IBDP Business Mana

! gement HL
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The big picture

Choosing the correct location can be the
difference between success and failure.
Traditional retail businesses must open a store in
a place that is easy for their target market to
visit. Manufacturers, on the other hand, must
consider whether their location gives them
convenient access to labour and raw materials.

Asia's manufacturing
boom
Over the last quarter of a century, global
manufacturing businesses have moved to China
and other Asian countries. This has come at the
expense of job losses in Europe and North
America. Figure 1 shows how the share of
global manufacturing output has changed
between 1990 and 2013. As you can see, Asia's
share of world production has grown from about
25% to around 45% during this period.

Figure 1. Global share of manufacturing

output.
Source: United Nations

The primary reason for this shift is the low

wages paid to workers in China and surrounding
countries. In the USA, the average
manufacturing worker will earn around $20 an
hour. Figure 2 shows the average monthly
wages for the leading Asian exporting countries.
Although these are rising, it is still significantly
cheaper to employ an Asian worker for a month
than it is to employ someone in the United States
for just a week! Based on these figures, the
Asian manufacturing boom looks set to continue.

Figure 2. Average monthly wages in USD.

Source: Economist

Figure 3 shows the effect that globalisation may

have had on the domestic US jobs market. Since
the 1960s, there has been a steady decline in the
importance of manufacturing to the United
States economy. However, international trade is
unlikely to be the sole reason for this decline.
Improvements in technology have also made
American workers more productive. This
increased efficiency will be appreciated by some
manufacturers who value expensive, potentially
more skilled labour over its Asian competition.

Figure 3. The percentage of US workers

employed in manufacturing.

It's not all bad news for the US: there are still
over 12 million people in the United States
working in manufacturing. Key questions to
consider include: which types of manufacturer
have kept or even increased their American
manufacturing base? What are the reasons for
choosing to set up factories in the US? What
advantages are these companies exploiting that
others cannot?

In this subtopic, we will investigate how

companies go about selecting the best location
for their operations. You will discover that
different types of business are to some degree
influenced by different factors. You will also
learn about subcontracting: the practice of
paying outside companies to perform what used
to be considered core functions of business.

" Concept

Determining the location of

production facilities depends on
many factors, but costs of
production usually have a big
impact on the decision. Asian
countries such as China, India and
others have become the
workshops of many industries
due to the lower labour costs in
comparison to the labour costs in
the more developed parts of the
world. While studying the
subtopic of location of production
facilities, consider the impact of
globalisation, national and
organisational culture in making
these decisions:

1. How has globalisation

made it possible for MNCs
to locate production
facilities in low labour cost
locations?

2. What is the influence of

organisational culture in
deciding to
outsource/offshore
production?

3. How do changes in the

external business
environment influence the
decision on where
production should be
located?

4. To what extent can

decisions about
outsourcing, relocating or
offshoring influence the
sales of a company?

5. Can increased globalisation

of production be associated
with increased
concentration of particular
economic activity and
hence more specialisation
and efficient use of scarce
resources?

Section questions

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section.

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