MARKETING

The Plant Location Puzzle

by Andrew D. Bartmess
FROM THE MARCHAPRIL 1994 ISSUE

A nn Reardon made her way across the crowded trade-show oor, deep in thought and
oblivious to the noisy activity all around her. As CEO of The Eldora Company (EDC) for
the previous 13 years, she had led her organization through a period of extraordinary
success. While larger bicycle makers had moved their manufacturing operations overseas to take
advantage of lower labor costs, Eldora had stuck with a domestic manufacturing strategy, keeping
its plant on the same campus as its corporate oces in Boulder, Colorado. Ann felt that her strategy
of keeping all the parts of the company in the same location, while unconventional, had contributed
greatly to cooperation among various departments and, ultimately, to the companys growth: EDC
had become the largest and most protable bicycle company in the United States. Yet her
manufacturing vice president, Sean Andrews, was now urging her to build a plant in China.

Look at the number of companies here, he had said that morning, as they helped several other
EDC staers stack brochures on the exhibit table and position the companys latest models around
the perimeter of their area. Manufacturing heads rarely attended trade shows; in fact, this was
Seans rst, but he had wanted to attend, and Ann had supported his interest. There are too many
players in this market, he had said. Ive been saying this for two months now, and you know the
forecasters numbers back me up. But if they werent enough to convince you, just look around. The
industry is reaching the saturation point here in the States. We have to break into Asia.

Leave it alone, Sean, Ann had replied. I know this is something youre pushing; youve said so in
the past. But lets set up a time to talk about it in detail later. This isnt the time or the place.
Now, three hours later, with the show in full swing, Ann understood why Sean had been compelled
to speak up again. Having all their competitors in the same room at the same time was a powerful
visual reminder of how the industry had changed. She thought about what Sean had said about the
U.S. market. In 1992, EDCs sales and earnings had hit record levels. The company now produced
almost 30% of the bicycles sold in the United States. But U.S. mass-market bicycle sales were
growing by only 2% per year, while the Asian market for those same bikes was nearly doubling on an
annual basis. And Eldora could not competitively serve those markets from its U.S. manufacturing
facility. Two of the largest bike manufacturers in the world, located in rapidly growing Asian
markets, enjoyed a signicant labor and distribution cost advantage.

She stopped at a mountain bike display set up by a fast-growing, young bike company. Mountain
bikes with front suspension were the latest trendthe added support and cushion allowed riders to
better absorb the shocks inherent in o-road riding without slowing down or losing balance. Most of
these bikes were still prohibitively expensive. But Eldora, too, had an entry in this product category,
retailing for about $190, and Ann was proud of it. For years, the company had concentrated its
eorts on inexpensive bicycles, which retailed through mass merchandisers for between $100 and
$200. Eldoras prices were slightly higher than other low-end competitors, but large retailers were
willing to pay the premium because EDC had consistently been able to oer many state-of-the-art
styles and features with quick, timely deliveries that competitors building overseas couldnt match.

One of the reasons the company had been so successful was that Boulder, Colorado, was a bicyclists
mecca. Eldora employees at all levels shared a genuine love of bicycling and eagerly pursued
knowledge of the industrys latest trends and styles. Someone was always suggesting a better way to
position the hand brakes, or a new toe grip that allowed for better traction and easier dismounts.
And Eldora never had a shortage of people willing to test out the latest prototypes.

Another reason was that all marketing sta, engineers, designers, and manufacturing personnel
worked on one campus, within a 10-minute walk of one another. Ann had bet big on that strategy,
and it had paid o. Communication was easy, and changes in styles, production plans, and the like
could be made quickly and eciently. Mountain bikes, for example, had gone from 0% to more than
50% of the market volume since 1988, and Eldora had met the increased demand with ease. And
when orders for cross-bikesa mountain/road bike hybrid that had enjoyed a spurt of popularity
began to fall o, Eldora had been able to adjust its production run with minimal disruption.
EDC had also beneted from its foray into the high-end market (bicycles retailing for between $400
and $700) 12 years earlier. One of Anns rst moves as CEO had been to enter into a joint venture
with Rinaldi, a high-end Italian bicycle manufacturer that at the time was specializing in racing
models. As part of the agreement, EDC had begun importing Rinaldi bikes under the brand name
Summit and selling them through specialty bike dealers. Similarly, Rinaldi had begun marketing
EDC bikes in Europe. That arrangement had had lasting rewards: although racing bikes were no
longer very popular, EDCs oerings had taken o. About 20% of EDCs sales were now made outside
the United States (primarily in Europe and Canada) through this and other agreements.

The relationships with Rinaldi and the specialty bike shops also helped keep EDC management
aware of the latest industry trends over the years. Most recently, those trends had included a move
toward more exotic frame materials like aluminum and carbon ber and more advanced
components, including the new front-fork suspension systems. Ann examined another rivals
brochure touting a soon-to-be-released high-end model with these advances. EDC engineers were
clearly ahead of the curve.

Her satisfaction was quickly tempered with thoughts of foreign sales performance. Between 1987
and 1991, EDCs foreign sales had grown at an annual rate of over 80%. But during the previous two
years they had been at.

