Retrenchment Strategies

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Unit-5 Retrenchment strategies

Unit-5Retrenchment strategies

What do you understand by retrenchment strategies?Astrategyused bycorporationsto reduce thediversityor the overall size of theoperationsof thecompany. This strategy is often used inorderto cutexpenseswith thegoalof becoming a morefinancial stablebusiness. Typically the strategy involves withdrawing from certainmarketsor the discontinuation ofsellingcertainproductsorservicein order to make a beneficialturnaround.

In other words, the strategy followed, when a firm decides to eliminate its activities through a considerable reduction in its business operations, in the perspective of customer groups, customer functions and technology alternatives, either individually or collectively is called as Retrenchment Strategy.

Types of Retrenchment Strategies


Turnaround strategy means backing out, withdrawing or retreating from a decision wrongly taken earlier in order to reverse the process of decline.There are certain conditions or indicators which point out that a turnaround is needed if the organization has to survive. These danger signs are as follows:a) Persistent negative cash flowb) Continuous lossesc) Declining market shared) Deterioration in physical facilitiese) Over-manpower, high turnover of employees, and low moralef) Uncompetitive products or servicesg) Mismanagement

2. Divestment Strategies

Divestment strategy involves the sale or liquidation of a portion of business, or a major division, profit centre or SBU. Divestment is usually a restructuring plan and is adopted when a turnaround has been attempted but has proved to be unsuccessful or it was ignored. A divestment strategy may be adopted due to the following reasons:

a) A business cannot be integrated within the company.b) Persistent negative cash flows from a particular business create financial problems for the whole company.c) Firm is unable to face competitiond) Technological up gradation is required if the business is to survive which company cannot afford.e) A better alternative may be available for investment

Liquidation strategy means closing down the entire firm and selling its assets. It is considered the most extreme and the last resort because it leads to serious consequences such as loss of employment for employees, termination of opportunities where a firm could pursue any future activities, and the stigma of failure.

Liquidation strategy may be difficult as buyers for the business may be difficult to find. Moreover, the firm cannot expect adequate compensation as most assets, being unusable, are considered as scrap.

Reasons for Liquidation include:

(i) Business becoming unprofitable(ii) Obsolescence of product/process(iii) High competition(iv) Industry overcapacity(v) Failure of strategy



What Is Organizational Downsizing?

When the management of an organization determines that their organization is not operating at peak efficiency, they typically look for ways to make the organization more productive. This is frequently accomplished viaorganizational downsizing, which is a reduction in organizational size and operating costs implemented by management in order to improve organizational efficiency, productivity and/or the competitiveness of the organization.

Organizational downsizing affects the work processes of an organization since the end result of the downsizing is typically fewer people performing the same workload that existed before the downsizing took place. The act of downsizing results in two categories of people:

Victims, the people who involuntarily lose their jobs due to organizational downsizing,Survivors, the employees who remain after organizational downsizing takes place.

What causes downsizing?

There are many reasons why a company may need to reduce the number of people it employs. The introduction of new technology may result in a reduced workload for employees. External financial pressures or increased competition in the marketplace may force a company to reduce its labor costs. Mergers and acquisitions may leave a company with more employees than it requires.

VOULANTARY RETIREMENT SCHEMESWhat Is the Meaning of "Voluntary Retirement Scheme"?A voluntary retirement scheme (VRS) package is offered to employees as an incentive to retire earlier than their normal retirement age. The VRS package usually contains generous retirement benefits for certain employees.PurposeThe purpose of a VRS is to downsize the number of employees on payroll to adapt to a changing business environment. VRS plans cut costs and reduce layoffs .

Targeted Employees

Employees of middle age or those closer to actual retirement age and who have been employed with a company for at least 10 years are usually the first to be offered a VRS package.


VRS may not be right for every individual because the retiree will have to live on a fixed income. Circumstances to consider are household dependent needs (e.g. college education expenses) and mortgage payments and other household expenses. If the VRS package isn't accepted, on the other hand, the employee might be laid off and receive few or no benefits.

What is Human Resource Outsourcing (HRO)?

Human resource outsourcing (HRO) occurs when a business instructs an external supplier to take responsibility (and risk) for HR functions and perform these tasks for the business. Payroll outsourcing is commonly outsourced for two reasons: its a time-consuming administrative task for employers, and there are many specialist companies with the technology and knowledge to run it efficiently and compliantly.

HR Outsourcingis a process in which the human resource activities of an organization are outsourced so as to focus on the organization`s core competencies. Often HR functions are complex and time consuming that it will create difficulty in managing other important thrust areas. By HR outsourcing, this problem can be avoided which will enhance effectiveness by focusing on what the organization is best at. It will also improve the flexibility of the organization to the rapidly changing business needs.

Some businesses will outsource their entire HR department while others will just outsource time-consuming administrative tasks, which allow their internal resource to focus on the strategic level.

Why Companies outsource HR?

What HR Functions can be Outsourced?

If a company choses to partially outsource HR, the company shares responsibilities with the vendor, sharing information and control over the functions. If the company decides to completely outsource, the vendor takes on all HR responsibilities. The owner or HR manager in the original company takes on a new role, liaison with the vendor, focusing only on HR in order to manage the vendor-company relationship. Whether partially or completely outsourcing, companies frequently outsource the following HR functions:

Background ScreeningPayroll ServicesRisk ManagementTemporary StaffingEmployee Assistance/CounselingHealth Care BenefitsRetirement PlanningPerformance Management

To Whom Can You Outsource HR?

The three types of HR outsourcing companies are Human Resources Organizations, Professional Employer Organizations, and Administrative Services Organizations.

1. Human Resources Organization (HRO)The majority of Human Resources Organizations (HROs) allow large businesses (1000+ employees) to choose which HR services they would like outsourced. When only some functions are dealt with by the HRO, a co-management relationship or shared HR relationship is made between the HRO and the business (this is typically the conservative approach to those first outsourcing HR).

When all functions of HR are outsourced, the HRO takes full responsibility. In large organizations, the strategic HR role remains an internal position; however, most administrative and tactical roles are outsourced. This can also be achieved in smaller organizations (typically under 200 employees) using a Professional Employer Organization.

To Whom Can You Outsource HR?2. Professional Employer Organization (PEO)A Professional Employer Organization, or PEO, handles all HR tasks and is usually more beneficial for small and mid-sized businesses (under 200 employees).

As the employer-of-record, the PEO will be responsible for taxes andworkers compensation.

Financial liability for the small business decreases due to the shared burden. Additionally, the PEO can obtain reduced rates on retirement packages and health benefits by combining employees from all of their customers.

To Whom Can You Outsource HR?3. Administrative Services Organization (ASO)The third HR outsourcing scenario is hiring an ASO, or Administrative Services Organization. As the name aptly implies, an ASO provides administrative services for your company.

These include processing payroll, performing direct deposits, and filing payroll taxes. Like outsourced payroll, the filing is under your federal employer ID number (FEIN).

The various functions that ASOs provide include:Safety ManagementCompliancePayroll ServicesPension AdministrationWorkers Compensation