1. Theories of Plant Location
Median Location Principle
Linear Market Competition (Hotelling)
Weber
Lösch
Isard’s Space Economy
Smiths Spatial Margins
Webber’s Uncertainty Effect

2. Median Location Principle: Minimize Transport Cost

3. Hotelling’s Vendors on the Beach Solution to such Competition
Essentially iterative competitive movements within the
agglomeration space
If seller 1 starts at A, then
seller 2 jumps to B,
then seller 1 jumps to C,
and seller 2 could proceed
to D, but that is inferior
to also locating at C,
splitting the market in
half. A B C D E

4. Weber’s Model of Manufacturing Industry Production
Developed in the early 20th Century in southern Germany
Input factors are not ubiquitous
This means that:
physical resources are not found everywhere
human labor is differentiated by skill & ability
capital availability varies
other inputs are also differentiated

5. Weber hypothesized that:
Given market prices, producers would seek to minimize production costs to maximize profits.
This leads to a taxonomy of production cost situations, considering
factor costs
transport costs on products
transport costs on finished goods

6. In the Weber Model, If producers Minimize Costs, then:
Min: Ipiqi+ Iriqidi +rqqdj
e.g.
Minimize sum of factor costs + transport costs
on factor inputs + transport cost on shipment of product to the market
If factor costs are “given,” then the problem becomes how to minimize transport costs.

7. The Material Index Principle as a guide to manufacturing location
Material index = weight of localized material
weight of product (unit)
If M.I. < or = 1.0, locate at market
Material types:
“Pure” materials: no weight loss in production
“Weight-losing materials”
“ubiquities”

8. Weber’s Cost Minimizing Model & the Principle of Material Orientation
Example: 2T local materials
3T ubiquities
MI = 2/5 = .4, locate at market
Alternative Situations
(1) Ubiquities only, MI = 0, locate at market
(2) Pure Materials only
(a) 1 pure material, MI = 1 M C

9. Material Index Cases, Cont.
(b) 1 pure material + ubiquities
MI < 1, locate at market
(c) several pure materials only
MI = 1, locate at market
(d) several pure materials + ubiquities
(3) Weight Losing Materials
(a) 1 weight losing material
MI > 1, locate at material location M C

10. Material Index Cases, Cont.
(b) 1 weight losing material + ubiquities
If MI > 1, locate at material site
If MI <1, locate at market
If MI = 1 ?, probably at market
( c) Several weight losing materials M1 C
Locate away from C M2

11. An Example of (c) P1 = 10, q1 = 2, r1 = .1 rq = .1, q = 5
p2 = 5, q2 = 4, r2 = MI = 6/5 = 1.2 7 M1 C
6.125 L 5 1
6.125 7 M2
At M1: = 45.5
At M2: = 44.5
At C: = 44.2
At L: =

12. Material Index Situations, Cont.
(d) Several weight-losing materials + pure materials: MI decreases, outcomes as in (b) above
(e) Several weight-losing materials + pure
materials + ubiquities: outcomes as in (d)
Upshot: Most situations are like c, d, and e.
3 classic locational outcomes: 1. Market,
2. Resource, and 3. Intermediate, sometimes “footloose”

13. Labor Cost Deviation • M1 • C • P Critical Isodapane • L1 • L2 • M2
P - Transport Cost Minimum Location
L1, L2 - Low Labor Cost Locations
C - Market
M1, M2 - Raw Material Sites

14. Weber’s Approach to Agglomeration Economies$ a1 a2 Q1 Q2
Scale of Output
For some index of agglomeration (e.g. a1 or a2): B
Separate
Market
Regions
e.g. A,B,C,
or agglomeration A A B C C
Critical
Isodapanes

15. Competition for Location in Agglomerations
S, T, and U are separate Markets, whose critical isodapanes are
SS, TT, and UU U S U S S1 U1 T T T1 S U T
S, T, and U can get agglomeration savings at T1, S1, and U1,
but need to bargain to move to a location realizing them in

16. Critique of Weber Conception of market demand limited
Transport costs not defined realistically
Labor is typically mobile, not fixed in space
Many manufacturing plants produce complex sets of products with complex sets of inputs
Treatment of agglomeration is rigid
Lösch: Location based on maximum profit, not minimum cost

17. Isard’s Substitution Framework
Input-factors can often be used substitutability
although the degree of substitution can vary by scale and by technology • Q3 A A • Q2 • Q1 Q2 Q1 B B
No substitution
“Perfect” substitutability

18. Substitution possibilities
Isoquants - Equal levels of output
Substitution is possible over a range
but factor proportions change A Q2 Q1 B