Sean appeared at Anns side, jolting her out of her thoughts and into the reality of her surroundings.
Dale just nished up the rst round of retailers meetings, he said. Wed like to get some lunch
back over at the hotel and talk about our options. Dale Stewart was Eldoras marketing vice
president. His views of what was best for the company often diered from Seans, but the two had
an amiable working relationship and enjoyed frequent spirited verbal sparring matches.

You wont let this go, will you, Ann said, throwing up her hands in a gesture of surrender. Fine,
lets talk. But you know I wont make a decision until weve had a more formal round of discussions
back in Boulder next month.

Over sandwiches, Sean made his case. Our primary markets in North America and western Europe
represent less than a quarter of the worldwide demand. Of the 200 million bicycles made in the
world last year, 40 million were sold in China, 30 million in India, and 9 million in Japan.
Historically, bikes sold in Asias developing markets were low-end products used as primary modes
of transportation. But the economic picture is changing fast. Theres a growing middle class.
Suddenly people have disposable income. Many consumers there are now seeking higher quality
and trendier styles. Mountain bikes with suspension are in. And cross-bikes are still holding their
own. In fact, the demand in these markets for the product categories we produce has been doubling
annually, and the growth rates seem sustainable.

If were going to compete in Asia, though, we need a local plant. My sta has evaluated many
locations there. Weve looked at wage rates, proximity to markets, and materials costs, and we feel
that China is our best bet. Wed like to open a plant there as soon as possible, and start building our
position.

Dale jumped in. Two of our largest competitors, one from China, one from Taiwan, have been
lling the demand so far, he said. In 1990, 97% of the volume produced by these companies was
for export. In 1994, they are projecting that 45% of their production will be for local markets. We
cant compete with them from here. About 20% of our product cost is labor, and the hourly wages of
the manufacturing workforce in these countries are between 5% and 15% of ours. It also costs us an
additional 20% in transportation and duties to get our bicycles to these markets.

He glanced at Sean quickly and continued. But heres where I disagree with Sean. I think we need a
short-term solution. These companies have a big lead on us, and the more I think about it, the more
I believe we need to put a direct sales operation in Asia rst.

Dale, youre crazy, Sean said, pouring himself some ice water from the pitcher on the table. What
good would an Asian sales operation do without a manufacturing plant? I know we source
components in Asia now, but we could save another 10% of those parts if we were located there.
Then we would really be bringing Eldora to Asia. If we want to compete there, we have to play from
our greatest strengthquality. If we did it your way, you wouldnt be selling Eldora bikes. Youd just
be selling some product with our label on it. You wouldnt get the quality. You wouldnt build the
same kind of reputation we have here. It wouldnt really be Eldora. Over the long term, it couldnt
work.
 Dale, youre crazy. What good would an Asian
sales operation do without a manufacturing
plant?
Were building bicycles, not rocket ships, Dale countered. There are lots of companies in Asia that
could provide us with a product very quickly if we gave them our designs and helped them with
their production process. We could outsource production in the short term, until we made more
permanent arrangements. He turned to Ann. We could even outsource the product permanently,
despite what Sean says. What do we know about building and running a plant in China? All I know is
were losing potential share even as we sit here. The trading companies arent giving our products
the attention they deserve, and they also arent giving us the information we need on the features
that consumers in these markets want. A sales operation would help us learn the market even as
were entering it. Setting up a plant rst would take too long. We need to be over there now, and
opening a sales operation is the quickest way.

Ann cut in. Dale has a good point, Sean, she said. Weve been successful here in large part
because our entire operation is in Boulder, on one site. Weve had complete control over our own
exible manufacturing operation, and thats been a key factor in our ability to meet rapid change in
the local market. How would we address the challenges inherent in manufacturing in a facility
halfway around the world? Would you consider moving there? And for how long?

Also, think about our other options. If the biggest issue keeping us out of these markets right now is
cost, then both of you are ignoring a few obvious alternatives. Right now, only our frame-building
operation is automated. We could cut labor costs signicantly by automating more processes. And
why are you so bent on China? Frankly, when I was there last month touring facilities, a lot of what I
saw worried me. You know, that day I was supposed to tour a production facility, there was a power
failure. Judging by the reactions of the personnel in the plant the next day, these outages are
common. The roads to the facility are in very poor condition. And wastewater and cleaning solvents
are regularly dumped untreated into the waterways. We could operate dierently if we located
there, but what impact would that have on costs?
Taiwan has a better developed infrastructure than China. What about making that our Asian base?
And Ive heard that Singapore oers attractive tax arrangements to new manufacturing operations.
Then theres Mexico. Its closer to home, and aside from distribution costs, the wage rates are similar
to Asias and many of the other risks would be minimized. You both feel strongly about this, I know,
but this isnt a decision we can make based on enthusiasm. Ann crumpled up her sandwich
wrapper and drank the last of her soda. Lets get back over to the exhibits. Im attending the IT
seminar at 1:30. Well schedule a formal meeting on this subject soon. I was going to say next
month, but how about bumping it up two weeks?

