{"id":17478,"date":"2025-07-11T08:56:18","date_gmt":"2025-07-11T08:56:18","guid":{"rendered":"https:\/\/certifeka-edu.com\/programs\/strategic-planning-professional-certificate\/lessons\/lesson-3-retrenchment-strategies-defensive-strategy\/"},"modified":"2025-07-13T17:15:57","modified_gmt":"2025-07-13T17:15:57","slug":"lesson-3-retrenchment-strategies-defensive-strategy","status":"publish","type":"lesson","link":"https:\/\/certifeka-edu.com\/ar\/programs\/strategic-planning-professional-certificate\/lessons\/lesson-3-retrenchment-strategies-defensive-strategy\/","title":{"rendered":"Lesson 3: Retrenchment Strategies (defensive strategy)"},"content":{"rendered":"
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Lesson 3: Corporate Strategy - Part Two<\/h2>\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t
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4.Retrenchment Strategies (defensive strategy)<\/span><\/h3>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t
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Retrenchment strategy, also known as defensive strategy, involves contraction of the scope or level of business or function.<\/span><\/h5>
In some cases, it amounts to a redefinition of the business.<\/span><\/h5>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t
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A firm pursues a retrenchment strategy when:<\/span><\/h5>
  • It drops product line(s), market(s), market segment(s) or function(s).<\/span><\/h5><\/li>
  • Focuses on functional improvements or reversing certain deteriorating trends.<\/span><\/h5><\/li><\/ul>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t
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    Businesses are like human beings.<\/span><\/h5>
    If excessive sugar (growth strategy in business perspective) is consumed then we become diabetic (loss making or poor performance in business point of view).<\/span><\/h5>
    To recover from diabetic situation, we have to cut down unnecessary things.<\/span><\/h5>
    This cutting down in personal lives are known as retrenchment in business parlance.<\/span><\/h5>
    Retrenchment is a short-run renewal strategy designed to overcome organizational weaknesses that are contributing to declining performance.<\/span><\/h5>
    It is meant to refill and rejuvenate the organisational resources and capabilities so that the organisation can regain its competitiveness.<\/span><\/h5>
    Retrenchment may be thought as a minor surgery to correct a problem.<\/span><\/h5>
    Managers often try a minimal treatment first-cost cutting or a small layoff-hoping that nothing more painful will be needed to turn the firm around.<\/span><\/h5>
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    Retrenchment Strategies (Defensive strategies) include:<\/span><\/h3>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t
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    1. Divestiture (Sell out \/ Divestment Strategy) <\/div><\/span>\n\t\t\t\t\t\t\t\n\t\t\t<\/path><\/svg><\/span>\n\t\t\t<\/path><\/svg><\/span>\n\t\t<\/span>\n\n\t\t\t\t\t\t<\/summary>\n\t\t\t\t
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    A divestiture strategy is pursued when a company sells or divests itself of a business or part of a business.<\/span><\/h5>
    It may be because of loss, less than target rate of return, urgency to mobilise funds, managerial problems, or redefinition of the business of the company<\/span><\/h5>
    Divestment strategy involves the sale of a company or major component of it.<\/span><\/h5>
    This option is suitable for those corporations operating with weak competitive position in the industry.<\/span><\/h5>
    If turnaround and captive strategies are not viable then this strategy is adopted.<\/span><\/h5>
    The sellout strategy makes sense if management can obtain a good price for its shareholders and the employees can keep their jobs.<\/span><\/h5>
    For Example — Ford sold its ailing jaguar and Land Rover unit to Tata Motors in 2008 for $2 billion.<\/span><\/h5>
    In year 2013-14 \/aiprakash Associates sold some Cement manufacturing facilities.<\/span><\/h5>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/details>\n\t\t\t\t\t\t
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    2.Liquidation(Bankruptcy Strategy) <\/div><\/span>\n\t\t\t\t\t\t\t\n\t\t\t<\/path><\/svg><\/span>\n\t\t\t<\/path><\/svg><\/span>\n\t\t<\/span>\n\n\t\t\t\t\t\t<\/summary>\n\t\t\t\t
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    Liquidation occurs when an entire company is sold or dissolved.<\/span><\/h5>
    The reasons for divestiture mentioned above could also be reasons for liquidation. When there are no buyers for a company that wants to be sold, its assets may be sold and company may be wound up.<\/span><\/h5>
    Liquidation is the termination of the company.<\/span><\/h5>
    This is the last resort to any company when all other attempts of turnaround, captive company, sell out fails.<\/span><\/h5>
    In case of liquidation firm has to go through tedious and complex legal formalities. Sometimes firm’s management is given to courts in return for some settlement of its obligations.<\/span><\/h5>
    This is referred as bankruptcy.<\/span><\/h5>
    While the terms bankruptcy and liquidation are often used together, they technically mean two different things.<\/span><\/h5>
    Liquidation is part of bankruptcy, but it is not the entire process.<\/span><\/h5>
    Bankruptcy deals with a much more broad scope of events that lead to the eventual discharge of firm’s debts.<\/span><\/h5>
    Lot of American companies became bankrupt especially after Sub Prime crisis. Here is the list of top 10 bankruptcies.<\/span><\/h5>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/details>\n\t\t\t\t\t\t
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    3.Becoming a captive(Captive Company Strategy): <\/div><\/span>\n\t\t\t\t\t\t\t\n\t\t\t<\/path><\/svg><\/span>\n\t\t\t<\/path><\/svg><\/span>\n\t\t<\/span>\n\n\t\t\t\t\t\t<\/summary>\n\t\t\t\t
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    A firm becomes a captive of another firm when it subjects itself to the decision of the other firm in return for a guarantee that a certain amount of the captive’s product will be purchased by the other firm<\/span><\/p>

