Retrenchment

What is retrenchment?

Retrenchment is the process of reducing costs or expenditures when the economy is struggling. In this process, most companies dismiss employees according to certain criteria, such as performance, tenure, and ethics. 

Retrenchment decisions must be made following a fair process, and the employer must provide reasonable justifications.

Why do companies use a retrenchment strategy?

The most common reason companies implement retrenchment is that they are in trouble financially. Cutting costs by firing employees is a business approach that aims to improve profitability. 

Other than financial problems, businesses and enterprises may use retrenchment due to economic, technological, and structural factors.

The retrenchment strategy can be beneficial for businesses to acquire capital for new projects and operations. Using the most up-to-date electronic systems, computer packages, equipment, and chemical formulas would reduce the need for more workers. Management can also reduce the layers of management to ease the transition.

Types of retrenchment strategy

Line extensions, operations, and initiatives in your company can all benefit from these. Retrenchment strategies fall into three main categories:

Turnaround strategy

This method is employed when a company looks to increase performance and reduce negative trends. Dissolving the organization’s unnecessary branches is a significant part of this procedure.

When a company’s business unit loses money, a turnaround strategy might help turn things around — a process of bringing a company back to profitability. Industrial units can be turned around with this method. 

In part, this method is designed to keep an eye on the company’s finances while minimizing the impact on its personnel.

Divestment strategy

This retrenchment strategy is implemented when a company’s turnaround strategy fails to produce the desired results. The profit and profile element is the primary focus of the divestiture strategy analysis. 

Reengineering the organization’s work culture is essential for divorcing a corporation. Organizational units, such as divisions and departments within a division, are all subject to investigation. 

It is common for a company to have its component dissolved as part of a diversion. It is possible for companies to sell, close, or spin-off a significant business unit or major operating division. Decisions to remove irrelevant, unprofitable, or inoperable operations are often made here.

This tactic, however, has the potential to result in the permanent suspension or elimination of numerous positions.

Liquidation strategy

Liquidation strategy is the climax of a company’s journey. All of the company’s assets are sold if there are no other options left to consider. 

A complete shutdown of a business will elicit unfavorable responses because it has profound effects, including losing jobs for those who worked there. As a result, the company may have a negative reputation.

There may be a lack of buyers and appropriate payment for most of its assets when it decides to liquidate its assets. Under ordinary and reparable circumstances, no company would choose to deliver on this promise. When the damages are so extensive, it is impossible to bring the company back to its former glory.

Advantages of retrenchment

Advantages of retrenchment include the following:

• Business operations can improve and allow the company to compete better.
• It can reduce reliance on the market. 
• Corporate profits rise as it gives them an advantage in recession.
• The owner gets more control over the management, specific initiatives, and the opportunity to communicate with personnel at all levels.
• There is less worry about overspending because of the mutual downsizing effect; each department gets the resources it needs to succeed.

Disadvantages of retrenchment

The following are some of the downsides of retrenchment:

• It may slow down economic activity.
• Productivity may diminish, which may also decrease earnings.
• The capacity to satisfy customers’ needs will be sacrificed.
• As a result of the mass layoff, the company will also lose expertise that may be difficult to replace.
• Without product or service discontinuation, the remaining workforce will be overworked and unable to meet market demand.
• Employees left behind will have fewer opportunities for career advancement.