The Hare and the Tortoise: The race is not to speedy (XVIII). Sometimes retrenchment is not that bad
… “The tortoise meanwhile kept going slowly but steadily”…The hare and the tortoise, a fable by Aesop
Have a beautiful June week. It is raining a lot in town, and I have been a bit hectic trying to solve an issue with my laptop. Suddenly on Sunday morning, the letter keys k, l, ñ, and 3 from my mainframe keyboard stopped to do their job. I was pushing down each of them, and nothing. The keys were lifeless, and I couldn´t make them work. What I did was to search for an ASCI code table in Goggle, and I found out that it functioned to use the “ALT” 75, 76, 107, and 108. Thus, I could continue typing. But it is a headache pain to try to type quickly this way. After failing, I decided to buy a new keyboard, adapt it to my laptop and voilà!. Here I am writing this publication for you today. I also bought a new stand with a cooling fan included that I can adapt to my laptop to obtain the right level of sight when I am typing. I am fascinated with the change. Finally. I wonder how many of us have had to work under bad posture conditions with a laptop during the Pandemic season.
Besides, let´s begin. Today we will continue with the third path when making decisions about growth and the pace of progress at the corporate strategy level. It is the turn for retrenchment routes. Please do not forget that I am “only” procuring the theory at the moment, we will return next week to use examples and to perform strategic reflection using the variable time.
The word retrenchment comes from the verb “retrench, which is nothing else than to cut down, to reduce, to delete, to reduce, to omit, or to curtail expenses to economize.
What to do when our business is not doing well? Or when our product lines are not able to be preferred by our potential clients? What to fix when our sales are going down, month by month, and profits are not showing anymore? What to ensure when our operational results are not providing possibilities to pay our debtors? What to do in these scenarios if we have run out of cash and we do not have any substitute? (Please notice and remember that retrenchment strategies explained today only apply to companies that have been running and operating for several years. This lecture doesn´t apply to entrepreneurship endeavors that have been under the pressure of the “valley of death” stage).
Here we find 4 types of strategies.
Number One. Turnaround Strategy
A turnaround decision emphasizes the improvement on the operational side. All of us have experienced the word turnaround in our lives. For example, when we are walking on the footway and we see danger ahead (either suspicious robbers, or something that make us afraid), then we immediately make a U-turn moving in the opposite direction. A reversal and shift in our way.
At the moment, many companies after the Pandemic crisis, have initiated a turnaround path, to solve the corporation´s problems. Usually, firms try to cut costs, diminish expenses and they even shut down certain locations, with the purpose to first, contract; and second, to consolidate what is left.
Contract means to make a general cutback. So whenever you read in newspapers that a company or a bank or an entity has eliminated jobs, or has closed plants, or has divested unprofitable businesses, that is contraction.
Consolidate signifies to implement a stabilization plan after the company has been streamlined. In addition, the consolidation phase includes reducing unnecessary overhead and adjust the business organization, by melting divisions, or by centralizing responsibilities. When people feel that the consolidation is only offering a heavy workload, and there is too much emphasis on downsizing and cutting expenses, then top management of high caliber tends to fly away.
To make turnaround processes successful, new management philosophy is required. One in which the conventional justification of the company to create shareholder value in which employees are not included, has to change to an integral organization in which each employee is involved, and people act collectively, with their motives empowered and with their actions following a purpose. When employees participate in profit sharing, they feel as if they are also shareholders of the corporation. And in consequence, they are committed to work hard in the retrenchment periods, to emerge better-organized, and much stronger; with the hope in their minds, that they will improve their competitive position to expand the business again.
Number 2. Captive company strategy.
