What is Retrenchment Strategy?

Retrenchment Strategy

Companies and businesses use organizational structures and policies to decide what suits their interests. As a result of hard times in the trade industry, companies cut redundant departments to maintain financial stability and profitability.

Organizations use a retrenchment strategy to gain a better financial position by reducing or lowering the costs of any of their business operations. 

Retrenchment is today’s easiest way to reverse policies that didn’t farewell and see through the damages. An organization takes this drastic step after suffering a heavy loss due to an idiotic investment.

What is a Retrenchment Strategy?

Retrenchment refers to discontinue products or services that no longer benefit the company. It also involves leaving markets where a business can’t survive. The result usually involves liquidating assets like product lines and terminating employees.

Retrenchment strategies can reduce operating expenses and reduce the size of an organization. This strategy may also help an organization achieve a good competitive position.

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Types of Retrenchment Strategy

  • Liquidating Assets: Liquidating Assets refer to a selling of investment, facilities, machinery, or entire divisions of an organization. For example, an airline facing a liquidity crisis might sell its facilities at a key airport.
  • Abandoning the markets: It refers to an abandonment of a particular location or segment of the market. Consider an investment bank that shuts down its Tokyo office as markets crash and the business no longer turns a profit.
  • Reduction in production: Decreased production of a product, such as closing or idling factories because of reduced demand.
  • Redundancy elimination: Redundancies are often associated with layoffs of non-critical or low-value employees.
  • Downsizing: The process of downsizing, also known as layoffs, involves terminating employees without any fault. When a firm is facing harsh economic conditions, it frequently reduces costs to save resources. Sometimes a company will downsize without leaving any market or business.
  • Outsourcing: Assignment of business processes to an external partner, which usually reduces costs. When outsourcing is done urgently, it is retrenchment.

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How do you create a Retrenchment Strategy?

Here are the details of how you can create the retrenchment strategy:

1. Selection Criteria

Layoffs should be done fairly. Transparency and measurable objectives should be adopted in the selection process.  Employers must select their employees according to their performance reviews and productivity to eliminate the possibility of favoritism. An employer should avoid keeping favorites over the most productive employees.

2. Select the Right Timing

Employers should react quickly when there are signs of trouble before it gets out of hand. Ideally, the announcement should be made in the early part of the week.

In this way, employers can address any reactions or situations that may arise following the announcement. It allows employees to access any support services they may have received during this difficult time.

3. Deal with it face-to-face

The news must be delivered personally to all affected employees. There is nothing more frustrating than finding out about retrenchments through other means.

It allows the employer and employee to discuss any concerns or questions they may have openly. Communication plays an essential role in retrenchment. Miscommunications will only make the already challenging situation worse.

4. All outcomes should be embraced

Be kind to those who are experiencing emotional turmoil. Whenever someone becomes angry, defensive, or accusatory, please do not feel compelled to give them a response. Instead, show

consideration and accept all possibilities. Every action and move of the organization during retrenchment is closely observed and followed by all employees. Others assess the organization based on the way it treats its existing employees.

5. Accurately present data and figures

To convey bad news, one must use facts, honesty, and unvarnished language. A letter should also be written to clarify the steps in the future.  Provide details about the last day, how much

severance they will receive, how it will be paid, as well as any assistance provided for their career transition.

6. Career Guidance

The best way to lessen the impact of a layoff is to provide the best support to those who are leaving in the hope of helping them find new employment.  Additionally to facilitating their successful career transition, career coaching also enables them to keep positive relationships with the organization even after they leave it.

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What are the 3 Retrenchment Strategies?

1. Turnaround Strategy

To minimize the negative trends that negatively impact the company’s performance, a turnaround strategy is implemented. Moreover, it is also known as a managerial principle that can transform sick businesses into healthy ones.

Additionally, the measure reverses negative trends such as declining market share, increasing manufacturing costs, lower sales, widening debt-equity ratios, lower profitability, working capital weaknesses, negative cash flow, and many other issues. It varies from one business to another how they implement the strategy.

2. Divestment Strategy

An organization with numerous assets, divisions, and products evaluates the profitability of all its divisions and departments. Either they are contributing to the strategy of the company, or they are not. They should be let go if they are not meeting the required results.

Divestment strategy means selling a portion of your company, asset, or division. Companies use a divestment strategy when an internal turnaround plan hasn’t worked. Companies and businesses use diversification strategies to achieve various purposes, such as mergers, resources creation, alternative investment plans, tech up-grading, persistent issues, negative cash flow, and mismatch assets.

3. Liquidation Strategy

Retrenchment strategy involves permanently shutdown of the enterprise and sale of all of its assets. The liquidation strategy is the opposite of that.

The conclusion of a business’s problems can only be reached by liquidation since liquidation is a severe outcome. It results in denying every potential opportunity and terminating all employees.

Business owners typically liquidate their small companies. However, government agencies, financial institutions, trade unions, and large companies don’t liquidate.

Also Read: Liquid Net Worth: What it is And How is it Determined?

How are Retrenchment Benefits Calculated?

There will be 20 days of wages for every year of employment if the employee has been employed for five years or more; less than two years will receive ten days’ wages, and more than two years will receive 15 days’ wages.

What does Retrenchment mean in Business?

According to Business Dictionary, retrenchment is defined as a “forced layoff of employees, or to reduce the payroll.” Companies retrench employees to reduce costs from salary and remuneration.

It might seem cruel or unreasonable to you, but business is business at the end of the day. From a business standpoint, laying off employees saves money that can be spent on new initiatives, training programs, etc., in an apparent attempt to move in a new direction and increase revenues.


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Frequently Asked Questions

How do retrenchment and layoff differ?

Employers use the term “layoff” to describe the provisional termination of their employees. The term ‘retrenchment’ refers to the involuntary separation of an employee caused by replacing their labor with machines or the department’s closing.

Is there a period of notice for retrenchment?

The notice period for a job less than six months is one week. The notice period for a job over six months but less than one year is two weeks, and a job over a year is four weeks. Therefore, a domestic or farmworker whose employment is over six months must give four weeks’ notice.

Are there any legal requirements for retrenchments?

An employer is legally required to provide retrenched workers with “severance pay,” which is dependent on the number of years of service. Therefore, employees’ wages may be higher if their contract states so or higher industry rate because of a Collective Agreement.

Is it possible to refuse a severance package?

Getting severance pay may be contingent on signing a severance agreement, although it is not required. It is common practice for an employer to require an employee to sign a severance agreement before providing severance. This means that if the employee refuses to sign, they will not receive severance pay.