Retrenchment strategies

Retrenchment strategies:

Retrenchment strategies are pursued by companies with a weak competitve position in some or all of its product lines resulting into poor performance. These strategies are undertaken to improve performance and so there is a pressure for management to improve performance. There are lots of turn around strategies management can adopt,let's analyse them below.

Turn around Strategy: 

it emphasizes the improvement of operational efficiency and is probably. It is considered to be most appropriate when a corporation's problems are pervasive but not yet critical. A major way to implement turn around strategy is by cutting costs and expenses and selling off assets. The two basic phases of a turn around strategy are contraction and consolidation.

Contraction is used to control the situation,it is the initial effort to keep the company under control with a general,across the board cut back in size and costs. The second phase which is consolidation,implements a program to stabilize the now leaner corporation. To streamline the company,plans are developed to reduce unnecessary overhead and to make functional activities cost 'justified. The consolidation phase is very crucial because as the company seeks to reduce overhead and cut unnecessary costs,they may loose the best people working for them. Also an overemphasis on downsizing and cutting costs coupled with a heavy hand by top management is usually counterproductive and hurts performance.

Captive Company Strategy:

A captive company strategy involves giving up independence in exchange of security. If a company is in a weak competitive position and is not financially able to undergo a full blown turnaround strategy or the industry may not be sufficiently attractive to justify such an effort, then the company can look for an angel by offering to be a captive company to one of its larger customers in order to guarantee the company's continued existence with a long term contract.

Sellout or Divestment Strategy:

if a corporation with a weak competitive position in an industry is unable to pull itself up or find customers to which it can become a captive company,such a company may have no choice but to sell out. The sell out strategy would be on a positive to shareholders if the management can s obtain a good price for its shareholders and the employees can keep their jobs by selling the entire company to another firm. The aim is that the new firm would have necessary resources and determination to return the company to profitability.

If the corporation has multiple business lines and chooses to sell off a division with low growth potential,then it is called a divestment

Bankruptcy / liquidation strategy:

Bankruptcy involves giving up management of the firm to the courts in return for some settlement of the corporation's obligations. The hope by top management is that once the court decides the claim on the company,the company will be stronger and better able to compete in a more attractive industry. A company is led to a bankruptcy/liquidation strategy when it finds itself In the worst possible situation with a poor competitive position in an industry with few prospects. Selling would be unattractive because no one will want to buy a weak company in an unattractive industry.

The contrast between bankruptcy and liquidation is that while bankruptcy seeks to perpetuate a company,liquidation is the termination of the firm. In liquidation, management may choose to convert as many sellable assets as possible to cash,which is then distributed to the shareholders after all obligations are paid.