Retrenchment

Strategies
 Retrenchment strategies
A strategy used by corporations to reduce the diversity or
the overall size of the operations of the company. This
strategy is often used in order to cut expenses with the goal
of becoming a more financial stable business. Typically the
strategy involves withdrawing from certain markets or the
discontinuation of selling certain products or service in
order to make a beneficial turnaround.

In other words, the strategy followed, when a firm decides

to eliminate its activities through a considerable reduction
in its business operations, in the perspective of customer
groups, customer functions and technology alternatives,
either individually or collectively is called as
Retrenchment Strategy.
Examples of Retrenchment strategy

General Motors of the United States

stopped producing a number of "makes"
of automobile. GM decided that it needed
to retrench by concentrating on just a few
"makes." It hoped this would help it
return to profitability.
Types of Retrenchment
Strategies
1. Turnaround Strategies
Turnaround strategy means backing out,
withdrawing or retreating from a decision wrongly
taken earlier in order to reverse the process of
decline.
Turn 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. An organization which faces
one or more of these issues is referred to as a ‘sick’
company.
 There are certain conditions or indicators which point
out that a turnaround is needed if the organization
has to survive. These danger signs are as follows:

 a) Persistent negative cash flow

 b) Continuous losses
 c) Declining market share
 d) Deterioration in physical facilities
 e) Over-manpower, high turnover of employees, and
low morale
 f) Uncompetitive products or services
 g) Mismanagement
 There are three ways in which
turnarounds can be managed
The existing chief executive and management
team handles the entire turnaround strategy
with the advisory support 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.
 Approaches to turnaround
• Surgical: The surgical approaches turnaround
involves a high attitude and the pattern of action
followed is roughly the same everywhere .
• The new ceo quickly asserts his authority by issuing
orders and directives for changes ,centralizes
functions, fires employees and close down plants and
divisions.
• Non surgical or humane: Its involves
understanding problems, eliciting opininons,adopting
and conciliatory attitude and coming to negotiated
settlements among different factions. The emphasis is
clearly on behavioral change and aimed at improving
work culture and morale.
Examples of Turnaround strategies
Xerox revealed a Turnaround Programme in
December 2000, which included cutting $1
billion in costs, and raising up to $4 billion
through the sale of assets, exiting non-core
businesses and lay-offs. Subsequently, in
August 2001, Mulcahy was made CEO.

Xerox continued to report losses in 2001, but it

returned to profit in 2002 and continued to
report profits in 2003.
2. Divestment Strategies

Divestment strategy involves the sale or

liquidation of a portion of business, or a major
division, profit centre or SBU. Divestment is
usually a restructuring plan and is adopted
when a turnaround has been attempted but has
proved to be unsuccessful or it was ignored
A divestment strategy may be adopted due to the following reasons:
a)A business that had been acquired proves to be
mismatch and cannot be integrated within the
company.

b) Persistent negative cash flows from a particular

business create financial problems for the whole
company.

c) Severity of competition and the inability of a firm to

cope with it may cause it to divest.

d) Technological up gradation is required if the business

is to survive which company cannot afford.
e) A better alternative may be available for investment
Contd…

f) Divestment may be done because of selling off a

part of a business the company may be in a position
to survive.

g) Lastly a firm may divest in order not to attract the

provisions of MRTP ACT or owning to oversize
and the resultant inability to manage a large
business.
 Divestment strategy

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
sold to Hindustan Levers as soaps and a
detergent was not considered a core business
for the Tatas.
 Liquidation strategy
Liquidation strategy means closing down the entire firm
and selling its assets. It is considered the most extreme
and the last resort because it leads to serious consequences
such as loss of employment for employees, termination of
opportunities where a firm could pursue any future
activities, and the stigma of failure.

Liquidation strategy may be difficult as buyers for the

business may be difficult to find. Moreover, the firm
cannot expect adequate compensation as most assets,
being unusable, are considered as scrap.
 Reasons for Liquidation
include:

(i) Business becoming unprofitable

(ii) Obsolescence of
product/process
(iii) High competition
(iv) Industry overcapacity
(v) Failure of strategy
i. DOWNSIZING
ii. VOLUNTARY RETIREMENT
SCHEMES
iii. HR OUTSOURCING
iv. EARLY RETIREMENT PLANS
v. PROJECT BASED EMPLOYMENT
 When the management of an organization determines that their
organization is not operating at peak efficiency, they typically look for
ways to make the organization more productive. This is frequently
accomplished via organizational downsizing, which is a reduction in
organizational size and operating costs implemented by management in
order to improve organizational efficiency, productivity and/or the
competitiveness of the organization.

