Retrenchment is a downsizing strategy, in which the firm concentrate or specialize in one or some particular SBUs. The strategy implementation consists in selling, rebuilding or eliminating complementary and unnecessary SBUs apart core ones of the firm. The ultimate objective of retrenchment aims to gain or regain the competitive advantage and economies of scale, that allow firm to improve its productivity and profitability (Palmer et al., 2009). In general, when firm implement the retrenchment strategy, costs will be reduced for only key and focused corporate expenses; that can positively contribute to the financial capacity of the firm.
The retrenchment strategy usually is implemented by two approaches. The first consists in cutting down general expenses by reducing employees, by closing offices or branches dealing with poor performance or failing to reach the profit target, by “freezing” recruitment campaigns and cutting employee salaries. By focusing on core activities, firm can also move their headquarters to a new more favorable location where firm can achieve low operating costs or access abundant raw materials with better prices; thereby firm can optimize its business.
Secondly, firm can implement the retrenchment strategy by limiting non-profit market segments, which are often saturated and/or outdated because of the emergence of new and advanced technologies. Such limitation allows firm to allocate their resources more focused on segments that have been researched and/or actually bring attractive profits.
In practice, the retrenchment strategy is often implemented through one or more following ways:
- Turnaround: there are two turnaround strategies, by which (i) firm consolidates or restructures its actual business portfolio, or (ii) firm cuts its labor and marketing costs.
- Captive company: in this way, firm decides to belong to a parent firm, for example by becoming the exclusive supplier for a large corporation.
- Divestment: in which firm eliminates a segment or part of its business by selling, closing or disposing of a SBU, a product line, or a division that is underperforming or out of strategic focus.
- Liquidation: in which the selling price of a business segment or an asset is calculated by subtracting the book value from the depreciated amount up to the date of liquidation of the asset.
- Bankruptcy: bankruptcy occurs when firm falls into total loss of profits. This is a legitimate way for the firm to restructure when declaring bankruptcy for its loyal customers.
A typical example of retrenchment strategy is HAGL Group in Vietnam. During the 10 years from 2002 to 2012, HAGL determined the real estate as its key business by adopting the diversification strategy. But since 2013, the Group restructured its business and finance by focusing investment in the agricultural sector in considering the fruit tree segment as its core business. HAGL has gradually divested from real estate, hydroelectricity, sugarcane and minerals. Specifically, the Group sold off sugarcane segment to TTC Group and hydroelectricity segment to Bitexco Group. Also, it sold real estate segment in Vietnam and Myanmar to Thaco Group. HAGL has also planned to gradually limit the scale of the livestock industry by focusing one the fruit tree segments.