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IB BUsiness MAnagement:
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Key Learning Outcomes:
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Location, location, locationDeciding on the best location for a new business - or relocating an existing one - is often crucial to its success. Location decisions - choosing new sites for expansion or relocation of the business - are some of the most important decisions made by management teams. Selecting the best site will have a significant effect on many departments of the business and, ultimately, on the profitability and chances of success of the whole firm.
Location decisions have three key characteristics:An 'optimal' location is one that selects the best site for expansion of the business or for its relocation, given current information. The best site should maximise the long-term profits of the business. The optimal site is nearly always a compromise between conflicting benefits and drawbacks; for example:
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An optimal location will be a balance between
Disadvantages associated with Suboptimal location decisions |
Quantitative factors influencing location decisionsQuantitative factors: These are measurable in financial terms and will have a direct impact on either the costs of a site or the revenues and its profitability.
Quantitative techniques in location choiceThe origins of Silicon Valley |
Qualitative factors influencing location decisionsQualitative factors: Non-measurable factors that may influence business decisions. Qualitative factors are not necessarily subordinate to quantitative financial factors.
+ good educational standards
+ highly qualified staff + avoidance of the problems associated with exchange rate fluctuations ClusteringA business cluster is a geographic concentration of interconnected businesses, suppliers, and associated institutions in a particular field. Clusters are considered to increase the productivity with which companies can compete, nationally and globally. Silicone Valley in California is the best known example. Other countries are trying to emulate this success.
Ever wonder why car yards tend to cluster together? Listen to this super interesting pod-cast below.
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Changing location to by-pass rules and regulations |
Bribery is a common cost to doing business in some countries |
The European Union should be a bastion of effective government |
Russia is a notoriously difficult place to locate a business |
Globalisation and location decisions
One of the main features of globalisation is the growing trend for businesses to relocate completely to another country or to set up new operating bases abroad. This process is often referred to as 'offshoring'. The world's largest corporations are now virtually all multinationals.
Offshoring: The relocation of a business process done in one country to the same or another company in another country. Multinational: A business with operations or production bases in more than one country. When previously offshored business functions or processes are insourced back to the country of domicile, then this is termed re-shoring. An increasingly common practiceA foreign country = foreign practices |
Countries trying to attract businessesThe benefits of international locationsThe limitations of international locations |
The art of apologising in Japan |
Foreign country/language! |
Reorganising productionIB Business Management requires students to discuss and evaluate the following methods of reorganising production: outsourcing, offshoring and insourcing. The summary notes below explain the key features and provide an evaluation of each method of reorganising production by considering the advantages and disadvantages of each.
OutsourcingOutsourcing: A practice used by different companies to reduce costs by transferring portions of work to outside suppliers rather than completing it internally.
Outsourcing is an effective cost-saving strategy when used properly. It is sometimes more affordable to purchase a good from companies with comparative advantages than it is to produce the good internally. An example of a manufacturing company outsourcing would be Dell buying some of its computer components from another manufacturer in order to save on production costs. Alternatively, businesses may decide to outsource book-keeping and accounting duties to independent accounting firms, as it may be cheaper than retaining an in-house accountant. Business operations that are commonly outsourced include:
Generally, business functions and processes outsourced to an external company bring cost savings and/or productivity gains. For example, a specialist accountancy firm may be contracted to prepare tax returns and investor reports at a cost far less than having to employ an accountant to do this internally. Likewise, specialist manufacturers will be able to supply components and products far more cost effectively and efficiently than a firm who does not have that area of expertise. The inevitable future of offshoring!
iNSOURCINGAssigning a project to a person or department within the company instead of hiring an outside person or company to do the work. While outsourcing is commonly thought of as a way for companies to save money, it is sometimes more cost effective to have the work done in-house. Another reason for insourcing is that a firm may not be happy with the quality of the service or manufacturing they have outsourced. Bringing that process back ‘in house’ provides better control of the process at all levels as long as the company has the resources and knowledge to re-establish these effectively.
When previously offshored business functions or processes are insourced back to the country of domicile, then this is termed re-shoring. As the relocation decision is likely to be costly, insourcing will not be entered into likely. In fact, industrial inertia (geographical) describes a stage at which an industry prefers to run in its former location although the main alluring factors are gone |
Outsourcing and offshoringExplain the difference between outsourcing and offshoring (two easily confused concepts). The audio track above is an easy to understand explanation of the key differences between outsourcing and offshoring.
OffshoringThe practice of basing some of a company's business functions (account and book-keeping), processes (manufacturing) or services (IT solutions) overseas, usually so as to take advantage of lower costs. Offshored functions can remain within the functional control and ownership of the business or they can be entirely outsourced to a separate offshore organisation – this is termed offshore outsourcing. Offshoring is outsourcing to a firm in a different country. The same advantages apply, and these advantages can likely be boosted. Costs can be further reduced (a Philippine-based call centre is likely less expensive than one based in the US. This could be from additional economies of scale being achieved, lower operating costs (especially labour costs) and lower tax rates.
Manufacturing (production) and services are the two categories of offshoring. Call centres, IT and accountancy services are common examples of business functions that are offshored. Factories producing entire products or component products account for a much larger share of the world’s offshored business processes than services do. Very Unethical offshoringReshoring |
5.4 Location:
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5.4 Location:
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Case Study: Location I |
Case Study: Location II |
Progress check - test your understanding by completing the activities below
You have below, a range of practice activities, flash cards, exam practice questions and an online interactive self test to ensure you have complete mastery of the IB Business and Management requirements for the Operations Management 5.5 Location topic.
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IB BUSINESS MANAGEMENT QUIZZES AND TWO CLASSROOM GAMES
Test how well you know the IB Business Management Operations Management 5.4 Location topic with the self-assessment tool. Aim for a score of at least 80 per cent.
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