Defensive Strategies

Growth and Stability Strategies are adopted when firms are performing well. So, when
performance of the firm is disappointing or declines are anticipated it may be appropriate for
firms to use these defensive strategies, namely retrenchment, divestment and liquidation.
Retrenchment Strategies
Retrenchment occurs when an organization regroups through cost and asset reduction to reverse
declining profits. Sometimes called a turnaround or re-organizational strategy, it is designed to
fortify an organizations basic distinctive competence.
Retrenchment strategies call for two primary actions. It may be employed singly or in
combination:
1. Cost reduction. Examples include decreasing workforce through employee attribution,
leasing rather than purchasing equipment, extending the life of machinery, eliminating
elaborate promotional activities, laying off employees, dropping items from a production
line, and discontinuing low-margin customers.
2. Asset Reduction. Examples include the sale of land, buildings, and equipment not
essential to the basic activity of the firm and the elimination of perks, such as the
company airplane and executives cars.
A retrenchment strategies is pursued when a firm has a weak competitive position in some or all
of its product lines resulting in poor performance. These strategies impose a great deal of
pressure to improve performance. Strategists then face many pressures especially from
shareholders, employees and the media.
Bankruptcy can also be an effective type of retrenchment. It can allow firm to avoid major debt
obligations and to void union contracts. A type of bankruptcy that a firm can file that is
considered as a retrenchment strategy is the Bankruptcy Chapter 11. Chapter 11 allows
organization to reorganize and comeback after filing a petition for protection.

Advantages Disadvantages
- Reverses declining profit & sales - When employees are given an
opportunity to leave the company, those
departing are often the top performer

Larsen & Toubro

Indias biggest engineering firm, has shed 14,000 employees, or 11.2% of its total workforce, in
one of the biggest corporate retrenchment exercises in recent times.
Reason behind?

Jobs becoming redundant on the back of increased digitization of operations

Losing projects
Why used retrenchment?
Businesses which are not in shape, we are trying to right size (them). If we do believe that it is
going to take some time for businesses to get back to normalcy, it is important we reduce the
under recoveries. So we are redefining the roles and responsibilities which were found to be
redundant.
- R Shankar Raman, Group CFO, L&T Group

Group CFO attributed this massive manpower reduction to a strategic decision to reshape
businesses that were under-performing. Adding that the job cuts were not concentrated in a
specific business, Raman said that they were spread across sectors. However, the financial
services sector had seen the maximum layoffs.

- Focused on profitable division - Growth decline

- Lack of diversity

Divestment
Divestment may be necessary when the industry is in decline or when a business unit drains
resources from more profitable units, is not performing well or no longer seem central to the
organization.
Selling a division or part of an organization is called a divestiture. Divestiture often is used to
raise capital for further strategic acquisitions or investments. Divestiture can be a part of an
overall retrenchment strategy to rid an organization of businesses that are unprofitable, that
require too much capital, or that do not fit well with the firms other activities.
The reasons for divestiture vary and the most common is the partial mismatches between the
acquired firm and the parent corporation. Divestiture promotes the business to focus on their core
strengths/business.
It is difficult for some firms to face the fact that they are in need of divestment. It is because they
think that they are admitting a failure when they decided to take divestment. Thats the reason
that when there is a change in the leader/the Ceo when divestment can be easily implemented.
SARA LEE
Sara Lee Corporation was an American consumer-goods company. It started out as a small
company in wholesale distribution that gradually grew to a series of related and unrelated
businesses. For the next 40 years, the company expanded to processing retail food and household
products. Their broad differentiation strategy and geographically spread operations has
management struggling to operate efficiently.
As Brenda Barnes began her new position as Chief Executive Officer for Sara Lee Corporation
in 2005. Her plan was to streamline Sara Lee, refocus the company and regenerate its core.
The key points to this new strategic plan was to begin the divesture of weak performing
segments of the company
Continues to divest non-food and low-margin units in order to focus on top brands

Effect
Understanding the change of business strategy to a more focused company makes Sara Lee
more attractive to the market. In these divisions Sara Lee recorded positive growth and
strong market share both in the US and global markets.
Sara Lee now represents a good strategic fit with similar product divisions and operations.
Sara Lee is also able to take advantage of sales and marketing activities because of the
closely related products.
Overall, Sara Lee has restructured the company in a way where both shareholders and
customers will be happy. Strategy has cut the fat of the business and allowed Sara lee to
focus on the meat of their business which was beverage, food service and international
businesses. By changing the process and operations Sara Lee will have the ability to keep
their prices low for their customers.
Liquidation
Liquidation is the strategy of last resort because it leads to serious consequences,
Loss of employment for workers.
Termination of opportunity where a firm could pursue any future activities.
Liquidation represents a divestment of all the firms business units and should be adopted only
under extreme conditions. In selecting liquidation the owners and strategic managers of a firm
are admitting a failure and is seen as the least attractive of the grand strategies.

Dead business is worth more than alive

Meaning: It is better to cease operating than to continue losing large sums of money.

- Minimizes the losses of all the firms -

stockholders

TATA
A multinational conglomerate holding company and Indias largest conglomerate. One of its
many business is the Tata Textile Mill.
EMPRESS MILLS
One of the textile mill controlled by the Tatas. When the mill was entrusted to Ratan Tata, it was
one of the few sick units in the Tata group, but he managed to turn it around, even ensuring a
dividend.

After Ratan Tata took over as a chairman, some efforts were made for modernization but these
proved to be grossly insufficient. A proposal to merge the mill with other textile units of the Tatas
could not materialize. Rationalisation of the prdcut-mix across these units also proved to be a
nonstarter owing to resistance offered by executives. Efforts to Negotiate a voluntary retirement
scheme to cut down on the 600 workers-employees strength also failed

As the market for coarse and medium cotton cloth (which was all that the Empress Mills
produced) turned adverse, the Mills losses began to mount . Bombay House(High Court) was
also unwilling to divert funds from other group companies into the Mill, which was finally
closed down in 1986.

The major strategic cause for liquidation lies in the fact that for nearly 50 years, Empress Mills
did not invest in modernization or keep pace with competition.
The case of Empress Mills provides the important lesson that timely strategic action is not taken
and the situation is allowed to drift, even a business as big as Tatas, cannot save the fall of the
Empress.