Retrenchment or Defensive Strategy

RETRENCHMENT OR
DEFENSIVE STRATEGY
Done by
Jijoraj RS
S1 Mcom
Meaning
Defensive Strategy is a marketing tool that management uses to defend their business
from potential competitors. The aim of the organisation is to maintain a current position
and to cut down the threats from other businesses.
Two Approaches:
● Block the competitors
● Introduce a counter attack.
RETRENCHMENT STRATEGY
Retrenchment Strategy (A.K.A Defensive strategy) is a defensive strategy adopted as
a reaction to problems resultant from internal or external environmental factors. In
simple terms, Retrenchment strategy involves the abandonment of those products or
services, which are no longer profitable for the organization.
It's adopted when the organisation isn't doing well or when an organisation’s survival
is threatened and is not competing effectively. This strategy is also followed when a
particular business is so small that it does not make any sizable contribution to the
total earnings of the organization.
Suitable situations for adopting Retrenchment strategy
● when the firm is weak competitor in the industry
● when the organization is unable to take advantage of internal strength
● when the organization has low Profitability, low efficiency, low morale and
increased pressure from stakeholders.
● when the organization is unable to utilise it's opportunities and minimize
threats.
● when the organization has distinct competitiveness but fails to meet its
objectives.
● when sufficient human talents isn't available for growth.
● when managers have low caliber.
TURNAROUND STRATEGY
It refers to the management measures which turn a sick company back to a
healthy one or those measures which reverse the deteriorating trends of
performance indicators.Turnaround strategy emphasizes on improving internal
efficiencyand a failing company can be turned into a healthy company by
following efforts:
● Reduction in costs.
● Increasing revenues
● Reducing investment in assets
● Revision of Strategy.
According to Hoffer, there are two ways of turning around a falling business
● Strategic turnaround: firm tries to restablish itself by changing its way of
doing things
● Operating turnaround: Firm tries to reduce its assets and expenses.
Suitable situations to adopt Turnaround strategies.
When the organization has;
● Persistent negative cash flow.
● Continuously facing negative profits.
● Declining market share.
● Mismanagement in organization.
● Mostly dependent on debts.
● Strikes/recession are common in the management.
Techniques for turning around a failing business
● Identify the areas which affect the organization’s growth.

● Reduce or cut budget which are not essential for the business.
● Take actions for the issues arising in the company.
● Products or services not producing positive results should be eliminated.
● Employees and positions that are no longer an asset to the company should be
eliminated
DIVESTMENT STRATEGY
Divestment is a form of retrenchment strategy used by businesses when they
downsize the scope of their business activities. Divestment usually involves
eliminating a portion of a business. Firms may elect to sell, close, or spin-off a
strategic business unit, major operating division, or product line. It is often used
to raise capital for further strategic investments.
Government organizations like Maruthi Udyog Ltd., ITDC Hotels, Bharat
Aluminium etc has been divested in order to be privatized
DIVESTMENT STRATEGY
Divestment is a form of retrenchment strategy used by businesses when they
downsize the scope of their business activities. Divestment usually involves
eliminating a portion of a business. Firms may elect to sell, close, or spin-off a
strategic business unit, major operating division, or product line. It is often used
to raise capital for further strategic investments.
Government organizations like Maruthi Udyog Ltd., ITDC Hotels, Bharat
Aluminium etc has been divested in order to be privatized
DIVESTMENT STRATEGY
● Low Market Share: due to less rate of return
● Availability of better alternatives: divert resources to other profitable lines
where rate of return is higher
● Creates financial problems for company due to persistent negative cash
flow.
● Firms may be forced to divest operations to avoid penalties for restraint of
trade
● The inability to cope with upcoming challenges for a business.
Suitable Conditions for Divestment
● When an organisation has pursued a retrenchment strategy and failed to