Walking back to the convention center with Dale and Sean, Ann realized that she wasnt just
frustrated because she didnt know which course EDC should pursue. She was concerned that she
really didnt know which aspects of the decision were important and which were irrelevant. Should
she establish a division in China? If so, which functions should she start with? Manufacturing?
Marketing? And what about engineering? Or should she consider a dierent location? Would Chinas
low labor costs oset problems caused by a poor infrastructure?

Would Chinas low labor costs offset the

problem of its poor infrastructure?
Growth had always been vitally important to Eldora, both in creating value to shareholders and in
providing a work environment that could attract and retain the most talented people. Now it
appeared that Ann would have to choose between continued growth and a domestic-only
manufacturing strategy that had served her well. Ann knew the plant location decision she had
made years earlier had been critical to the companys success, and she felt the companys next move
would be just as crucial.

Should EDC establish a division in Asia?

Ann E. Gray is an assistant professor of production and operations management at the Harvard
Business School.
Dale and Sean have the right idea. Without question, EDC should move aggressively into the large
and growing Asian markets for recreational bicycles. The primary focus should be improving market
share and brand visibility. Both of them seem to understand that if the company continues with its
arms-length approach of using trading companies, there is no way it will be able to compete in the
region against its two largest competitors in China and Taiwan. But it is clear from their
conversations with Ann that neither of them knows how to construct a winning business strategy
for the Asian market. In my work examining numerous companies plant location strategies, Ive
talked to quite a few Seans and Dales lled with regret over the way they managed their rst
signicant forays into Asian markets. EDC would do well to learn three simple lessons from these
companies mistakes.

For starters, wage rates should not drive the manufacturing location decision. Wages must be put in
the context of local productivity, skill levels, infrastructure, governmental policy, and management
talent.

Second, a foreign sales operation or manufacturing operation does not determine a companys
access to local markets. Distribution channels in those markets are controlled through a network of
established business relationships. EDC could set up an extensive. Asian operation only to learn that
market access is controlled by the very trading companies it was working with before it made the
move.

Forge an alliance with an Asian company, learn

about the market, and then worry about
manufacturing.
Finally, many companies think only of the immediate benets of a foreign operation. Since foreign
units are generally set up in a boom time, few managers pay close attention to foreign governments
restrictions on plant closings or labor force reductions. But those limits may heavily constrain the
companys ability to adjust its manufacturing strategy later on, if increased outsourcing or less
labor-intensive technology becomes desirable.
Ann must determine a long-term strategy for the Asian market. This entails understanding EDCs
true competitive strengths and positioning the company so that those strengths arent jeopardized
even as it moves quickly into the new arena.

The companys key to competitive advantage comes from its ability to adapt the features of a high-
end bicycle to a less expensive, mass-market model. That means EDCs ability to copy designs and
its exible manufacturing operation are critical. It also means that while manufacturing may drive
the companys ultimate strategy, Ann must not make production decisions lightly.

Copying high-end bicycles involves adapting frames to look like high-end models (for example,
incorporating front shock absorbers) and working with suppliers to produce inexpensive copies of
the necessary components. Flexibility in manufacturing probably comes from having designs that
are easy to assemble. Ann might want to think about establishing a nal assembly plant in Asia, but
she should keep frame production closer to home, at least at this time. Assembling oshore will not
seriously compromise EDCs quality or design exibility. But building the frames oshore might
limit its exibility in adapting designs, especially if EDC has to use less automated technology than it
currently uses in Boulder. EDCs initial capital investment will also be smaller if Ann chooses to
perform only assembly operations oshore. And since bicycle frames are made of increasingly
lightweight materials, the cost of transporting them to Asia shouldnt drive the companys decision
to manufacture them there.

Ann might establish a nal assembly plant in

Asia, but she should keep frame production
closer to home.
So what should she do? Identify and establish an alliance with a companyor companiesthat can
provide EDC with a strong distribution network and knowledge of the Chinese and Indian markets.
Despite Dales enthusiasm, EDC just doesnt have the international sophistication to create such a
network alone.

While this network is gearing up, Ann should evaluate manufacturing locales. In some situations, it
is advantageous to locate near ones strongest competitors. Ann may decide that it is necessary to
compete head-on and to keep a close eye on competitive developments. But a company needs to
understand whether or not these advantages are compelling in their markets. The Asian bicycle
market is still led by U.S. and European styles and frame materials technology. Ann may nd,
through her alliances, that having a local manufacturing plant does not oer her a signicant
advantage in either understanding or responding to market needs.

In the future, if Ann does decide to assemble bicycles oshore, I have one major recommendation:
that her rst move be to hire good local management talent. This is a critical resource in most
developing countries. And, at a minimum, she should have the top one or two managers spend a few
months at the Boulder campus. This is the best way to transfer EDCs company culture, quality
expectations, environmental responsibility, and workforce policies across the ocean.

Kasra Ferdows is a professor at the Georgetown University School of Business Administration in

Washington, D.C. He specializes in international manufacturing.

