Using Business Environment And Strategy Analysis

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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:


Captive Company

Selling out




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 â€" 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.


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).


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.


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, Alcatel-Lucent, 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 the end of this subsidy and increased competition.