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Retrenchment Strategies - Strategic Alternatives & Choice of Strategy

   Posted On :  26.06.2018 04:01 am

When an organization’s survival is threatened and it is not competing effectively, retrenchment strategies are often needed.

Retrenchment Strategies
 
When an organization’s survival is threatened and it is not competing effectively, retrenchment strategies are often needed. The three basic types of retrenchment are
 
1. Turnaround,
 
2. Divestment, and
 
3. Liquidation.
 

Turnaround

 
Strategy is used when an organization is performing poorly but has not yet reached a critical stage. It usually involves getting rid of unprofitable products, pruning the work force, trimming distribution outlets, and seeking other methods of making the organization more efficient. If the turnaround is successful, the organization may then focus on growth strategies.
 

Divestment

 
Strategy involves selling the business or setting it up as a separate corporation. Divestment is used when a particular business doesn’t fit well in the organization or consistently fails to reach the objectives set for it. Divestment can also be used to improve the financial position of the divesting organization.

Liquidation

 
Strategy involves closure of the business, which is no longer profitable. It may be technologically obsolete or out of times with market trends.

Choices

 
How do firms choose strategies?
 
Stability strategy is adopted because
 
1. It is less risky, involves fewer changes and people feel comfortable with things as they are
 
2. The environment faced is relatively stable
 
3. Expansion may be perceived as being threatening
 
4. Consolidation is sought through stabilizing after a period of rapid expansion.
 
Expansion strategy is adopted because
 
5. It may become imperative when environment demands increase in pace of activity
 
6. Psychologically, strategists may feel more satisfied with the prospects of growth from expansion: chief executives may take pride in presiding over organizations perceived to be growth-oriented.
 
7. Increasing size may lead to more control over the market vis-à-vis competitors
 
8. Advantages from the experience curve and scale of operations may accrue
 
i. Retrenchment strategy is adopted because:
 
9. The management no longer wishes to remain in business either partly or wholly due to continuous losses and inviability
 
10. The environment faced is threatening
 
11. Stability can be ensured by reallocation of resources from unprofitable to profitable businesses.
 
i. Combination strategy is adopted because:
 
12. The organization is large and faces a complex environment
 
13. The organization is composed of different businesses, each of which lies in a different industry requiring a different response
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