the intended retrenchment must be sent to employees by the employer by section 189(3) of the Labour Relations Act.

Also Read: Successful Retail Business Ideas - Which is the Best Retail Business in India?

Retrenchment Strategy Types 

Now that we have understood the retrenchment strategy let us look at the different types of retrenchment strategies. Following are the various retrenchment strategy types explained:

1. Turnaround Strategy 

 A turnaround plan is a retrenchment strategy that reduces the harmful tendencies that affect the performance of the business. It is a management strategy that has the potential to revive a failing company. It reverses negative directions like declining market share, rising material costs, reduced sales, a widening debt-to-equity ratio, lower profitability, working capital concerns, negative cash flows, and numerous challenges. How businesses use this strategy differs depending on the circumstances.  

Dell Technologies declared in 2006 that it would employ a cost-cutting strategy by selling products directly to customers. The direct sale was unsuccessful, and the corporation suffered a significant financial loss. In 2007, Dell made a turnaround and abandoned its direct-sale strategy. Dell is currently the second-largest retailer in the world for computers. 

2. Divestment Strategy 

A major firm that has accumulated several assets, product divisions, and departments; examine the profitability of various divisions and departments. You release them if they aren't producing the expected results. Put another way; a divestment strategy sells a section of your company, an asset, or a division. Companies use a disposal plan after a failed turnaround strategy.

Diversification is a technique that businesses and companies use for a variety of reasons, including merger plans, resource creation, the existence of multiple investment plans, technology upgrades, enduring problems, mismatched assets, and negative cash flows. When a company divests, it scales back operations or sells a division to concentrate on its core challenges and utilises the proceeds to expand that division's business. Keep in mind that liquidation is not the same as divestment. In a divestiture, a company sells a non-strategic business. It receives cash for strategic investments in its core business, as opposed to a liquidation, where a company sells its unit and shuts the door.

Also Read: What Is a Business Advisor, Meaning, Roles & Average Salary 

3. Liquidation Strategy 

The organisation's most disagreeable option is the liquidation approach, which entails selling off its resources and ceasing all commercial operations altogether. It is the most important and final option before retrenchment strategy because it has major negative effects, including a sense of despair, lost possibilities in the future, a damaged reputation in the market, employee job loss, etc. Because there may not be any purchasers, the company using the liquidation approach may have trouble selling its assets and may not receive enough money for most of them.

The extreme level of the retrenchment strategy is the liquidation approach, in which you permanently close your company and sell all of your resources. Because it might have negative effects, liquidation is the last resort for any firm with issues. Most small enterprises close their doors, and creditors, suppliers, financial institutions, trade unions, and government agencies are large businesses that don't go out of business. 

4. Captive Company Strategy

When a company depends on another company to survive, it defines a captive company strategy. When the industry prospects are not promising enough to justify the work needed to turn the firm around, a company with weak competition may choose not to pursue a turnaround strategy. The business still has to solve the issue of declining sales and profitability. In this case, the business is looking for an "angel," often one of its biggest clients. As a result, this customer becomes a prisoner of the business and receives a secure and assured business. It can also assist cut costs by reducing certain functions, like marketing. The advantage for the smaller company is that it receives guaranteed revenue and must surrender its independence in exchange. 

For instance, Simpson Motors decided to become a captive firm to General Motors, supplying the automaker with 80% of its manufacturing under contractual agreements. The advantage for the smaller company is that it receives guaranteed revenue and must surrender its independence in exchange.

What are the Reasons For Retrenchment Strategy

 The following are the reasons for retrenchment strategy:  

1. Poor Performance 

It makes perfect sense to close down business lines or centres that are not generating value and serve as productivity laggards in the company when performance is subpar and losses are incurred. 

2.Threat to Survival 

A corporation will frequently shut down a portion of its operations when unexpected activity in its product markets hinders the company's success. Many times, the company's shareholders also compel such a plan. 

3. Redistribution of Resources 

The corporation may be required to scale back operations in the current business and redistribute the resources freed to more productive areas if other outstanding investment possibilities arise. 

4. Inadequate Resources 

The corporation might also require financial resources to maintain its current market position. The corporation might not have the money and might be compelled to separate off unproductive parts of its operations to redeploy the resources. 

5. To Ensure Better Management and Greater Effectiveness

A corporation may occasionally diversify too much. As a result, it loses control, which impacts operational efficiency. Retrenching helps the company reduce its size to a tolerable level by streamlining its product line. 

Also Read: How to Expand a Business - 18 Strategies for Quickly Expanding a Business

Advantages of Retrenchment Strategy 

1. Cost-efficient 

Even if you disagree with it and find the retrenchment strategy unpleasant, it still saves you money. Businesses have a wide variety of resources dispersed throughout their numerous departments, and bringing them back together benefits them. A retrenchment strategy aids organisations in meeting expenses when they are going through the challenging phase of limited funds. They can avoid taking on debt from financial firms thanks to cost-effectiveness.

2. Improved Performance 

All the employees would start acting better when the company went through the retrenchment strategy phase. They would keep doing better work because they don't want to give their boss an excuse to fire them. The business's total productivity would increase as well. 

Disadvantages of Retrenchment Strategy 

1. Losing Employees 

No matter how clear the process of retrenchment strategy is, you cannot see through a person to their inner capacities. The loss of dedicated workers would devastate the business, and once they are gone, the management understands their significance.  

2. Criticism

Social media would also show the public's reaction and their families' bad reactions toward the business. It depends on how the administration responds to the situation, whether it lasts a few days or months. People are looking for someone to blame.

Also Read: What Is Business Structure & Learn How to Choose a Business Structure

Conclusion:

Retrenchment strategy tactics can be used to expand a company's operations while preventing it from going bankrupt. Organizations can reduce expenses using a liquidation plan while increasing their business through divestment and turnaround.

Follow Khatabook for the latest updates, news blogs, and articles related to micro, small and medium businesses (MSMEs), business tips, income tax, GST, salary, and accounting.

FAQs

Q: What are the features of a retrenchment strategy?

Ans:

 Simply said, a retrenchment strategy entails discontinuing any goods or services that are no longer lucrative for the company. Additionally, it involves pulling out of markets where merely surviving is an everyday challenge. 

Q: What does retrenchment strategy mean?

Ans:

 A business approach known as retrenchment strategy entails abandoning goods and services that the company no longer requires. 

Q: Examples of retrenchment strategies?

Ans:

An example of a retrenchment strategy would be: Selling assets abandoning markets decreasing production outsourcing downsizing.

Q: In what circumstances do firms adopt a retrenchment strategy?

Ans:

The following are the reasons for implementing a retrenchment strategy:

  • Inadequate Resources
  • Redeployment of Resources
  • For Securing better Management and Improved Efficiency 
  • Threat to Survival

Q: What are the four retrenchment strategies?

Ans:

The four types of retrenchment strategies are turnaround, liquidations, divestment, and captive company.

Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.
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Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.