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IB Syllabus 5.4
IB Syllabus 5.4
The learning outcomes (or assessment objectives) for this section of the IB Business Management syllabus are:
The reasons for a specific location of production (AO2)
The following ways of reorganizing production, both nationally and internationally (AO3):
Outsourcing / subcontracting
Offshoring
Insourcing
Reshoring
In-Class Activities
In-Class Activities
Day 1: Vocabulary
Day 1: Vocabulary
Entrance / Exit Slip
To what extent does location of production determine company success?
What factors in location should be considered?
Advantages and Disadvantages of:
Outsourcing / subcontracting
Offshoring
Insourcing
Reshoring
Please complete the following tables
Day 2: Case Study
Day 2: Case Study
Location Assignment (Choose 1)
Option 1: Case study. 7. Artigianato Capelli (AC)
Questions A, B, C, D, E (Optional F)
Option 2: Choose a company or industry and determine the best place to locate a new business. Compare that with another country that they should not locate and analyze why not.
Brief description of company or industry.
Analysis of Qualitative and Quantitative factors in both countries.
Risks that may exist and recommendations on how to deal with risks.
Copy and Complete this table into your notes for studying:
On your own, or with a partner, consider the types of businesses listed in the table below and discuss two or three factors that would be important for a location decision.
What you should know
By the end of this subtopic, you should be able to:
define the following terms: (AO1)
location
outsourcing/subcontracting
offshoring
insourcing
reshoring
explain the reasons for a specific location of production (AO2)
evaluate outsourcing/subcontracting, offshoring, insourcing and reshoring as ways of reorganising production, both nationally and internationally (AO3)
https://quizlet.com/pa/834097560/54-location-flash-cards/?i=4jrhob&x=1jqt
https://www.gimkit.com/view/651b6bb30927e6002bad9fb5
Bulk-increasing industries
Describes the businesses that need to be located near to their customer as the final product (such as hand-made home furniture) is bulkier and heavier than the raw materials used to make it.
Bulk-reducing industries
Describes the businesses that need to be located near to the raw materials needed to produce a certain good, e.g., breweries should locate where there is a readily available supply of barley and water, as the weight of the final output is less than that of the raw materials.
Clustering
This occurs when businesses choose to locate near other firms operating in related industries in order to benefit from passing trade and demand for products in complementary markets.
Cost of living
This is a measure of how expensive it is for people to live in a particular geographical location.
Enterprise zones
Also known as assisted areas, these are geographical areas that receive direct government financial assistance for economic regeneration and development.
Footloose organizations
These businesses do not have to locate in any particular area, i.e. they can choose to locate almost anywhere as there are no cost advantages of any particular location.
Government incentives
Financial motivators offered by the state to businesses to locate in a particular area or regions, perhaps due to high unemployment. Examples of such incentives include grants, subsidies, tax concessions, and interest-free loans.
Industrial inertia
This exists when a business chooses to remain in the same location although there are no cost advantages in doing so.
Infrastructure
Refers to the physical and organizational structures and systems necessary for society to function, such as transportation facilities, motorways (highways), road networks, and communications networks.
Insourcing
This refers to the use of an organization’s own resources in order to fulfil a specific job, function, or project instead of it being outsourced to a third-party provider.
Location
This refers to the geographical place or position of a business.
Offshoring
This is an extension of outsourcing but involves relocating part of or all of an organization’s functions and processes overseas.
Outsourcing
This is the use of third-party subcontractors for carrying out non-core activities of an organization in order to improve operational efficiency and reduce production costs.
Reshoring
Sometimes referred to as onshoring, this is the practice of bringing back business functions to the domestic country from overseas.
Subcontractors
These outsourced firms perform non-core activities for an organization. They are used for their expertise and the cost advantages they bring.
5.1 Extra Notes
5.1 Extra Notes
What factors should be considered when a company is deciding whether to move operations to another location?
