5.5 Location5.5 Location

Chapter 34Chapter 34

Picking a LocationPicking a Location

Location decisions have 3 Location decisions have 3 characteristics:characteristics:

They are strategic – they have a long term They are strategic – they have a long term impact on the business.impact on the business.

They are difficult to reverse due to cost They are difficult to reverse due to cost considerations.considerations.

They are made by the highest levels of They are made by the highest levels of management.management.

Optimal LocationOptimal Location

What is optimal location?What is optimal location?

A business location that gives the best A business location that gives the best combination of combination of quantitativequantitative and and qualitativequalitative factors factors

Bad Location?Bad Location? Problems that occur with non-optimal locations:Problems that occur with non-optimal locations:

High fixed cost sitesHigh fixed cost sites High break-even level of productionHigh break-even level of production Low profits – or even lossesLow profits – or even losses If low capacity, increased or high unit costsIf low capacity, increased or high unit costs

High variable costs – like laborHigh variable costs – like labor Low contribution per unit producedLow contribution per unit produced Low profits – or even lossesLow profits – or even losses High unit variable costs reduce competitivenessHigh unit variable costs reduce competitiveness

Low Unemployment rateLow Unemployment rate Problems recruiting qualified staffProblems recruiting qualified staff Staff turnover could be a problemStaff turnover could be a problem Pay levels may need to be high to attract and retain staffPay levels may need to be high to attract and retain staff

Poor Transit StructurePoor Transit Structure Increased transportation costs for materials and finished goodsIncreased transportation costs for materials and finished goods Relatively inaccessible to customersRelatively inaccessible to customers Difficult to operate Difficult to operate JUST-IN-TIMEJUST-IN-TIME inventory stock management inventory stock management

Factors that influence Factors that influence locationlocation

Quantitative FactorsQuantitative Factors These are measurable in financial These are measurable in financial

terms and will have a direct impact terms and will have a direct impact on either the costs of a site or the revenues on either the costs of a site or the revenues from it and its profitability.from it and its profitability.

Qualitative FactorsQualitative Factors Non-measurable factors that mayNon-measurable factors that may

influence business decisions influence business decisions

Quantitative FactorsQuantitative Factors

Site and capital costsSite and capital costs (buildings or shop-fitting costs)(buildings or shop-fitting costs) Prime office and retail space could be Prime office and retail space could be

expensiveexpensive Building in a greenfield site (undeveloped Building in a greenfield site (undeveloped

land) must be compared with retrofitting an land) must be compared with retrofitting an existing buildingexisting building

Quantitative FactorsQuantitative Factors

Labor CostsLabor Costs Is the business labor Is the business labor

intensive?intensive? An medical office will need a An medical office will need a

lot of skilled staff.lot of skilled staff. A computing center will need a A computing center will need a

lot of computer hardware and lot of computer hardware and very few peoplevery few people

Quantitative FactorsQuantitative Factors

Transportation CostsTransportation Costs Heavy and bulky raw materialsHeavy and bulky raw materials

like steel or grain will be costly like steel or grain will be costly to shipto ship May need to locate near suppliersMay need to locate near suppliers

Service industries Service industries (hotels and retailing) (hotels and retailing) need to be located near need to be located near customerscustomers

Quantitative FactorsQuantitative Factors

Sales Revenue PotentialSales Revenue Potential Sales can be directly related to locationSales can be directly related to location

Convenience stores need to be convenient for Convenience stores need to be convenient for customerscustomers

Locations can add value or foster an imageLocations can add value or foster an image Expensive retailers on Madison AvenueExpensive retailers on Madison Avenue Prestigious financial Prestigious financial

address on Wall Streetaddress on Wall Street

Quantitative FactorsQuantitative Factors

Government GrantsGovernment Grants Grants may be offered to entice a company Grants may be offered to entice a company

to locate to a particular location within a to locate to a particular location within a country, state, or city.country, state, or city.

Often used to attract business Often used to attract business to areas with high unemployment.to areas with high unemployment.

Making a DecisionMaking a Decision

1 Profit Estimates1 Profit Estimates Compare revenues and costs for each Compare revenues and costs for each

location and determine potential profit location and determine potential profit opportunityopportunity

2 Investment Appraisal2 Investment Appraisal Calculate the payback of capital investment Calculate the payback of capital investment

to prepare each locationto prepare each location 3 Break-even Analysis3 Break-even Analysis

The lower break-even level, the better the The lower break-even level, the better the site – if all other things are equalsite – if all other things are equal

Qualitative FactorsQualitative Factors

SafetySafety Avoid potential risk of public safety.Avoid potential risk of public safety.

A factory might locate in a rural area to reduce A factory might locate in a rural area to reduce the risk of an industrial accident harming the the risk of an industrial accident harming the public vs higher transportation costs.public vs higher transportation costs.

Room for further expansionRoom for further expansion Locating to a site that has little room for Locating to a site that has little room for

expansion, may force another relocationsexpansion, may force another relocations

Qualitative FactorsQualitative Factors

Managers’ PreferenceManagers’ Preference In a small business, managers preferences In a small business, managers preferences

to desirable work location or close to home to desirable work location or close to home may be a factor.may be a factor.

Large corporations will consider the impact Large corporations will consider the impact of earnings and profits to shareholders.of earnings and profits to shareholders.

Labor SupplyLabor Supply Availability of skilled labor and cost of laborAvailability of skilled labor and cost of labor

Qualitative FactorsQualitative Factors

Ethical ConsiderationsEthical Considerations Will move cause workers to be redundant?Will move cause workers to be redundant? Would laying off workers cause bad Would laying off workers cause bad

publicity?publicity? What if the move involves locating to a What if the move involves locating to a

country with less stringent environmental country with less stringent environmental laws and other regulations?laws and other regulations?

