Retrenchment Strategies Type Essay

A retrenchment grand strategy is followed when an organization aims at a densification of its activities through substantial reduction or the elimination of the scope of one or much of its businesses in borders of their respective customer groups, customer functions, or alternative technologies either singly or together with in order to improve its overall performance. E.g A corporate hospital decides to focus only on special treatment and realize higher revenues by reducing its commitment to general case which is slight profitable.The growth of industries and markets are threatened by various external and internal developments (External developments government policies, demand saturation, growing of substitute products, or changing customer needs. Internal Developments poor management, wrong strategies, poor quality of usable management and so on.) In these situations the industries and markets and consequently the companies face the danger of decline and will go for adop ting retrenchment strategies. E.g fountain pens, manual type writers, tele printers, s aggroup engines, jute and jute products, slide rules, calculators and wooden toys are some products that wee either disappeared or face decline.There are three types of retrenchment strategies forgearound Strategies, Divestment Strategies and Liquidation strategies.1. Turnaround StrategiesTurn around strategies derives their name from the action involved that is reversing a negative trend. There are certain conditions or indicators which point out that a turnaround is needed for an organization to survive. They arePersistent Negative change flowsNegative ProfitsDeclining market shareDeterioration in Physical facilitiesOver manning, high disorder of employees, and low moraleUncompetitive products or servicesMis managementAn organization which faces one or more of these issues is referred to as a sick company.There are three ways in which turnarounds can be managedThe existing chief executive a nd management team handles the entire turnaround strategy with the advisory assist of a external consultant. In another case the existing team withdraws temporarily and an executive consultant or turnaround specialist is employed to do the job. The last method involves the replacement of the existing team specially the chief executive, or merging the sick organization with a healthy one.Before a turn around can be formulated for an Indian company, it has to be first declared as a sick company. The declaration is done on the basis of the Sick Industrial Companies encounter (SICA), 1985, which provides for a quasi judicial body called the Board of Industrial and Financial Reconstruction (BIFR) which acts as the corporate unsex whenever companies fall sick.2. Divestment StrategiesA divestment strategy involves the sale or liquidation of a portion of business, or a major division. Profit centre or SBU. Divestment is usually a part of rehabilitation or restructuring externalize and is adopted when a turnaround has been attempted but has proved to be unsuccessful. Harvesting strategies a unhomogeneous of the divestment strategies, involve a process of gradually letting a company business wither off in a carefully controlled mannerReasons for DivestmentThe business that has been acquired proves to be a mismatch and cannot be compound within the company. Similarly a project that proves to be in viable in the long term is divested Persistent negative cash flows from a particular business create financial problems for the whole company, creating a need for the divestment of that business. Severity of competition and the inability of a firm to cope with it may cause it to divest. technological up gradation is required if the business is to survive but where it is not possible for the firm to enclothe in it.A preferable option would be to divest Divestment may be done because by selling off a part of a business the company may be in a position to survive A bett er alternative may be available for investment, cause a firm to divest a part of its useless business. Divestment by one firm may be a part of merger plan executed with another firm, where mutual exchange of unprofitable divisions may take place. Lastly a firm may divest in order to sop up the provisions of the MRTP Act or owing to oversize and the resultant inability to manage a pear-shaped business. E.g TATA group is a highly diversified entity with a range of businesses under its fold.They identified their non core businesses for divestment. TOMCO was divested and change to Hindustan Levers as soaps and a detergent was not considered a core business for the Tatas. Similarly, the pharmaceuticals companies of the Tatas- Merind and Tata pharma were divested to Wockhardt. The cosmetics company Lakme was divested and sell to Hindustan Levers, as besides being a non core business, it was found to be a non- competitive and would have required substantial investment to be sustaine d.3. Liquidation StrategiesA retrenchment strategy which is considered the most entire and unattractive is the liquidation strategy, which involves closing down a firm and selling its assets. It is considered as the last recur because it leads to serious consequences such as loss of employment for workers and other employees, termination of opportunities where a firm could quest after any future activities and the stigma of failureThe psychological implicationsThe prospects of liquidation create a bad wallop on the companys reputation. For many executives who are closely associated firms, liquidation may be a traumatic experience. Legal aspects of liquidation Under the Companies Act 1956, liquidation is termed as kink up. The Act defines winding up of a company as the process whereby its life is ended and its property administered for the benefit of its creditors and members. The Act provides for a liquidator who takes control of the company, collect its assets, pay it debts, a nd finally distributes any surplus among the members according to their rights.