BUSS4 Example Essay - Retrenchment

Here is an example BUSS4 essay - this one is on retrenchment

QUESTION

To what extent is it essential that a business adopts a strategy of retrenchment in order to change from failure to success?

INTRODUCTION

Retrenchment, or the cutting back of the scale and scope of a firm's activities, is a common strategy for businesses that are struggling to succeed. Whilst it can often be an important part of a business turnaround, there is no guarantee that it will succeed. Let's examine the importance of retrenchment as part of turning business failure into success.

One reason why retrenchment is an essential part of turning business failure into success is that it should result in a much clearer sense of strategic direction. My analysis for this point is based on the view that a failing business is likely to have made inappropriate strategic decisions that leave it at a competitive disadvantage. Over time, firms can suffer from strategic drift, by choosing strategies that are not appropriate for a changing external environment, perhaps assuming that past successes are inevitable if they keep doing what they always have. However, these poor strategic decisions catch up on previously successful firms. A poorly executed diversification perhaps through the wrong takeover target can result in significant losses. An over-ambitious market development strategy that results in losses due to much stronger than expected competition can also leave a business in trouble. Before too long, a firm can find itself with a diverse portfolio of businesses, or over-stretched in terms of using its resources to invest in the best opportunities. Retrenchment can help fix these problems.Here are two examples that both support this line of analysis. Firstly, when Satya Nadella took over as CEO of Microsoft in early 2014 he inherited a global business that had clearly lost its strategic direction, including the failed $7bn takeover of Nokia’s mobile phones business. Decisive action was required, so Nadella instigated a retrenchment strategy of closing down much of the Nokia business (resulting in 18,000 job losses) so Microsoft could focus on the remaining profitable elements. Secondly the action taken by Dave Lewis when he joined Tesco as CEO in Autumn 2014. He recognised that over many years Tesco had lost its strategic focus on grocery retailing through related diversifications and international expansion. As part of his significant retrenchment at Tesco, Lewis sold the Giraffe and Dobbies Garden Centre businesses and Tesco’s operations in Turkey in order to rationalise the business portfolio and release finance to reinvest in the core, profitable UK supermarket business. These actions were consistent with giving Tesco a much clearer sense of strategic direction. Linking this point back to the essay question, I believe that an appropriate strategy of retrenchment is an important part of refocusing a business’ strategy on what it does best – where it can compete effectively and succeed. Of course, whether the right retrenchment decisions are taken will depend on if leadership have a clear sense of where they want to take the business, but assuming they do, clear strategic direction is more likely to result in business success.

Another reason why retrenchment is an essential part of a strategy to turn business failure into success is that retrenchment is likely to be part of significant organisational change required to achieve a turnaround. The line of analysis for this point is that retrenchment is nearly always part of a major change programme aimed at addressing the causes of "failure". Of course retrenchment is never an easy decision since it goes against the traditional assumption that businesses need to expand in order to grow profits. However, a "failing" business almost by definition has some competitive weaknesses that need to be addressed by a change management project. Step change projects in particular are likely to involve decisions about cutting back the scale and scope of a firm's operations, often to significantly reduce costs (a possible cause of heavy losses) or to address a cash flow or liquidity crisis (another kind of failure). Two of the best examples which support this line of analysis are the retrenchment strategies implemented during change programmes led by Harriet Green at Thomas Cook and Moya Greene at the Royal Mail. Indeed there are some interesting comparisons and similarities that can be made between them. Both Harriet and Moya were external appointments made a mandate to lead strategic change; Thomas Cook was in financial distress and Royal Mail needed to prepare for the transition from public to private ownership whilst facing increasingly intense competition. Both CEOs moved quickly to remove layers from the organisational hierarchy; dispose of non-core businesses and work closely with key stakeholder groups (particularly employees) to drive their change programme. These are the classic elements of successful retrenchment strategies. In the case of Thomas Cook, the evidence of success was a significant improvement in share price; for Royal Mail, it was a successful though controversial privatisation. For both, retrenchment as part of major change projects helped turn failure into success. Linking back to the essay question, I think this point strongly supports the argument that retrenchment is essential for a business turnaround because it seems to be a common feature of successful major change projects in different industries.

On the other hand, a reason why retrenchment may not be essential in order to for a business to change from failure to success is that retrenchment can often leave a business weaker and less competitive rather than stronger and more successful. The logic of this analysis is as follows. Retrenchment involves cutting back. That often means the loss of significant numbers of management and other staff positions as well as a reduction in capacity. It can also involve the disposal of business units that provide value to other parts of a business group. There are clearly risks involved in this approach. The loss of senior management may result in the loss of important expertise to a business. Scaling back capacity may reduce the ability of a business to benefit from economies of scale thereby increasing unit costs and potentially reducing competitiveness. The danger of retrenchment, to borrow a medical analogy, is that you cut out essential organs rather than trim the fat from a business. Let's look quickly at two examples which are relevant to this analysis. When Stephen Elop took over as CEO of Nokia his famous "burning platform" memo became the mandate for implementing a substantial retrenchment strategy aimed at restoring Nokia's competitiveness and fortunes. Over 40,000 jobs were cut, including many senior managers and research teams. Did it make Nokia stronger? Not at all. It weakened the business and eventually the best option Nokia had was to sell its mobile phone business to Microsoft. That business was so weak when it was sold, not even Microsoft could turn it from failure to success, so further retrenchment followed. Another example in the same industry was the retrenchment by new CEO Thorsten Heins at Blackberry (RIM). Here was another former market leader where layers of management we removed and production scaled back. the result? It made Blackberry even weaker and its position as a smartphone leader was lost forever. Linking back to the essay question, the examples of Nokia and Blackberry strongly support the argument that retrenchment is not without significant risk. Retrenchment can make things much worse, deepening the "failure" of a business rather than helping it towards success.

Overall, in my opinion whilst it is not essential to adopt retrenchment in every circumstance, retrenchment is likely to be the best option for many businesses who need to change from failure to success. This is because successful retrenchment forces a business to refocus on what it does best and how to compete effectively in order to succeed. Whilst often painful to stakeholders (particularly employees and management) retrenchment is usually an intrinsic part of any significant strategic change for a business that needs to be turned around. Of course there is no guarantee that retrenchment will turn failure into success. Much depends on the speed and extent of the retrenchment & whether it results in relevant organisational change. The wrong retrenchment can leave a business weaker and more vulnerable to strong competition despite the high cost involved. However, the most important reason I reach this conclusion is that retrenchment is particularly needed when a business finds itself at a significant competitive disadvantage, either in terms of its cost structure, product competitiveness and/or its strategic focus. Retrenchment is key to fixing those first before a business can recover.