accomplish it.
● When a division needs more resources than the company can provide.
● When it's responsible for an organization's poor performance.
● When larger amount of cash is needed quickly.
● When government antitrust action threatens an organization.
Types of Divestment
● Sell-off or Hive-off: A sell-off is a sale of a part of the organization to a third
party due to various reasons to protect the firm from takeover activities and to
reduce the business risk. Here, the organization sells of its non core businesses
and concentrate on its core businesses.
● Spin-off: When a parent company creates a new independent company by
selling or distributing new shares of its existing business, this is called a spinoff.
The spin off will have a separate management structure and a new name, but it
will retain the same assets, intellectual property, and human resources.
● Split-off: Split-off is a divorce of two approximately equal-sized business units or
divisions. Once share ownership is shuffled the two units do separate
businesses.
LIQUIDATION STRATEGY
Liquidation strategy is adopted by the organization that includes selling off its assets
and the final closure or winding up of the business operations. Liquidation is done
when neither turnaround or divestment seems feasible. The firm adopting the
liquidation strategy may find it difficult to sell its assets because of the non-
availability of buyers and also may not get adequate compensation for most of its
assets.
Suitable conditions for Liquidation strategy
● When organization fails to implement retrenchment or divestment strategies.
● When the organization's only alternative option is bankruptcy
● When stockholders can minimize their losses by selling the assets
Legal aspects of Liquidation

● Compulsory winding up
● Voluntary winding up
● Voluntary winding up under the supervision of Court
CAPTIVE COMPANY STRATEGY
A strategy that is pursued when a firm sells the bulk of its products to one customer
(wholesaler/ dealer), who in turn performs some of the functions commonly done by
an independent firm.
Suitable conditions for adopting Captive company strategy

● Firm sells more than 75% products to a single customer.
● Customer performs many functions normally performed by the company.
● When the organization is unwilling to strengthen its marketing or other
functions.
● When organization thinks that captive company strategy is the best means of
achieving financial strength.
OTHER DEFENSIVE STRATEGIES
● Harvest: A harvest strategy is typically employed toward the end of a product's
life cycle when it is determined that further investment will no longer boost
product revenue. Company halts all new investments in capital equipment,
advertising, R&D etc. in order to maximize short to medium term cash flow from
the unit before liquidating it. The aim of the business is for a lower market
share, which will give the company its best short-run return with a longer term
of eventually pulling out of the market.
○ Types of Harvest Strategy
■ Selling Harvest: a.k.a exit strategy, the entrepreneur is going to exit the
firm and is free to start a new company.
■ Gradual Harvest: focuses more on creating profits than expansion.
● Transformation strategy: A transformation occurs when a firm makes a major
change in its outlook and operations, usually including moving from one kind of
business to another. Changes in strategy are usually quite substantial. Such
strategies are difficult to implement because they require a great deal of
flexibility on the part of the entire organization. According to Joe G. Thomas,
firms may undertake a transformation when:
○ Returns on current operations are lower than desired.
○ Opportunities in other areas are especially attractive.
○ Investments needed in the current operations exceed what the firm is
willing or able to spend.
○ Strong, flexible management team exists.
○ The firm has a strong financial base to support its transformation.
● Leadership: The organization aims to be the market leader in declining market
and so achieve above average returns for the industry. Even in declining market,
the firm emphasizes to remain in the industry.
● Niche: Concentrating on a single product and market. It is a strategy involving
very low degree of risk and represents the typical behaviour of the small
companies. This strategy involves identifying niches in a declining industry, that
are profitable and establishing a dominant position.
● Bankruptcy: it is a means whereby an organization that is unable to pay its debts
can seek court protection from creditors and from certain contract obligation,
while it tries to regain financial health and stability. If a firm can convince
creditors about the revival of the firm in the near future, a reorganization
bankruptcy comes into existence.
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RETRENCHMENT OR

● Identify the areas which affect the organization’s growth.

● When an organisation has pursued a retrenchment strategy and failed to

Legal aspects of Liquidation

Suitable conditions for adopting Captive company strategy

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