    Captive strategy means relinquishing independence in exchange for security. Company with very weak position or company is operating in such industry which is not sufficiently attractive or both may not initiate full blown turnaround strategy.<\/span><\/p>

    In this circumstances company’s management search an angel by offering to be captive company to one of its larger customers in order to guarantee company’s existence through long term contract. By this way company may reduce its cost and scope of some functional activities.<\/span><\/p>

    For Example Before declaring itself as a sick company in 2013, Ambassador Car maker Hindustan Motors (HM) was involved in contract manufacturing. In the process HM became captive company as it secured two long term contracts (through JVs) with Japanese auto makers Mitsubishi and Isuzu. HM used to assemble Mitsubishi’s Cedia, Outlander, Pajero and Montero.<\/span><\/p>

    Its tie up with Isuzu Motors was for sports utility vehicles (SUVs) and pickup trucks. During these times, a very small production capacity was used for HM’s own products. Besides Ambassador, HM also was involved in manufacturing ‘Winner’ light commercial vehicles. But all the HM’s efforts to revive (by HM’s management & BIFR i.e. Board for Industrial and financial restructuring) its business failed leading to its liquidation.<\/span><\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/details>\n\t\t\t\t\t\t

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    4. Turnaround: <\/div><\/span>\n\t\t\t\t\t\t\t\n\t\t\t<\/path><\/svg><\/span>\n\t\t\t<\/path><\/svg><\/span>\n\t\t<\/span>\n\n\t\t\t\t\t\t<\/summary>\n\t\t\t\t
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    A turnaround strategy involves management measures designed to reverse certain negative trends and to bring the firm back to normal health and profitability.<\/span><\/h5>
    Turnaround strategy is mainly appropriate when firm’s problems are pervasive but not severely critical.<\/span><\/h5>
    It is a strategy adopted by firms to stop the decline and revive their growth.<\/span><\/h5>
    Robbins and Pearce has suggested comprehensive model for turnaround process.<\/span><\/h5>
    A turnaround situation exists when a firm encounters several years of declining financial performance subsequent to a period of prosperity.<\/span><\/h5>
    In simple words, turnaround situation is nothing but absolute and relative-to-industry declining performance of a sufficient degree to warrant explicit turnaround actions.<\/span><\/h5>
    Turnaround situations are caused by combinations of external and internal factors.<\/span><\/h5>
    But it has been largely observed that root cause of turnaround situation lies internally only.<\/span><\/h5>
    Firms wrong decisions or delay in taking decisions or underestimation of external \/ competitive threat or complacency may lead to turnaround situation.<\/span><\/h5>
    The immediacy of the resulting threat to company continued existence caused by the turnaround situation is known as turnaround situation severity.<\/span><\/h5>
    Low levels of severity are indicated by declines in sales or income margins, while extremely high severity would be indicated by impending bankruptcy.<\/span><\/h5>
    The recognition of a relationship between cause and response is very important for a turnaround process and hence, the importance of properly assessing the cause of the turnaround situation so that it could be the focus of the appropriate recovery response is very important.<\/span><\/h5>
    The response to turnaround situation can be broken down to two phases i.e. retrenchment (contraction) phase & recovery (consolidation) phase.<\/span><\/h5>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/details>\n\t\t\t\t\t\t
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    5. Retrenchment (contraction) phase <\/div><\/span>\n\t\t\t\t\t\t\t\n\t\t\t<\/path><\/svg><\/span>\n\t\t\t<\/path><\/svg><\/span>\n\t\t<\/span>\n\n\t\t\t\t\t\t<\/summary>\n\t\t\t\t
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    The retrenchment phase is focused on the firm’s survival and achievement of a positive cash flow. <\/span>
    The means to achieve this objective needs an emergency plan to stop the firm’s financial bleeding.<\/span>
