Question

A top-level executive of a tire manufacturer is considering diversifying and expanding operations into China, where labor and materials are cheaper. The firm has already diversified itself to double its original number of locations. All of its newest locations have been implemented by the same executive. So far, the return on investment for each of the newer locations is negative. Why might the executive want to open yet another location?

Answer 1

The key reason a top level executive would want to open yet another location especially in a place like china where labor and materials is cheaper is minimizing risk of loss.

Step-by-step explanation:

Diversification strategies are used to expand firms’ operations by adding markets, products, services, or stages of production to the existing business.

In this case, the top level executive is giving emphasis to lower cost of production at the new location as a reason to expand it operations there and also diversify.

Minimizing risk of loss is his primary motivation because over time, when the already established companies currently running at a deficit which could be in line with the business model, begin to record profit, some might still lag behind but not all of them at once.

If one location performs poorly over a certain period, others may perform better over that same period, reducing the potential losses from concentrating resources capital under fewer locations.