1. 5.5 Location
Chapter 34

2. Picking a Location Location decisions have 3 characteristics:
They are strategic – they have a long term impact on the business.
They are difficult to reverse due to cost considerations.
They are made by the highest levels of management.

3. Optimal Location What is optimal location?
A business location that gives the best combination of quantitative and qualitative factors

4. Bad Location? Problems that occur with non-optimal locations:
High fixed cost sites
High break-even level of production
Low profits – or even losses
If low capacity, increased or high unit costs
High variable costs – like labor
Low contribution per unit produced
High unit variable costs reduce competitiveness
Low Unemployment rate
Problems recruiting qualified staff
Staff turnover could be a problem
Pay levels may need to be high to attract and retain staff
Poor Transit Structure
Increased transportation costs for materials and finished goods
Relatively inaccessible to customers
Difficult to operate JUST-IN-TIME inventory stock management

5. Factors that influence location
Quantitative Factors
These are measurable in financial terms and will have a direct impact on either the costs of a site or the revenues from it and its profitability.
Qualitative Factors
Non-measurable factors that may influence business decisions

6. Quantitative Factors
Site and capital costs (buildings or shop-fitting costs)
Prime office and retail space could be expensive
Building in a greenfield site (undeveloped land) must be compared with retrofitting an existing building

7. Quantitative Factors Labor Costs Is the business labor intensive?
An medical office will need a lot of skilled staff.
A computing center will need a lot of computer hardware and very few people

8. Quantitative Factors Transportation Costs
Heavy and bulky raw materials like steel or grain will be costly to ship
May need to locate near suppliers
Service industries (hotels and retailing) need to be located near customers

9. Quantitative Factors Sales Revenue Potential
Sales can be directly related to location
Convenience stores need to be convenient for customers
Locations can add value or foster an image
Expensive retailers on Madison Avenue
Prestigious financial address on Wall Street

10. Quantitative Factors Government Grants
Grants may be offered to entice a company to locate to a particular location within a country, state, or city.
Often used to attract business to areas with high unemployment.

11. Making a Decision 1 Profit Estimates 2 Investment Appraisal
Compare revenues and costs for each location and determine potential profit opportunity
2 Investment Appraisal
Calculate the payback of capital investment to prepare each location
3 Break-even Analysis
The lower break-even level, the better the site – if all other things are equal

12. Qualitative Factors Safety Room for further expansion
Avoid potential risk of public safety.
A factory might locate in a rural area to reduce the risk of an industrial accident harming the public vs higher transportation costs.
Room for further expansion
Locating to a site that has little room for expansion, may force another relocations

13. Qualitative Factors Managers’ Preference Labor Supply
In a small business, managers preferences to desirable work location or close to home may be a factor.
Large corporations will consider the impact of earnings and profits to shareholders.
Labor Supply
Availability of skilled labor and cost of labor

14. Qualitative Factors Ethical Considerations
Will move cause workers to be redundant?
Would laying off workers cause bad publicity?
What if the move involves locating to a country with less stringent environmental laws and other regulations?

15. Qualitative Factors Environmental concerns Infrastructure
A business may be reluctant to setup in an environmentally fragile location.
Infrastructure
Quality infrastructure may be important
Access to roads, waterways, ports, and communication – reliable Internet access, cell and land telephone lines, and reliable power

16. Other Location Issues The pull of the market Planning restrictions
Development of suburbs, and easy transportation with cars
Planning restrictions
Zoning laws and regulations that restrict where companies can locate to protect communities
External economies of scale
Cost reductions when “like” companies are clustered together (Silicon Valley in California)

17. Multi-Site Locations Advantages Disadvantages
Greater convenience for consumers McDonald’s restaurants in every town
Coordination problems between the locations
Lower transportation costs Breweries can supply large cities from regional locations rather than distribute nationally
Potential lack of control and direction from senior management based at head office
Production-based companies reduce the risk of supply disruption if there are technical or industrial problems in one factory
Different cultural standards and legal systems in different countries – the business must adapt to these differences
Opportunities for delegation of authority to regional managers from head office – helps to develop and improve staff skills and improve motivation
If sites are too close to each other, there may be a danger of “cannibalism” where one location takes sales away from another location
Cost advantages of multi-sites in different countries

18. Globalization & Location
Offshoring
The relocation of a business process from one country to another by the same company.
Multinational
A business with operations or production bases in more than one country. HL

19. Reasons to Relocate Globally
1 To reduce costs
Potential for higher profits by relocating abroad to take advantage of lower labor rates.
Call Centers India
TV Production Czech Republic
Toys China
Vacuum cleaners Malaysia HL

20. Reasons to Relocate Globally
Labor Comparison Chart to Germany* *German has some of the highest labor costs in the world.
Country
Weekly Pay in Euros
Germany Wages
India 26
300
China 43
600
Bulgaria 45
Brazil 62
800
Hungary
165
2200 HL

21. Reasons to Relocate Globally
2 Access to Global Markets
Rapid economic growth in foreign markets create huge potential for sales
Best way to access is to BE there
Domestic markets maybe saturated; therefore limiting growth
Threats from government regulations
Response to a competitor entering a foreign market – be there first mentality HL

22. Reasons to Relocate Globally
3 Avoid protectionist trade barriers
Avoid paying tariffs
Avoid trade agreement limitations
European Union
NAFTA
ASEAN (Association of South East Asian Nations)
Example: Toyota has plants in the USA to avoid import tariffs
Trade Barrier: Taxes (tariffs) or other limitations on the free international movement of goods and services HL

23. Limitations to International Locations
Language and other communication barriers
Cultural differences
Level of service concerns
Time difference problems, time delays in phone messages, language barriers
Supply-Chain concerns
Issues develop if production is not near raw materials or bought-in goods
Ethical considerations
Loss of jobs in current country
Using child labor or very low-wage labor in new country
Could move create a negative public image
Can well-qualified staff be recruited if the company is viewed as unethical HL