EDC cannot hide in the Colorado mountains much longer. The Boulder campus is a base, and Anns
vision should be the creation of other, similar bases in regions of the world where bicycles are taken
seriously. This does not mean chasing low production costs; nor does it mean using a factory to get
inside protected markets. It means creating a network of interdependent centers that learn from one
another and expand the strategic options of the company for supplying its dierent markets. Under
this vision, a factory in a new regionwhich should be Anns rst moveis the harbinger of much
more to come, a consequence of a major and lasting commitment by the company to that region.

Think big and take the company global with a

series of Boulder-like campuses.
EDC must learn to do what it does so well in Boulder elsewhere in the world. Such a move poses
signicant challenges because the drive toward manufacturing excellence in Boulder must continue
unabated throughout the expansion. EDC cannot aord a slowdown in its domestic investment. But
Ann should not hesitate. The risks of doing nothing are far greater.

Ann herself has noted that the U.S. market is approaching saturation. And EDCs two main
competitorsin China and Taiwanare already exporting substantial shares of their output. It would
be nave to think that they and others will leave EDCs market alone. In all probability, it wont be
long before the rst of the many competitors will open a gleaming bicycle factory at EDCs doorstep.
If EDC remains on its current path, it will probably be pushed into ever smaller niches. It will
become a more marginal player and predictablylike Lamborghini and Ferrari in the automobile
industrywill eventually be acquired by a larger company.

Ann may be tempted to consider outsourcing manufacturing in countries where costs are lowerin
eect, turning EDC into the Nike of the bicycle industry. But she should recognize that such a course
would mean a substantial change of strategy, taking EDC away from those things it does best. She
shouldnt let the excitement of entering a foreign market cloud her judgment.

The companys core competencethe design and manufacture of innovative and high-performance
bicyclesis embedded in its Boulder campus and in the close geographical and organizational
proximity of its manufacturing, engineering, development, design, marketing, purchasing, and
other functions. Managing a network of subcontractors around the globe requires a dierent set of
skills, and developing those skills would consume all of EDCs top managers time and energy for the
foreseeable future. So instead of embarking on this risky road, where even those far ahead seem
vulnerable, why not build on strength? Why not spend the energy on establishing manufacturing
and development bases in other meccas of bicycle lovers and riders?

Given the limited managerial resources of EDC, Ann and her team can aord only one such move in
the next few years. China is the right place to start. Yes, it will be dicult to set up and operate a
plant there. It will be even more dicult to turn it into a regional base for EDC. There will be power
shortages, stiing bureaucracies, poor infrastructure, and many other obstacles. But, ironically,
because of all those diculties, it is easier to get into China right now than into many other Asian
locales. EDC seems to have a window of opportunity. It should seize it. Perhaps, to ease the
transition into the country, Ann should consider nding a local partner. But she shouldnt let the
tactical details blur the clarity of the strategy.

So here is my advice to Ann: Start a factory in China. Choose several possible sites in well-developed
areas. To narrow the selection, ask yourself which site would best attract the kinds of qualied
people you need for your companys Chinese campus. Then go for the best answereven if it means
fewer subsidies and tax breaks, more expensive land, higher wages, and dicult logistics. Argue
with the government bureaucrats, and with your nancial people if you have to. But do not let the
easily measured factors push out the more subtle but important considerations. Remember, you are
putting a plant in China not only for production but also so that you can learn from Chinese
consumers, suppliers, competitors, engineers, and managers. You are going to China today to ensure
survival in Boulder tomorrow.

Ann should open an ofce in China immediately

but put off any manufacturing decisions until
she learns more about the Asian market.
Keith Cerny is an associate in the London oce of McKinsey & Company. He is the coauthor of a
Harvard Business School case on plant location and of the article Building Competitive Advantage
Through a Global Network of Capabilities, which appeared in the Winter 1993 issue of the
California Management Review. He is currently working on a survey of plant-location decision
making for the McKinsey Quarterly.

Even though Dale and Sean have presented a compelling picture of the economic benets of
manufacturing in China, Ann shouldnt rush into anything. A limited investment of time and money
up front to investigate and assess the Asian market may save EDC a good deal of trouble later on.

First, Ann must explore the costs of manufacturing in Chinacosts that neither Dale nor Sean seems
to be aware of. In all likelihood, for example, EDC will have to import managerial skills at
considerable expense until it can develop local expertise. Skilled labor is also in short supply, so she
must plan on spending additional sums to attract or train qualied personnel. Foreign funded joint
ventures generally must pay wages up to 50% higher than those paid by state enterprises and
sometimes must oer additional bonuses, like performance-related incentives and subsidized
housing. Whats more, government regulations have in the past required annual wage increases of
up to 15%. Employee productivity is also a major factor, since it may be quite low in China
compared with productivity in neighboring Hong Kong, for example.

EDC may also incur a host of ancillary costs, depending on Anns course of action. Hotels, for
example, have been known to add surcharges for long stays; telecommunication is expensive; and if
the company is not part of a joint venture, it may have to pay a signicant tax on any cars it imports.
Further, as Ann has noted herself, much of the Chinese infrastructure is old or in poor condition;
establishing any kind of base there may require a large capital expenditure.

