What Is "Corporate Retrenchment Strategy"?

Companies that use a retrenchment strategy are shrinking to survive. Corporations often improve their market position by expanding, diversifying or buying up other firms. A retrenchment business reverses that, withdrawing from certain markets or discontinuing product lines to slash expenses. If retrenchment works, it results in corporate renewal, leaving the company in a stronger, more stable financial position.

Choosing a Retrenchment Strategy

Retrenchment is only one of several strategies corporations can use. A long-running business may use stability, expansion or retrenchment strategies at different points in its life.

Corporations use stability strategies when they're satisfied with their current position. Stability tactics are keeping everything the same; waiting before making a decision and making temporary changes to keep profits stable. Expansion strategies help corporations grow. They include concentrating and specializing in a profitable line, diversifying into multiple fields or expanding into new markets.

Corporations adopt a retrenchment strategy when they're overextended. The emphasis is on cutting costs or stabilizing cash flow rather than attracting new customers or boosting sales. There are three main methods:

  • Turnaround: restructure operations to be leaner and more profitable.
  • Divestment: getting rid of unproductive divisions, acquisitions or products. The goal is to refocus on profitable products or services rather than spending money on unsuccessful operations. Staff at the remaining divisions may be downsized.
  • Liquidation: shutting down unprofitable operations and selling the assets. It's a more drastic step than divestment.

Tesco, the United Kingdom's largest supermarket chain, has been using a retrenchment strategy for several years. In the early 21st century, Tesco was all about expansion and diversification, but in the century's second decade, sales started to decline. The reason? Changes in consumer behavior, a rough economy and new competitors.

Tesco adopted a retrenchment strategy so that it could cut costs and thereby lower prices to stay competitive. Its tactics included closing unprofitable stores, canceling plans for opening new stores and selling off its internet service, Tesco Broadband.

Pros and Cons

In business, there's no strategy guaranteed to win every time. Before a company starts divestment, it needs to weigh the pros and cons of retrenchment.

The pluses:

  • Retrenchment gets rid of business lines that aren't profitable.
  • It allows the corporation to concentrate on the things it's best at and stop doing things that don't fit its skill set.
  • Some markets are changing so radically; it's best to get out of them. 
  • It frees up money that can be focused on more profitable ventures. 

The minuses:

  • Retrenchment can be expensive. Tesco spent $1.2 billion when it retrenched and gave up on the U.S. market.  
  • Shrinking the company means cutting staff at unsuccessful stores and product lines. That can cost the company the services of skilled, valuable employees.
  • Outsiders may assume the company is starting a death spiral.
  • Retrenching and refocusing cut costs. That may not help if what the company needs is newer, more innovative products. 

Retrenching Your Staff

The effects of retrenchment on employees are usually listed among the strategic negatives. Just closing stores or product lines is negative for all the employees who suddenly find themselves jobless. Other employees have to deal with the fear they'll be next or cope with an expanded workload. For example, a company that saves money by centralizing HR or customer-experience staff may saddle the central staff with a lot more work.

Managers who have to tell employee after employee they've been downsized may come to dread their job. Staffers who jump ship before they can be downsized may cost the company key people. Any company that plans to retrench needs to think about ways to minimize the impact on corporate staff. Communication is vital; if the corporation doesn't tell employees what's going on, the office rumor mill will make it up. One simple step is for managers to ask what they'd want to know if they were in the employees' shoes. Use that insight as the basis of internal communications during the retrenchment.

References

About the Author

Fraser Sherman has written about every aspect of business: how to start one, how to keep one in the black, the best business structure, the details of financial statements. He's also run a couple of small businesses of his own. He lives in Durham NC with his awesome wife and two wonderful dogs. His website is frasersherman.com