What are Expansion and Retrenchment Strategies?


Posted September 15, 2021 by ieconsultant

Strategies used to make decisions regarding the allocation of resources or to follow an operational strategy are often classified as sustainability strategies, expansion (growth) strategies, layoff strategies, or combination strategies.

 
What is an expansion strategy?

An expansion strategy is synonymous with a growth strategy. A firm strives to achieve rapid growth, compete, achieve high profits, develop a brand, capitalize on economies of scale, exert greater influence or capture a larger market share. This may involve gaining more market share through traditional competitive strategies, entering new markets, targeting new market segments, offering new products or services, expanding or improving existing operations.

Below are common expansion strategies:

Expansion through Concentration – This involves focusing on resource allocation and operational efficiency on one or a group of business units or core business functions. Concentration may include: entering the current market with an existing value proposition; develop a new market by attracting new customers to the existing value proposition; Developing a new value proposition to offer in the existing market. The advantage of expansion through concentration is that it allows the firm to focus on areas where it already has a level of operations and competency.

Expansion through Diversification – This strategy involves diversifying a company's value offering in one of two ways:

1) Focused diversification involves developing a new value proposition that is related to existing value propositions.

2) entering new markets is necessary for conglomerate diversification (either by combining with an existing value proposition or with another industry competitor).

Expansion through Integration – Integration involves the consolidation of operating units anywhere along the value chain to create greater efficiencies and produce economies of scale. Unlike other strategies, it does not involve making changes to existing markets or targeting new customer groups. This consolidation can occur between business units or by acquisition or combination of competitors. See our separate discussion of horizontal and vertical integration for more detail.

Expansion through Internationalization – This method involves creating new markets to offer value by looking outside the immediate nation. Generally, this option is preferable when there is little room for expansion in the domestic markets.

What is a layoff strategy?

A redemption strategy seeks to restructure, sell or otherwise disinvest a business entity. It aims to reduce costs, streamline operations or stabilize cash flow. There are three primary types of layoff strategy:

Turnaround Strategy - This is a restructuring strategy. It calls for restructuring operations to be more cost efficient or profitable. It often comes in response to an ineffective strategy that hurts the company.

Disinvestment strategy - This means reducing operations or completing the disinvestment (liberating) of a business entity. Typically, the operating entity will be losing money or will not fit in with the company's main operating objectives. Some drivers of this strategy are negative cash flow, continuing losses, poor business integration, better alternative use of assets, the value proposition becoming obsolete, rising costs, or small (non-growing) market share.

Liquidation Strategy - A liquidation strategy is similar to a disinvestment. It focuses on selling specific assets or closing business units. Unlike disinvestment, which seeks to streamline operations and focus on resource allocation, liquidation views a business entity as a loss or failure.

What is a Combination Strategy?

A combination strategy employs a simultaneous combination of other master strategies. It involves the use by a firm of a different strategy in different business units or the use of multiple strategies in the same business unit at the same or different times.

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Last Updated September 15, 2021