Retrenchment strategy

A retrenchment grand strategy is followed when an organization aims at a contraction of its activities through
substantial reduction or the elimination of the scope of one or more of its businesses in terms of their
respective customer groups, customer functions, or alternative technologies either singly or jointly in order to
improve its overall performance. E.g: A corporate hospital decides to focus only on special treatment and
realize higher revenues by reducing its commitment to general case which is less profitable.

The growth of industries and markets are threatened by various external and internal developments (External
developments – government policies, demand saturation, emergence of substitute products, or changing
customer needs. Internal Developments – poor management, wrong strategies, poor quality of functional
management and so on.) In these situations the industries and markets and consequently the companies face
the danger of decline and will go for adopting retrenchment strategies. E.g: fountain pens, manual type writers,
tele printers, steam engines, jute and jute products, slide rules, calculators and wooden toys are some products
that have either disappeared or face decline.

There are three types of retrenchment strategies – Turnaround Strategies, Divestment Strategies and
Liquidation strategies.

1. Turnaround Strategies

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. They
are:

• Persistent Negative cash flows

• Negative Profits
• Declining market share
• Deterioration in Physical facilities
• Over manning, high turnover of employees, and low morale
• Uncompetitive products or services
• Mis management

An organization which faces one or more of these issues is referred to as a ‘sick’ company.

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.

Before a turn around can be formulated for an Indian company, it has to be first declared as a sick company.
The declaration is done on the basis of the Sick Industrial Companies Act (SICA), 1985, which provides for a
quasi judicial body called the Board of Industrial and Financial Reconstruction (BIFR) which acts as the
corporate doctor whenever companies fall sick.

2. Divestment Strategies

A divestment strategy involves the sale or liquidation of a portion of business, or a major division. Profit centre
or SBU. Divestment is usually a part of rehabilitation or restructuring plan and is adopted when a turnaround
has been attempted but has proved to be unsuccessful. Harvesting strategies a variant of the divestment
strategies, involve a process of gradually letting a company business wither away in a carefully controlled
manner

Reasons for Divestment

• The business that has been acquired proves to be a mismatch and cannot be integrated within the
company. Similarly a project that proves to be in viable in the long term is divested
• Persistent negative cash flows from a particular business create financial problems for the whole
company, creating a need for the divestment of that business.
• Severity of competition and the inability of a firm to cope with it may cause it to divest.
• Technological up gradation is required if the business is to survive but where it is not possible for the
firm to invest in it. A preferable option would be to divest
• Divestment may be done because by selling off a part of a business the company may be in a position to
survive
• A better alternative may be available for investment, causing a firm to divest a part of its unprofitable
business.
• Divestment by one firm may be a part of merger plan executed with another firm, where mutual
exchange of unprofitable divisions may take place.
• Lastly a firm may divest in order to attract the provisions of the MRTP Act or owing to oversize and the
resultant inability to manage a large business.

E.g: 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. Similarly, the pharmaceuticals companies of the Tatas-
Merind and Tata pharma – were divested to Wockhardt. The cosmetics company Lakme was divested and sold
to Hindustan Levers, as besides being a non core business, it was found to be a non- competitive and would
have required substantial investment to be sustained.
3. Liquidation Strategies

A retrenchment strategy which is considered the most extreme and unattractive is the liquidation strategy,
which involves closing down a firm and selling its assets. It is considered as the last resort because it leads to
serious consequences such as loss of employment for workers and other employees, termination of
opportunities where a firm could pursue any future activities and the stigma of failure

The psychological implications

• The prospects of liquidation create a bad impact on the company’s reputation.

• For many executives who are closely associated firms, liquidation may be a traumatic experience.

Legal aspects of liquidation: Under the Companies Act 1956, liquidation is termed as winding up. The Act
defines winding up of a company as the process whereby its life is ended and its property administered for the
benefit of its creditors and members. The Act provides for a liquidator who takes control of the company, collect
its assets, pay it debts, and finally distributes any surplus among the members according to their rights.

The stability grand strategy is adopted by an organization when it attempts at an incremental improvement of
its functional performance by marginally changing one or more of its businesses in terms of their respective
customer groups, customer functions, and alternative technologies – either singly or collectively

E.g: A copier machine company provides better after sales service to its existing customer to improve its
company product image, and increase the sale of accessories and consumables

This strategy may be relevant for a firm operating in a reasonably certain and predictable environment.
Stability strategy can be of three types –No Change Strategy, Profit Strategy, Pause/ Proceed – with – caution
Strategy.

