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Business Strategy - Retrenchment


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A revision presentation for business & management students on the topic of retrenchment

Published in: Business, News & Politics

Business Strategy - Retrenchment

  1. 1. Retrenchment
  2. 2. What is retrenchment?“To cut down or reduce something” “Tighten ones belt” “Use resources more carefully “
  3. 3. What drives retrenchment?• Uncompetitive cost structure• Inadequate returns on All of investment which• Poor competitive position indicate• Financial distress (e.g. high the need debt)• Market decline for• Failed takeovers strategic• Economic downturn change• Change of ownership
  4. 4. Methods of retrenchment• Significant reductions in output & capacity• Significant job losses• Product or market withdrawals• Disposals of business units• Outsourcing key business functions• De-mergers
  5. 5. Implications for change• Much depends on the scale and scope of the retrenchment• Small-scale, incremental retrenchment has only limited impact• Significant retrenchment is often associated with a fundamental reappraisal of the business
  6. 6. Downsides of “downsizing”• Little evidence that downsizing actually improves profitability• Motivation and morale for those left behind usually worsens• Potentially damaging knock-on effects on productivity, innovation and staff retention
  7. 7. Change implications of major business rationalisationCommon Actions Possible Implications for ChangeChanged organisation Changed management responsibilitiesstructures Greater workloads / higher stress (possibly) New teams and colleagues Different reporting structuresNew leadership and/or Different leadership styleownership Uncertainty (particularly amongst management) New priorities, aims and objectives A threat to the prevailing corporate culture Previous projects often abandoned (e.g. investment) A new / renewed sense of urgencyFewer people Loss of morale and increased de-motivation Bad news for some external stakeholders (e.g. local community, local suppliers)
  8. 8. Examples ofRetrenchment
  9. 9. Nokia changes direction Nokia’s new CEO Stephen Elop issued his famous “burning platform” email in Feb 2010 highlighting the need for significant strategic change at Nokia Since then, there have been over 30,000 job losses at Nokia as the firm has refocused its strategy on partnership with Microsoft
  10. 10. Yell moves to digital Yell, the business directories business, has struggled as demand for paper-based products has declined and it is left with a huge $3bn debt to finance. The new strategy includes a rationalisation of the business, further cost-cutting and heftier investment in digital platforms.
  11. 11. Starbucks Exits Australia Starbucks rationalises its store portfolio in Australia – 2008 Poor competitive position there – hard to compete with existing coffee shop operators Strategic decision to focus investment on the US market
  12. 12. ITV exists social networking ITV plc disposes of website Friends Reunited (2009) for £25, some £150m less than it paid for the business Friends Reunited had a poor competitive position (v Facebook) Considered non-core by new ITV management
  13. 13. Burberry rationalises UK capacity Burberry plc announces plans to cut operating costs by £50m p.a. Sewing factory in Rotherham closed – production transferred to another group factory Example of capacity rationalisation
  14. 14. Fujitsu downsizes in response to recession Economic downturn hits the IT services market Fujitsu makes 10% of its workforce redundant due to substantial declines in demand
  15. 15. Thomas Cook retrenches to survive A collapse in demand and three profits warnings take Thomas Cook to the brink of collapse Significant rationalisation announced to gain support of banks
  16. 16. Tesco exits from Japan Tesco decides to sell its portfolio of 129 stores in Japan after failing to build a successful presence in a highly competitive market ““Having made considerable efforts in Japan, we have concluded that we cannot build a sufficiently scalable business“ – Phil Clarke: Tesco CEO
  17. 17. Thorntons’ strategic review New CEO conducts a detailed review of Thornton’s strategic direction after several profits warnings. Decisions include; •At least 120 stores to be closed over three years (as existing leases expire) + potentially 60 other stores •Grow the Thorntons franchise portfolio •Aim to cut operating costs of around £2m per year from the supply chain
  18. 18. Corus sells mothballed steel plant Corus mothballed its Teeside steel plant in 2010 after the loss of a major contract. The plant was sold to a competitor steel producer some months later as Corus made permanent the reduction in its UK steel- making capacity
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