IB Business Management SL 5.4 Location Questions
Analyse how location decisions balance markets, labour, suppliers, costs and operational needs in IB Business Management SL.
- Syllabus
- First assessment 2024
- Course
- Business management SL
- Level
- SL
Exam points
- Define and identify the key concepts and tools in 5.4 Location.
- Apply 5.4 Location to business calculations, case evidence or management decisions where relevant.
- Analyse and evaluate 5.4 Location using case context, stakeholder impacts and business trade-offs.
Covered syllabus points
Question 1
[Maximum number: 10]
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.
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.
Award marks according to the markbands on page 3.
Question 2
[Maximum number: 4]
Zeat’s MiniC production line, based in the UK, has 125 employees, most of whom have been with the business since 2000. Currently, approximately 90 % of MiniC sales are to customers in the EU, and profit margins for the MiniC air compressors have fallen significantly due to rising costs in the UK. Lucas recommended to ELE directors that MiniC production be outsourced to a manufacturer in Hungary in the EU.
ELE has three profitable divisions but faces major changes. Gasoline sales are expected to decline as governments ban new gasoline and diesel cars, while electric-car sales are growing and battery prices are falling. Zeat's gasoline-station compressor market is saturated but profitable, and car-rental growth in Europe is expected to slow. The car-rental division has expanded through stations, airports and online booking. The existing Section B information below gives the data needed to evaluate market share, redundancy, outsourcing MiniC production to Hungary and Perrana's offer to buy the gasoline stations. The offer would close the stations, make all station employees redundant and require ELE to relocate 700 car-rental offices, but it could finance expansion into India, where tourism and urbanization are growing and car rentals are still a small share of cars on the road.
ELE is continuing to focus on all three of its divisions.
Car rental division
In 2010, ELE owned 4.5% of the European Union (EU) car rental market. In 2019, ELE's car rental division had revenues of EUR 0.9 billion in a market worth EUR 16.8 billion. Initially, ELE only provided car rentals in its gasoline stations in Belgium. By 2014, ELE had expanded the service to its stations in France, Spain and the UK. Giselle believes that maintaining high levels of customer satisfaction is an important factor in the car rental division's continuing success.
Zeat division
Zeat's MiniC production line, based in the UK, has 125 employees, most of whom have been with the business since 2000.
Currently, approximately 90 % of MiniC sales are to customers in the EU, and profit margins for the MiniC air compressors have fallen significantly due to rising costs in the UK. Lucas recommended to ELE directors that MiniC production be outsourced to a manufacturer in Hungary in the EU.
Gasoline station division
The gasoline station division accounted for 35 % of ELE's operating profits in 2021. Perrana PLC, a global supermarket chain, has offered to purchase all of ELE's gasoline stations. The offer significantly exceeds the current market value of ELE's gasoline stations.
Perrana would close the gasoline stations and open supermarkets on the sites. All ELE gasoline station employees would face redundancy. ELE's workforce will feel betrayed. Although Hugo is very unhappy about the proposal, Giselle has mixed feelings: she would need to find new locations for her 700 car rental offices, but the sale could help finance the expansion of ELE car rentals into India.
Explain two factors relevant to the Zeat division in its decision to outsource MiniC production to Hungary.
Factors include:
- financial aspects: profit margins for MiniC had fallen due to rising costs in the UK: it might be cheaper to produce in Hungary.
- sales aspects: much of the sales ( 90 % ) is in the EU which might make Hungary a better choice (EU single market).
- political aspects: after Brexit, trading with EU is easier from a country within the EU (such as Hungary).
- geographical aspects: geographical proximity to customers (but this aspect of (re)location must be linked to outsourcing).
- legal aspects: laws/policies in Hungary (different/better?).
- cultural and linguistic aspects: communication and possible problems of cross-cultural understanding.
- quality aspects: quality and quality control/assurance might be better in Hungary (or not).
- HR aspects: outsourcing means contracting a specialized company, so the Hungarian workforce may be more proficient (but less committed or less loyal?).
Accept any other relevant factor.
Mark as 2+2.
Award [1] for each relevant factor identified and an additional [1] for a description of how that factor relates to the Zeat division. Maximum two factors.
N.B. do not expect candidates to have advanced knowledge about EU/Hungary/Brexit.
Maximum award overall: [4].
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