Retrench strategy is adopted when the company not doing well, when an organization’s survival is threatened and it is not competing well. It involves contraction of the scope or level of business or function. It is also called defensive strategy. At very first, retrenchment entails selling of fixed properties to raise needed fund, cutting weaker product line or marginal business, reduce the number of employees and adaptation of expense control systems.
Five conditions for when retrenchment may be an effective strategy;
⦁ When an organization has a clearly distinctive competence but has failed consistently to meet its objectives and goals over time.
⦁ When an organization is one of the weaker competitor in a given industry.
⦁ When an organization is plagued by inefficiency, low profitability, poor employee morale, and pressure from stockholders to improve performance.
⦁ When a company has no plan to manage and deal with SWOT.
⦁ When an organization has grown so large and so quickly that major internal restructuring is needed.
Retrenchment strategies specially focused on various methods which will be helpful to reduce the cost of operation while the company suffering from low or no growth. It includes following three options;
Turnaround: Turnaround means to establish measures which reverse the unfavorable situation in the company. This strategy emphasizes on improving internal factors to save the company before selling the properties and reducing the employees as the ways of cost cutting in the company.
Divestiture: Selling a division or part of an organization during cost saving or fund raising process in the organization, is called divestiture. This strategy is often used to raise capital for further improvement of low growth company.
Liquidation: Selling entire parts of the company is called liquidation. Actually it is not a strategy; it is recognition of defeat of the company in the competitive market. The company adopts this strategy when it realizes that other options of retrenchment are not functional.