112 THE BUSINESS POLICY GAME: Instructor\'s Manual Foreign Plant Location- Vigne
ID: 332530 • Letter: 1
Question
112 THE BUSINESS POLICY GAME: Instructor's Manual Foreign Plant Location- Vignette 6 To: BPG Management Team From: J. P. Jordan, Chair, Board of Directors Subject: Changing Production Location We have recently been approached by a firm in South America which has offered to manufacture our product and ship it to our home area for two thirds of what the product currently costs our firm. The South American firm has good references and has a record of high quality performance. It also has the capability to upgrade models as often as once a quarter On the surface, at least, this offer looks very attractive. However, we need to examine it in depth. If we accept the offer, we could sell our product at a lower price, thus benefiting our customers. Our profits would be higher which would benefit our stockholders. However, we would close our production plant(s) and lay off most of our production staff. This would have a serious impact on our current employees as well as on the surrounding community. We need to explore thoroughly the ramifications of this opportunity prior to making a final decision. I am calling a special Board meeting to consider the offer. Please develop a position on the following issues prior to the meeting. 1. How would our stockholders be affected by the change? 2. How would our customers react to the change? 3. What is the impact upon our employees if we accept the offer? 4. What is the impact upon the community if we accept the offer? 5. Is there likely to be any governmental action if we accept the offer? 6. What is the reaction of our competitors likely to be if we accept the offer?Explanation / Answer
1. Offshoring and plant closing can have both positive and negative ramifications on stockholder wealth. If this plan succeeds, lower product costs would enable the company to capture larger market share thus increasing stockholder wealth. But there are certain risks that are involved in this decision, like the loss of nationalistic customers, possible supply interruptions in transition, lower productivity prior transition, possible legal suits and public policy action, failure of the foreign firm to offer quality product, economic and political shifts in the country eliminating the benefits, etc. these risks have the potential to erode stockholder wealth gained by this change.
2. Customers are expected to react positively towards this change, as the effective cost of the products will reduce. But, there is a possibility of an outrage from nationalistic customers and media, which can change customer’s perception about the product and the brand, affecting the company negatively.
3. If we accept the offer, we would have to lay off all manufacturing employees, due to plant closing. This will obviously negatively impact the employees, affect their morale, and create anxiety amongst them. The company will have to incur additional costs of terminating the employees.
4. The community will be affected negatively if this offer is accepted. A large number of employed members of the community will suddenly go out of jobs, negatively impacting the overall growth and development of the community.
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