What is Retrenchment Strategy
Retrenchment strategy is the corporate level strategy that focused on stable the company’s financial position by desertion unprofitable operations to cut the company’s expenses. There are three types of retrenchment strategies includes: Turnaround strategy, Divestment strategy, and Liquidation strategy.
The retrenchment strategy is adopted by the company that wants to restruct or discontinue a business unit. These are the reasons the company needs to restructure or discontinue a business unit by using the retrenchment strategy:
- The industry is no longer attractive anymore.
- Too small or declining market share.
- The business unit becomes unprofitable.
- Better invest in other business units.
- Wrong corporate strategy.
- The business unit is continuous losses.
Turnaround strategy is a retrenchment strategy that is adopted when the company realized they going in the wrong direction and needs to be undone before it affects the company’s performance and when the company wants to restructure.
To put it simply, the turnaround strategy is a strategy about undoing a bad idea before it is too late.
Divestment strategy is a retrenchment strategy that focused on downsizing the operation or completely divesting a business unit that is unprofitable to allocate the company’s resources to other profitable operations.
The company adopts the divestment strategy when they found that the business unit can’t compete against other competitors and better invest in alternative choices (by allocating the failure’s resource).
Liquidation strategy is a retrenchment strategy that focused on selling assets to provide liquidity to the company and completely stop a whole failed business unit. This typically happens when the company fails to turn around while it’s unable to integrate with other business units, then the last choice is shutting down the business unit.
The difference between divestment and liquidation strategy is the liquidation strategy adapted when a business unit is failed and extensive loss, then the company needs to sell the whole business unit and allocate the cash to other business units. While the divestment strategy is just stop the operation to allocate the company’s resources to other existing operations.