Retrenchment or Retreat Strategy:
An enterprise may retreat or retrench from its present position to survive or improve its performance. Such a strategy may be adopted during a period of recession, tough competition, scarcity of resources, and re-organization of the company to reduce waste. This strategy, though reflecting the failure of the company to some degree becomes highly necessary for the survival of the company.
The Retrenchment Strategy is adopted when an organization aims at reducing its one or more business operations with the view to cut expenses and reach a more stable financial position.
In other words, the strategy followed, when a firm decides to eliminate its activities through a considerable reduction in its business operations, from the perspective of customer groups, customer functions, and technology alternatives either individually or collectively are called Retrenchment Strategy.
The firm can either restructure its business operations or discontinue it, to revitalize its financial position. There are three types of Retrenchment Strategies:
(i) Turnaround Strategies:
Retrenchment may be done either internally or externally. Internal retrenchment is done to improve internal working. This usually takes the form of an operating turnaround strategy. In contrast, a strategic turnaround is a more serious form of external retrenchment and leads to disinvestment or liquidation.
Turnaround strategies may be adopted in different ways. One way may be that the existing chief executive and management team handles the turnaround strategy with the help of a specialist or external consultant. The success of this approach will depend upon the type of credibility the chief executive has with banks and other financing institutions.
In another situation, the present chief executive withdraws from the scene temporarily and the work is done by the outside specialist employed for this job. The third approach to execute the turnaround strategy involves the replacement of the existing team or merging the sick organization with a healthy one.
(ii) Disinvestment Strategies:
It involves the sale or liquidation of a portion of business or major division or profit center etc. Disinvestment is usually a part of a rehabilitation or restructuring plan. This strategy is adopted when the turnaround strategy has failed. A firm may disinvest in two ways. A part of the company is divested by spinning it off as a financially and managerially independent company, with the parent company retaining or not retaining partial ownership. Alternatively, the firm may sell a unit outright.
(iii) Liquidation Strategies:
It involves the closing down of a firm and selling its assets. It is considered to be the last resort because it leads to serious consequences such as loss of employment for workers and other employees, termination of opportunities where the firm could pursue any future activities, and also the stigma of failure which will be attached to this action.