strategic-management

146 PART 2 • STRATEGY FORMULATION
• When there exists financial synergy between the acquired and acquiring firm. (Note
that a key difference between related and unrelated diversification is that the former
should be based on some commonality in markets, products, or technology, whereas
the latter should be based more on profit considerations.)
• When existing markets for an organization’s present products are saturated.
• When antitrust action could be charged against an organization that historically has
concentrated on a single industry.
Defensive Strategies
In addition to integrative, intensive, and diversification strategies, organizations also could
pursue retrenchment, divestiture, or liquidation.
Retrenchment
Retrenchment occurs when an organization regroups through cost and asset reduction to
reverse declining sales and profits. Sometimes called a turnaround or reorganizational
strategy, retrenchment is designed to fortify an organization’s basic distinctive competence.
During retrenchment, strategists work with limited resources and face pressure from
shareholders, employees, and the media. Retrenchment can entail selling off land and
buildings to raise needed cash, pruning product lines, closing marginal businesses, closing
obsolete factories, automating processes, reducing the number of employees, and instituting
expense control systems.
Smithfield Foods, the world’s largest pork processor, is closing 6 of its 40 plants,
laying off 1,800 employees, and cutting production by 10 percent in 2009 in efforts to stop
the liquidity drain on the firm. The retrenchment moves are expected to save the firm $55
million in 2010 and $125 million in 2011. Pork is the world’s most consumed meat by
volume. 17
Starbucks has launched a massive retrenchment strategy in efforts to save the
company. CEO Howard Schultz says Starbucks will soon close 300 underperforming,
company-operated stores worldwide, including 200 in the United States. These closing are
on top of 600 recent Starbucks closings in the United States and 61 closings in Australia.
However, the firm plans to open 140 stores in the United States in 2009 and open 170
stores outside the United States. Starbucks plans to cut 700 corporate and nonretail positions
globally. In addition, as part of Starbucks’s strategy to survive the global recession,
the company will enter the value-meal race to combat McDonald’s new McCafe coffee
bars, which are spreading nationally and likely soon globally.
Pursing a heavy retrenchment strategy to survive, Citigroup recently announced that it
is cutting 52,000 more jobs. This is the largest corporate layoff announcement since 1993,
when IBM cut 60,000 jobs. Citigroup had already cut 23,000 jobs in 2008 as its stock price
fell 70 percent in that year alone.
Tokyo-based Sony Corp. is cutting 8,000 jobs and closing 6 of its 57 factories by
March 2010 as prices of televisions fall and consumer spending in general declines. Sony
has also been hurt by falling demand for digital cameras and the sharp rise in the yen
against major currencies, which has cut into profits by reducing its overseas revenue when
converted back into the Japanese currency.
Most banks are pursuing retrenchment. A total of 25 banks failed in 2008, including
16 with less than $1 billion in assets. The three largest bank failures by size in 2008 were
Washington Mutual in Seattle, Washington, IndyMac Bank in Pasadena, California, and
Downey Savings and Loan Association in Newport Beach, California.
Macy’s Inc. in 2009 eliminated 7,000 jobs among its 840 department stores and cut its
dividend by 62 percent. The firm also ended merit pay increases for executives and slashed
its 2009 capital-spending budget by $150 million to about $450 million, down from the
planned amount of $1 billion. Also as part of its retrenchment strategy, Macy’s bought
back $950 million in debt. Macy’s expects sales to be down about 8 percent on average per
store in 2009. The company is merging its four divisions under one person and discounting
its merchandise substantially.