CA Intermediate · Financial Management and Strategic Management · Strategic Choices
Kaveri Textiles Ltd faces falling demand and rising losses in its core business. Management decides to cut costs sharply, sell surplus assets and reduce headcount to restore profitability, without leaving the business. Later, if this fails, it would consider selling the unit. Which statement correctly classifies the first step?
The first step is a retrenchment strategy implemented as a turnaround. The firm reduces costs, assets and workforce to restore profitability while remaining in the same business. Divestment is only a later option if the turnaround fails, and neither stability nor expansion matches the shrinking actions described.
- ARetrenchment strategy through a turnaround approachCorrect
- BDivestment strategy through a spin-off
- CStability strategy through a pause or proceed-with-caution approach
- DExpansion strategy through horizontal integration
Explanation
Cost cutting, asset reduction and downsizing to reverse losses while staying in the business is a turnaround strategy under retrenchment. Divestment is the later contemplated sale, not the current step. Stability strategies do not involve shrinking assets, and the firm is not expanding.
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