How Entrepreneurs Optimize the Cost of Production
The Sanford C. Bernstein investment-research firm has estimated that costs per unit manufactured in Ethiopia were more than half the cost in China as of 2011. Bernstein analyst Anthony Sleeman said costs rose 18% in Ethiopia in 2011 versus 2010, compared with a 7.7% spike in China. At that rate, Mr. Sleeman expects Ethiopia's costs per unit to exceed China's by 2019.6
In my opinion, the thought of finding new countries that seem to have a lower production cost is a high-risk idea. H&M seems to be desperately trying to find alternatives for price optimization and not taking into consideration the stability of the economy in Africa compared to China, where production is the main source of income. I believe that H&M has not considered all the other factors of price and profit optimization that it has. Knowing H&M’s popularity among middle and lower-class society, it could even the extra cost of production in China (compared to Africa) by simply raising the price for collection items sold exclusively. This would in no way affect the lower-class buyers to whom the need of the basic item is much higher than the wish to acquire something exclusive, where on the other hand, the middle-class buyer values the exclusivity of an item higher than the need of it and would still buy the item, despite the raised price.
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