1. No-Change Strategy

It is a conscious decision to do nothing new. The firm will continue with its present business definition. When a
firm has a stable internal and external environment the firm will continue with its present strategy. The firm has
no new strengths and weaknesses within the organization and there is no opportunities or threats in the
external environment. Taking into account this situation the firm decides to maintain its strategy.

Several small and medium sized firm operating in a familiar market- more often a niche market that is limited
in scope – and offering products or services through a time tested technology rely on the No – Change
Strategy.

2. Profit Strategy

No firm can continue with the No – Change Strategy. Sometimes things do change and the firm is faced with
the situation where it has to do something. A firm may assess the situation and assume that its problem are
short lived and will go away with time. Till then a firm tries to sustain its profitability by adopting a profit
strategy
For instance in a situation when the profit is becoming lower firm takes measures to reduce investments, cut
costs, raise prices, increase productivity and adopt other measures to solve the temporary difficulties.

The problem arises due to unfavorable situation like economic recession, government attitude, and industry
down turn, competitive pressures and like. During this kind of situation that the firm assumes to be temporary
it would adopt profit strategies

Some firms to overcome these difficulties would sell off assets such as prime land in a commercial area and
move to suburbs. Others have removed some of its non-core business to raise money, while others have
decided to provide outsourcing service to other organizations.

3. Pause/ Proceed with Caution Strategy

It is employed by the firm that wish to test the ground before moving ahead with a full fledged grand strategy,
or by firms that have an intense pace of expansion and wish to rest for a while before moving ahead. The
purpose is to allow all the people in the organization to adapt to the changes. It is a deliberate and conscious
attempt to postpone strategic changes to a more opportune time.

E.g: In the India shoe market dominated by Bata and Liberty, Hindustan Levers better known for soaps and
detergents, produces substantial quantity of shoes and shoe uppers for the export market. In late 2000, it
started selling a few thousand pairs in the cities to find out the market reaction. This is a pause proceed with
caution strategy before it goes full steam into another FMCG sector that has a lot of potential

Growth strategy

Growth is a way of life. Almost all organizations plan to expand. This strategy is followed when an organization
aims at higher growth by broadening its one or more of its business in terms of their respective customer
groups, customers functions, and alternative technologies singly or jointly – in order to improve its overall
performance.

There are five types of expansion (Growth) strategies

1. Expansion through concentration

2. Expansion through integration
3. Expansion through diversification
4. Expansion through cooperation

1. Expansion through concentration

It involves converging resources in one or more of firms businesses in terms of their respective customer
needs, customer functions, or alternative technologies either singly or jointly, in such a manner that it results in
expansions. A firm that is familiar with an industry would naturally like to invest more in known business rather
than unknown business. Concentration can be done through
 • Market Penetration: It involves selling more products to the same market by focusing intensely on
existing markets with its present products, increasing usage by existing customers and increasing
market share and restructures a mature market by driving out competitors E.g.: Low pricing strategies
• Market Development: It involves selling the same products to new markets by attracting new users to
its existing products. Market development can be geographic wise and demographic wise. E.g.: XEROX
Company educated small business entrepreneurs to create new markets.
• Product Development: It involves selling new products to the same markets by introducing newer
products in existing markets. E.g.: the tourism industry in India has not been able to attract new
customers in significant numbers. New products such as selling India as a golfing or ayuerveda-based
medical treatment destination are some of the product development efforts in the tourism industry to
attract more tourists.

Advantages of concentration strategies

• Involves minimal organizational changes and is less threatening.

• Enables the firm to specialize by gaining the in-depth knowledge of the businesses.
• Enables the firm to develop competitive advantage.
• Decision-making can be made easily as there is a high level of productivity.
• Systems and processes within the firm become familiar to the people in the organization.

Disadvantages of concentration strategies

• It is dependent on one industry if there is any worse condition in the industry the firm will be affected.
• Factors such as product obsolescence, fickleness of market, emergence of newer technologies are threat
to concentrated firm
• Mangers may not be able to sustain interest and find the work less challenging.
• It may lead to cash flow problems.