19. Substitution possibilities
Isocosts - Equal levels of cost, C1<C2<C3 Q2
X is the ideal amount of A,
Y is the ideal amount of B
for production at level Q1 Q1 C3 C2 A C1 X Q2 Q1 C1 C2 C3 Y B

20. Expansion Curve - joins optimal factor combinations across scale of outputQ3 Q2 C3 C2 Q1
Factor Y C1
Expansion Path Q3 Q2 C3 Q1 C2 C1
Factor X

21. Spacing of isoquants and scale economies and/or diseconomies
Output
Scale Economies
Linear
Diseconomies
Factor X

22. Isoquants displaying scale economies & diseconomies
Factor Y
Isoquants displaying scale economies & diseconomies
Diseconomies
Economies
Factor Y 30 40 30 20 20 10 10
Factor X
Factor X

23. Isard’s Substitution Model: two point location model - pure materials
Transformation Line
Distance from M
Distance from C

24. Isard’s Substitution Model, 3 point location problemX O 
Market V
Distance from A  P O T  R   S Y  P S  
Material B R U W X V O
Distance from B  T  P
Material A  R
Distance from A  S Y W U
Distance from B

25. Smith’s Space-Cost Curve
Weber’s isodapane concept: equal transport costs from a reference point
Formed by adding transport costs for individual factors - mapped as “isotims”
X and Y are the “spatial margins of profitability” $
Area of Profit
(Material & Product)
Total Cost X Y
Market
Material Source

26. Webber’s Uncertainty Effect
In reality, we do not have perfect knowledge about markets and factor costs
Uncertainty deters (large) investments
Uncertainty enhances the importance of external economies - new entrants get the benefits caused by existing sellers
Ex ante versus ex post evaluations, leading to satisficing behavior

27. Businesses in a Volatile Environment: A Two-Way Relationship
Business as a “black box”: unpacking the contents
Inputs Firm Outputs
Competing elements
internal to the firm
Materials,
Capital
Labor
Finished or
semifinished
products
Motives for behavior
in space:
profit: maximum?
Or: a “satisficing” level
“bounded rationality”
Herbert
Simon

28. Forces influencing the decision-making process
Structure
and systems
Values of society
EXTERNAL
CULTURE
Expectations
of Individuals
Leadership
and mgt.style
Objectives
Organized Groups
Expectations
of Stakeholders
History
and age
Expectations
of Coalitions
Products and technology
Market Situation
NATURE OF BUSINESS

29. Organizing with regard to the value chain
Vertically integrated versus specialized in parts of the value chain
Determination of scope via transactions costs - Coase’s theorem: The firm will carry out a particular task up to the point at which “the costs of organizing an extra transaction within the firm are equal to the costs involved in carrying out the transaction in the open market, or to the costs of organizing by another entrepreneur.”
Williamson: internal activities organized hierarchically; external organized horizontally
Dynamism: vertical integration & disintegration related to changes in transactions costs

30. The Uncertain and Volatile Business Environment
Global Environment
Macroenvironment
Societal Environment
Domain Environment
Task Environment
Business
Organization
Firm Environment
Boundary

31. The Task Environment Substitute Products Industry Competitors
Potential
Entrants
Competitors
Bargaining
Power
FIRM
Bargaining
Power
Customers
Suppliers
Regulators
Government
Labor Unions

32. But, Production Networks are Inherently Unstable
Factor prices change
Factor supply availability changes
Market tastes change
Market demand mix/levels change
Process and product technology changes
In the globalized and oligopolistic market environment, organizational change is rampant
 Upshot: Trajectories & Adjustment

33. Turbulent Environments
Increasing complexity
Complex
Turbulent
Conditions
Increasing dynamism
Simple
Static
Conditions
Low levels
of uncertainty
Increasing
Uncertainty

34. A Common Outcome of this Turbulence: The Product Life Cycle
Sales
Volume
Initial Growth Maturity Decline Obsolescence
development

35. Examples of the Product Life Cycle
Fashion clothes
Automobiles
Generations of Boeing airplanes
…….but not all products follow this trajectory:
Levi 501 shrink-to-fit jeans
“Coke” & name brands that play off product stability: Tiffany; L.L Bean; Campbell’s Soup

36. Like Schumpeter, Freeman’s view that economic systems experience “creative gales of destruction: Campus computing as an example
Mode of Input: varied also over time!

37. Impacts of IT in the Current Business World
Are we in a new era of techno-economic adjustment due to IT?
Symptoms: Geographic realignments of employment, industrial power, and multiplier effects
Consequences: reshaping of political, social, and economic systems
Consequences that we cannot forecast!

38. So, do big businesses really have advantage?
Yes, and No.
Yes, as measured in most narrowly defined industrial categories, but within many are powerful competitors in the small firm cohort
Scale economy factors that we covered are important in creating advantage, but they can also be an impediment.