Qualitative FactorsQualitative Factors

Environmental concernsEnvironmental concerns A business may be reluctant to setup in an A business may be reluctant to setup in an

environmentally fragile location.environmentally fragile location.

InfrastructureInfrastructure Quality infrastructure may be importantQuality infrastructure may be important

Access to roads, waterways, ports, and Access to roads, waterways, ports, and communication – reliable Internet access, cell communication – reliable Internet access, cell and land telephone lines, and reliable powerand land telephone lines, and reliable power

Other Location IssuesOther Location Issues The pull of the marketThe pull of the market

Development of suburbs, and easy transportation Development of suburbs, and easy transportation with carswith cars

Planning restrictionsPlanning restrictions Zoning laws and regulations that restrict where Zoning laws and regulations that restrict where

companies can locate to protect communitiescompanies can locate to protect communities

External economies of scaleExternal economies of scale Cost reductions when “like” companies are clustered Cost reductions when “like” companies are clustered

together (Silicon Valley in California)together (Silicon Valley in California)

Multi-Site LocationsMulti-Site LocationsAdvantagesAdvantages DisadvantagesDisadvantages

Greater convenience for consumers Greater convenience for consumers McDonald’s restaurants in every townMcDonald’s restaurants in every town

Coordination problems between the Coordination problems between the locationslocations

Lower transportation costsLower transportation costsBreweries can supply large cities from Breweries can supply large cities from regional locations rather than regional locations rather than distribute nationallydistribute nationally

Potential lack of control and direction Potential lack of control and direction from senior management based at from senior management based at head officehead office

Production-based companies reduce Production-based companies reduce the risk of supply disruption if there are the risk of supply disruption if there are technical or industrial problems in one technical or industrial problems in one factoryfactory

Different cultural standards and legal Different cultural standards and legal systems in different countries – the systems in different countries – the business must adapt to these business must adapt to these differencesdifferences

Opportunities for delegation of Opportunities for delegation of authority to regional managers from authority to regional managers from head office – helps to develop and head office – helps to develop and improve staff skills and improve improve staff skills and improve motivationmotivation

If sites are too close to each other, If sites are too close to each other, there may be a danger of there may be a danger of “cannibalism” where one location “cannibalism” where one location takes sales away from another locationtakes sales away from another location

Cost advantages of multi-sites in Cost advantages of multi-sites in different countriesdifferent countries

Globalization & Location Globalization & Location

OffshoringOffshoring The relocation of a business process from The relocation of a business process from

one country to another by the same one country to another by the same company.company.

MultinationalMultinational A business with operations or production A business with operations or production

bases in more than one country.bases in more than one country.

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Reasons to Relocate GloballyReasons to Relocate Globally

1 To reduce costs1 To reduce costs Potential for higher profits by relocating Potential for higher profits by relocating

abroad to take advantage of lower labor abroad to take advantage of lower labor rates.rates. Call CentersCall Centers IndiaIndia TV ProductionTV Production Czech RepublicCzech Republic ToysToys ChinaChina Vacuum cleanersVacuum cleaners MalaysiaMalaysia

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Reasons to Relocate GloballyReasons to Relocate Globally

Labor Comparison Labor Comparison Chart to Germany*Chart to Germany*

*German has some of the highest *German has some of the highest labor costs in the world.labor costs in the world.

CountryCountry

Weekly Weekly Pay in Pay in EurosEuros

Germany Germany WagesWages

IndiaIndia 2626 300300

ChinaChina 4343 600600

BulgariaBulgaria 4545 600600

BrazilBrazil 6262 800800

HungaryHungary 165165 22002200

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Reasons to Relocate GloballyReasons to Relocate Globally

2 Access to Global Markets2 Access to Global Markets Rapid economic growth in foreign markets Rapid economic growth in foreign markets

create huge potential for salescreate huge potential for sales Best way to access is to BE thereBest way to access is to BE there Domestic markets maybe saturated; Domestic markets maybe saturated;

therefore limiting growththerefore limiting growth Threats from government regulationsThreats from government regulations Response to a competitor entering a foreign Response to a competitor entering a foreign

market – be there first mentalitymarket – be there first mentalityHL

Reasons to Relocate GloballyReasons to Relocate Globally 3 Avoid protectionist trade barriers3 Avoid protectionist trade barriers

Avoid paying tariffsAvoid paying tariffs Avoid trade agreement limitationsAvoid trade agreement limitations

European UnionEuropean Union NAFTANAFTA ASEAN ASEAN (Association of South East Asian Nations)(Association of South East Asian Nations)

Example:Example: Toyota has plants in the USA to Toyota has plants in the USA to avoid import tariffsavoid import tariffs

Trade Barrier:Trade Barrier: Taxes (tariffs) or other Taxes (tariffs) or other limitations on the free international movement limitations on the free international movement of goods and servicesof goods and services

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Limitations to Limitations to International LocationsInternational Locations

Language and other communication barriersLanguage and other communication barriers Cultural differencesCultural differences Level of service concernsLevel of service concerns

Time difference problems, time delays in phone messages, Time difference problems, time delays in phone messages, language barrierslanguage barriers

Supply-Chain concernsSupply-Chain concerns Issues develop if production is not near raw materials or Issues develop if production is not near raw materials or

bought-in goodsbought-in goods Ethical considerationsEthical considerations

Loss of jobs in current countryLoss of jobs in current country Using child labor or very low-wage labor in new countryUsing child labor or very low-wage labor in new country Could move create a negative public imageCould move create a negative public image Can well-qualified staff be recruited if the company is viewed Can well-qualified staff be recruited if the company is viewed

as unethicalas unethical

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