What are the advantages and disadvantages of retrenchment?


Quick Answer

Advantages of retrenchment include reduced costs, improved efficiency, improved competitiveness and reduced reliance on the markets. Retrenchment increases profits for shareholders and creates a strategy to survive economic downturn. The disadvantages of retrenchment include growth decline, reduced profits, smaller workforce, reduced productivity and inability to meet consumer demand.

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Full Answer

Retrenchment, also called downsizing or rightsizing, involves a decrease in the diversity of business activities, which often requires a reduction in the workforce or sale of assets associated with terminated product lines. It may include debt restructuring through bankruptcy or even liquidation of the company. Retrenchment involves reduction of a business’s expenditures to become economically sound.

Retrenchment effects can be categorized as financial, organizational or human. Downsizing generates financial benefit to the company through direct increase in the value to shareholders. Cutback initiatives include reduced overheads, efficient communication, less bureaucracy and faster decision-making.

Reduction of a company’s scope of operations leads to reduced revenues due to decreased economy of scale and may cause death of the business. Laying off some employees has a cost implication in terms of compensation for the more experienced and higher paid workers who remain. Retrenchment without withdrawing some of the products or services compromises efficiency and overloads the remaining workers who are expected to work more, leading to reduced productivity and inability to meet market demand.

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