2. Expansion through Integration

It is done where the company attempts to widen the scope of its business definition in such a manner that it
results in serving the same set of customers. The alternative technology of the business undergoes a change. It
is combing activities related to the present activity of a firm. Such a combination may be done through value
chain. A value chain is a set of interrelated activity performed by an organization right from the procurement of
basic raw materials down to the marketing of finished products to the ultimate customers. E.g.: Several process
based industry such as petro chemicals, steel, textiles of hydrocarbons have integrate firm

A make or buy decision is then made when firms wish to negotiate with the suppliers or buyers. The cost of
making the items used in the manufacture of ones owns products are to be evaluated against the cost of
procuring them from suppliers. If the cost of making is less that the cost of procurement then the firm moves
up the value chain to make the item itself. Like wise if the cost of selling the finished products is lesser than the
price paid to the sellers to do the same thing then the firm would go for direct selling.

Among the integration strategies are of two type’s vertical and horizontal integration.

• Vertical Integration: when an organization starts making new products that serve its own needs vertical
integration takes place. Vertical integration could be of two types Back ward and forward integration.
Backward integration means moving back to the source of raw materials while forward integration
moves the organization nearer to the ultimate customer. Generally when firms vertically integrate they
do so in a complete manner that is they move backward or forward decisively resulting in a full
integration but when a firm does not commit it fully it is possible to have partial vertical integration
strategies too. Two such partial vertical integration strategies are ‘taper’ integration and ‘quasi’
integration. Taper integration requires firms to make a part of their own requirements and to buy the
rest from outsiders. Through quasi integration strategies firm purchase most of their requirements from
other firms in which they have an ownership stake. Ancillary industrial units and outsourcing through
sub contracting are adapted forms of quasi integration.
• Horizontal Integration: when an organization takes up the same type of products at the same level of
production or marketing process, it is said to follow a strategy of horizontal integration. When a luggage
company takes over its rival luggage company, it is horizontal integration. Horizontal integration
strategy may be frequently adopted with a view to expand geographically by buying a competitors
business, to increase the market share or to benefit from economics of scale.

3. Expansion through Diversification

Diversification is a much used and much talked about set of strategies. It involves a substantial change in the
business definition – singly or jointly- in terms of customer groups or alternative technologies of one or more of
a firm’s businesses. . There are two categories, concentric and conglomerate diversification.

Concentric Diversification: when an organization takes up an activity in such a manner that is related to the
existing business definition of one or more of firms businesses, either in terms of customer groups, customer’s
functions or alternative technologies, it is called concentric diversification. Concentric diversification may be of
three types:

1. Marketing related concentric diversification: when a similar type of product is offered with a help of
unrelated technology for e.g., a company in the sewing machine business diversifies in to kitchen ware
and household appliances, which are sold to house wives through a chain of retails stores.
2. Technology- related concentric diversification: when a new type of product or service is provided with
the help of related technology, for e.g., a leasing firm offering hire- purchase services to institutional
customers also starts consumer financing for the purchase of durable sot individual customers.
 3. Marketing- technology related concentric diversification: when a similar type of product is provided with
the help of related technology, for e.g., a rain coat manufacturer makes other rubber based items, such
as water proof shoes and rubber gloves sold through the same retail outlets

Conglomerate Diversification: when an organization adopts a strategy which requires taking of those activities
which are unrelated to the existing businesses definition of one or more of its businesses either in terms of their
respective customer groups, customer functions or alternative technologies. Example of Indian company which
have adopted apart of growth and expansion through conglomerate diversification the classic examples is of
ITC, a cigarette company diversifying into the hotel industry

4. Expansion through Cooperation

The term cooperation expresses the idea of simultaneous competition and cooperation among rival firms for
mutual benefits. Cooperative strategies could be of the following types:

1. Mergers
2. Takeovers
3. Joint ventures
4. Strategic alliances

Mergers Strategies: A merger is a combination of two or more organizations in which one acquires the assets
and liabilities of the other in exchange for shares or cash or both the organization are dissolved and the assets
and liabilities are combined and new stock is issued. For the organization, which acquires another, it is an
acquisition. For the organization, which is acquired, it is a merger. If both the organization dissolves their
identity to create a new organization, it is consolidation. There are different types of mergers they are
horizontal merger, vertical merger, concentric merger and conglomerate merger.

• Horizontal Mergers: it takes place when there is a combination of two or more organizations in the same
business. E.g: A company making footwear combines with another footwear company, or a retailer of
pharmaceutical combines with another retailer in the same businesses.
• Vertical Mergers: It takes place when there is a combination of two or more organizations, not
necessarily in the same business, which create complementarities either in terms of supply of raw
materials (input) or marketing of goods and services (outputs). E.g: A footwear company combines with
a leather tannery or with a chain shoe retail stores
• Concentric Mergers: It takes place when there is a combination of two or more organizations related to
each other either in terms of customer functions, customer groups, or the alternative technologies used.
E.g: A footwear company combining with a hosiery firm making socks or another specialty footwear
company, or with a leather goods company making purse, hand bags and so on
 • Conglomerate Mergers: It takes place when there is a combination of two or more organizations
unrelated to each other, either in terms of customer functions, customer groups, or alternative
technologies used. E.g: A footwear company combining with a pharmaceutical firm.