Also, supplier infrastructure in China is in poor shape by Western standards. The old state-planning
system favored volume targets, and as a result, little emphasis was placed on production quality.
The state determines the price of locally obtained materials, and the prices set may not be optimal
for EDC. Supplier reliability problems will require EDC to hold a larger inventory than a comparable
U.S. plant, which will also raise costs, although there may be some scope to import parts from other
Asian locations. Should any legal disputes develop, Ann must be prepared to deal with a highly
politicized legal system.

Ann must also consider the risks associated with locating only one arm of the business in China.
EDCs success in the past has derived from its responsiveness to the market, based upon the close
collaboration among manufacturing, sales, and marketing. Developing that quick response will be
dicult in China if only manufacturing is located there. And, because China lacks the skilled labor,
it is very hard at present to set up leading-edge design facilities there.

Rather than making a quick decision, Ann should encourage her management team to take the
following four-pronged approach to building capabilities in the Chinese market. She should:

1. Establish a small oce in China. EDCs immediate need is to begin to collect information about
the Chinese market and to develop vital local relationships. The market changes daily, so having a
local operation to collect current information is essential, especially since published statistical data
are either limited or unreliable. Chinese bureaucracy can also present formidable diculties: the
local EDC oces secondary goal should be to establish and build up a local network of contacts with
government agencies, suppliers, and potential partners.

2. Assess the scale of the opportunity. Once the EDC team in China has been in place for a few
months and has a rsthand perspective on the Asian business environment, the company can begin
to assess the true scope of the opportunity. In particular, EDC must decide how important price is to
Chinese consumers. It may be possible, for example, to cover some of the higher U.S. manufacturing
cost through a price premium based on the Western brand name, although the team will need to
assess local customers ability to aord the products if they must pay in foreign currency. Ann and
her team will also need to understand how quickly the bicycle is evolving from a basic mode of
transport into a recreational product as Chinese consumers become more auent. To pull it o, EDC
must identify the appropriate product/market strategy; the company must also determine how
much regional customization of its product lines will be required.

3. Identify and evaluate entry options. Next, the group can begin to assess entry strategies.
Preserving exibility should be the overriding criterion, and again, Ann should take the time to
explore the pros and cons of each option. Opportunities for foreign companies to participate in the
Chinese market are changing rapidly, so a new option may emerge in only a few months. For
example, stock ownership rules in China have recently changed, allowing some overseas investors
to take majority control over joint ventures with Chinese partners. Some companies that acted too
quickly last year are now locked into unfavorable arrangements.

In developing Chinese manufacturing capacity, EDC has several options, including joint venture,
contract production, and greeneldthat is, building a completely new production facility. Of those,
greeneld looks the most promising.

A joint venture with local factories is the least likely to be successful unless the partners are very
well screened. Existing Chinese companies vary widely in exibility of operations, management
style, and level of marketing sophistication. Failing to nd a good match early can lead to
disappointment on both sides later.

In the short term, subcontracting production is also probably not a good idea. Schwinn, for example,
created two major competitors in its own market by subcontracting production to Chinese
companies.

With greeneld construction, EDC will be able to install state-of-the-art production equipment and
recruit and train employees to meet its precise requirements. It will be essential, however, for the
company to set up supplier capabilities well in advance of plant construction.

At this point, Ann must also consider location. It would be easiest by far for EDC to set up
manufacturing in a free-trade zone, but such locations are intended as export platforms, not to serve
the Chinese market. A better choice might be to locate in one of the coastal cities, which oer better
access to the rest of the mainland as well as certain investment incentives.

EDC needs a manufacturing presence in Asia.

4. Plan for market entry and expansion. Once Ann has assessed the markets attractiveness and
EDCs potential entry strategies, shell be ready to decide whether or not to go ahead. If the answer
is yes, Ann and her team should plan expansion on a region-by-region basis. They should think of
China as a group of countries, not as a homogeneous entity. Tastes and business rules will vary
between regions, and the poor quality of the countrys infrastructure will make it very dicult to
distribute nationally. Trying to go national all at once will lead only to disappointment.

Donald B. Roseneld is a senior lecturer at the Massachusetts Institute of Technologys Sloan School
of Management in Cambridge, Massachusetts.

Alan MacCormack is an associate in the London oce of Booz, Allen and Hamilton.

L. James Newman III is a senior engineer at Analog Devices in Norwood, Massachusetts.

Ann has to stop daydreaming about EDCs old, successful growth strategy. Its obsolete. But as she
forms a new strategy to meet the demands of a rapidly growing international market, she shouldnt
entirely turn her back on EDCs past. EDCs international growth should be built on the strengths the
company has developed in Boulder. In essence, Anns best international strategy will be to extend
her domestic strategy by establishing a major functional presence in each region of high demand.

The companys key capabilities are design and manufacturing for the mass market. In design, EDC
has excelled by keeping pace with newer technologies and then rapidly translating them into mass-
market products. In manufacturing, its exibility has been critical to coping with large changes in
product mix while ensuring a quick response to the demands of mass merchandisers.