Quantitative Reasons
Availability, suitability and cost of Land
Availability, suitability and cost of Labour
Proximity to Customers
Proximity and access to Raw Materials
Bulk Increasing Industries
Bulk Reducing Industries
Government incentives and limitations
Qualitative Reasons
Management preferences
Local Knowledge
Infrastructure
Political Stability
Government Restrictions and Regulations
Ethical Issues
Clustering
Feasibility of E-Commerce
Location Factors in Detail
Cost and availability of land – Rents are higher in busy central business districts and popular locations than in rural and remote areas. This often results in higher prices being charged by businesses located in busy and popular locations in order to maintain their profit margins. However, this can deter some customers, so put off some businesses from locating in a particular location.
Cost and availability of labour – Many firms choose to locate in rural areas or overseas in order to gain access to cheaper and / or better skilled labour.
Nearness to markets – Most retailers need to be located near to their customers. Examples include hair salons, restaurants and suppliers of fresh produce. Being located closer to customers (domestic or overseas) helps a business to gain competitive advantages by having reduced transportation costs and greater convenience to customers. Geographers use the term "megacity" to describe a very large city, typically with a population of more than 10 million people (see table below for the World Economic Forum's forecasts for the world's largest cities by 2030). Locating in megacities provides many opportunities for businesses.
Local infrastructure – Infrastructure refers to the physical and organizational structures and systems necessary for society to function. This includes transportation facilities, motorways (highways), road networks, waste management systems, and telecommunication networks. It also includes social infrastructures such as schools and colleges, hospitals, libraries, and legal systems (such as the courts) to facilitate businesses to operate more efficiently. Economic infrastructures include a country's monetary system including commercial banks, insurance companies, and other financial institutions.
Government incentives – Economically assisted areas or enterprise zones are the locations identified by the government that are in need of economic regeneration and development. These areas are likely to have a very high unemployment rate, low average incomes and relative poverty. Businesses may choose to locate in these areas due to the existence of government incentives, such as grants, subsidies tax concessions, and interest-free loans (or loans on very low rates of interest). These financial incentives are used to cut production costs, thereby enticing businesses to (re)locate in these areas.
Clustering – Firms often choose to locate near other firms operating in related industries in order to benefit from passing trade and demand for products in complementary markets. For example, coffee shops might be located in shopping malls to attract customers who may need a coffee break from their shopping. Children’s clothes retailers might choose to locate near toy stores.
Bulk-increasing industries – These industries need to be located near to the customer because the final product (such as hand-made home furniture) is bulkier and heavier than the raw materials used to make it.
Bulk-reducing industries – These industries need to be located near to the raw materials used to produce a certain good. For example, in the brewery industry, it makes financial sense for breweries to locate near where there is a readily available supply of barley and water as the weight of the final output is less than the raw materials.
Strategic reasons – Multinational companies often locate in overseas markets in order to bypass trade protectionist measures, i.e. trade restrictions imposed on imported goods and services.
The cost of living – This is a measure of how expensive it is for people to live in a particular geographical location. For employees, the cost of living is a key determinant of whether they (re)locate in a particular area. The cost of living includes measures such as rental costs (for residential property), petrol prices, food prices, and utilities (water, gas, electricity, and telecommunications). The cost of living is an important factor that businesses need to consider in order to attract suitably qualified and experienced workers, such as setting suitably attractive wages and salaries.
Where parts of an iPhone come from
Outsourcing (subcontracting)
Outsourcing (subcontracting)
Outsourcing
This is the use of third-party subcontractors for carrying out non-core activities of an organization in order to improve operational efficiency and reduce production costs.
Subcontractors
These outsourced firms perform non-core activities for an organization. They are used for their expertise and the cost advantages they bring.
