Contraction Strategy

Contraction strategies decrease the size or scope of operations for an organization either at the corporate level or business level. Contraction strategies include divestiture, liquidation, harvesting, and retrenchment.

With divestiture, an operating unit is sold off as a result of a decision to permanently and completely leave the market despite the market's current viability. Generally, the service or business to be divested has value and will continue to be operated by the purchasing organization. An organization may divest a service because it needs cash to fund more important operations for long-term growth, the service may not be achieving management's goal, or the service is too far from the organization's core business or management's area of expertise. For example, many multihospital systems have divested their insurance operations (HMOs) to concentrate on care delivery.

Liquidation involves selling the assets of an organization. The assumption underlying a liquidation strategy is that the unit or service cannot be sold as a viable and ongoing operation. However, the assets (facilities, equipment, and so on) still have value and may be sold for other uses. Common reasons for pursuing a liquidation strategy include bankruptcy, the emergence of a new technology that results in a rapid decline in the use of the old technology, and the desire to dispose of nonproductive assets. For example, an aging hospital building may be sold for its property value or an alternative use.

A harvesting strategy is selected when the market has entered long-term decline. Although the organization may have a relatively strong market position, industrywide revenues are expected to decrease. The organization “rides the decline,” allowing the business to generate as much cash as possible but at the same time investing no new resources. In a harvesting strategy, the organization attempts to reap maximum short-term benefits before the product or service is eliminated. Such a strategy allows the organization to make an orderly exit from a declining segment of the market by planned downsizing. In the pharmaceutical industry, harvesting strategies are common for drugs that are being replaced by more potent or effective drugs.

A retrenchment strategy is a response to declining profitability often brought about by increasing costs. The market is still viewed as viable, and the organization's products or services continue to have wide acceptance. Retrenchment typically involves a redefinition of the target market, [Page 105]selective cost elimination, and asset reduction. Retrenchment may be directed toward reduction in personnel, the range of product or services, or the geographic market served. It represents an effort to reduce the scope of operations. In some cases, a health care organization expands to new markets but may find that costs are more than anticipated, that the organization is “spread too thin” to adequately serve the market, and that local competitors are better positioned to provide quality services at lower cost. Therefore, the organization retrenches to its original or a more focused market.