Retrenchment - Explained

Retrenchment is a term used to describe when a business decides to significantly cut or scale-back its activities.

Retrenchment might occur when one or more of the following happen to a business:

•  Reduce output & capacity
• Job losses / redundancy programmes
• Product / market withdrawal
• Disposal of business unit
• Scaling back planned capital investment

What Are the Causes of Retrenchment?

Retrenchment normally arises from decisions to change strategic direction, which in turn usually happens because of one or more of the following:

• New leadership (usually a new CEO)
• Excessively-high costs and low profitability (or unsustainable losses)
• Low ROCE
• Excessively high gearing (leading to cash flow problems)
• Loss of market share
• A failed takeover or merger
• Economic downturn
• Change of ownership

Implications of Retrenchment for Change Management

A decision to adopt a strategy of retrenchment by definition involves change for a business. Can this change be implemented successfully? Much depends on the circumstances, 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 – and therefore with complex and costly change management

Some of the key implications of retrenchment for change management are summarised in the table below: