Centralization and Profit

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.”

Discuss how well reasoned . . . etc.

The writer says, "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." This argument correlates conducting business from a single point with profit. I do not agree with this reasoning.

Companies spread operations to more than one location
-to expand their business into new countries or regions that demand a local presence
-to take advantage of time differences and be operational 24x7
-take advantage of favorable, business friendly regulations (tax breaks, less bureaucracy, ease of starting or closing a business) and/or conditions (availability of cheap labor, abundant raw material, excellent infrastructure, availability of credit) not available in the current location

Generally growth and the desire to penetrate new markets leads to companies expanding to more than one location. Such growth entails commitment in terms of investment in new infrastructure and resources. So apparently this can affect the bottom line profit of the company. However such an effect should be more than offset by the fact that this adds to assets of the company and long term strategic interests. So, in all probability Apogee is undergoing such a growth cycle and there may be nothing to really panic about. Acting in haste and repenting in leisure is not a good thing to do.

The writer further says, "Such centralization would improve profitability by cutting costs and helping the company maintain better supervision of all employees." This statement assumes that operation costs are the only reason behind profit falls. It further assumes that all employees from all locations would be willing to shift. Such a sudden shift will not only be catastrophic loss to the company in terms of loss of assets sold in haste but may also lead to severe attrition. If the company is public, not to mention the effect it may have on the investor sentiment. The statement suggests that the decision to expand may not have been taken carefully and the decision to contract may go down the same path.

The only condition in which this may actually be a good decision is if the branches opened are quite old and still not turning profitable. A close review or even downright shutting down of such branches may be needed to cut down losses. It still would not make sense to indiscriminately close down all branches.

Concluding, the writer's reasoning links centralization and profits without any logical proof for the same. He assumes that people will be ready to re-locate and centralization will not cause any attrition. The whole reasoning looks like thought in hurry and shallowly.