The retrenchment generic strategy is adopted when an organization intends substantially to reduce the scope of its activity. For this purpose, the problem areas are identified and the causes of the problems are diagnosed. Then, steps are taken to solve the problems that result in different types of retrenchment strategies.
Various external and internal developments threaten the prospects of industries and markets. In declining industries companies face such risks as falling demand, emergence of more attractive substitutes, adverse govt. policies, and customer needs and preferences are undergoing changes. In addition to external developments, there are company specific developments such as poor management, poor quality of functional management and wrong strategies that cause company failures. In such circumstances the industries, markets and companies encounter the danger of decline. Several products such as black & white TV, VCRs, jute and jute products, calculators and wooden toys have either disappeared or are facing decline, and the companies in these industries and markets were forced to eliminate operations or shut down.
The decline manifests in several symptoms reflected in the performance indicators of companies such as diminishing profitability, dwindling cash flow, reducing sales, shrinking market share and increasing debt. A vigilant management can establish an effective monitoring and control system to timely receive the signal of impending danger and check the malaise. In such a situation recovery becomes a possible strategic option.
There are four types of recovery situations. Realistically non-recoverable situation with little chance of survival as the company is not competitive, the potential for improvement is low, there is a cost disadvantage, and the demand for basic products or services is in a terminal decline. Temporary recovery situation could be initially successful retrenchment but may not bring sustained turnaround. This could occur when the repositioning of the product is possible, now forms of competitive advantages can be identified, or cost reduction and revenue generation are possible. Sustained survival situation where a turnaround is achievable but little potential for future growth exists. The industry may be in a process of slow decline. A company facing such a situation could either divest or go in for a turnaround, if it foresees a comfortable niche in the industry where it perceives chances of being the industry leader. Sustained recovery situation is such a condition where a genuine and successful turnaround is possible due to new product development and/or market repositioning and if the industry is attractive enough. Possibly the decline was caused more by internal factors than external conditions. A retrenchment strategy can take any of the following forms: Turnaround strategy, Divestment or divestiture strategy
Various external and internal developments threaten the prospects of industries and markets. In declining industries companies face such risks as falling demand, emergence of more attractive substitutes, adverse govt. policies, and customer needs and preferences are undergoing changes. In addition to external developments, there are company specific developments such as poor management, poor quality of functional management and wrong strategies that cause company failures. In such circumstances the industries, markets and companies encounter the danger of decline. Several products such as black & white TV, VCRs, jute and jute products, calculators and wooden toys have either disappeared or are facing decline, and the companies in these industries and markets were forced to eliminate operations or shut down.
The decline manifests in several symptoms reflected in the performance indicators of companies such as diminishing profitability, dwindling cash flow, reducing sales, shrinking market share and increasing debt. A vigilant management can establish an effective monitoring and control system to timely receive the signal of impending danger and check the malaise. In such a situation recovery becomes a possible strategic option.
There are four types of recovery situations. Realistically non-recoverable situation with little chance of survival as the company is not competitive, the potential for improvement is low, there is a cost disadvantage, and the demand for basic products or services is in a terminal decline. Temporary recovery situation could be initially successful retrenchment but may not bring sustained turnaround. This could occur when the repositioning of the product is possible, now forms of competitive advantages can be identified, or cost reduction and revenue generation are possible. Sustained survival situation where a turnaround is achievable but little potential for future growth exists. The industry may be in a process of slow decline. A company facing such a situation could either divest or go in for a turnaround, if it foresees a comfortable niche in the industry where it perceives chances of being the industry leader. Sustained recovery situation is such a condition where a genuine and successful turnaround is possible due to new product development and/or market repositioning and if the industry is attractive enough. Possibly the decline was caused more by internal factors than external conditions. A retrenchment strategy can take any of the following forms: Turnaround strategy, Divestment or divestiture strategy
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