    It involves the classic retrenchment activities such as liquidation, divestment, product elimination, and downsizing the workforce<\/span>Retrenchment strategies are also characterized by the revenue generating, product\/market refocusing or cost cutting and asset reduction activities.<\/span>
    When severity is low, a firm has some financial buffer.<\/span>
    Stability may be achieved through cost reduction alone. <\/span>
    When the turnaround situation severity is high, a firm must immediately arrest the decline or bankruptcy is imminent.<\/span>Cost reductions must be supplemented with more drastic asset reduction measures.<\/span>
    Assets targeted for reduction are those ones which are underproductive. <\/span>
    In contrast, more productive resources are protected from cuts and further reconfigured as critical elements of the future core business plan of the company, i.e. the intended recovery response.<\/span>After retrenchment phase, organisation has to sink in these bitter steps and for that purpose a stabilization plan is required to streamline and improve core operations.<\/span><\/h5>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/details>\n\t\t\t\t\t\t
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    6. Recovery (consolidation) phase <\/div><\/span>\n\t\t\t\t\t\t\t\n\t\t\t<\/path><\/svg><\/span>\n\t\t\t<\/path><\/svg><\/span>\n\t\t<\/span>\n\n\t\t\t\t\t\t<\/summary>\n\t\t\t\t
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    The second phase involves a return-to-growth or recovery stage and the turnaround process shifts away from retrenchment and move towards growth and development.<\/span><\/h5>
    It is often seen that those firm declined due to external factors needs entrepreneurial reconfiguration i.e. top management’s creative intervention.<\/span><\/h5>
    Recovery through efficiency maintenance (maintaining leaner\/efficient organisation post retrenchment) would be possible if turnaround causes are internal.<\/span><\/h5>
    Means such as acquisitions, new products, new markets, and increased market penetration would fall under entrepreneurial reconfiguration.<\/span><\/h5>
    Recovery is said to have been achieved when economic measures indicate that the firm has regained its pre-downturn levels of performance.<\/span><\/h5>
    Between these two stages, a clear strategy is needed for a firm. As the financial decline stops, the firm must decide whether it will pursue recovery in its retrenchment reduced form through a scaled-back version of its pre-existing strategy, or whether it will move to a return-to-growth stage.<\/span><\/h5>
    It is at this point that the ultimate direction of the turnaround strategy becomes clear. Essentially, the firm must choose either to continue to pursue retrenchment as its dominant strategy or to couple the retrenchment stage with a new recovery strategy that emphasizes growth. The degree and duration of the retrenchment phase should be based on the firm’s financial health.<\/span><\/h5>
    One can find lot of similarities between ailing bedridden human being and firm in turnaround situation. That is why; author has drawn parallels between turnaround processes and medical treatment process.<\/span><\/h5>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/details>\n\t\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>","protected":false},"comment_status":"open","ping_status":"closed","template":"","class_list":["post-17478","lesson","type-lesson","status-publish","hentry"],"yoast_head":"\nLesson 3: Retrenchment Strategies (defensive strategy) - Certifeka-edu<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/certifeka-edu.com\/ar\/programs\/strategic-planning-professional-certificate\/lessons\/lesson-3-retrenchment-strategies-defensive-strategy\/\" \/>\n<meta property=\"og:locale\" content=\"ar_AR\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Lesson 3: Retrenchment Strategies (defensive strategy) - Certifeka-edu\" \/>\n<meta property=\"og:description\" content=\"Lesson 3: Corporate Strategy – Part Two 4.Retrenchment Strategies (defensive strategy) Retrenchment strategy, also known as defensive strategy, involves contraction of the scope or level of business or function. 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