IB Business Management HL 5.4 Location 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, FA 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 FA, 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.

fashionable neighbourhood, recruiting household employees, getting agencies to establish concert tours, producing more CD albums, and, more importantly, promoting her. Ruth explained to Alejandra that unless the product life cycle of music stars is carefully managed, it is often short. Alejandra needed a brand identity. Her revenue streams would be based on that brand. She would also develop strategies to extend the life of the product, which was Alejandra herself. Alejandra had an identity partly based upon her youthful and innocent look, her powerful voice and her Hispanic heritage. Ruth said that now that Alejandra was an adult, she needed to dress more like a young woman and less like a child. Nervous about this transition, Alejandra agreed to a more glamorous image. She began going to a famous hairdresser and style expert, Gavin Pratt. Soon, she had another revenue stream: appearing on the cover of high-profile fashion magazines. Ruth also argued that Alejandra needed to be "less ethnic". The US was rapidly changing demographically. The percentage of the American population that was Hispanic was small, but it was rapidly growing, thus expanding the Spanish-speaking American market. However, this demographic shift was creating a negative political reaction in the US. Focus groups showed that some English-speakers did not like the name "Lady Alejandra". Ruth recommended a new name: just "LadyA" as one word, pronounced "lay-dee-ay", with equally strong emphasis on the first and last syllables. It worked. By the year 2000, LadyA was one of the most successful musicians in the US. Popular with English-speakers, especially teenage girls and young women, she also appealed to many Hispanics. Even though all her songs were now in English and were popular in the mainstream music charts, Spanish-speaking Americans were still fans. They saw LadyA as a shining success story of a Hispanic American. As LadyA grew more popular, both her revenue and expenses increased. By 2001, she was earning millions of dollars a year from CD album sales, concerts, magazine covers, and music videos. She employed a full-time accountant to help manage her revenue and all the many expenses of her new life. For her work, she employed a band, a group of dancers, and a variety of musical and video technicians. She asked Gavin to join her full time in order to plan all aspects of her clothing, make-up, and hairstyle. For her concerts she also had an events manager who arranged bookings of venues and hotels, and who hired a company specializing in logistics, who transported equipment and set up the stage at each concert location. These were her core employees. Temporary employees were needed at each venue to help set up the venue and stage. She had many peripheral employees for her increasingly extravagant personal life: two personal assistants, two housekeepers, one chef, one personal trainer, one driver, and one chief bodyguard, who supervised six bodyguards. She was very inconsistent in her style of leadership with her employees. Sometimes she was very direct, giving detailed instructions and getting angry if they were not followed exactly. At other times, she adopted a more laissez-faire leadership style. The employees never knew what to expect. Communication was poor. Although working for a superstar had exciting moments, the employees frequently complained behind her back, mockingly calling her "la princesa". Alejandra originally operated as a sole trader. However, as the business grew it became clear that she needed the protection of limited liability and so she changed the business to a private limited company, LadyA Management Limited (LAM). Alejandra herself owned 98% of the shares in LAM. Her parents and Ruth Liebermann owned the remaining $2 \%$. Technology was changing the music industry. In 2000, online file sharing software became widely available. Though the file sharing of copyrighted material was usually illegal, many people did it anyway, especially young people. The sales of CD albums began to fall. This trend continued with the emergence of other new technologies such as MP3 players and smartphones. Another important technological change was video hosting websites, which effectively ended the direct profitability of music videos. Before video hosting websites, musicians received royalties for videos that appeared on television. Now, artists such as LadyA had to produce their own videos and upload them to video hosting websites. These productions were expensive, but did not generate any direct revenue. The definition of a successful musician was also changing. With falling sales revenue from music (a problem made worse by the economic downturn that began in 2008), artists had to transform themselves into "media personalities" and find ways to generate revenue from these branded identities, just as Ruth had predicted. In 2009, LadyA started appearing in many above the line and below the line promotions of various types of products. LadyA was always very careful about which products she endorsed. Each one had to strengthen her brand identity as a beautiful, mainstream American, yet one with Hispanic passion and intensity. She also began communicating with her fans through various social networking websites. In 2010, LadyA started offering her own product line of perfume and cosmetics, promoted under the name LadyA. Primary and secondary market research had showed that perfume and cosmetics would best connect with LadyA's established brand and help her reach her main target market: teenage girls and young women. The production of LadyA perfume and cosmetics was outsourced, to an established manufacturer in Malaysia, where costs were much lower. Quality control could, however, be a problem. The Malaysian manufacturer would produce LadyA perfume and cosmetics using batch production which would enable a variety of products to be made; LadyA would have to pay $60 \%$ of the costs in advance. The wholesaling and distribution was also outsourced, to a company in Minnesota. By 2011, LadyA perfume and cosmetics were sold in a nation-wide chain of department stores in the US. At the same time, Alejandra decided to reorganize the business. She continued to manage all of her household employees personally. She appointed a Managing Director, and a Human Resources Manager to assist in workforce planning and manage the rest of the business. She delegated some business functions, but kept a very close interest in all decisions through her meetings with the Managing Director. One benefit of this reorganization was that, with clear roles, systems and procedures in place, Alejandra's employees complained less. On a personal level, 2012 was a big year for Alejandra. She married Rafaele Eco, an Italian investment banker, and they purchased a large mansion in Hollywood, requiring an even greater number of peripheral employees. Over the next few years, LadyA was at the peak of her media power, wealth, and fame. She was more mature and business-oriented than when she was in her twenties. Her leadership style had matured as well. She became more consistent and

Describe two benefits for LadyA of outsourcing the production of perfume and cosmetics to Malaysia.