Examples of Outsourcing
Typical business activities/functions that are outsourced
Customer service call centres
Maintenance of information communications technology (ICT) systems
Manufacturing of parts and components
Property management and maintenance
Public relations
Recruitment and selection (recruitment agencies)
Security systems and services
Training and development (continuous professional development).
Under what circumstances would you want to Outsource?
Advantages
Cost
Quality
Focus on core functions of company
Limitations
Trust
Quality not fully controlled
Need effective communication
Can cause uncertainty in workforce
Advantages of Outsourcing
The organization is freed up to concentrate on its core activities and strategy
The organization gains from the specialized services and cost advantages of the third-party partner
Outsourcing helps to rationalize business operations, hence cuts costs and improves efficiency and profitability for the organization.
Disadvantages of Outsourcing
Quality issues and concerns can arise with the use of subcontractors
There are costs involved in monitoring and maintaining professional relationships with subcontractors
There can be potential conflict of interest with third party providers.
This Man Worked Undercover In A Chinese iPhone Factory | Insider Tech
Offshoring
Offshoring
Offshoring
Involves relocating part of or all of an organization’s functions and processes overseas.
Examples of Offshoring
Apple and Samsung outsource the production of their smartphones to Foxconn (the multinational manufacturer headquartered in Taiwan) in locations such as China and India.
BMW offshores the production of its MINI to Oxford, UK. With all MINI cars being electric by 2030, BMW has also outsourced the production of the electric MINI to Chinese manufacturer Great Wall Motor. BMW also has a joint venture with China's Brilliance Auto to build BMW-branded cars for sale in China.
General Electric (GE) has a research and development (R&D) centre in Bangalore, India. The decision whether to offshore requires the firm to consider additional risks and uncertainties of relocating operations to unfamiliar places.
JPMorgan Chase & Co, the American multinational investment bank and financial services company, has offices in Manila and Cebu, Philippines, specialising in mortgage operations, IT services, and call centre activities.
Examples of typical offshored functions and processes include:
Customer call centres
Finance and accounting services
Information Communication Technologies (ICT)
Manufacturing (production)
Research and development (R&D)
Telesales
Advantages of Offshoring
Wages may be significantly lower in other countries, allowing the firm’s costs to be reduced. The price can then be reduced (to gain a price advantage) or kept the same but allowing the firm to gain a higher profit margin.
Similarly, employment laws in overseas nations may be less stringent, making it easier and cheaper for a business to operate.
Offshoring means the organization can focus on its core competencies.
Job creation and career opportunities in the host country.
Disadvantages of Offshoring
Offshoring is often associated with unethical business practices, e.g., such as the use of child labour and mistreatment of workers in low income countries
There are potential problems arising from cultural issues and language barriers, possibly leading to misunderstandings and conflict.
There may be concerns about quality control and quality standards with overseas workers. Monitoring the quality of output of an external party is more difficult than doing this in-house.
Offshoring can initially lead to redundancies in the domestic economy. Staff cuts and retrenchments need to be handled sensitively, yet can also be very expensive if severance payments (compensations) are made.
As with any strategy to expand overseas, even if a business carries extensive market research to ensure its products sell well internationally or its offshoring operations will succeed, there can still be problems due to a lack of local knowledge and awareness of local business etiquette. Something as simple as the location name can create problems for local businesses attempting to market their products overseas.
Insourcing
Insourcing
Insourcing / In-house production
refers to the use of an organization’s own resources in order to fulfil a specific job, function or project instead of it being outsourced to a third party provider. The firm’s own employees do the work, e.g. the organization hires its own accountants, market researchers, lawyers and computer engineers. Hence, insourcing (or in-housing) enables the business to retain full control of its operations.
Advantages of Insourcing
Insourcing involves the use of existing resources and employees, so this can be cheaper than using an outsourced provider. This is especially the case if there are no significant capital investment costs involved.
It enables an organization to have better control of its operations.
It helps to develop institutional knowledge (the collective historical and cultural awareness and understanding of skilled and experienced workers).