Organizational downsizing affects the work processes of an organization

since the end result of the downsizing is typically fewer people performing
the same workload that existed before the downsizing took place. The act
of downsizing results in two categories of people:

1. Victims, the people who involuntarily lose their jobs due to

organizational downsizing,
Survivors, the employees who remain after organizational downsizing
2.
takes place.
What causes downsizing?

There are many reasons why a company may need to reduce the
number of people it employs. The introduction of new technology
may result in a reduced workload for employees. External financial
pressures or increased competition in the marketplace may force a
company to reduce its labor costs. Mergers and acquisitions may
leave a company with more employees than it requires.
 VOULANTARY
RETIREMENT SCHEMES
What Is the Meaning of "Voluntary Retirement
Scheme"?
 A voluntary retirement scheme (VRS) package is
offered to employees as an incentive to retire
earlier than their normal retirement age. The VRS
package usually contains generous retirement
benefits for certain employees.
Purpose
 The purpose of a VRS is to downsize the number of
employees on payroll to adapt to a changing
business environment. VRS plans cut costs and
reduce layoffs .
 Targeted Employees

Employees of middle age or those closer to actual retirement age

and who have been employed with a company for at least 10 years
are usually the first to be offered a VRS package.

Considerations

VRS may not be right for every individual because the retiree
will have to live on a fixed income. Circumstances to consider are
household dependent needs (e.g. college education expenses) and
mortgage payments and other household expenses. If the VRS
package isn't accepted, on the other hand, the employee might be
laid off and receive few or no benefits.
What is Human Resource
Outsourcing (HRO)?
Human resource outsourcing (HRO) occurs when a business instructs an
external supplier to take responsibility (and risk) for HR functions and perform
these tasks for the business. Payroll outsourcing is commonly outsourced for
two reasons: it’s a time-consuming administrative task for employers, and there
are many specialist companies with the technology and knowledge to run it
efficiently and compliantly.

HR Outsourcing is a process in which the human resource activities of an

organization are outsourced so as to focus on the organization`s core competencies.
Often HR functions are complex and time consuming that it will create difficulty in
managing other important thrust areas. By HR outsourcing, this problem can be
avoided which will enhance effectiveness by focusing on what the organization is
best at. It will also improve the flexibility of the organization to the rapidly
changing business needs.

Some businesses will outsource their entire HR department while others will
just outsource time-consuming administrative tasks, which allow their internal
resource to focus on the strategic level.
Why Companies outsource
HR?
What HR Functions can be
Outsourced?
If a company choses to partially outsource HR, the company shares
responsibilities with the vendor, sharing information and control over the
functions. If the company decides to completely outsource, the vendor
takes on all HR responsibilities. The owner or HR manager in the original
company takes on a new role, liaison with the vendor, focusing only on
HR in order to manage the vendor-company relationship. Whether
partially or completely outsourcing, companies frequently outsource the
following HR functions:

Background Screening
Payroll Services
Risk Management
Temporary Staffing
Employee Assistance/Counseling
Health Care Benefits
Retirement Planning
Performance Management
 To Whom Can You
Outsource HR?
 The three types of HR outsourcing companies are Human Resources Organizations,
Professional Employer Organizations, and Administrative Services Organizations. –

 1. Human Resources Organization (HRO)

 The majority of Human Resources Organizations (HROs) allow large
businesses (1000+ employees) to choose which HR services they would like
outsourced. When only some functions are dealt with by the HRO, a co-
management relationship or shared HR relationship is made between the HRO
and the business (this is typically the conservative approach to those first
outsourcing HR).

When all functions of HR are outsourced, the HRO takes full responsibility.
In large organizations, the strategic HR role remains an internal position;
however, most administrative and tactical roles are outsourced. This can also
be achieved in smaller organizations (typically under 200 employees) using a
Professional Employer Organization.
 To Whom Can You
Outsource HR?
2. Professional Employer Organization (PEO)
A Professional Employer Organization, or PEO, handles all HR
tasks and is usually more beneficial for small and mid-sized
businesses (under 200 employees).

As the employer-of-record, the PEO will be responsible for taxes

and worker’s compensation.

Financial liability for the small business decreases due to the

shared burden. Additionally, the PEO can obtain reduced rates on
retirement packages and health benefits by combining employees
from all of their customers.
 To Whom Can You
Outsource HR?
3. Administrative Services Organization (ASO)
The third HR outsourcing scenario is hiring an ASO, or Administrative
Services Organization. As the name aptly implies, an ASO provides
administrative services for your company.

These include processing payroll, performing direct deposits, and filing

payroll taxes. Like outsourced payroll, the filing is under your federal
employer ID number (FEIN).

The various functions that ASO’s provide include:

Safety Management
Compliance
Payroll Services
Pension Administration
Worker’s Compensation