Crowdsourcing Solutions

Retrenchment Strategy Advantages and Disadvantages


In this era of commercial rat-race companies and private organizations are in a constant hurry to change policy structures to secure what is best for their interest.

At times of crisis, downsizing the cause of problems seems to be the most sought after solution.

Hence it is normal for companies to take eliminating redundant branches to regain financial stability and ensure profitable investments for the future.

Be it an employee or the employer the impact of retrenchment does make a huge difference in one’s career path.

Here are what you need to know about the retrenchment strategy in strategic management to prepare yourself for the upcoming challenges.

So now let us start with the retrenchment strategy definition.

disadvantages of retrenchment strategy

What is Retrenchment Strategy?

Retrenchment strategy is a practice done by organizations to gain a better financial position by lowering or reducing the costs of any of its business operation.

1. General strategy:

Nowadays, retrenchment is the easiest way to see through the damages and revoke policies that did not fare well.

This dire step comes to pass when a company has suffered a heavy loss at the hands of their own foolish investment.

Evidently, this is a huge blow to the company’s fund despite the murderous competition that goes on constantly.

Retrenchment in business, therefore, seems to be the immediate and most effective measure at times like this. The process on a whole focuses on rightsizing the excess involvements of the company in order to catch an instant breath.

2. Formidable diversity:

Eliminate all funding that seems most unlikely to fetch a reason for sustaining them. Cancel all impending projects or transactions that are underway to prevent further monetary loss.

Nevertheless, it is crucial to foster a few areas of work regardless of what it costs the company. These few unique areas of work which have seen through the company’s success earlier on are to be given special importance.

Whereas, an excess branch of work reaping no big fortune and showing no sign of further improvement are to be done away immediately.

It is important to maintain a formidable diversity in branches of work at a company rather than giving rise to a large number to unnecessary work plans.

3. Financial security:

Companies too try retrenchment in strategic management entirely to put a hold to the different losses.

Retrenchment aims at cutting down on all expensive fields. This gives way to maintaining a low budget plan to make sure there is not any financial drop.

Moreover, this gives the employers time to think over the bad investments and about the necessary steps that have to be taken in order to prevent other managerial fiascos.

Nevertheless, retrenchment mainly involves curtailing of different excess positions that are not of much use to the company’s well-being.

However, downsizing or laying of employees definitely runs the risk of losing devoted employees while eliminating redundant avenues.

4. Forming Goals:

Definitely having goals that will lead to success is the primary interest of any enterprise. The first and foremost target of the retrenchment strategies is giving life to the goals.

There are times when investments take a downward turn and best business strategy goes awry and the only sensible solution to this is to be calm and brave.

Retrenchment, however, manages to ease the impact of such a blow by saving funds that were not being put to good use.

More often, companies suffer in amateur hands since many a time company managers take bad decisions and are too late to realize it. It is in such times that retrenchment comes to their tremendous help in giving them enough time to fix the problems without much harassment.

When is Retrenchment Strategies Appropriate?

As per the definition, the main aim of the retrenchment strategy is to make the organization financially stable.

Retrenchment strategies are also used to cut down operating expenses and reduce the size of the company for the betterment of the organization. This strategy can also be used to get a good stand in this competitive market.

The retrenchment strategies mainly acts on two factors, they are

1. Cost cutting
2. Restructuring.

With the help of the 3 different types of strategies, an organization can use any of them as per their requirements to conduct a successful retrenchment strategy.

Effects of Retrenchment on Employees:

1. Prospect of career correction:

Despite the fact that it seems unjust to sack employees on the pretext of futile investments there is a silver lining to it.

It is likely that companies are going to keep the most hardworking employees but in no face should it mean an end of a career for those being intercepted.

First of all, a notice will be given before a retrenchment process is in order.

Secondly, every employee will be given a fair chance to prove one’s worth through the screening.

Nevertheless, it is advisable that everyone must take the notice period seriously to consider the prospect of career correction where the risk of facing a retrenchment policy will be less.

2. Work Experience:

Regardless of everything, there is a brighter side to retrenchment which is the job experience certificate.

Obviously, being subjected to retrenchment does not mean the end of everything for good. Sometimes companies have to resort to drastic measures which involve taking decisions that would not normally cross their mind.

Nonetheless, the good news is you can still apply to different companies for the job of your choice. In addition to your renewed chances, you are bound to be given preference if your company is kind enough to give you a recommendation.

3. Rise in entrepreneurship:

No matter how badly it ends for an employee, new opportunities are always going to present itself.

One such opportunity is the prospect of entrepreneurship. One may use whatsoever knowledge he/she had gained while working at the previous company prior to the retrenchment to start a new enterprise from scratch.

With the rise in professional individualism in terms of trade and commerce, one can easily opt for starting one’s own business-level strategy with a little investment.

In light of recent days, the boom in entrepreneurship has almost taken the shape of a trend that is taking the globe by storm.

4. Grievance:

Then there is, of course, the grieving factor. Some people no matter what, are never going to come to terms with being entitled to retrenchment.

