S.

K SOMAIYA COLLEGE OF ARTS, SCIENCE & COMMERCE

VIDYAVIHAR (EAST), MUMBAI - 400077

PROJECT ON:
CORPORATE LEVEL STRATEGY
(RETRENCHMENT STRATEGY)
MASTERS OF COMMERCE
(BANKING & FINANCE)

PART 1 (SEM)
(2015-2016)

Submitted:
In Partial Fulfillment of the requirements
For the Award of the Degree of
MASTERS OF COMMERCE
(BANKING & FINANCE)
BY
JINAL D.PANCHAL
ROLL NO : 58

DECLARATION
I JINAL D.PANCHAL student of class in M.com (BANKING & FINANCE)
PART 1 (SEM-1), ROLL NO.58, academic year 2015-2016 Studying at S.K.
SOMAIYA COLLEGE OF ARTS, SCIENCE AND COMMERCE, hereby
declare that the work done on the project Entitled CORPORATE LEVEL
STRATEGY-RETRENCHMENT STRATEGY is true and original and any
Reference used in this project is duly acknowledged.

DATE:
PLACE: MUMBAI

----------------------------SIGNATURE OF STUDENT
(JINAL D.PANCHAL)

CERTIFICATE
This is to certify that MRS.JINAL D,PANCHAL studying in M.com (BANKING
& FINANCE) PART 1 (SEM-1), ROLL NO. 58, academic year 2015-2016 at
S.K.SOMAIYA COLLEGE OF ARTS, SCIENCE & COMMERCE has
completed the project on CORPORATE LEVEL STRATEGYRETRENCHMENT STRATEGY under the guidance of Prof. RAVIKANT
SANGURDE
The information submitted herein is true and original to the best of my
knowledge.

PROF. RAVIKANT

DR.SANGEETA

SANGURDE

____________________
EXAMINER

KOHLI

___________________ EXTERNAL
MR.
[CO-ORDINATOR]

DECLARATION BY GUIDE
I, the undersigned Prof. RAVIKANT SANGURDE has guided MRS JINAL
D.PANCHAL , ROLL NO.58 for his project. He has completed the project on
CORPORATE

LEVEL STRATEGY-RETRENCHMENT STRATEGY

successfully.
I, hereby declare that information provided in this project is true as per the
best of my knowledge.

Thank You,
Yours Faithfully,

(Prof.
RAVIKANT SANGURDE)
Project Guide

ACKNOWLEDGEMENT
It gives me immense pleasure to present a project on CORPOARTE LEVEL
STRATEGY-RETRENCHMENT STRATEGY As a M com student it is a great
honour to undergo a project work at an graduate level and I would like to thank the
University of Mumbai for giving me such a golden opportunity.
I am eternally grateful to almighty god for giving me the spirit to put in my best
effort towards my project. I owe my sincere gratitude to DR. SANGEETA
KOHLI, the principal of our college. I am also thankful to my project guide
RAVIKANT SANGURDE for her valuable guidance and for providing an insight
to the subject.
I am also obliged to the library staff of S.K.. Somaiya College for the numerous
books made me available for the handy reference.
Although, I have taken every care to check mistake and misprint yet it is difficult
to claim perfection. Any error, omission and suggestion brought to my notice, will
be thankfully acknowledged by me.

TABLE OF CONTENT

Sr. NO

PARITCULARS

PAGE NO

INTRODUCTION STRATEGY

DEFINITION

PROCESS

LEVEL OF STRATEGIES

CORPORATE LEVEL STRATEGY

TYPES OF CORPORETE STRATEGIES

11

RETRENCHMENT STRETEGY

14

TURNAROUND

18

SURVIVAL

27

LIQUIDATION

35

KEY FINDINGS

38

CONCLUSION

39

INTRODUCTION
STRATEGY
The word strategy is derived from the Greek word strategos that is stratus
(meaning army) and ago (meaning leading/moving).
Strategy is an action that managers take to attain one or more of the organizations
goals. Strategy can also be defined as a general direction set for the company and its
various components to achieve a desired results state in the future. Strategy results
from the detailed strategic planning process.

A strategy is all about integrating organizational activities and utilizing and allocating
the scarce resources within the organizational environment so as to meet the present
objectives. While planning a strategy it is essential ti consider that decision are not
taken in a vacuum and that any act taken by a firm is likely to be met by a reaction
from those affected, competitors, customers, employees or suppliers .

