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Meaning of retrenchment strategy

Retrenchment refers to elimination or dropping all or any of the following:

  1. Product
  2. Product line
  3. Market
  4. Service

Retrenchment strategy is followed when an organization substantially reduces to the action that company cannot do the activity.

Characteristics of retrenchment strategy

There are three Characteristics of retrenchment strategy

  1. Like expansion strategy, divestment strategy too, involves a redefinition of the business of the corporation.
  2. This strategy involves retrenchment/divestment of some of the activities in a given business of the firm or sell-out of some of the businesses as such.
  3. Divestment is to be viewed as an integral part of corporate strategy without any stigma attached.


  1. Redefine the business of the company.
  2. Emphasis  to Divest  some of the product of the firm or sell out  some of business or liquidate.
  3. Divestment is integral part of corporate strategy as no stigma is attached. Resource can be used some where better.

Reasons for retrenchment strategy


  1. Risk
  2. Environment
  3. Setting continuous negative cash flow
  4. Threat
    1. Risk: A risky business that had been acquired proves to be a mismatch and cannot be integrated within the company. Risk and severity of competition and the inability of a firm to cope with it may cause it to divest.
    2. Environment: Environment forces the management to change according to situation.
    3. Setting Negative Cash Flow consistently: Persistent negative cash flows from a particular business create financial problems for the whole company, creating the need for divestment of that business. Setting better alternatives for investment causes a firm to divest a part of its non-profitable businesses.
    4. Threat: Because of threat the management no longer wishes to remain in business either partly or wholly due to continuous losses and unavailability. 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.

Kinds of Retrenchment Strategy

There are different kinds of retrenchment strategies-

  1. If the organization chooses to focus on ways and means to reverse the process of decline, it adopts a turnaround strategy.
  2. If it cuts off the loss-making units, divisions, or SBUs, curtails its product-line, or reduces the functions performed, then it adopts a divestment (or divestiture) strategy.
  3. If none of these actions work, then it may choose to abandon the activities totally, resulting in a liquidation strategy.

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