Takeover Strategies: Takeover or acquisition is a popular strategic alternative adopted by Indian companies.
Acquisitions usually are based on the strong motivation of the buyer firm to acquire. Takeovers are frequently
classified as hostile takeovers (which are against the wishes of the acquired firm) and friendly takeovers (by
mutual consent)

• Friendly takeovers are where a takeover is not resisted or opposed, by the existing management or
professionals. E.g: Tata Tea’s takeover of Consolidated Coffee (a grower of coffee beans) and Asian
Coffee (a processor) is an example of a friendly takeover.
• Hostile takeovers is where a takeover is resisted, or expected to be opposed, by the existing
management or professionals.

Joint Venture Strategies: Joint ventures are a special case of consolidation where two or more companies from
a temporary form a temporary partnership (also called a consortium) for a specified purpose. They occur when
an independent firm is created by at least two other firms. Joint ventures may be useful to gain access to a new
business mainly under these conditions

• When an activity is uneconomical for an organization to do alone.

• When the risk of business has to be shared.
• When the distinctive competence of two or more organization can be brought together.
• When the organization has to overcome the hurdles, such as import quotas, tariffs, nationalistic –
political interests, and cultural roadblocks.

Strategic alliances: They are partnership between firms whereby their resources, capabilities and core
competencies are combined to pursue mutual interest to develop, manufacture, or distribute goods or services.
There are various advantages:

• Two or more firms unite to pursue a set of agreed upon goals but remain independent subsequent to the
formation of the alliances. A pooling of resources, investment and risks occurs for mutual gain
• The partner firms contribute on a continuing basis in one or more key strategic areas, for example,
technology, product and so forth.
• Strategic alliances offer a growth route in which merging one’s entity, acquiring or being acquired, or
creating a joint venture may not be required
• Global partners can help local firms by developing global quality consciousness, creating adherence to
international quality standards, providing access to state of the art technology, gaining entry to world
wide mass markets, and making funds available for expansions.
Sbu

Strategic Business Unit or SBU is understood as a business unit within the overall corporate identity which is

distinguishable from other business because it serves a defined external market where management can conduct strategic

planning in relation to products and markets. The unique small business unit benefits that a firm aggressively promotes in a

consistent manner. When companies become really large, they are best thought of as being composed of a number of

businesses (or SBUs).

In the broader domain of strategic management, the phrase "Strategic Business Unit" came into use in the 1960s, largely as

a result of General Electric's many units.

These organizational entities are large enough and homogeneous enough to exercise control over most strategic factors
affecting their performance. They are managed as self contained planning units for which discrete business strategies can

be developed. A Strategic Business Unit can encompass an entire company, or can simply be a smaller part of a company

set up to perform a specific task. The SBU has its own business strategy, objectives and competitors and these will often be

different from those of the parent company. Research conducted in this include the BCG Matrix.

This approach entails the creation of business units to address each market in which the company is operating. The

organization of the business unit is determined by the needs of the market.

An SBU is an operating unit or planning focus that groups a distinct set of products or services, which are sold to a uniform

set of customers, facing a well-defined set of competitors. The external (market) dimension of a business is the relevant

perspective for the proper identification of an SBU. (See Industry information and Porter five forces analysis.) Therefore, an

SBU should have a set of external customers and not just an internal supplier.[1]

Companies today often use the word “Segment” or “Division” when referring to SBU’s, or an aggregation of SBU’s that share

such commonalities.

Strategic Business Unit (SBU) is necessary when corporation starts to provide different products and hence,
need to follow different strategies.

SBUs are also known as strategy centers, Independent Business Unit or even Strategic Planning Centers.

Strategic Business Unit (SBUs) is necessary when corporation starts to provide different products and hence,
need to follow different strategies. To ease its operation, corporate set different groups of product/product line
regarding the strategy to follow (in terms of competition, prices, substitutability, style/ quality, and impact of
product withdrawal). These strategic groups are called Strategic Business Units (SBUs).

SBUs are also known as strategy centers, Independent Business Unit or even Strategic Planning Centers.