This situation involves giving up independence in exchange for security and protection. For example, let´s talk about the retail chain Sears. This company has been in trouble for quite a while and in October 2018, after losing market share, filed for bankruptcy owing more than $134 million debt, announcing it will close 142 stores. Eleonora Escalante Strategy found out the cause of this situation: changes of preferences in the consumers who wanted to buy equivalent products in dollar stores, through online marketplaces as amazon.com, or directly to the manufacturers. In addition, the family weekend trip to the mall lost its appeal in families who have become dependent on the mobile or Smartphone experience of living; then we also found out, the problem is not inherent only to Sears, or Macy´s, or other huge anchor department stores inside malls, but this is the same to all the stores’ retailers who are renting a space in malls. All have experienced a weak competitive position since several years ago, given that as a whole industry, they have been substituted, because customers have found the same offer “online”. What to do? The captive company strategy was considered by Sears. For a moment let´s consider that the section of electronics and home appliances manufacturers – suppliers are the core business of the distributor Sears. And the company Electrolux is the main player in this department store (75% of sales in Sears are for Electrolux). Sears searches for Electrolux’s help by offering to be a captive company, to guarantee Sears continued existence with a long-term contract. Sears is looking to reduce the scope of some of its functional activities, reducing costs, reducing product lines, and the weaker Sears has gained certainty of sales in return for becoming heavily dependent on Electrolux. In exchange, Electrolux has provided exclusivity to Sears in that country. With the stamp of approval of Electrolux, Sears won the confidence of other suppliers, that arranged exclusivity long-term contracts with Sears, under competitive prices, utilizing Sears as their “unique and only” main distributor/retailer.
Number 3. Sell-Out or Divestments
If a corporation with a weak competitive position in an industry is unable either to pull itself up by its bootstraps or to find a supplier or customer or distributor (an agent in its value chain) that can help them, and there is no other measure to consider; then the company has no choice but to sell out.
The sell-out path makes sense if management can still obtain a good price for its shareholders and the employees can keep their jobs by selling the entire company to another firm. The firm will be acquired by another one. The hope is that the buyer can maneuver with its necessary resources to determine a new way for profitability.
If the corporation has multiple business lines or units, and it chooses to sell off a division with low growth potential, or a division that is losing money, this is called divestment or spin-off.
In declining industries, divestment is also another decision to consider. Particularly if the future looks unattractive, because of lack of demand. Nevertheless, changes in consumer preferences are always back and forth, and it is well possible for those who buy companies in industries under a declining phase, to reignite them through a well-conceptualized transformation for recovery and marketing efforts. Eleonora Escalante Strategy believes that even declining industries have the optimism to be healthier again, by helping to kindle or catch the light of the demand for those products and services.
Number 4. Bankruptcy/Liquidation.
Regardless if the industry is passing through stormy waters, there is always a space for reconstruction, renewal, and transformation. Bankruptcy is used when there is courage and faith to re-emerge again. Consequently, the decision to declare bankruptcy seeks to perpetuate a corporation. We believe that the decision to file for bankruptcy must be temporal, and only to gain the “time” in which the firm can settle in the judicial courts about how to arrange a settlement for the corporation´s debt or obligations. The court usually decides the claims on the company, with the purpose to support the company to leave out the weak situation, and arise later to be better able to compete with an improved corporate strategy. An example of a company that filed for bankruptcy (2008) only to emerge again at its own pace, has been Bennigan´s Grill and Tavern. Some airline corporations have utilized this controversial approach too.
Liquidation is the termination of the firm. A close of the company is a decision in which the goal is to convert as many saleable assets as possible to cash. This money is then distributed to debtors and shareholders. Liquidation is also utilized when top management (including the board of directors) does not have a new cohort of leaders, and there is no desire to continue moving after a crisis develops. At the end of the day, any corporation requires a robust board of directors who will be able to safeguard shareholders’ interests, and plan to make adjustments before considering liquidation.
In my next publication, we will proceed with the racing decision path of establishing priorities. We will understand what is portfolio analysis. Watch the outline below. Thank you for reading to me.
Bibliography of reference utilized today:
Disclaimer: Illustrations in Watercolor are painted by Eleonora Escalante. Other types of illustrations or videos (which are not mine) are used for educational purposes ONLY. Nevertheless, the majority of the pictures, images, or videos shown on this blog are not mine. I do not own any of the lovely photos or images posted unless otherwise stated.
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