Defensive strategies in business are mechanisms put in place to protect a company from potential threats and risks. These threats can come from various sources such as competitors, changing market conditions, technological advancements, or even internal challenges like poor management practices. By implementing defensive strategies, companies aim to safeguard their market position, profitability, and long-term sustainability.
Defensive Strategies Notes and Exam Questions Business Studies Grade 12
Defensive strategies are a set of actions taken by a company to reduce its exposure to risk and protect itself from potential losses. There are several types of defensive strategies, including retrenchment, divestiture/divestment, and liquidation.
1. Retrenchment: Retrenchment is a defensive strategy that involves cutting back on business activities and reducing costs to improve profitability. This may involve reducing the number of employees, closing unprofitable business units, or selling off non-core assets. Retrenchment can help a company to restructure and refocus its operations, but it can also lead to job losses and damage to the company’s reputation.
Retrenchment examples:
- AngloGold Ashanti: In 2020, AngloGold Ashanti, a South African mining company, announced plans to retrench 2,000 workers in South Africa as part of a restructuring plan aimed at improving profitability.
- South African Airways (SAA): SAA, the flag carrier airline of South Africa, announced plans to retrench nearly 5,000 workers in 2020 as part of a turnaround plan aimed at saving the struggling airline from collapse.
Divestiture/Divestment:
Divestiture or divestment is a defensive strategy that involves selling off business units or assets that are not performing well or are no longer a core part of the company’s operations. This can help to raise cash and reduce debt, but it can also result in a loss of revenue and market share.
Divestiture Examples:
- Barloworld: In 2020, Barloworld, a South African industrial company, announced plans to sell its loss-making automotive and logistics divisions as part of a strategic review aimed at focusing on core business areas.
- Naspers: In 2019, Naspers, a South African multinational conglomerate, announced plans to spin off its African pay-TV business, MultiChoice Group, into a separate company, as part of a broader strategy to unlock value for shareholders.
Liquidation
Liquidation is a defensive strategy that involves selling off all of a company’s assets and shutting down operations. This is typically done when a company is no longer able to meet its financial obligations or when it is no longer profitable. Liquidation can help to pay off creditors and other obligations, but it can also result in job losses and damage to the company’s reputation.
Liquidation Examples:
- Edcon: In 2020, Edcon, a South African retail company that owns brands such as Edgars and Jet, announced plans to enter into voluntary business rescue and liquidation due to financial difficulties caused by the COVID-19 pandemic.
- Stuttafords: In 2017, Stuttafords, a South African department store chain, announced that it would close all its stores and enter into voluntary liquidation due to declining sales and mounting debt.
Defensive strategies are important for companies to reduce their exposure to risk and protect themselves from potential losses. Retrenchment, divestiture/divestment, and liquidation are three common defensive strategies that companies can use to restructure and refocus their operations. However, each strategy has its own benefits and drawbacks, and the choice of strategy will depend on the company’s goals, financial situation, and market conditions.