Location, location, location

What influences location - AS Technology – Allows remote working. For Unit 3 this affects how large companies are able to locate internationally (eg offshore in India) Costs of factors of production – Cheap labour in particular, but land (rent) and transport as well Infrastructure – Network of transport, utilities (eg electricity, telecoms), healthcare etc. Qualitative factors – Personal preference of owner

Methods of making a location decision Quantitative methods – Gather information and make forecasts on: Capital costs – the site, building, machinery etc Labour costs (importance depends on how capital or labour- intensive the industry is Transport costs Revenue potential (particularly for retail) Government grants – Assess Profitability Using investment appraisal!

Profitability Compare revenues with costs of different sites For example: Mobile phone shop (£)City centreShopping centre (out of town) Rental and other property costs225,00095,000 Estimated annual variable costs750,000400,000 Estimated annual sales (units)25,00017,000 Forecast selling price per unit5045 Annual revenue Annual costs Annual profits

Investment appraisal Need to take into account the capital costs, so investment appraisal is a better way Use payback, ARR and NPV Set criteria, eg payback less than 5 years, or ARR more than 10% or NPV must be positive with discount rate of 10% Typically compare different locations

Investment appraisal examples Choosing site in Poland or site in Hungary Poland Capital cost £5m Hungary Capital cost £3m Payback period3.7 years2.5 years ARR (over first 5 years)14%9% NPV (over first 5 years, 10% discount rate) £3m£2m

Qualitative factors Qualitative factors range from purely personal to others which are key to business success, but cannot be measured in financial terms Business success: – Room for expansion – Safety – Ethical considerations – IT and other infrastructure (transport etc) Personal (mostly manager’s preference) – Good housing and leisure facilities – Quality of life – Convenience of access to other locations

Optimal location Why is it important to choose the right site? What is an optimal site? Benefits of optimal site – Improved competitiveness – Unique selling point - Knightsbridge, Mayfair, Milan – Access to customers – Increased flexibility

Multi-site location Obviously applies to some businesses – Retail, retail banking – In fact most businesses which need to be close to retail customers have multiple retail outlets Also applies to other businesses and other parts of a business (eg other parts of a bank) because advantages: – Lower costs – Better market focus

Disadvantages

International location Extra dimension to multi-site location Growing trend as part of globalisation Drivers are: – Cost reduction – mostly cheaper labour costs – Access to global markets China, and other growth markets

International location Problems Language and other communication barriers Cultural – can exist in market and in workforce Quality of service (or product) eg offshore call centres Ethical – loss of jobs