DEFINITION OF STRATEGY
According to oxford dictionary
Strategy is a plan of action or policy designed to achieve a major or overall
aim.
According to Johnson and schools
Strategy is the direction and scope of an organization over long term: which
achieves advantage for the organization through its configuration of resources

within a challenging environment, to meet the needs of markets and to fulfill

stakeholders expectations.
In simple words it can be defined as
Strategy is a broad long term plan designed to achieve the overall objectives of the
firm
In other words, strategy is about
Where is the business trying to get to in the long term?( direction)
Which markets should a business compete in and what kinds of activities are
involve in such markets?(markets: scope)
How can the business perform better than the competition in those markets?
(advantage)
What resources (skills, asses, finance, relationships, technical competence and
facilities) are required in order to be able to compete? (resources)
PROCESS OF STRATEGY

The process of strategy is cyclical in nature. The elements within it interact among
themselves. Figure-1 present the process for single SBU firm. The process has to be
adjusted for multiple SBU firms because there it is conducted at corporate level as
well as SBU levels as these firms insert SBU strategy between corporate strategy and
functional strategy.
For our understanding, the process has been divided into the following steps:
1. Strategic Intent

2. Environmental and Organizational Analysis

3. Identification of Strategic Alternatives
4. Choice of Strategy
5. Implementation of Strategy
6. Evaluation and Control

FIG-1 : STRATEGIC PROCESS

FIG-1 : Strategic Process in a Single SBU Firm

LEVEL OF STRATEGIES
Strategy can be formulated on three different levels:

corporate level

business unit level

functional or departmental level.

While strategy may be about competing and surviving as a firm, one can argue that
products, not corporations compete, and products are developed by business units.
The role of the corporation then is to manage its business units and products so that
each is competitive and so that each contributes to corporate purposes.
Consider Textron, Inc., a successful conglomerate corporation that pursues profits
through a range of businesses in unrelated industries. Textron has four core business
segments:

Aircraft - 32% of revenues

Automotive - 25% of revenues

Industrial - 39% of revenues

Finance - 4% of revenues.

While the corporation must manage its portfolio of businesses to grow and survive,
the success of a diversified firm depends upon its ability to manage each of its product
lines. While there is no single competitor to Textron, we can talk about the
competitors and strategy of each of its business units. In the finance business segment,
for example, the chief rivals are major banks providing commercial financing. Many
managers consider the business level to be the proper focus for strategic planning.

Corporate Level Strategy

Corporate level strategy fundamentally is concerned with the selection of businesses
in which the company should compete and with the development and coordination of
that portfolio of businesses.
Corporate level strategy is concerned with:

Reach - defining the issues that are corporate responsibilities; these might include

identifying the overall goals of the corporation, the types of businesses in which the
corporation should be involved, and the way in which businesses will be integrated
and managed.

Competitive Contact - defining where in the corporation competition is to be

localized. Take the case of insurance: In the mid-1990's, Aetna as a corporation was
clearly identified with its commercial and property casualty insurance products. The
conglomerate Textron was not. For Textron, competition in the insurance markets took
place specifically at the business unit level, through its subsidiary, Paul Revere.
(Textron divested itself of The Paul Revere Corporation in 1997.)

Managing Activities and Business Interrelationships - Corporate strategy seeks to

develop synergies by sharing and coordinating staff and other resources across
business units, investing financial resources across business units, and using business
units to complement other corporate business activities. Igor Ansoff introduced the
concept of synergy to corporate strategy.

Management Practices - Corporations decide how business units are to be

governed: through direct corporate intervention (centralization) or through more or

less autonomous government (decentralization) that relies on persuasion and rewards.

Corporations are responsible for creating value through their businesses. They do so
by managing their portfolio of businesses, ensuring that the businesses are successful
over the long-term, developing business units, and sometimes ensuring that each
business is compatible with others in the portfolio.

Business Unit Level Strategy

A strategic business unit may be a division, product line, or other profit center that can
be planned independently from the other business units of the firm.
At the business unit level, the strategic issues are less about the coordination of
operating units and more about developing and sustaining a competitive advantage for
the goods and services that are produced. At the business level, the strategy
formulation phase deals with:

Positioning the business against rivals

Anticipating changes in demand and technologies and adjusting the strategy to

accommodate them

Influencing the nature of competition through strategic actions such as vertical

integration and through political actions such as lobbying.

