Retrenchment among small manufacturing firms during recession

Empirical evidence suggests that retrenchment enhances a firm's recovery from declining performance. Identifying exactly when and how to retrench is the next step in applying retrenchment research to managerial practice. Our research reports in-depth analysis of retrenchment during the past recession and offers guidance to small firms facing the next recession. First, retrenchment is identified as a common but not universal response to recession for small firms: over two-thirds of the firms sampled retrenched during the 1990-1991 recession. Second, a theoretical explanation of the priorities placed on the retrenchment of certain factors of production is advanced. Retrenchment is best undertaken on factors that are easily traded on markets and that lack "asset specificity" as transaction-cost scholars have defined the term. Empirical findings based upon a survey of U.S. small manufacturing businesses support the theoretical hypotheses.