Evaluate location choices by balancing markets, labour, suppliers, costs, globalization and operational risk in IB Business Management HL cases.
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.
Crisis management and Mapa
The Portuguese company Mapa manufactures a handheld global positioning system (GPS)* device. In the winter of 2012, Mapa received reports that its GPS devices often failed in extremely cold weather. According to the media, the problem first appeared in 2011, when mountain climbers with the Mapa GPS devices discovered inaccuracies in the coordinates the devices provided. Rumours of the GPS failure began to circulate in the climbing community. Then, after several accidents in the mountains, including fatalities, television news programmes began to report the problem. Only then did Mapa begin to take action.
Engineers concluded that the problem resulted from where and when the quality testing was being performed. The production of a component part outsourced to a company in Iceland was being quality tested in Portugal in the summer. There was also poor communication between the producer of the component part and Mapa because of differences in language and culture.
Mapa's tall organizational structure, bureaucracy (and bureaucratic corporate culture) and centralized decision making meant that no manager acted until the Chief Executive Officer (CEO) formally apologized. As a result, Mapa had taken too long to admit that there was a problem and so consumer confidence fell and Mapa's reputation suffered.
The production process of the GPS device is shown in the table below:
\footnotetext{
* global positioning system (GPS): provides location, including geographic coordinates and time information to users anywhere on earth as long as their receivers (commonly a handheld device such as a smartphone with a GPS application) have unobstructed lines of wireless transmission to various GPS satellites
}
Define the term outsourcing.
On a recent trip to Bangladesh, Su discovered the work of Arif Koomar. He founded a for-profit microfinance provider, which trades under the name AK Bank. Very successful, AK Bank serves much of Bangladesh and has provided finance to over three million households to buy solar power systems specifically commissioned by AK Bank. Each solar power system generates enough electricity for a household. Su made an immediate decision. She would find somewhere else in the world in which a similar scheme would bring great benefits to communities. She eventually identified Afghanistan, a country with around 34 million people. After years of war, many areas of Afghanistan lack a reliable supply of electricity. Su saw an opportunity to manufacture a household-based solar power systems similar to those used in Bangladesh and aimed at poor and often remote families. She set up a social enterprise called Afghan Sun (AS), which operates as a private limited company. Su recruited a team of volunteers from HH employees who are keen to work on the project. An important decision to be made is the location of the main production facility for the solar power systems. Su is considering two locations.
| Country A | Country B | |
|---|---|---|
| Nature of the economy | Developed economy | Developing economy |
| Unemployment | Low but rising | High |
| Skills level | High | Shortage of skills |
| Government assistance | Limited, free market economy | Encourages investment from overseas with grants available |
| Local wage costs | High | Low |
| Currency | Stable | Falling |
| Facilities | New facilities would be required, high rents | Suitable facilities available at a low rent |
| Transport links to Afghanistan | Complex | Straightforward |
| Political environment | Stable, but election may lead to a change in government | One party state |
| International trade | Part of a major trading agreement | No major trading agreements |
Table 1: Location factors of the two countries Su is considering for the main production facility
Su is considering two possible locations for the production facility. Explain the factors (reasons) that Su may consider when deciding between the two locations.