Such capabilities require a proximity to the customer. EDCs development process is so sensitive to
market needs that serving Asian markets from the United States or Mexico is not a viable option.
Whats more, EDC has no obvious way to serve Asian markets in a cost-eective way from the
United States. Labor cost disadvantages, extensive transportation and duty costs, and limits on
economies of scale will quickly overpower any benets of working out of Boulder. Supporting such a
cost disadvantage through premium pricing is unrealistic given the mass-market focus.

So EDC must establish its own Asian operationsa group of regional manufacturing facilitieswith
dedicated development resources for tailoring products to local tastes. And that network must
belong to EDC. Given the companys need for exibility and superior quality, outsourcing
production wouldnt be realistic. EDC wouldnt have the kind of hands-on control it needs.

Having a decentralized manufacturing network will allow the company to limit its risks in serving
global markets. Any company competing in the global environment faces risk associated with such
factors as exchange-rate volatility, political uncertainty, and interregional trade restrictions. But
establishing multiple facilities, each with limited additional capacity, diuses the risks and increases
the likelihood of success. Exchange-rate shifts or problems at one facility can be better handled with
such a strategy.

Having said that, Ann must select her locations with care. Thus far, she doesnt have enough
information on which to base a location decision. But as she explores her options, heres what she
should keep in mind:

Most important, Ann should ensure that infrastructure factors are given priority over cost. Many
companies mistakenly assume that manufacturing site location is primarily a cost-driven process
that seeks to juggle labor rates, materials costs, plant scale, and transport costs. However, we believe
location ultimately has the power to make (or break) a companys business strategy. When assessing
possible locations, Ann should place great emphasis on the qualitative factors that support her
business strategy. Only after a number of desirable sites have been identied on this basis is a cost
analysis of the options appropriate.

EDCs competencies dictate that minimum levels of education and infrastructure are prerequisites
for any site location. For example, the need for local design expertise requires a source of
professional skills. The need for exible manufacturing and for the presence of a dynamic product
mix requires a more responsive and involved workforce. Finally, supplier quality and
responsiveness levels require that a reliable vendor infrastructure is in place or can be developed.
These factors have driven EDCs success in the U.S. market; Ann must continue to emphasize all of
them in the companys expansion strategy.

Ann would do well to review the strategies of some of the more powerful multinationals. The key
players in every major industry, from cellular phones to instant cameras, have or are planning a
presence in each of their major markets. Motorola, for example, has often rejected countries where
costs were lower, because infrastructure and education levels were insucient to support specic
product and process technologies.

With those issues in mind, locating in Taiwan or the more advanced areas of China seems likely.
Similar arguments could ultimately lead to a manufacturing presence in India. With a carefully
managed strategy, in ten years EDC will have a strong presence in multiple markets, each served by
local plants.

Steven C. Wheelwright is the Class of 1949 Professor of Business Administration at the Harvard
Business School. He has written books on manufacturing and is coauthor, with Kim B. Clark, of
Revolutionizing Product Development.

EDCs management team is o track and headed for serious trouble. All three executives are
shortsighted and narrow in their perspectives, letting factors of near-term importance exert undue
inuence on their thinking, and considering the issue of international expansion only from their
own limited, functional perspectives. None is considering the issue broadly enough to ensure that
the course of action selected will provide a long-term advantage. It is striking, for example, that
even though all three consider rapid new product introduction as part of their past success, none
sees product development and product engineering as essential elements of the Asian-expansion
issue.

EDCs management team is off track and

headed for serious trouble.
Ann needs to get her senior management team (including the vice president of product
development) to step back and examine three levels of strategy: corporate/business, functional, and
facility/site.

The Corporate/Business Level. Entering a new market means a signicant change in the current
boundaries of EDCs business, which, in turn, will likely warrant changes in how the company
achieves competitive advantage. If Ann expects EDC to succeed in the larger Asian market, with its
greater price sensitivity, she may have to realign the companys driving philosophies and shift the
center of its competitive position. For example, although EDC views itself as a high-volume, low-
cost producer, those same words carry dierent implications in the Asian market. The low-price
leader in Asia is likely to have a very dierent cost structure and product-feature set than EDC and
its domestic competitors. Furthermore, it is unlikely that EDC fully appreciates consumer needs in
Asia or the real diculties inherent in setting up a distribution channel there. Ann and her senior
managers may have to begin thinking of EDC as being two separate businesses, and they should
address that possibility before taking action on a new site.

The Functional Level. Each of the primary functions must carefully rethink its traditional focus and
capabilities. Supporting a strategy that encompasses the Asian market is quite dierent from
supporting a strategy that targets only America and Europe. For example, manufacturing must
consider the signicant dierence between one plant serving one market, two plants each serving
their own market, and a network of plants, suppliers, and distribution channels serving multiple
markets. Moreover, establishing processes that will enable the network to evolve as supply,
distribution, and consumer needs change is a considerably more complex and dicult task than
those EDCs manufacturing operations have had to learn to address in the past.

