5.4 Location
IBBM
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.
Optimal Location
 What is optimal location?
 A business location that gives the best
combination of quantitative and
qualitative factors
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
 Low profits – or even losses
 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
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
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
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
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
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
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.
Making a Decision
 1 Profit Estimates
 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
Qualitative Factors
 Safety
 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
Qualitative Factors
 Managers’ Preference
 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
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?
Qualitative Factors
 Environmental concerns
 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
Other Location Issues
 The pull of the market
 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)
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
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
Reasons to Relocate Globally
 1 To reduce costs
 Potential for higher profits by relocating
abroad to take advantage of lower labor
rates.
 Call Centers
 TV Production
 Toys
 Vacuum cleaners
HL
India
Czech Republic
China
Malaysia
Reasons to Relocate Globally
 Labor Comparison
Chart to Germany*
*German has some of the highest
labor costs in the world.
HL
Country
Weekly
Pay in
Euros
Germany
Wages
India
26
300
China
43
600
Bulgaria
45
600
Brazil
62
800
Hungary
165
2200
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
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
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
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HL
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