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.
Types of retrenchment strategy
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:
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.
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 utilizes 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.
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.
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.
Downsizing is a retrenchment strategy that involves reducing the size of a company by eliminating jobs, departments, or entire business units.
This is usually done to cut costs, improve efficiency, or adjust to changes in the market. Here are some steps that can be taken to implement a downsizing strategy:
1. Define the objectives: Before downsizing, it’s important to define the strategy’s objectives. This could include reducing costs, improving efficiency, or focusing on core business areas.
2. Assess the current situation: A thorough assessment should be carried out to identify areas where downsizing could be beneficial. This could include analyzing financial data, conducting employee surveys, and reviewing business processes.
3. Identify areas for downsizing: Based on the assessment, areas for downsizing should be identified. This could include eliminating redundant positions, consolidating departments, or selling non-core business units.
4. Develop a communication plan: It’s important to develop a communication plan that includes how employees will be notified of the downsizing, what support will be provided to affected employees, and how the company will address concerns and questions.
5. Implement the downsizing: Once the communication plan is in place, the downsizing can be implemented. This could include offering voluntary severance packages, laying off employees, or reassigning employees to other business areas.
6. Monitor and evaluate: After the downsizing is implemented, monitoring and assessing the impact on the business is important. This could include analyzing financial data, assessing employee morale, and reviewing customer satisfaction. Based on the results, adjustments need to be made to the downsizing strategy.
It’s important to note that downsizing can significantly impact employees and the company as a whole. Therefore, it should be approached carefully and with sensitivity. Providing support to affected employees and communicating clearly throughout the process can minimize negative impacts and ensure a successful downsizing strategy.
Examples of Retrenchment Strategy
A hotel chain is facing losses in the restaurant business, so they sell it off and focus on hoteling, and start outsourcing the food and beverage services. This is an example of a liquidation strategy.
After sacking Steve Jobs from Apple in 1985, Apple started losing its market position. However, his return in 1997 turned the company around, and now it is the largest tech company on the planet. This is an example of a turnaround retrenchment strategy.
An organization had three separate business operations. The return on investment was 20%, 15%, and 5%. So, they decided to sell the third operation and use the money to grow the first business. This is an example of a divestment retrenchment strategy.
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.
How to implement retrenchment strategies
Below are steps you can follow to use a retrenchment strategy:
1. Select productive professionals
Selecting the most productive professionals at your organization can help show others the best practices being used and can help you restructure your organization.
The most productive professionals often have tips they can share to increase the productivity of others and are often willing to take on a few extra projects to make transitions smoother.
They may also help you understand how other people may react to the news of the organizations using a retrenchment strategy, helping you develop the best plans for telling the professionals you work with.
2. Use appropriate timing
When you choose to tell the professionals at your organization about a retrenchment strategy is important. Picking a day and time near the beginning of the week can help them adjust as they continue the work week and allow them time to ask questions about the process.
Telling them as early as possible can give them time to adjust to prepare for and adjust to any changes that may happen as part of the strategy.
Allowing them enough time to make alternative plans, if possible, can show how much you care for and respect them and that you want to see them succeed, even though the organization needs to make some changes.
Telling the professionals you work with early enough can also help you develop more effective strategies for helping them transition to new opportunities.
3. Give professionals the news directly
Approaching the professionals you work with directly, as opposed to using an email or telephone call, can help reduce any negative emotions people feel. They may still feel them, but this way shows that you want to tell them the strategy directly, which can help you show your respect for their work and help them respect you even through the retrenchment period.
This method of delivering the news can also help you and the professionals plan for the transition more easily. Finally, telling them directly can help you answer questions they may have about the process.
4. Explain with facts and logic
There may be a lot of emotions when you explain the retrenchment strategy to the professionals you work with. Helping them through it with facts and logic can help them understand why the organization decided how it did and help them process their next steps.
Once you explain the facts, let them ask questions and develop their own strategies for addressing the changes that happen during the process. Even as you let them address the changes in their own work-life, create options to help them transition to new opportunities.
