-
animeshpanda
- Junior | Next Rank: 30 Posts
- Posts: 10
- Joined: Mon Jan 10, 2011 1:03 pm
- Location: GA, Espana
The following appeared in a memorandum from the business department of the Apogee Company.
"When the Apogee Company had all its operations in one location, it was more profitable than it is today. Therefore, the Apogee Company should close down its field offices and conduct all its operations from a single location. Such centralization would improve profitability by cutting costs and helping the company maintain better supervision of all employees."
The author of the memorandum is trying to convince its readers that the policy of centralization would be a profitable move by the company. No doubt this strange memorandum is no surprise as this is a policy followed by many conservative countries in Europe who have a very regional economy, where client needs can be met through internet in the local language. According to me , the stand is highly objectionable for a truly international company from commercial and progressive point of view.
First of all, the premise used by the author is highly skeptical. It draws a vague picture of profitability. It is unclear if he considers profitability as profit in terms of percentage or profit in terms of actual revenue with deducted costs. If it is percentage, it is quite natural the same percentage of profit might not remain but the volume of profit might be substantial. One thing is for sure, expanding and decentralizing is atleast , profitable in this case. Also, it does not tell anything about when the company started showing less profit, there is a possibility the data has been shown when company is slowly expanding and is still in the phase of "capital investment" when it is not supposed to show profit , such as infrastructure development. so conclusions from short term is inappropriate.
Second, even if we exclude the above skepticism as invalid and in favor of the author's contention, even then, the move goes right against the economic theories. A company diversifies and expands once it is a market leader in its own region. The confidence in the local region fuels the need of company to expand further to reap more profits. The profits can be sustained if the company expands and spreads to more markets, not the other way around. Therefore, decentralization by establishing local managing field offices to understand and serve the needs of its clients from vicinity is a recommended method. Of course through internet , most clients can be served from a single location, but as business expands, it becomes not only profitable, but also necessary for the company to cater to regional needs and development. Naturally , the profit may not be as strongly seen as one here the company has its stronghold , but in a matter of time and regional experience, and with local professionals, high rates of profit are certainly achievable. Companies with international reach like Zara Fashion cannot consider centralization by closing factories and outlets in 32 countries , just because they show lesser profit than one in Spain, where it stays unrivaled. Centralisation is , therefore , a retrogradive to its economy and in most cases , insensible.
Thirdly, unless it is a dot com company which can operate from one office, field offices cut a lot of revenues wasted because of transportation. Further, a central production unit means larger space needed to handle all activities, excessive inventory stock and larger volume of workforce and strong union. From capitalist point of view, nuclear offices , contrary to author's contention are better managed than central offices. Hence there is no wonder branching and establishment of nodal points close to clients at remote locations is economically beneficial in every aspect. An Exception is in the case of automobiles where transpiration costs are less than establishing local production units
In sum, one can understand the difficulty in penetrating different markets and expectation of low profit or high costs in making regional factories , or even in some cases, losses. But for a company which eyes future and excelling in market, centralization is not only unthoughtful, it is cumbersome and unmanageable. It is therefore, expected from a company to make careful thinking to consider centralization only when the field offices are rendered without any major activity or have run out of all options to tap the local financial resources.
"When the Apogee Company had all its operations in one location, it was more profitable than it is today. Therefore, the Apogee Company should close down its field offices and conduct all its operations from a single location. Such centralization would improve profitability by cutting costs and helping the company maintain better supervision of all employees."
The author of the memorandum is trying to convince its readers that the policy of centralization would be a profitable move by the company. No doubt this strange memorandum is no surprise as this is a policy followed by many conservative countries in Europe who have a very regional economy, where client needs can be met through internet in the local language. According to me , the stand is highly objectionable for a truly international company from commercial and progressive point of view.
First of all, the premise used by the author is highly skeptical. It draws a vague picture of profitability. It is unclear if he considers profitability as profit in terms of percentage or profit in terms of actual revenue with deducted costs. If it is percentage, it is quite natural the same percentage of profit might not remain but the volume of profit might be substantial. One thing is for sure, expanding and decentralizing is atleast , profitable in this case. Also, it does not tell anything about when the company started showing less profit, there is a possibility the data has been shown when company is slowly expanding and is still in the phase of "capital investment" when it is not supposed to show profit , such as infrastructure development. so conclusions from short term is inappropriate.
Second, even if we exclude the above skepticism as invalid and in favor of the author's contention, even then, the move goes right against the economic theories. A company diversifies and expands once it is a market leader in its own region. The confidence in the local region fuels the need of company to expand further to reap more profits. The profits can be sustained if the company expands and spreads to more markets, not the other way around. Therefore, decentralization by establishing local managing field offices to understand and serve the needs of its clients from vicinity is a recommended method. Of course through internet , most clients can be served from a single location, but as business expands, it becomes not only profitable, but also necessary for the company to cater to regional needs and development. Naturally , the profit may not be as strongly seen as one here the company has its stronghold , but in a matter of time and regional experience, and with local professionals, high rates of profit are certainly achievable. Companies with international reach like Zara Fashion cannot consider centralization by closing factories and outlets in 32 countries , just because they show lesser profit than one in Spain, where it stays unrivaled. Centralisation is , therefore , a retrogradive to its economy and in most cases , insensible.
Thirdly, unless it is a dot com company which can operate from one office, field offices cut a lot of revenues wasted because of transportation. Further, a central production unit means larger space needed to handle all activities, excessive inventory stock and larger volume of workforce and strong union. From capitalist point of view, nuclear offices , contrary to author's contention are better managed than central offices. Hence there is no wonder branching and establishment of nodal points close to clients at remote locations is economically beneficial in every aspect. An Exception is in the case of automobiles where transpiration costs are less than establishing local production units
In sum, one can understand the difficulty in penetrating different markets and expectation of low profit or high costs in making regional factories , or even in some cases, losses. But for a company which eyes future and excelling in market, centralization is not only unthoughtful, it is cumbersome and unmanageable. It is therefore, expected from a company to make careful thinking to consider centralization only when the field offices are rendered without any major activity or have run out of all options to tap the local financial resources.
Nine-tenths of wisdom is being wise in time ~Theodore Roosevelt