Michael Porter identified three generic strategies (cost leadership, differentiation,
and focus) that can be implemented at the business unit level to create a competitive
advantage and defend against the adverse effects of the five forces.

Functional Level Strategy

The functional level of the organization is the level of the operating divisions and
departments. The strategic issues at the functional level are related to business
processes and the value chain. Functional level strategies in marketing, finance,
operations, human resources, and R&D involve the development and coordination of
resources through which business unit level strategies can be executed efficiently and
effectively.
Functional units of an organization are involved in higher level strategies by
providing input into the business unit level and corporate level strategy, such as
providing information on resources and capabilities on which the higher level
strategies can be based. Once the higher-level strategy is developed, the functional
units translate it into discrete action-plans that each department or division must
accomplish for the strategy to succeed.

CORPORATE STRATEGIES

Growth is essential for an organization. Organizations go through an inevitable

progression from growth through maturity, revival, and eventually decline. The broad
corporate strategy alternatives, sometimes referred to as grand strategies, are:
stability/consolidation, expansion/growth, divestment/ retrenchment and combination
strategies. During the organizational life cycle, managements choose between growth,
stability, or retrenchment strategies to overcome deteriorating trends in performance.

Just as every product or business unit must follow a business strategy to improve its
competitive position, every corporation must decide its orientation towards growth by
asking the following three questions:
1. Should we expand, cut back, or continue our operations unchanged?

2. Should we concentrate our activities within our current industry or should we

diversify into other industries?
3. If we want to grow and expand nationally and/or globally, should we do so
through internal development or through external acquisitions, mergers, or strategic
alliances?
At the core of corporate strategy must be a clear logic of how the corporate objectives,
will be achieved. Most of the strategic choices of successful corporations have a
central economic logic that serves as the fulcrum for profit creation. Some of the
major economic reasons for choosing a particular type corporate strategy are:
a) Exploiting operational economies and financial economies of scope.
b) Uncertainty avoidance and efficiency.
c) Possession of management skills that help create corporate advantage.
d) Overcoming the inefficiency in factor markets and
e) Long term profit potential of a business.

The non-economic reasons for the choice of corporate strategy elements include :
a) Dominant view of the top management,
b) Employee incentives to diversify (maximizing management compensation),
c) Desire for more power and management control,
d) Ethical considerations and
e) corporate social responsibility.

There are four types of generic corporate strategies. They are:

1. Stability strategies:

Make no change to the companys current activities

2. Growth strategies:
Expand the companys activities
3. Retrenchment strategies:
Reduce the companys level of activities
4. Combination strategies:
A combination of above strategies
STABILITY STRATEGY
Stability strategy is a strategy in which the organization retains its present strategy at
the corporate level and continues focusing on its present products and markets. The
firm stays with its current business and product markets; maintains the existing level
of effort; and is satisfied with incremental growth. It does not seek to invest in new
factories and capital assets, gain market share, or invade new geographical territories.
Organizations choose this strategy when the industry in which it operates or the state
of the economy is in turmoil or when the industry faces slow or no growth prospects.
They also choose this strategy when they go through a period of rapid expansion and
need to consolidate their operations before going for another bout of expansion.
EXPANSION OR GROWTH STRATEGY

Firms choose expansion strategy when their perceptions of resource availability and
past financial performance are both high. The most common growth strategies are
diversification at the corporate level and concentration at the business level. Reliance
Industry, a vertically integrated company covering the complete textile value chain
has been repositioning itself to be a diversified conglomerate by entering into a range
of business such as power generation and distribution, insurance, telecommunication,
and information and communication technology services. Diversification is defined as
the entry of a firm into new lines of activity, through internal or external modes. The
primary reason a firm pursues increased diversification are value creation through
economies of scale and scope, or market dominance. In some cases firms choose
diversification because of government policy, performance problems and uncertainty
about future cash flow. In one sense, diversification is a risk management tool, in that
its successful use reduces a firms vulnerability to the consequences of competing in a
single market or industry. Risk plays a very vital role in selecting a strategy and
hence, continuous evaluation of risk is linked with a firms ability to achieve strategic
advantage (Simons, 1999). Internal development can take the form of investments in
new products, services, customer segments, or geographic markets including
international expansion. Diversification is accomplished through external modes
through acquisitions and joint ventures. Concentration can be achieved through
vertical or horizontal growth. Vertical growth occurs when a firm takes over a
function previously provided by a supplier or a distributor. Horizontal growth occurs
when the firm expands products into new geographic areas or increases the range of
products and services in current markets.

