Cut back strategies are those where the organization curtails or, in extreme cases, divests nonperforming assets, products, divisions. businesses, functions.
When there are short-term changes in the external environment that reduce demand (for example, because of recession or increasing unemployment) or erode short term profits (for example, non-availability of a key raw material due to a natural disaster), the organization opts for strategies that improve profitability by tactical or strategic means.
If, however, the erosion in the profitability is because of irreversible changes in the external environment (for example, introduction of technologically superior products such as mobile phone over the pager) or strategic errors of the organisation (for example, having too many ”likely- to- make profit products” over “making- profit” products in portfolio), then the cut back is more widespread and drastic.
In such cases, the managerial decision hinges on whether the resources can be freed to be used more productively elsewhere if in the current situation return is below expectation.
Cut back strategies call to test the general manager’s interpersonal skills and emotional intelligence when drastic options are followed (such as layoffs).
Organizations can retrench in phases or, depending on the situation, decide to divest or totally liquidate the business.
Other than these reasons organizations opt for cut back strategies when the:
- Cash flows are negative leading to losses.
- Industry profitability is declining.
- Operational efficiency has deteriorated.
- Competitors are efficient and steadily increasing market share.
- Products are technologically inferior and productive assets are locked in their manufacture.
- Physical facilities and assets deteriorate.
- Future profitability depends on allocating resources from unproductive to productive areas.
- The organization is hard-pressed for cash.
- There are a number of pathways to effectively cut back.