Back in 2009, when I purchased my first car, I only had a few brands to choose from. Within the next decade, what I just witnessed was a boom in the automobile industry and other parallel industries.
But this is not an article on the growth and rapid global expansion of the automotive industry (So I will not bore you for sure :). Rather we will talk about the flip side of the coin.
How do companies deal with situations when they found themselves in the “low margin, low growth” category market for a product. Let us take an example of a company and expand the case.
I am talking about the mighty Ford Motors case study from India
Ford was started at Dearborn, Michigan, a suburb of Detroit in 1903 with 12 investors and 1,000 shares. Over the century Ford became global and was open to everyone. As a matter of fact, at the time, Ford’s initial public offering (IPO) of common stock shares was the largest IPO in history.
With its rapid expansion, Ford also entered India in October 1995 as Mahindra Ford India Limited (MFIL), a 50-50 joint venture with Mahindra & Mahindra Limited. By 1998, Ford increased its stake from 50% to 78% and renamed the company to Ford India Pvt. Ltd.
From there on it was unstoppable. It launched iconic cars like Ford Ikon (personal favorite to date) and Ford Escort. In 2011, Ford Figo even received the prestigious Indian Car of the Year Award. Till now it looks like a perfect journey for an international company in India. But the journey was not that simple as it looks.
In August 2019, the company reported a 31% YoY decline in sales to 5517. To give an idea, industry leader Maruti Suzuki sells more than this in a day. With just a 3% Market Share and $2 billion in investments over its two decades of existence, Ford India eventually decided to exit the Indian Market in September 2019.
It did not exit completely though. Ford India just ended its independent operations. It went on a Joint Venture with Mahindra. Ford India transferred its assets to Mahindra, giving the latter a 51% stake. Ford India still had a 49% stake and voting rights.
Read: How Facebook used “Beachhead Strategy” to become a giant?
That was Ford India’s Story. But in general, a company exiting a market has to deal with many external forces and drivers. It is very complex to decide which market and which product/service to forgo and how.
But one solution to this is the Retrenchment strategy. The strategy aims to make the organization financially stable and future-oriented. Especially in tough times due to Covid-19, Retrenchment strategy is used by many companies.
Lets first understand what it is!!
What is the meaning of Retrenchment Strategy?
In the early 20th century, many military battles, such as those in World War I, were fought in a series of parallel trenches. The strategy says to focus on strength and concentrate on holding a small trench. This small retreat was preferable to losing the battle entirely. Trench warfare inspired the business term retrenchment.
This strategy slowly become popular and is now used in corporate and startups.
Retrenchment strategy in laymen’s terms is an abandonment of a non-performing market or a non-performing product that is no longer profitable to the organization. Retrenchment is often accomplished by laying off employees or closing certain branches. In general, the retrenchment strategy is about the strategic contraction of a business or a part of the business to enhance the overall business performance.
A retrenchment strategy is used when an organization seeks to reverse a decline in performance. The main focus of such a strategy is to increase operating efficiencies and improve cash flowArthur G. Bedeian
What are the types of Retrenchment Strategies?
There are primarily three types of retrenchment strategies.
- Turnaround Strategies– This happens when a company is facing negative cash flows or low profitability or declining market share or worsening debt-equity ratio. In such cases, the focus is either on reducing costs and investments through downsizing or stricter control on expenditures or selling or assets. Or increasing profitability through better monetization opportunities like launching new products or revamping the brand or reducing prices to increase sales.
- Divestment strategies– Divestment is simply the process of selling subsidiary assets, investments, or divisions of a company. The strategy is adopted when a part of a business or division was acquired but did not turn out to be profitable or the division needs heavy investments in some form but a company is better off without it. In such cases, the organization either sells the division or separates the division (spin-off) by making it an independent entity that is responsible for its own profitability.
- Liquidation strategies– Liquidation a last resort that any company would like to adopt. The company implements this strategy when it is no longer in a position to pay to its creditors or shareholders due to cash shortage or lack of market requirement for its products. In summary, it’s about selling the business and its assets when it is no longer attractive to run the business.
Ford India, Other Organizations and the Retrenchment strategy
Ford is one of the top 5 automobile manufacturers in the world in terms of Volumes. No one would have ever thought that one-day Ford would use Retrenchment Strategy in one of the key markets- India. I must emphasize here that India is currently the 4th largest market in the world and is expected to be the world’s third-largest automotive market in terms of volume by 2026.
Read: Will Digital Growth help India Unlock Trillion Dollar Opportunity?
As market dynamics change, each company needs to adapt to economic cycles.
In the year 2019, Ford made an announcement. The Ford motor decided to retrench from India and transfer operations to Mahindra & Mahindra along with its assets. It’s not exactly a liquidation strategy as it still holds 49% of the business along with voting rights.
So Ford motor remains in a country that has a very high growth potential without having to shoulder the full cost burden of developing new models. The strategy helped Ford in generating some cash flow to find its growth avenues elsewhere.
The Retrenchment strategy is used by organizations all around the world especially by startups. A great example is how P&G the world’s largest consumer products maker focused to improve revenue and profit. Using the Retrenchment strategy P&G dropped almost 100 of its product categories and focused on the key product to maximize long-term value and create exciting opportunities within the businesses.
Now let talk about the fast-food sector which has used the Retrenchment as a key strategy. The McDonald’s and KFC’s combined foreign sales rose 400% in the last decade mostly due to sales in China. But in the years 2012 to 2017, the companies have since retrenched or sold their Chinese operations to simply its sprawling business through the franchise model
What are the Challenges of Retrenchment Strategy?
The retrenchment strategy has its challenges especially when the market a company is retrenching from is a lucrative and growing market. The organization is losing out on an opportunity to be part of such a market.
Retrenchment from a market might give the global brand name bad press and can affect the global business. Companies might also receive bad publicity due to the firing of people or mass layoffs as part of its retrenchment strategy.
As they say, every coin has two sides. Retrenchment strategy can act as a boon but if wrongly implemented can act as a bane. But then that’s a story for another time!!
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