It maintains or creates jobs in the local and domestic economy.
It is suitable for start-ups businesses and smaller organizations with little or no experience in using subcontractors.
Disadvantages of Insourcing
Employees may not have the required knowledge, abilities or experience to perform the tasks. By contrast, outsourced specialists could be more effective and productive.
Multinational companies that want to expand in overseas markets cannot rely on insourcing as a growth strategy.
Reshoring (the practice of bringing back business functions to the domestic country) can be expensive as the costs of insourcing are likely to be high. This will have a negative impact on profits, at least in the short term.
Reshoring
Reshoring
Reshoring (sometimes referred to as onshoring) is the practice of bringing back business functions to the domestic country from overseas. Hence, it is the opposite of offshoring.
Reshoring increased significantly during the COVID-19 pandemic when companies that relied on products produced offshore were negatively effected by the trade and travel restrictions
Why Reshoring?
The cost advantages of operating in the overseas location (offshoring) have been reduced or eliminated. This might be due to rising average wages in the foreign country or the foreign government removing tax concessions and/or subsidies and grants formerly used to make offshoring attractive.
The domestic government has provided financial incentives, such as grants and subsidies, to businesses that bring back production (reshore). The government may want to do this in order to increase domestic employment.
There may have been concerns about quality and/or ethical problems related to offshoring. In such cases, managers may decide that it is easier to monitor and control quality by bringing production back to domestic shores.
Political instability means it has become less attractive, or even unviable, to remain in the overseas location. An example is the many multinational businesses that pulled out of Russia due to the Russo-Ukrainian War.
Advantages of Reshoring
Higher quality products for consumers - Offshore manufacturing offers the cheapest solution for many producers, due to the use of relatively cheap labour and technologies.
Greater control of production processes - Offshoring to foreign countries often have significantly less rigid laws and regulations to ensure quality and safety standards, including fair working conditions.
Reduced risks - As operations are brought back to domestic shores, there are fewer risks and complexities in the supply chain, such as shipping delays and bureaucratic procedures at border control.
Operational efficiency - Similarly, by operating in the domestic time zone, reshoring enables business activities to be conducted without the challenges of operating across different time zones. This can allow businesses to deal with issues a lot faster, thereby shortening lead times in the production process.
Avoidance of tariffs (import taxes) - Reshoring production helps producers to avoid tariffs. This means domestics firms can avoid charges imposed on products coming into the country from overseas. Lower production costs can be passed onto consumers in the form of lower prices, thereby improving the domestic firm's competitiveness.
Domestic employment - Reshoring brings jobs back to the home country, which brings greater economic prosperity.
Disadvantages of Reshoring
High costs - Reshoring can be expensive as the costs of reshoring production facilities are likely to be high. The strategy does not necessarily lower expenses, perhaps to due relatively high minimum wages and the cost of rent in the domestic economy. Having to start from scratch can have a negative impact on profits, at least in the short term.
Resourcing needs - There may be a lack of local expertise (which is a key reason for offshoring certain business functions in the first place). Before committing to a decision, managers need to determine whether the business has access to sufficient and appropriate human and capital resources necessary to execute a reshoring strategy.
International relations - A reshoring decision is likely to damage relationships with foreign offshoring producers and suppliers. In an ever-globalized world, international harmony is good for businesses conducting trade in overseas markets.
Time lags - Businesses with offshoring activities are likely to be tied in for some time due to contracts with overseas producers. The decision to reshore often requires the termination of such contracts although this will take time to execute. Firms may need to seek legal advice before reshoring so as to avoid lawsuits based on contract disputes.
The Daily Podcast: How Tesla Planted the Seeds for Its Own Potential Downfall (April 9, 2024)
Elon Musk's factory in China save his company and made him ultrarich. Now, it may backfire.
https://www.nytimes.com/2024/04/09/podcasts/the-daily/tesla-china-ev.html
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