ResearchBuster: Retrenchment

Most businesses aim to grow - but not all succeed - and many are forced to reduce the scale and scope of their business activities as a deliberate act of strategy. This is known as “retrenchment” and A2 students should have an understanding of some examples of retrenchment in action. Which firms / brands were involved? What happened? And why? Here are some suggestions that students could add to their notes:

This presentation provides an overview of the concept of retrenchment:

Business Strategy - Retrenchment

Sony sheds 10,000 staff in major reorganisation

Key reasons: A similar story to Nokia and HP. Sony has been struggling to compete in the television business with Samsung and LG, while Apple and Samsung have taken significant share in the smartphone market. The job losses are part of a change in strategic direction for Sony which says it will focus its business on three areas - digital imaging, games consoles and mobile devices.

HP cuts 27,000 jobs by the end of 2014

Key reasons: Management at HP explained the move was part of a “productivity initiative designed to simplify business processes” and comes as rival products such as the Apple’s iPad and Samsung’s Galaxy tablet computers eat into HP’s sales.

Royal Mail postal volumes in rapidly decline

Key reasons: the fundamental shift in personal messaging from written mail to email and SMS, Skype etc has had a dramatic effect on mail volumes handled by Royal Mail. Around 65,000 full and part-time workers have left the business since 2002, including 5,500 in the past year, while 12 mail centres have closed and a further 16 are set to shut.

Comet - closure of retail stores and support centres

Key reasons: rapid decline in consumer confidence leading to lower spending on high-priced electrical items; migration of spending from high street to online

Pfizer closes its research and development facility in the UK - 2,000 jobs lost

Key reasons: decision to reduce spending on R&D globally by $1.5bn per year

Northern Rock reduces workforce further with 680 job losses

Key reasons: Northern Rock was nationalised in 2008 following the banking crisis. At the time of nationalisation, Northern Rock had almost 6,000 employees; by the time of the 2011 redundancies, the workforce had been reduced to 2,000. NR management had agreed a scaling down of the bank’s activities in agreement with the Government.

Nokia cut 4,000 jobs and outsource another 3,000 following JV with Microsoft

Key reasons: Nokia’s new CEO Stephen Elop announced a significant change in strategic direction for Nokia in early 2011, deciding to partner with Microsoft in an attempt to create a third smartphone “eco-system” to compete with Apple and Google (Android). That decision, together with a rapidly falling market share led to the decision to make significant cuts to Nokia’s workforce around the world. Further job cuts in 2012 have increased to over 30,000 the number of job losses at Nokia since Elop became CEO.

MySpace Halves in Size

Key reasons: MySpace, bought by News International for $580 in 2005 - proved to be a disastrous acquisition. It rapidly lost market share to Facebook and is now worth only a tiny fraction of the acquisition price. News International implemented a classic retrenchment strategy designed to cut MySpace’s cost base prior to sale. In Jan 2011, management announced that MySpace would undergo a “significant organisational restructuring that will result in a 47-percent staff reduction across all divisions globally and impact about 500 employees”.

Cisco shut down Flip Camcorders

Key reasons: rapid changes in technology had shortened the product life cycle of a product which only recently enjoyed rapid growth. Killed off by growing demand for smartphones with good video capture functionality (and potentially lack of investment in product development by Cisco)

Thorntons scale back their retail portfolio

Key reasons: strategic review led by new CEO identifies a competitive position that is too reliant on highly seasonal retail demand. High fixed costs of operating a large retail portfolio in the UK make profits susceptible to sudden drops in revenues. Customer behaviour is changing - Thornton’s needs to move to a more sustainable business model

Yell pins hopes on digital directories

Key reasons: decline in demand for paper-based business directories. High debts putting pressure on cash flows and profitability. Yell is also spread widely in terms of global business operations, with units operating different IT systems. Rationalisation aimed at reducing operating costs, reducing geographical spread and migrating to one main IT system to support a digital growth strategy.

Lloyds Bank restructures and downsizes

Key reasons: Lloyds Banking Group - formed through several takeovers and mergers at the height of the banking crisis - is restructuring under a new CEO in order to return the business to profitability. Extensive branch network and international operations all require streamlining. A major change management programme.

Thomas Cook sells Indian operation and aims for £35m of cost savings per year

Key reasons: UK’s second-largest tour operator hit in 2011 by a significant reduction in demand for its long-haul holidays (particularly Egypt). Several profits warnings led to a collapse in confidence with share price falling by over 90% in just a few days. Business has high debts but has agreed a £100m refinancing / lifeline from its bankers in return for agreeing to a significant rationalisation of the group. Thomas Cook’s Indian subsidiary to be sold + 200 more high street travel agencies to be closed. Objective is to reduce annual operating costs by £35m per year.

Philips Electronics axes over 2,000 jobs in bid to reduce business complexity

Philips Electronics has said it will axe 2,200 more jobs as it battles the tough economic climate and attempts to save 1.1bn euros (£877m) in annual costs. The announcement was made by Philips' CEO Frans van Houten who has announced a strategy of improved efficiency and reduced complexity in the business. Van Houten also wants to change the culture at Philips to make it more entrepreneurial.In his first year as boss, Van houten responded to tougher competition and a slowdown in demand by cutting thousands of jobs, replacing his entire executive team and making the company’s unprofitable television operation a joint venture.

Direct Line Group retrenches ahead of planned sale

Direct Line Group announced proposals to axe nearly 900 roles and close a site in the North East of England. The group, which owns the Churchill, Green Flag brands and employs some 15,000 staff in the UK, is planning the redundancies as part of plans to make £100 million of cost-savings by the end of 2014.

Lexmark Exits the Printer Inkjet Market

Lexmark will stop development of its inkjet technology by 2013 and close its inkjet supplies factory in Cebu, Philippines by 2015. 1,700 jobs will be lost as a result.