IB Business Management SL 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, 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.

Alexa's Apparel Ltd. (AA)

Alexa and Antonio Pérez founded Alexa's Apparel Ltd. (AA) in 2020. AA is located in Arizona, United States (USA). Alexa designs traditional Mexican dresses and offshores the manufacturing to women in indigenous communities in Mexico. The dresses are individually handmade by artisans working at home, who hand-cut, hand-sew, and hand-embroider (decoratively sew) the dresses. Customers order these custom-made dresses at designer markets throughout Arizona. On average, a dress takes 10 days to complete, and artisans typically make two dresses per month.

State two features of offshoring.

In 2022, the global home water filter market was $14 billion.

SVT's product penetration in Europe and the United States of America (USA) is high and growing but low in the rest of the world. In 2022:
- SVTs total sales revenue from home water filters was $\$4.9$ billion
- the average revenue earned per water filter was $\$20$
- 90 % of SVTs home water filter sales were to Europe and the USA.

In 2022, SVT announced the closure of its European and USA water filter manufacturing factories. Water filter profit margins had fallen for three years, partly because of increasing costs of energy, rent and labour. SVT has since built a huge new factory in Asia to manufacture home water filters.

SVT's market research, using quota sampling, found that 80 % of households that purchased an SVT water filter:
- had an above-average income
- owned two or more cars.

In January 2023, SVT:
- launched an advertising campaign in Europe and the USA highlighting the lack of potable water for millions of people in less economically developed countries (LEDCs)
- announced a 5 % worldwide increase in the price of its home water filters.

SVT committed to use the revenue from the 5 % price increase to provide two million free WF15 water purifiers annually to charities in LEDCs. It costs SVT $10 to make a water purifier.

Some disagreement occurred among the board of directors regarding this price increase. Some directors felt it would highlight SVTs vision and commitment to helping people in LEDCs, but others believed sales might fall, impacting profits in SVTs Consumer Products Division.

Explain two factors that SVT would have needed to consider when deciding where to open the new factory in Asia.