The Facility or Site Level. Senior management must establish appropriate plant charters,
performance measures, and investment expectations that will match the overall corporate/business
strategy and execute the selected functional strategies while achieving the comparative advantages
of an Asian location. Those comparative advantages may include not only lower wage rates, tax
concessions, cheaper components, and reduced shipping times and costs, but also a better
understanding of competitors, customers, and channels, resulting in faster rates of improvement
and greater market penetration.
 No one at EDC is thinking objectively about the
companys long-term prospects.
To illustrate the breadth and depth of the issues EDCs senior managers need to explore, consider
the lessons learned by leading companies in addressing the simplest of these strategy levels:
facility/site. Ask a manager at one of these high-performance companies what makes an individual
facility wildly successful and a source of signicant competitive advantage, and youll discover that
such plants tend to be one of three types, each of which contributes in a unique way to that
companys competitive advantage.

The rst type is found in organizations whose primary source of competitive advantage is low
cost/high volume. These plants have a location and charter that emphasize minimizing overall total
cost. Emerson Electric, for example, is tenacious about designing for manufacturability, nding low-
cost labor/low-overhead locations and ensuring that all the elements that go together in the
manufacturing equation work to provide the lowest total cost of the delivered product. Wildly
successful plants of this type are often located oshore in low-labor-cost areas (like the China plant
proposed by Sean at EDC), but they have been chartered, located, and continually evaluated on their
ability to provide the lowest possible delivered cost to the major markets they serve. Sometimes
those markets are local; much more often, such plants make a part of the product or product line
that is then shipped to several dierent markets. What is critical is that such plants focus on those
activities that they can handle at lowest minimum cost, and rely on other parts of the companys
manufacturing network to handle the remainder of the activities at minimum possible cost.

A second type of facility can be found in leading companies whose primary bases of competitive
advantage are customer responsiveness and market interaction. Such market-focused facilities tend
to be small but economically viable units that can be put very close to the customer. For example,
some of the most successful metal-can and plastic-bottle plants are of minimum economic scale and
focused on a very limited regional market territory. Often such facilities provide limited added value
on a product that would be expensive to transport or warehouse, and whose considerable variety
requires frequent and rapid changeovers.
The third facility type can be found in companies that compete primarily on product design and
features in a rapidly changing technological environment. These plants emphasize close working
relationships and integration between development engineering and manufacturing. Both the speed
and ease with which development engineers can get pilot production runs of new products make it
imperative that such a facility be in close physical proximity to development and engineering
resources.

All these facilities succeed by interacting with and complementing the central tenet of the
companys business strategy over the long term. They are planned, built, and operated in support of
that competitive advantage, not as a solution to a single functional issue. Taking a strategic
perspective on the Asian plant-location issue at EDC requires deciding which of those types of
interactions is likely to be most important for the future business strategy and ensuring that the
facility delivers and supports that over an extended time.

Ann should also rethink the logic and rationale for onshore automationsomething she herself
mentioned briey in the case. But she should keep in mind that onshore automation is a solution,
not a type of competitive advantage. Thus, following the guideline that competitive advantage
should play a central role in choosing a solution, she can look at the type of circumstances in which
onshore automation might t with each of the three types of competitive advantage. If she decides
EDC must compete on the basis of product technology and its rapid evolution, onshore automation
makes sense if there is a close link between the product and process technologies. That is, if the
automated technology can provide competitive strength and a more defensible position for the
product, then onshore automation may well be the answer. If EDCs competitive advantage is lowest
delivered cost, onshore automation may be appropriate, but only if its cost is as low as or lower than
what could be achieved by a less automated oshore facility. Onshore automation makes sense only
if it contributes to a least-total-cost solution. And nally, if Ann intends to compete primarily on
customer responsiveness and customer interaction, onshore automation is likely to be the best
solution only if it is the most eective and ecient way to meet those customer requirements.

Ann should keep in mind that onshore

automation is a solution, not a type of
competitive advantage.
Ann and her senior management team at EDC should thoroughly examine each of the three levels of
strategy into which their Asia market/oshore plant issue must be integrated. They need to agree
upon how each level of strategy should be changed, and then, based on appropriate data and
analyses, develop and implement a plan of action that will achieve the full potential, providing a
strengthened competitive advantage not only in the short term but over the long term as well.

Bernie Kotlier is a former executive vice president at Lawee Inc. in Long Beach, California, which
markets Univega Bicycles.

The Eldora Company should expand into the Asian market with a strong manufacturing presence.
As the leading U.S. bicycle producer, EDC is well positioned to take advantage of Asias rapidly
increasing appetite for sports-oriented consumer goods. With 30% of the U.S. bicycle market and
recent record earnings, Eldora has the horsepower to expand aggressively overseas. Having
experienced impressive gains in the United States and Europe, its clear that the company has the
growth-oriented management and corporate culture it needs to become a signicant player in the
global marketplace. Ann clearly recognizes the vital importance of protable growth to Eldoras
shareholders and the opportunity value that growth represents to her sta. The time is clearly ripe
for EDC to make its move.