RETRENCHMENT STRATEGY

Many firms experience deteriorating financial performance resulting from market

erosion and wrong decisions by management. Managers respond by selecting
corporate strategies that redirect their attempt to turnaround the company by
improving their firms competitive position or divest or wind up the business if a
turnaround is not possible. Turnaround strategy is a form of retrenchment strategy,
which focuses on operational improvement when the state of decline is not severe.
Other possible corporate level strategic responses to decline include growth and
stability.

COMBINATION STRATEGY
The three generic strategies can be used in combination; they can be sequenced, for
instance growth followed by stability, or pursued simultaneously in different parts of
the business unit. Combination Strategy is designed to mix growth, retrenchment, and
stability strategies and apply them across a corporations business units. A firm
adopting the combination strategy may apply the combination either simultaneously
(across the different businesses) or sequentially. For instance, Tata Iron & Steel
Company (TISCO) had first consolidated its position in the core steel business, then
divested some of its non-core businesses. Reliance Industries, while consolidating its
position in the existing businesses such as textile and petrochemicals, aggressively
entered new areas such as Information Technology.

RETRENCHMENT STRATEGIES
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 o
verall performance.

E.g.:
A corporate

hospital

decides

to

focus

only

on

special

treatment

realize higher revenues by reducing itscommitment to general case which is less

profitable.

and

The growth of industries and markets are threatened by various external and internal
developments (External developments government policies, demand saturation,emerg
ence 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, jut
e a n d j u t e 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.

RETRENCHMENT STRATEGIES
Retrenchment is a short-run renewal strategy designed to overcome organizational
weaknesses that are contributing to deteriorating performance. It is meant to replenish
and revitalize the organizational resources and capabilities so that the organization can
regain its competitiveness. Retrenchment may be thought as a minor surgery to
correct a problem. Managers often try a minimal treatment first-cost cutting or a small
layoff-hoping that nothing more painful will be needed to turn the firm around. When
performance measures reveal a more serious situation, more drastic action must be
taken to restore performance.
Retrenchment strategies call for two primary actions:

1. Cost cutting and

2. Restructuring.

One or both of these tools will be employed more extensively in turnaround

situations, because the problems are deeper there than in retrenchment situations. A
cost cutting program should be preceded by careful thought and analysis. Rarely is it
wise to use a simplistic across-the-board cost cutting program. Some departments or
projects may need additional funding, while others need modest cuts, and still others
need drastic cuts or need to be eliminated altogether. If cost cutting is a part of the
strategy implementation, then the plan of implementation should clearly specify how
it will be applied across the organization and why is it being proposed.
Retrenchment strategy alternatives include shrinking selectively, extracting cash for
investment in other businesses, and divestment. While these strategies result in
generating cash, they differ in terms of their intentions. Divestment of the whole
business is an end game strategy and it may be done via selling or liquidation of
business. Under the strategy of extraction of cash for investment in other business,
cash is generated from the troubled business mainly via budget and cost contraction.
In both strategies, the intention of management is to quit the troubled business.
In the shrinking selectively strategy (SSS), cash is generated via downsizing
(contraction of size or divesting some operations. The strategy of shrinking selectively
involves retrieving the value of investments in some parts of the market while
reinvesting in others because in some niches demand will continue to be grow while
in others the demand shrivels. The objective is to capture the desirable niches. A firm,
which chooses the shrink selectively strategy, should have some internal competitive

advantages, which it hopes to preserve. Thus, it may prefer to retain some part of its
former businesses by shrinking rather than divesting, because of the possible
advantages it had built up through the years.
Shrinking selectively as a repositioning strategy (i.e., matching market niche with
distinctive competence) often results in renewed strength. For example, the TATA
group continued concentrating on its various business including steel, automobile
manufacturing, etc while selling Tomco, which did not share a synergistic relationship
with its current portfolio of businesses. Similarly, the LTV steel companys decision
(after filing in 1986) to concentrate on flat rolled steel products, while divesting
other steel operations, reflects the intent to maintain a leadership position in
production of high-quality, value-added steel for critical engineering application.

