There are three types of Retrenchment Strategies:

Retrenchment Strategy

Turnaround Strategy

Divestment Strategy

Liquidation Strategy

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:
1. 2. 3. 4. 5. 6. 7.

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
1.

The existing chief executive and management team handles the entire turnaround strategy with the advisory support of a external consultant.

2.

In another case the existing team withdraws temporarily and an executive consultant or turnaround specialist is employed to do the job.

3.

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 turnaround 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. Turnaround Process: The Turnaround Process begins with a depiction of external and internal factors as causes of a firms performance downturn. If these factors continue to detrimentally impact the firm, its financial health is threatened. Unchecked financial decline places the firm in a turnaround situation. A turnaround situation represents absolute and relative-to-industry declining performance of a sufficient magnitude to warrant explicit turnaround actions. A turnaround is typically accomplished through a two stage process.

The initial stage is focused on the primary objectives of survival and achievement of a positive cash flow. The means to achieve this objective involves an emergency plan to halt the firms financial haemorrhage and a stabilization plan to streamline and improve core operations. In other words, it involves the classic retrenchment activities: liquidation, divestment, product elimination, and downsizing the workforce. Retrenchment strategies are also characterized by the revenue generating, product/market refocusing or cost cutting and asset reduction activities. While cost cutting, asset reduction and product/market refocusing are easy to visualize, the idea of revenue-generating is best captured by a strategy that is characterized by increased capacity utilization, and increased employee productivity.

Retrenchment is an integral component of turnaround strategy. The critical role of retrenchment in providing a stable base from which to launch a recovery phase of the turnaround process is well established. Many firms that have achieved a reversal of financial

or competitive decline inevitably refer to the presence of retrenchment as a precursor or prelude to the implementation of a successful recovery strategy. The question remains, however, as to why retrenchment is so frequently an appropriate first step in an overall turnaround process. One possible explanation is that economic decline diminishes the firms resource slack. Cost retrenchment helps to preserve the residual resources. Resource flexibility provides additional slack and is achieved through asset redeployment Resource flexibility must be substituted for slack that has been largely depleted, or when the heightened requirements of strategic redirection place additional demands on the firm for resources. These heightened requirements stem from concurrent demands on the firm to overcome the destructive momentum of the established strategy and to cover the high start-up costs of implementing the new strategic initiatives. Consequently, retrenchment may be necessary to stabilize the situation by securing or providing slack regardless of the subsequent recovery strategy that is chosen.

The second phase involves a return-to-growth or recovery stage and the turnaround process shifts away from retrenchment and move towards growth and development and growth in market share. The means employed for achieving these objectives are acquisitions, new products, new markets, and increased market penetration. The importance of the second stage in the turnaround situation is underscored by the fact that primary causes of the turnaround situation have been associated with this phase of the turnaround process- the recovery response. For firms that declined primarily as a result of external problems, turnaround has most often been achieved through strategies based on a revenue driven reconfiguration of business assets. For firms that declined primarily as a result of internal problems, turnaround has been most frequently achieved through recovery responses that were heavily weighted toward efficiency maintenance strategies. Recovery is said to have been achieved when economic measures indicate that the firm has regained its pre-downturn levels of performance.

Between these two stages, a clear strategy is needed for a firm. As the financial decline stops, the firm must decide whether it will pursue recovery in its retrenchment reduced

form through a scaled-back version of its pre-existing strategy, or whether it will shift to a return-to-growth stage. It is at this point that the ultimate direction of the turnaround strategy becomes clear. Essentially, the firm must choose either to continue to pursue retrenchment as its dominant strategy or to couple the retrenchment stage with a new recovery strategy that emphasizes growth. The degree and duration of the retrenchment phase should be based on the firms financial health.

ONeill (1986) investigated the relationship of contextual factors to the effectiveness of four primary turnaround strategies:

1. Management (new head executive, new definition of business, new top management team, morale building among employees), 2. Cutback (cost cutting, financial and expense controls, replacing losing subsidiaries), 3. Growth (new product promotion methods, entering new product areas, acquisitions, add markets), and 4. Restructuring (change in organizational structure, new manufacturing methods).