Asia, moreover, has many built-in attractions for a company like EDC. For example, most bike
components are made there. That translates into lower transportation costs and the ability to
implement just-in-time deliveries that could cut inventory and enhance Eldoras capacity to respond
rapidly to new market trends. The added volume of a second EDC factory will maximize Eldoras
economies of scale and procure deeper quantity discounts on parts, transportation, and materials.
An Asian supply base will also position Eldora to master competitive pressures in the Americas and
Europe. It will give Eldora the exibility to ship either U.S.- or Asian-made products depending on
cost, market preference, and tari considerations.

Before EDC makes a move, however, Ann must size up her Asian-based competition. After all, 40
million bicycles are made and sold annually in China alone. That huge production capacity
represents a lot of competitors. Fortunately for Eldora, most of those bikes are clunky single-speed
utility models made in factories that know little about satisfying the new Asian consumers taste for
quality, style, or function. Japans major bicycle factories make appealing products, but they cant
compete on price. The Indian bicycle industry can produce quantity, but quality is another matter.
EDCs biggest competition will come from the two Asian high-quality mega-producers. Combined,
they have a current capacity of over 4.5 million units. But even considering the Big Twos plans for
expansion and the growth of other, smaller cycle manufacturers, the vastness of the market and its
growth rate ensure plenty of room for Eldora to succeed.

That said, where should Eldora locate its Asian plant? I agree with Sean and his stas selection of
China as the most advantageous site. Labor costs are low in China, but what is even more appealing
is that those costs will stay low indenitely. Taiwans and Japans once-low labor costs have
skyrocketed, but raising the standard of living substantially for more than a billion Chinese will take
decades, if not generations.

Unlike Taiwan or Singapore, China has abundant domestic natural resources and its infrastructure is
improving rapidly. In free-trade zones like those in Guangdong and Shanghai, new industrial parks,
roads, and utilities are under construction. Some excellent port facilities have already been
completed. Infrastructure is not a signicant problem for manufacturers that locate near the coast.
In the interior, Chinas infrastructure is poor, but that will challenge any company attempting to
distribute nished goods on the mainland no matter where the merchandise is made.

China also now boasts one of the best selections of bicycle components in the world. It has long had
an ample supply of inexpensive basic parts (for the production of those 40 million utility bikes). In
the last few years, numerous Taiwanese parts makers as well as a few key Japanese suppliers have
established China-based production of competitively priced higher grade components. Altogether,
the strength of Chinas domestic component industry would give Eldora the local availability and
sharp pricing it needs to prosper.

Establishing a plant in China is dicult, however. Its not an endeavor most U.S. companies are well
equipped to handle. The Far East is a long way from home, and U.S. citizens there must face much
that is foreign and disconcerting: language, culture, politics, and a socialist/capitalist economic
system.
But Dales suggestion that Eldora could even outsource the product permanently would likely do
little for the number one U.S. bike builder other than create another strong competitor. During the
1980s, Schwinn Bicycle Company gave once-tiny Giant Manufacturing of Taiwan orders for
hundreds of thousands of private label units annually. Within the decade, Giant Manufacturing
opened its own U.S. subsidiary and lived up to its name by taking a sizable chunk of Schwinns U.S.
business.

Eldora must have ownership in the Asian plant before transferring know-how, and the best approach
is a joint venture. By nding the correct joint venture partner from Taiwan, Hong Kong, or China,
Eldoras China-based operation can gain substantial benets.

EDCs best approach to the Asian market is

through a manufacturing joint venture.
The joint venture partner will speak the language, understand Chinese customs, and know how to
manage employee relations. Eldora will still need to send some managers to China, but the partners
management contribution will ease the strain on the U.S. team considerably. An Asian partner will
be invaluable in negotiating the Chinese political landscape and may already have land or a plant on
the mainland. In any case, the joint venture partner will greatly expedite Eldoras ability to move on-
line with minimal delay.

One of the greatest benets of establishing a joint venture partner in China is the potential for
constructing and capitalizing on an Eldora retail bicycle network. The partner would be helpful in
recruiting and training retailers. Once assembled, the chain would be a vital sales tool and a valuable
asset because retail outlets in China are sparse and poorly organized. Sporting goods makers around
the world will be looking for distribution channels, and they would pay to be able to plug into an
Eldora network.

Which departments should Ann send rst to China? That depends on whether the joint venture
partner already has a high-quality plant. If so, Eldora could begin shipping bicycles within 8 to 12
months, and manufacturing, engineering, and marketing should all be packing for Asia as soon as a
deal is signed. If new plant construction is required, the lead time will be two to three years.
Production experts would go rst to help design the facility, product engineers would follow, and
the marketing department would begin researching the market about a year before bicycle
production commenced. Sales would begin setting up the retail distribution network right after the
marketing survey was completed.

With the right partner in Asia, Ann will be on her way to solidifying a top position in the global bike
market that is built rmly on her companys commanding role in the U.S. bicycle industry.

A version of this article appeared in the MarchApril 1994 issue of Harvard Business Review.

Andrew D. Bartmess is a consultant in the Boston ofce of Deloitte & Touche. He focuses on the manufacturing industry.

This article is about MARKETING

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