Viacom sold its 82 percent stake in Blockbuster. Background:

Viacom serves an ever-growing population of kids, twins, teens and adults who want
their favorite media and entertainment. As a leading global entertainment content
company, its prominent and respected brands includes the multiplatform properties
of MTV Networks, BET Networks, Paramount Pictures and Paramount Home
Entertainment. The Blockbuster Corporate Communications Department assists the
media in providing company specific and home entertainment industry related
information. With more than 2,600 stores outside the United States, Blockbuster is
recognized as a world leader in rentable home entertainment (video and DVD).
Fact:

Viacom's getting out of the video rental business. At the end of 2004, Viacom Inc., the
media and entertainment conglomerate, which owns an 82 percent stake in
Blockbuster, the video and DVD rental chain, received $738 million in cash from
Blockbuster Inc.
Strategy picked upon this case:
Retrenchment
regroup through cost and asset reduction to reverse declining sales and profits by
selling off assets, pruning product line, closing marginal business, obsolete factory,
reduce employee, instituting expense control system.
Reasons:
Viacom's getting out of the video rental business through perspicuously divorced
itself from Blockbuster by spinning it off to its shareholders. The strategy picked by
Viacom that selling off its marginal business, Blockbuster called retrenchment.
Variants of Retrenchment Strategy:

The three major variants of retrenchment strategy are 1. Turnaround strategy,

2. Survival strategy and
3. Liquidation strategy.

TURNAROUND STRATEGIES
Turnaround 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
Mismanagement 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
e x e c u t i v e 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
Industriala n d F i n a n c i a l R e c o n s t r u c t i o n ( B I F R ) which acts as the corp
orate doctor whenever companies fall sick.

TURNAROUND STRATEGY

Turnaround is a strategy adopted by firms to arrest the decline and revive their
growth. A turnaround situation exists when a firm encounters multiple years of
declining Financial performance subsequent to a period of prosperity (Bibeault, 1982;
Hambrick & Schecter, 1983; Schendel et al., 1976; Zammuto & Cameron, 1985).
Turnaround situations are caused by combinations of external and internal factors
(Finkin, 1985; Heany, 1985; Schendel et al., 1976) and may be the result of years of
gradual slowdown or months of precipitous financial decline. The strategic causes of
performance downturns include increased competition, raw material shortages, and

decreased profit margins, while operating problems include strikes and labour
problems, excess plant capacity and depressed price levels. The immediacy of the
resulting threat to company survival posed by the turnaround situation is known as
situation severity (Altman, 1983; Bibeault, 1982; Hofer, 1980). Low levels of severity
are indicated by declines in sales or income margins, while extremely high severity
would be signaled by imminent bankruptcy. The recognition of a relationship between
cause and response is imperative for a turnaround process and hence, the importance
of properly assessing the cause of the turnaround situation so that it could be the focus
of the recovery response is very important.

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 hemorrhage 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
(Bibeault,1982; Finkin, 1985; Goodman, 1982; Hall, 1980). 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 (Bibeault, 1982;

Goodman, 1982) 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
(Hofer, 1980; Schendel et al., 1976). For firms that declined primarily as a result of
external problems, turnaround has most often been achieved through strategies based
on an 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.

Turnaround Situations: Severity and Speed of Strategic Response

The nature, extent and speed of the appropriate strategic response depends primarily
on two dimensions of the turnaround situation: severity and causality. Severity of the
turnaround situation is a measure of the firms financial health; it gauges the
magnitude of the threat to company survival. Since the immediate concern to the firm

is the extent to which the decline is a threat to its short-term survival, severity is the
governing factor in estimating the speed with which the retrenchment response will be
formulated and activated. Of course, performance that declines relative to that of
competitors, but not absolutely, may necessitate almost no retrenchment. Rather, a
reconsideration of strategy with a probable reconfiguration of assets would usually be
deemed appropriate.

When severity is low, a firm has some financial cushion. Stability may be achieved
through cost retrenchment alone. When the turnaround situation severity is high, a
firm must immediately stabilize the decline or bankruptcy is imminent. Cost
reductions must be supplemented with more drastic asset reduction measures. Assets
targeted for divestiture are those determined to be underproductive. In contrast, more
productive resources are protected from cuts or reconfigured as critical elements of
the future core business plan of the company, i.e., the intended recovery response.