5. Provide career coaching
Career coaching is a way you can help any professional who moves away from the organization during the retrenchment process. It allows them a way to understand, write about and present their skills.
Career coaching can also help professionals develop connections in their industry and learn about opportunities for similar work in their area. This can also help you show you care about their outcomes as professionals and want to help them transition as easily as possible.
Effects of Retrenchment on Employees:
1. Prospect of career correction:
Despite the fact that it seems unjust to sack employees on the pretext of futile investments there is a silver lining to it.
It is likely that companies are going to keep the most hardworking employees but in no face should it mean an end of a career for those being intercepted.
First of all, a notice will be given before a retrenchment process is in order.
Secondly, every employee will be given a fair chance to prove one’s worth through the screening.
Nevertheless, it is advisable that everyone must take the notice period seriously to consider the prospect of career correction where the risk of facing a retrenchment policy will be less.
2. Work Experience:
Regardless of everything, there is a brighter side to retrenchment which is the job experience certificate.
Obviously, being subjected to retrenchment does not mean the end of everything for good. Sometimes companies have to resort to drastic measures which involve taking decisions that would not normally cross their mind.
Nonetheless, the good news is you can still apply to different companies for the job of your choice. In addition to your renewed chances, you are bound to be given preference if your company is kind enough to give you a recommendation.
3. Rise in entrepreneurship:
No matter how badly it ends for an employee, new opportunities are always going to present itself.
One such opportunity is the prospect of entrepreneurship. One may use whatsoever knowledge he/she had gained while working at the previous company prior to the retrenchment to start a new enterprise from scratch.
With the rise in professional individualism in terms of trade and commerce, one can easily opt for starting one’s own business-level strategy with a little investment.
In light of recent days, the boom in entrepreneurship has almost taken the shape of a trend that is taking the globe by storm.
Then there is, of course, the grieving factor. Some people no matter what, are never going to come to terms with being entitled to retrenchment.
These immovable kind of people are eventually going to take to desperate measures to heckle the company in every way possible.
However, this is not entirely their fault given the fact that they have contributed a considerable amount of their time and effort over the years in the making of the company.
They are sure as anything not going to let go of what they think is rightfully theirs, in this case, the position that has been eliminated.
This is not completely unbecoming of them since they have served the company once but completely justified as they would think themselves to be equally deserving of being retained.
Effects of Retrenchment on Organizational Performance:
1. Eliminating redundancy:
Retrenchment has its primary use in freeing the company of commercial attachments that are not yielding as heavily as expected.
Trying to be in vogue for the consumers, companies sometimes introduce posts or offer perks that are utterly meaningless and as a matter of fact very costly. Later these risky investments give them a run for their money.
To avoid having to close down the company, employers start reducing the number of employees starting with downsizing the number of positions they had introduced which lead to disappointment.
Anyhow, eliminating redundant involvements is one possible way to impose a cost-effective relationship between the company and its employees.
2. Improves service:
The performance automatically improves after the retrenchment since that is what it apparently aims to do. On removing the redundancies the problems become much easier to handle due to the reduction in monetary losses.
Often it happens that salaries are reduced to a meagre amount in light of desperate times. So the employees rush from pillar to post to revive the company’s lost health in order to restore the pay scale.
It is ultimately the workers’ prerogative to look after the company. So the service from their end undoubtedly improves lest the next brunt of retrenchment should be on their neck.
3. Keeping everybody on their toes:
It is given that a fresh retrenchment is going to keep each and every employee on their toes. It is normal for the employees to be afraid of a future reduction in the number of workers.
This keeps the employees on high alert since they are going to be afraid of being removed if they do not work properly. They cannot afford to be liberal in their ways of working when there has been a retrenchment earlier on.
So these are definitely some of the positive ways in which retrenchment can improve the performance of the organization or the company with nothing more than a word or two of motivation from the employers.
Advantages of Retrenchment Strategy
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.
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.
I’m conclusion, Retrenchment strategies can be used to stop an organization from going bankrupt and grow the business. Liquidation strategy helps organizations cut costs, while divestment and turnaround help them grow their operations.