Retrenchment literally means cutting

down or reduction, particularly of public

expenditure. In other words, it can also be
defined as a set of organizational activities
undertaken to achieve cost and asset
reductions
and
disinvestment,
has
received strong academic and practitioner
support as an expeditious means for
reversing declining financial performance.
Retrenchment revolves around cutting
sales. Retrenchment is a corporate-level
strategy that seeks to reduce the size or
diversity of an organization's operations. It
is also a reduction of expenditures in
order to become financially stable.
Retrenchment is a pullback or a
withdrawal from offering some current
products or serving some markets.
Retrenchment is often a strategy
employed prior to or as part of a
Turnaround strategy. Retrenchment is
something akin to downsizing. When a
company or government goes through
retrenchment, it reduces outgoing money

or expenditures or redirects focus in an

attempt to become more financially
solvent. Many companies that are being
pressured by stockholders or have had
flagging profit reports may resort to
retrenchment to shore up their operations
and make them more profitable. Although
retrenchment is most often used in
countries throughout the world to refer to
layoffs, it can also label the more general
tactic of cutting back and downsizing.
Companies can employ this tactic in two
different ways. One way is to slash
expenditures by laying-off employees,
closing superfluous offices or branches,
reducing benefits such as medical
coverage or retirement plans, freezing
hiring or salaries, or even cutting salaries.
There are numerous other ways in which
a company can employ retrenchment.
These can be non-employee related, such
as reducing the quality of the materials
used in a product, streamlining the

process in which a product is

manufactured or produced, or moving
headquarters to a location where
operating costs are lower.
The second way in which a company may
practice retrenchment is to downsize in
one market that is proving unprofitable
and build up the company in a more
profitable market. If one market has
become obsolete due to modernization or
technology, then a company may decide
to change with the times to remain
profitable.
Retrenchment is of special importance to
small firms during recession. Therefore, it
would seem that small firms need to
understand retrenchment as a possible
response
to
poor
macroeconomic
conditions. States or governments may
also use retrenchment as a means to
become more financially stable. In
capitalist nations, retrenchment is effected
by lowering taxes in the hopes of pumping
more money into the economy. This tactic

is always healthily debated throughout all

levels of government. When applied to
governments, retrenchment may also
refer to a state cutting cost by making jobs
obsolete, closing governmental offices,
and cutting government programs and
services. However, this is not a classic
example of retrenchment, because when
expenses are cut in one area, politicians
tend to re-direct them to other areas.
Types of Retrenchment Strategies:
Turnaround
Captive Company
Selling out
Divestment
Bankruptcy
Liquidation
The above are explained in brief below:
Captive Company - Essentially, a captive
company's destiny is tied to a larger

company. For some companies, the only

way to stay viable is to act as an exclusive
supplier to a giant company. A company
may also be taken captive if their
competitive position is irreparably weak.
Turnaround - If a company is steadily
losing profit or market share, a turnaround
strategy may be needed. There are two
forms of turnarounds. Firstly, one may
choose contractions (cutting labor costs,
PP&E and Marketing). Secondly, a
company may decide to consolidate.
Bankruptcy - This may also be a viable
legal protective strategy. Bankruptcy
without a customer base is truly a bad
place.
However, if
one
declares
bankruptcy with loyal customers, there is
at least a possibility of a turnaround.
Divestment - This is a form of
retrenchment strategy used by businesses
when they downsize the scope of their
business activities. Divestment usually
involves eliminating a portion of a

business. Firms may elect to sell, close, or

spin-off a strategic business unit, major
operating division, or product line. This
move often is the final decision to
eliminate unrelated, unprofitable or
unmanageable operations
Liquidation " It is the process by
which a company (or part of a company)
is brought to an end, and the assets and
property of the company redistributed.
Liquidation may either be compulsory
(sometimes referred to as a creditors'
liquidation) or voluntary (sometimes
referred to as a shareholders' liquidation,
although some voluntary liquidations are
controlled by the creditors. Liquidation can
also be referred to as winding-up or
dissolution,
although
dissolution
technically refers to the last stage of
liquidation.
Of the above the most important one is
Turnaround. If a company is steadily

losing profit or market share, a turnaround

strategy may be needed. There are two
forms of turnarounds: First, one may
choose contractions (cutting labor costs,
etc.). Second, they may decide to
consolidate the business with new
ventures and revamping the existing
structure. However, turnaround can be
expensive and hence should be well
planned and requires sufficient expertise
and time.
Case:
In 1999, the revenues of Xerox Corp
(Xerox), the world's largest photocopier
maker, began to fall, and in 2000 it
reported a loss of $273 million. Xerox also
lost $20 billion in stock market value (from
April 1999 to May 2000). Xerox cited
many reasons for its bad performance
including the huge reorganization effort
initiated by the then CEO, Richard
Thoman. In May 2000, he was replaced
by his predecessor Paul Allaire, and Anne
Mulcahy (Mulcahy) was made COO.