These immovable kind of people are eventually going to take to desperate measures to heckle the company in every way possible.

However, this is not entirely their fault given the fact that they have contributed a considerable amount of their time and effort over the years in the making of the company.

They are sure as anything not going to let go of what they think is rightfully theirs, in this case, the position that has been eliminated.

This is not completely unbecoming of them since they have served the company once but completely justified as they would think themselves to be equally deserving of being retained.

Effects of Retrenchment on Organizational Performance:

1. Eliminating redundancy:

Retrenchment has its primary use in freeing the company of commercial attachments that are not yielding as heavily as expected.

Trying to be in vogue for the consumers, companies sometimes introduce posts or offer perks that are utterly meaningless and as a matter of fact very costly. Later these risky investments give them a run for their money.

To avoid having to close down the company, employers start reducing the number of employees starting with downsizing the number of positions they had introduced which lead to disappointment.

Anyhow, eliminating redundant involvements is one possible way to impose a cost-effective relationship between the company and its employees.

2. Improves service:

The performance automatically improves after the retrenchment since that is what it apparently aims to do.

On removing the redundancies the problems become much easier to handle due to the reduction in monetary losses.

Often it happens that salaries are reduced to a meagre amount in light of desperate times. So the employees rush from pillar to post to revive the company’s lost health in order to restore the pay scale.

It is ultimately the workers’ prerogative to look after the company. So the service from their end undoubtedly improves lest the next brunt of retrenchment should be on their neck.

3. Keeping everybody on their toes:

It is given that a fresh retrenchment is going to keep each and every employee on their toes. It is normal for the employees to be afraid of a future reduction in the number of workers.

This keeps the employees on high alert since they are going to be afraid of being removed if they do not work properly. They cannot afford to be liberal in their ways of working when there has been a retrenchment earlier on.

So these are definitely some of the positive ways in which retrenchment can improve the performance of the organization or the company with nothing more than a word or two of motivation from the employers.

Different Types of Retrenchment Strategy:

1. Turnaround strategy:

The process of retrenchment strategies in strategic management can be broken into 3 levels of strategy or 3 divisible components.

These are the turnaround strategy, divestment strategy and last but not the least, liquidation. The first-ever elementary step taken in terms of retrenchment is the turnaround.

This looks into the problems from a lens favourable to both the company and its employees. This process primarily involves dissolving of redundant branches of the organization.

This strategy is in part to check the fiscal backdrops without harming the interest of the employees to a great degree.

2. Divestment strategy:

When the business turnaround plan does not take expected turns employers have to vouch for a higher level of treatment.

This fresh level of retrenchment is called the divestment strategy. The divestment policy focuses on restructuring and rightsizing rather than just eliminating posts.

Divestment entails re-engineering of every possible nook and cranny of the work culture at the company.

However, this strategy runs the risk of eliminating posts including permanent suspension of a large number of employees.

3. Liquidation:

The worst side of the retrenchment strategy is liquidation. Playing this card means collateral damage to both parties.

In no uncertain terms, it means the end of an organization or the closing down of a company. This is the last step of this whole process and only comes to play when everything else fails.

A company would never decide to deliver on this under normal and reparable circumstances. This is for when the damage has gone beyond repair and nothing can be done to restore the old face of the company.

Advantages and Disadvantages of Retrenchment Strategy:

1. Cost-effective strategy:

Despite many things that can be said against retrenchment, it does handle the immediate problems very effectively.

A retrenchment procedure is carried out when the company has squandered a vast amount of money into something irretrievable.

Nevertheless, retrenchment is the first aid to the damages sustained before thinking of better ways to recover from the trauma.

This is why the retrenchment strategy in business is so positively cost-effective without taking a larger toll on the organization or the company. The is one of the best retrenchment benefits.

2. Improves performance:

Evidently, the employees are going to be on their best behaviour once the retrenchment has been placed. Nobody can be too safe from the clutches of retrenchment regardless of how devoted an employee is.

Any lack in performance can be used against them. The employees, therefore, are on their toes at all times lest they should be targeted for their lack of trying.

Automatically this calls upon their best performance the company must have seen in ages.

3. Loss of good employees:

Despite being strict and fair, screening is not always up to the mark. In spite of all the efforts made to save the best of employees, it is impossible to see through person to person after all.

And in all the riffraff the company loses one or two of its most hardworking employees. Once the list is made there is not much the company heads can do to keep the employees they favour on the team.

Doing that will appear unjust to all those who have cleared the screening.

4. Critical response:

On top of everything, the company will have to withstand the wave of hatred and criticism coming from all those who were told off so unceremoniously.

This is one sphere of public reaction that every field of work has. But honestly one cannot blame the other since it is just as imperative to impose retrenchment when necessary, as finding a better solution to pan out to your employees rather than extricate them so irreverently.


Nonetheless, it is to be noted that retrenchment is not a one-way lane and mostly thinks along the lines of RIFs and mass layoffs. Therefore placing a retrenchment is definitely going to weigh in both advantages and disadvantages for you to choose from.