Practise IB Business Management SL/HL 5.4.1 by applying location of production concepts to exam-style questions.
FrioAire Appliances (FA)
FrioAire Appliances (FA) manufactures medium-priced and medium-quality refrigerators. It is a multinational public limited company. Its factory is located in a less economically developed country that has high unemployment, a tradition of autocratic leadership and labour costs lower than FA's home country. The factory is profitable, and FA pays consistently good dividends. Market growth for medium-priced and medium-quality refrigerators is limited.
As part of a strategic objective to increase productivity and to enter a fast-growing market for high-priced and high-quality refrigerators, F A is considering building a new factory in and relocating production to Germany. This would require closing the factory in the less economically developed country. The new factory will:
- use innovative technologies, including advanced robotics and 3D processes
- require fewer employees, but those it does require will need to have better skills and qualifications.
Germany has a highly skilled, qualified and productive workforce. The new factory would allow FA to reposition its products. However, FA would need to raise significant finance to build and equip the new factory.
FA's leadership style at the factory in the less economically developed country is autocratic. Members of FA's board wonder whether this style would be suitable for the new factory in Germany, where workers have more bargaining power because of their high skill level and the labour-friendly cultural traditions. In Germany, FA would have to follow more regulations regarding the environment, health and safety, and employee rights.
FA workers in the less economically developed country are very loyal to F A, which has continued operation through a civil war at significant cost to itself (for security). If FA were to close in the less economically developed country, the workers would not find such good jobs.
Evaluate the option of building a factory in, and relocating to, Germany.
Evaluate the option of building a factory in, and relocating to, Germany.
The option of building a factory in and relocating to Germany is a major strategic decision. In certain respects, FA would be an entirely different company: new products, new processes, new types of workers and new leadership styles, as well as a wholly new cultural context. Going into highly sophisticated high-tech manufacturing with robots has the potential to position FA for a future of highly automated manufacturing. Without making these changes, FA runs some risk of remaining stuck in much lower value-added processes, which in the long run are less profitable. The risks are very high. The potential rewards are high as well.
Perhaps a strategy for FA would be not to sell the older factory but to continue to operate it and rely on those profits to support the new factory as it gets started. Whether FA's balance sheet is strong enough to operate both factories is an open question, as is the question of whether its management has sufficient depth to operate two major plants.
Balance in this context means having two arguments for opening the plant in Germany and two arguments against, which could be partially couched in a discussion of leaving the old plant open.
Accept any other relevant examination.
A conclusion with judgment is expected.
Marks should be allocated according to the mark bands on page 3 with further guidance below.
For one relevant issue that is one-sided, award up to [3]. For more than one relevant issue that is one-sided, award up to a maximum of [4].
Award a maximum of [6] if the answer is of a standard that shows balanced analysis and understanding throughout the response with reference to the stimulus material but there is no judgment/conclusion.
Candidates cannot reach the [7-8] markband if they give judgment/conclusions that are not based on analysis/explanation already given in their answer.
There is considerable stimulus material. Candidates that largely repeat the stimulus material with little or no analysis award up to a maximum of [4]
It is expected that the candidate goes beyond just providing some relevant arguments for or against any suggested strategy and finish off with some conclusions and judgment.
Candidates, in order to reach to the top markband, should show clear evidence of substantiation/well supported.
Answer one question from this section. The organizations featured in sections A and B and in the paper 1 case study may not be used as a basis to your answer.