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What is Retrenchment?

A CEO may consider retrenchment if expenses outweigh profit.
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  • Written By: O. Wallace
  • Edited By: Niki Foster
  • Last Modified Date: 28 July 2014
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Retrenchment is something akin to downsizing. When a company or government goes through retrenchment, it reduces outgoing money or expenditures or redirects focus in an attempt to become more financially solvent. Many companies that are being pressured by stockholders or have had flagging profit reports may resort to retrenchment to shore up their operations and make them more profitable. Although retrenchment is most often used in countries throughout the world to refer to layoffs, it can also label the more general tactic of cutting back and downsizing.

Companies can employ this tactic in two different ways. One way is to slash expenditures by laying off employees, closing superfluous offices or branches, reducing benefits such as medical coverage or retirement plans, freezing hiring or salaries, or even cutting salaries. There are numerous other ways in which a company can employ retrenchment. These can be non-employee related, such as reducing the quality of the materials used in a product, streamlining the process in which a product is manufactured or produced, or moving headquarters to a location where operating costs are lower.

The second way in which a company may practice retrenchment is to downsize in one market that is proving unprofitable and build up the company in a more profitable market. If one market has become obsolete due to modernization or technology, then a company may decide to change with the times to remain profitable.

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States or governments may also use retrenchment as a means to become more financially stable. In capitalist nations, retrenchment is effected by lowering taxes in the hopes of pumping more money into the economy. This tactic is always healthily debated throughout all levels of government. When applied to governments, retrenchment may also refer to a state cutting costs by making jobs obsolete, closing governmental offices, and cutting government programs and services. However, this is not a classic example of retrenchment, because when expenses are cut in one area, politicians tend to re-direct them to other areas.

Employees are often the casualty of retrenchment, as the tactic does not take their interests into account. They are often considered simply as commodities that are either profiting or costing the company, and are therefore either a necessary expense or a financial liability.

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Discuss this Article

anon330535
Post 9

I would like to know more about retrenchment policy and its effect on employees, what measures can a employee can take, etc.

pleonasm
Post 8

Retrenchment doesn't always mean people losing jobs, although it can seem that way. If a company shifts into concentrating on a different focus, that's also called retrenching. It might even end up with more people being hired, as the company needs the extra skill base.

For example, Apple once only dealt in computers. Technically, when they shifted their muscle behind the ipod, you could call that retrenchment but I'm pretty sure it didn't result in any job losses.

croydon
Post 7
@Mor - That's all very well in a world where businesses are all just doing their best to stay afloat. But in the real world, they are often doing fine maintaining their customer base or whatever, and they decide to retrench because they can and because they want to make more money.

After all, if you can shift your manufacturing out of the country and save money, why wouldn't you? It's got nothing to do with saving the business, no matter what they tell you. People are losing their jobs because the stockholders want to make more money.

Mor
Post 6

@anon27757 - I'm sure whenever an economic crisis happens there is much more retrenchment than when the economy is chugging along nicely.

Which is a problem, in my mind, because as bad as the connotations are, a retrenchment procedure is actually a good tactic for a company to take, preferably before they get in trouble. After all, if they aren't making a profit, they could potentially go out of business altogether, which means a lot more people would be out of work.

I guess what I'm saying is that they ought to always have the bottom line in mind and organize themselves accordingly, rather than doing it in a big shift when they get desperate.

anon27757
Post 4

Would like to know the economic crisis's effect on retrenchment and its effect on employees generally!

anon9535
Post 1

Retrenchment is not a popular strategy. Organizations which are in turn-around mode have to take necessary measures to rescue the situation.

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