What is retrenchment?

• ‘To cut down or reduce something’

• ‘Use resources more carefully’

• Retrenchment is the process of deliberately downsizing a business to enable it to improve operational control.

• Firms often use this strategy to minimise the impact of diseconomies of scale after a period of previously rapid growth.

• Sometimes a downturn in the external economic environment can leave a business with excess stock and resources lying idle. This is inefficient and costs a business money.

Examples of retrenchment within a business:

• Reduce output and capacity

• Job losses

• Product/market withdrawal

• Disposal of business unit

• Scaling back investment

What drives retrenchment?

• Costs too high

• Low ROCE

• High gearing

• Loss of market share

• Failed takeover

• Economic downturn

• Change of ownership

*All of which indicate the need for strategic change

Modern examples of retrenchment:

• Nokia:

  • ‘I have learned that we are standing on a burning platform. And, we have more than one explosion - we have multiple points of scorching heat that are fuelling a blazing fire around us.’ Stephen Elop (2010)

• Tesco:

  • Tesco exits its US chain of 199 Fresh and Easy shops, which never made a profit, at a cost of £1.2bn. 2013

• Microsoft:

  • “The overall result of these changes will be more productive, impactful teams across Microsoft… We will simplify the way we work to drive greater accountability, become more agile and move faster’ Satya Nadella (2014)

Implication for change management:

• Much depends on the scale and scope of retrenchment

• Small-scale, incremental retrenchment has only limited impact

• Significant retrenchment is often associated with a fundamental reapraisal of the business

Retrenchment and change:

• Change organisation structures:

  • Changed management responsibilities

  • Greater workloads / higher stress (possibly)

  • New teams and colleagues

  • Different reporting structures

• New leadership and/or ownership

  • Different leadership style

  • 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 urgency

• Fewer people:

  • Loss of morale and increased de-motivation

  • Bad news for some external stakeholders (e.g. local community, local suppliers)

Problems with retrenchment:

• The nature of retrenchment (downsizing) inevitably means that there will be job losses.

• Job losses can attract trade union action, negative media attention and stakeholder protests within the local community.

• Job insecurity concerns for remaining employees.

• Employees might be uncertain about the future direction of the company and as a result might look for other work leading to a rise in labour turnover.