Each Business Unit must meet the following criteria:

 1. Have a unique business mission, independent from other SBUs.
2. Have clearly definable set of competitors.
3. Is able to carry out integrative planning relatively independently of other SBUs.
4. Should have a Manager authorized and responsible for its operation.

Mission
A mission statement is a formal, short, written statement of the purpose of a company or organization. The mission statement
should guide the actions of the organization, spell out its overall goal, provide a sense of direction, and guide decision-making. It
provides "the framework or context within which the company's strategies are formulated."[1] Historically it is associated
with Christian religious groups; indeed, for many years, a missionary was assumed to be a person on a specifically religious
mission. The word "mission" dates from 1598, originally of Jesuits sending ("missio", Latin for "act of sending") members
abroad[1

Mission statements often contain the following

 Purpose and aim of the organization

 The organization's primary stakeholders: clients, stockholders, congregation, etc.
 Responsibilities of the organization toward these stakeholders
 Products and services offered

According to Hill, the mission statement consists of: 1. a statement containing the reason for using your product 2. a statement
of some desired future state (vision) 3. a statement of the key values the organization is committed to 4. a statement of major
goals

The mission statement can be used to resolve differences between business stakeholders. Stakeholders include: employees
including managers and executives, stockholders, board of directors, customers, suppliers, distributors, creditors, governments
(local, state, federal, etc.), unions, competitors, NGO's, and the general public. Stakeholders affect, and are affected by, the
organization's strategies.
Business Statement Example:

Here is the Coca-Cola Company's mission statement for Stakeholders which is published in Jeffrey Abrahams' new book, 101 Mission
Statements From Top Companies (Ten Speed Press, 2007):

"The Coca-Cola Promise: The Coca-Cola Company exists to benefit and refresh everyone it touches. The basic proposition of our business is
simple, solid, and timeless. When we bring refreshment, value, joy and fun to our stakeholders, then we successfully nurture and protect our
brands, particularly Coca-Cola. That is the key to fulfilling our ultimate obligation to provide consistently attractive returns to the owners of our
business." (p. 40)

The audience for this mission is specifically for the stakeholder.

The values here are stated explicitly: refreshment, value, joy, fun, and attractive returns. These words were obviously carefully chosen by
those who crafted this mission statement. The “ultimate obligation” of “attractive returns” is a powerful way to state the company’s vision and
keeps the values stated in context.

A separate mission statement is published on The Coca-Cola Company's website for access by the general public:
“Everything we do is inspired by our enduring mission:

• To Refresh the World… in body, mind, and spirit.

• To Inspire Moments of Optimism… through our brands and our actions.
• To Create Value and Make a Difference… everywhere we engage.”

These values are consistent with the stakeholder version of the mission: refreshment and value are echoed in addition to inspiration.

Mission and vision statement

Mission Statements & Vision Statements
Unleashing the power of purpose

Vision Statements and Mission Statements are the inspiring words chosen by successful leaders to clearly and concisely
convey the direction of the organization. By crafting a clear mission statement and vision statement, you can powerfully
communicate your intentions and motivate your team or organization to realize an attractive and inspiring common vision of the
future.

“Mission Statements” and “Vision Statements” do two distinctly different jobs.

A Mission Statement defines the organization's purpose and primary objectives. Its prime function is internal – to define the
key measure or measures of the organization’s success – and its prime audience is the leadership team and stockholders.

Vision Statements also define the organizations purpose, but this time they do so in terms of the organization’s values
rather than bottom line measures (values are guiding beliefs about how things should be done.) The vision statement
communicates both the purpose and values of the organization. For employees, it gives direction about how they are
expected to behave and inspires them to give their best. Shared with customers, it shapes customers’ understanding of why
they should work with the organization.

Mission Statement Creation

1. To create your mission statement, first identify your organization’s “winning idea”.

This is the idea or approach that will make your organization stand out from its competitors, and is the reason that
customers will come to you and not your competitors (see tip below).

2. Next identify the key measures of your success. Make sure you choose the most important measures (and not too many
of them!)

3. Combine your winning idea and success measures into a tangible and measurable goal.
4. Refine the words until you have a concise and precise statement of your mission, which expresses your ideas,
measures and desired result.

Vision Statement Creation

Once you’ve created your mission statement, move on to create your vision statement:

1. First identify your organization’s mission. Then uncover the real, human value in that mission.
2. Next, identify what you, your customers and other stakeholders will value most about how your organization will achieve
this mission. Distil these into the values that your organization has or should have.

3. Combine your mission and values, and polish the words until you have a vision statement inspiring enough to energize
and motivate people inside and outside your organization.