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. The
case examines the events that led to the
decline of Xerox, and in particular how
major reorganization strategies can affect
a company.
Bankruptcy is a legally declared inability
or impairment of ability of an individual or
organization to pay its creditors. Creditors
may file a bankruptcy petition against a
debtor ("involuntary bankruptcy") in an
effort to recoup a portion of what they are
owed or initiate a restructuring. In the
majority of cases, however, bankruptcy is
initiated by the debtor (a "voluntary

bankruptcy" that is filed by the insolvent

individual or organization).
Case:
Lehman Brothers Holdings Inc. was a
global financial-services firm which, until
declaring bankruptcy in 2008, participated
in business in investment banking, equity
and fixed-income sales, research and
trading, investment management, private
equity, and private banking. It was a
primary dealer in the U.S. Treasury
securities market. On September 15,
2008, the firm filed for bankruptcy
protection following the massive exodus of
most of its clients, drastic losses in its
stock, and devaluation of its assets by
credit rating agencies. The filing marked
the largest bankruptcy in U.S. history.
During the week of September 22, 2008,
Nomura Holdings announced that it would
acquire Lehman Brothers' franchise in the
Asia Pacific region, including Japan, Hong
Kong and Australia as well as, Lehman
Brothers' investment banking and equities

businesses in Europe and the Middle

East. The deal became effective on
Monday, 13 October. In 2007, non-U.S.
subsidiaries of Lehman Brothers were
responsible for over 50% of global
revenue produced. Lehman Brothers'
Investment
Management
business,
including Neuberger Berman, was sold to
its management on December 3, 2008.
In finance and economics, divestment is
the reduction of some kind of asset for
either financial or ethical objectives or sale
of an existing business by a firm. A
divestment is the opposite of an
investment. A firm may divest (sell)
businesses that are not part of its core
operations so that it can focus on what it
does best. Many other firms also sell
various businesses that were not closely
related to their core businesses. Another
motive for divestitures is to obtain funds.
Divestment generates funds for the firm
because it is selling one of its businesses
in exchange for cash. A third motive for

divesting is that a firm's "break-up" value

is sometimes believed to be greater than
the value of the firm as a whole. In other
words, the sum of a firm's individual asset
liquidation values exceeds the market
value of the firm's combined assets. This
encourages firms to sell off what would be
worth more when liquidated than when
retained. A fourth motive to divest a part of
a firm may be to create stability. A fifth
motive for firms to divest a part of the
company
is
that
a
division
is
underperforming or even failing. Often the
term is used as a means to grow
financially in which a company sells off a
business unit in order to focus their
resources on a market it judges to be
more profitable, or promising. Sometimes,
such an action can be a spin-off.
Case
The Bell System was the AT&T monopoly
that provided telephone service in the

United States from 1877 to 1984. In 1984,

the company was broken up into separate
companies, by a Federal mandate. Before
the 1984 break-up, the Bell System
consisted of AT&T Inc, Cincinnati Bell Inc,
Qwest
Communication
International,
Verizon communication Inc, AlcatelLucent, Avaya Inc, Nortel Networks, NEC,
etc. These companies were divested from
AT&T in 1984. The breakup of AT&T was
initiated by the filing in 1974 by the U.S.
Department of Justice of an antitrust
lawsuit against AT&T. The case, United
States v. AT&T, led to a settlement
finalized on January 8, 1982, under which
"Ma Bell" agreed to divest its local
exchange service operating companies, in
return for a chance to go into the
computer business, AT&T Computer
Systems. Effective January 1, 1984,
AT&T's local operations were split into
seven independent Regional Holding
Companies, also known as Regional Bell
Operating Companies (RBOCs), or "Baby
Bells". Afterwards, AT&T, reduced in value

by approximately 70%, continued to

operate all of its long-distance services.
The breakup led to a surge of competition
in the long distance telecommunications
market by companies such as Sprint and
MCI. Long-distance rates, meanwhile,
have fallen due both to