In addition, Robbins and Pearce found that the severity of the turnaround situation
was the best indicator of the type and extent of retrenchment that was needed,
although an immediate cost cutting response to financial decline (absolute and relative
to the industry) was consistently found to be of value. The researchers also presented
a model of turnaround based on evidence that business firm turnaround
characteristically involved a multi-stage process in which retrenchment could serve as
either a grand or operating strategy. Hofer (1980) conceptualized a link between
severity of the downturn and the degree of cost and asset reductions that a firm should
include in its recovery response. He referred to cost and asset reduction activities as
operating turnaround strategies. Operating strategies designed for cost reduction were
recommended for firms in less severe turnaround situations. Drastic cost reductions
coupled with asset reductions were recommended for firms in more severe turnaround

situations i.e., more severe problems require more drastic solutions. Usually, asset
reduction is more drastic than cost reduction.

As the importance of external environmental factors assume importance relative to the

internal factors, effective and innovative activities are more appropriate in the
recovery phase of the turnaround process. If the reverse is true, efficiency
maintenance activities are more appropriate. In either case, the recovery phase of the
turnaround process is likely to be more successful in accomplishing turnaround when
it is preceded by proactively structured retrenchment which results in the achievement
of near-term financial stabilization. Innovative turnaround strategies involve doing
things differently whereas efficiency turnaround strategies entail doing the same
things on a smaller or more efficient scale. Revenue generating through product
reintroduction, increased advertising and selling efforts, and lower prices represent
modifications in existing strategy and can, therefore, be classified as innovative
turnaround strategies In other words, innovative turnaround strategies involve product
or market based activities while efficiency strategies focus on the production and
management systems within the firm.

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 reestablish
the long term viability of the firm.
Refer to turnaround case study of Kirloskar Pneumatic Company limited below:

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, Air-conditioning 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.

SURVIVAL STRATEGY
When the company is on the verge of extinction, it can follow several routes for
renewing the fortunes of the company. These are discussed in the following sections.
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 r
estructuring 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
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.

Divestment

An organization divests when it sells a business unit to another firm that will continue
to operate it. Threatened with bankruptcy between 1979 and 1982, Chrysler sold its
U.S. Army tank division to General Dynamics, its Air Temp air conditioning unit to
Fedders, and its European distribution units to Peugeot/Citroen. The purpose was to
focus only on the U.S. auto market- its main market. In our country, the TATA group
has, in some form or the other, been realigning its portfolio since the early 1990s. But
in the past few years it had done this in a more structured manner. The divestment of
Tomco and Tata Steels cement plant was a conscious decision. It was Tata Steels
decision to concentrate on steel and get out of the cement business. As for Tomco, the
company had reached a point where it required immediate attention, not only in
financial terms but in terms of management as well. The group felt that it did not have
the requisite managerial skills in the specific area where Tomco operated and hence
decided to hive it off.

KB Toys filed for bankruptcy and announced plans to close half of its 1,217
stores in the USA. Toys R Us is the #1 specialty toy retailer. KB is
#2.Background:
KB Toys (previously known as Kay Bee Toys) was a chain of mall-based retail toy
stores in the United States. It was founded in 1922 by the Kaufman brothers. KB
operated 605stores in 44 U.S. states, Puerto Rico as well as Guam. KB Toys operated
three distinct store formats: KB Toys, KB Toy Works, and KB Toys Outlet (aka Toy
Liquidators). It was privately held in Pittsfield, Massachusetts. KB Toys was owned
by Big Lots and Melville Corporation at one time.
Fact:
KB Toys filed for bankruptcy in five years, the chain was liquidated beginning in
December 2008. The sales were concluded by the end of January 2009. The Gordon

Brothers Group handled the liquidation of these stores. On February 9th 2009, KB
closed the remaining stores following the second bankruptcy filing in four years.
Strategy picked upon this case:
Divestiture
selling division or part of the organization to raise capital for further strategic
acquisition or investment
Reasons:
In this case, the description has just stated that KB Toys planned to close half of its
stores in the USA (while the fact, KB Toys had already done liquidation). While at
that time, KB Toys wished might gain capital to survive through divestiture