His model predicted a negative relationship between growth strategies and turnaround success where there were strong competitive pressures. Where firms were in weak market positions, success was found for cutback and restructuring strategies. For firms competing in mature or declining industries, efficiency or operating recovery strategies offer the best prospects for successful turnaround. Retrenchment (cost cutting and asset reducing) are sufficient under certain circumstances to re-establish the long term viability of the firm.

Kirloskar Pneumatic Company Limited-Turnaround Success

Kirloskar Pneumatic Company Limited (KPC) was set up in 1958. It started operations with the manufacture of air compressors and pneumatic tools in collaboration with Broom and Wade Ltd., U.K. and then diversified into Airconditioning, Refrigeration and Transmission. Currently its activities are grouped into four major divisions: Air-Compressor, Airconditioning and Refrigeration, Hydraulic Power Transmission and Process gas.

During the recession in the late 1990s, the sales bottomed out and the management realized that the business could not grow any more. This triggered a period of introspection and the company started looking inwards. Every time any business hits the bottom, there are two perspectives external and internal. Since the management had little control over external factors, it focused on managing the internal working of the company. Fortunately, even on the external front, the company had a chance to buy out one of their major competitors K G Khosla. The move started in 1994 when KG Khosla Company became sick and the ICICI requested the Kirloskars to manage this business. Subsequently both the companies, KPC & KG Khosla, were merged in the year 2000.

The first thing KPC management team did was to understand the business of KG Khosla their product lines, style of business, etc. Then it started leveraging the synergies between the two companies. Since the sales of the KPC were already bottoming out and the Khosla product line with its manufacturing facilities was added to its plant in Pune, the company was left with no other option except to cut costs across the board. By the end of 2000, the management of KPC had through an understanding with the staff at Faridabad plant of KG Khosla reduced the employee strength considerably. The VRS at Faridabad was introduced with a total understanding with the parting staff. KPC then shifted 90 people from Pune to Faridabad for about three months during which time the company saw to it that the production continued at Faridabad with these workers. After this activity at Faridabad, the company also restructured its Pune plant by reducing the strength by 650 people. The final

strength of employees at both the plants after this whole downsizing exercise finally stood at 800.

The company then turned its attention on restructuring its debt to bring the interest costs down. The third element of improvement was adding new product lines to its existing range while concentrating on improving the efficiency of its existing products. As a result, KPC turned around after successful implementation of all these well planned initiatives during the period 1999 2002.

2. Divestment Strategies A divestment strategy involves the sale or liquidation of a portion of business, or a major division, profit center 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
1.

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

2.

Persistent negative cash flows from a particular business create financial problems for the whole company, creating a need for the divestment of that business.

3.

Severity of competition and the inability of a firm to cope with it may cause it to divest.

4.

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

5.

Divestment may be done because by selling off a part of a business the company may be in a position to survive

6.

A better alternative may be available for investment, causing a firm to divest a part of its unprofitable business.

7.

Divestment by one firm may be a part of merger plan executed with another firm, where mutual exchange of unprofitable divisions may take place.

8.

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 Liquidation is the final resort for a declining company. This is the ultimate stage in the process of renewing company. Sometimes a business unit or a whole company becomes so weak that the owners cannot find an interested buyer. A simple shutdown will prevent owners from throwing good money after bad once it is clear that there is no future for the business.

Bankruptcy is a last resort when the business fails financially. The court will liquidate its assets. The proceeds will be used to pay off the firms outstanding debts. Some companies file for bankruptcy instead of liquidating. Under this option, the firm reorganizes its operations while being protected from its creditors. If the firm can emerge from bankruptcy, it pays off its creditors as best as it can. The psychological implications
1. 2.

The prospects of liquidation create a bad impact on the companys 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 fullfledged 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

Liquidation of Bharat Starch A case in point is the liquidation of loss-making Bharat Starch, a B M Thapar group company, following the sale of its starch and citric acid divisions to English India Clays and Bilt Chemicals, respectively. This was done as a part of financial restructuring to relieve the company of its outstanding liabilities. As part of the deal, the two buyers would actually take over the liabilities of Bharat Starch thereby reducing a major part of the debt burden of the company. The Thapar family is the largest shareholder in the company with a 45 per cent stake, followed by UK-based Tate & Lyle, which has a 40 per cent stake. The rest is divided between financial institutions and the public. For Bilt Chemicals, the takeover of the citric acid plant in Gujarat was a perfect fit since the company was planning to go in for expansions in the segment.