Spin-Off
In a spin-off, a firm sets up a business unit as a separate business through a
distribution of stock or a cash deal. This is one way to allow a new management team
to try to do better with a business unit that is a poor or mediocre performer. For
instance, Indian Rayon and Industries Ltd (IRIL), an Aditya Birla group enterprise,
has decided to spin-off its insulators business under Jaya Shree Insulator Division, in
favor of a new company - Vikram Insulators Private Ltd (VIPL). The net assets of Rs
92.98 crore of the insulators division were transferred in favor of VIPL and a 50:50
joint venture with the Japanese insulators giant - NGK Insulators Ltd - was forged.
The joint venture with NGK Insulators Ltd was proposed in order to upgrade the
quality of the existing insulators and to develop new and more technically advanced
insulators.

In consideration of transfer of the insulators business, VIPL would allot to IRIL 1.25
crore equity shares of Rs 10 each at par and debentures of (rupee equivalent) $ 25
million. On completion of the demerger, NGK would subscribe to 1.25 crore equity
shares of Rs 10 each of VIPL for cash at a premium. This would result in equal
shareholding for both IRIL and NGK and equal board representation in VIPL.
With increased and complex demands of the power transmission system, the quality
and technical requirements of insulators have become more stringent and rigid. The
existing manufacturers of insulators in the country, including IRIL, did not have the
technical capability of manufacturing insulators of such high quality and specification
and hence the need for this new arrangement.

Restructuring the Business Operations

The company tries to survive by restructuring its management team, financial
reengineering or overall business reengineering. Business reengineering involves
throwing aside all old business processes and starting from scratch to design more
efficient processes. This may cut costs and assist a turnaround situation. This is much
easier to visualize in a manufacturing process, where each step of assembly is
examined for improvement or elimination. It would be foolish to find more efficient
ways to perform processes that should be abandoned and hence, reengineering is
strongly suggested in such cases.
Downsizing is a euphemism for a layoff. As the case of Kirloskar Pneumatic
Company suggests, it is a good way to cut costs quickly. But unless downsizing is tied
to a rational strategy, problems can crop up. Cutting staff without changing the
amount and type of work done simply means that the remaining employees must do

more work. This will result in cost reduction, but product quality and customer service
may suffer.
On the other hand, if the firm does not down size, its performance deteriorates. Hence
any downsizing plan recommended should fit logically with the strategy proposed.

Case Study- Gillette India-Restructuring for Growth

Gillette India has achieved its growth target in the most profitable manner through
strategic restructuring and functional excellence.
The strategic restructuring focused on its business portfolio to identify the businesses
it would like to continue and the ones it wishes to exit. Consequent to strategic
restructuring, Gillette exited the Geep Battery business and the Braun business.
Likewise, it discontinued all the non-profitable and non-strategic business lines in its
existing portfolio.
The company also developed strategic governing statements for each of the business,
which made each business extremely focused. Advertising spend was focused on the
right strategic product. Advertising or sales promotion, which gave short-term
benefits, was discontinued.

The company also focused on improving short-term gross profit margins of its core
businesses. Comprehensive profit improvement plans were put in place through
promotions, SKU rationalizations, cost reduction and improved asset management.
Functional excellence initiatives ensured that each and every process within the
organization is benchmarked against peer group companies and process improved
through a well-defined action plan.

Post Restructuring Scenario

After the divestiture of Geep battery business, grooming business (blades and razors)
has emerged as the single largest business accounting for 70% of turnover. Focus
has been on the premium double edge, which was declining earlier, but with focused
support and advertising this product made a strong rebound. Mach III the flagship
brand of the company continues to perform extremely well with its niche premium
positioning. Overall, the blades and razors business has registered a 22% growth. In
addition, a new product called Vector Plus has been introduced in India. The product,
which is an outcome of three years of development at its Boston Research and
Development Facility, is based on the Indian consumer habits.
In personal care business, the main focus was on the tube shaped gel and the Gillette
Series products in aerosol, gel, foam, after-shave and splash. This segment has
registered a growth of 400%. Activities aimed at preventing the growth gray market
have also aided growth in this segment. The oral care strategy for India has been
revised to target the mass segment.
Two products have been launched - Oral-B Classic and Oral-B Plus, both positioned
in the popular price segment. This business has grown by 34% during 1999.

The alkaline battery segment (Duracell), accounts for a small part of turnover, but
company enjoys a very high market share in the category. The strategy here would be
wait and watch till the alkaline category starts growing. This business has grown at
about 11% year on year.

Financial Results
All these restructuring initiatives resulted in:
1. The company reporting the highest ever profit of Rs.170 million by Gillette in
India. Net profit during the nine month ended September 2003 stood at
Rs.437 million.
2. Operating margins jumped from a low 10% in second quarter of 2002 to 26% in
second quarter of 2003. Besides the divestment of the low margin battery business,
the strengthening of the Indian rupee also aided profitability, as 40% of Gillette
products sold in Indian market are imported products.
3. Core grooming business registered a healthy topline growth of 11% and gross
margins also improved.
4. Inventory came down by 14% and receivables have also been bought down.

5. Ad-spend in first nine months of the year of 2003 was Rs.211 million (7.7% of net
sales). The company planned to increase ad-spend in the fourth quarter of
2003 and 2004. Surplus cash freed through sale of assets and working capital
improvement was proposed to be reinvested in brand building.

LIQUIDATION STRATEGY
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 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

Combination (Mixed Strategies)

The combination grand strategy is followed when an organization adopts a
mixture of stability, expansion and retrenchment either at the same time in its
different business or at different times in the same business with
the aim of improving its performance. Complicated situations generally
require complex solutions. Combination strategies are the complex solutions that
strategists have to offer when faced with the difficulties of real life businesses.

E.g.:
A p a i n t c o m p a n y a u g m e n t s i t s o f fe r i n g o f d e c o r a t i v e p a i n t s t o
p r o v i d e a w i d e r variety to its customers (stability) and expands its product range
to include industrial and automotive paints (expansion). Simultaneously, it
decides to close down the division which undertakes large scale painting contract
jobs (retrenchment).It would be difficult to find an organization that has
survived and grown by adopting a single pure strategy. The complexity of doing
business demands that different strategies be adopted to suit the situational
demands made upon the organization. An organization which has followed a
stability strategy for quite some time has to think of expansion. Any organization
which has been on an expansion path for long has to pause to consolidate
its businesses.

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. In such a situation, liquidation is the best option. 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.
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.

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 takeover 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.

KEY FINDINGS
To date, there has been no comprehensive study of great power retrenchment and no
study that defends retrenchment as a probable or practical policy. Using historical data
on gross domestic product, we identify eighteen cases of "acute relative decline" since
1870. Acute relative decline happens when a great power loses an ordinal ranking in
global share of economic production, and this shift endures for five or more years. A
comparison of these periods yields the following findings:

Retrenchment is the most common response to decline. Great powers suffering

from acute decline, such as the United Kingdom, used retrenchment to shore up their
fading power in eleven to fifteen of the eighteen cases that we studied (6183
percent).

The rate of decline is the most important factor for explaining and predicting the

magnitude of retrenchment. The faster a state falls, the more drastic the retrenchment
policy it is likely to employ.

The rate of decline is also the most important factor for explaining and predicting

the forms that retrenchment takes. The faster a state falls, the more likely it is to
renounce risky commitments, increase reliance on other states, cut military spending,
and avoid starting or escalating international disputes.
In more detail, secondary findings include the following:

Democracy does not appear to inhibit retrenchment. Declining states are

approximately equally likely to retrench regardless of regime type.

Wars are infrequent during ordinal transitions. War broke out close to the transition

point in between one and four of the eighteen cases (622 percent).

Retrenching states rebound with some regularity. Six of the fifteen retrenching

states (40 percent) managed to recapture their former rank. No state that failed to
retrench can boast similar results.

CONCLUSION
Retrenchment is probable and pragmatic. Great powers may not be prudent, but they
tend to become so when their power ebbs. Regardless of regime type, declining states
routinely renounce risky commitments, redistribute alliance burdens, pare back
military outlays, and avoid ensnarement in and escalation of costly conflicts.
Husbanding resources is simply sensible. In the competitive game of power politics,
states must unsentimentally realign means with ends or be punished for their
profligacy. Attempts to maintain policies advanced when U.S. relative power was

greater are outdated, unfounded, and imprudent. Retrenchment policiesgreater

burden sharing with allies, less military spending, and less involvement in militarized
disputeshold the most promise for arresting and reversing decline.