SL OPERATIONS MANAGEMENT

LOCATION IB BUSINESS & MANAGEMENT –

A COURE COMPANION (2009)

Introduction to Location

• One of the most important decisions a business has to make is where it will locate or as the business grows where it should relocate to.

• There is a distinction between setting up a business for the first time and moving the business on to a new location.

• However many of the factors have a bearing in both cases.

• The only difference might be the objectives of the company.

Why do businesses relocate?

• Chasing the market• Gaining room for expansion• The business might be a merger

and there is a need for neutral new venue.

What factors determine the location?

• Costs• Competition• Type of Land• Markets• Inertia• Labor Pool• Infrastructure • Suppliers• Government• Laws • Taxes.

LOCATION ISSUESCosts

• Costs will be big determining factor and will largely depend on the type of business that is being started.

Land• If the business is a large scale manufacturer, it may

need a large, flat surface area.Labour• If the business is a technical one (such as a

laboratory requiring skilled workers) the biggest cost may be labour.

LOCATION ISSUESCosts

Transport• If the business is producing large quantities of a physical

product transport costs may be crucial. There are two options

Bulk Increasing• If the business is bulk increasing, it buys in lots of

components and builds something bigger (such as TVs or cars) then it makes sense to set up the business close to the market, as transporting the finished bigger items is likely to be more expensive than bringing in lots of smaller components.

LOCATION ISSUESCosts

Bulk Decreasing• If the business is bulk decreasing – that is the

business buys in large quantities of raw materials and turns them into smaller end products (businesses such as paper mills or slaughterhouses) it makes sense to set up the business close to the source of the raw materials.

LOCATION ISSUESCompetition

• There is a balance that needs to be made between finding a gap in the market physically and setting up near to your direct competition.

• Retail outlets, theatres, law firms and many more businesses set up close to their rivals as the chance of getting passing trade increases, if the area becomes known for a particular product.

LOCATION ISSUESCompetition

Cannibalistic Marketing• In the most extreme form, companies such as Starbucks

are famous for setting up a system called cannibalistic marketing.

• Starbucks sets up one franchise in a location and then sets up more units in the area to flood the particular sector.

• They will keep on doing this though each new franchise eats up some of the profits of the existing outlets, until eventually there are so many outlets that there is no possible extra trade to be generated.

LOCATION ISSUESType of Land

• The type of land will be important, not only in terms of cost, but because of its suitability.

• Eg: Ski resorts in the French Alps may have done a good business in the early parts of the 20th century, but with the onset of global warming and glacier shrinkage, the snow covering has changed.

• The company Chamonix has at times had to import artificial snow because the level of natural snow is too low to guarantee consistent coverage throughout the ski season.

LOCATION ISSUESMarkets

• In the past many business had to set up close to their customers.

• There were even special markets set up for special products (so for instance) you might find the corn exchange, the gold bullion market or a general market place (such as the Great bazaars) in North Africa and the Middle East (eg: Damascus, Marrakesh, or Istanbul)

LOCATION ISSUESMarkets

E-Commerce• With e-commerce the need for a physical

market place has changed and this can bring huge advantages for start up-internet companies.

• Rather than depending on a physical market, this may only require an efficient distribution system through which to provide their products.

LOCATION ISSUESInertia

• Very often businesses set up in places that the owners are familiar with. Eg: Bill Gates and the Silicon Valley entrepreneurs.

• Setting up in your own garage may cut down on costs, but it will restrict your ability to expand.

• On the other hand, relocating to new areas where you don’t have so many contracts may act as drag on your business.

• For Bill Gates , the pull of Berkley and Stanford counteracted the push for expansion for quite some time.

LOCATION ISSUESLabour Pool

• Key to any business are the employees to do the work.

• Whether this requires university graduates or school leavers, most businesses need to take account of the type of workers available and balance this with the skills and qualifications the business requires.

• A high level of unemployment will reduce pressure for salary increases.

LOCATION ISSUESLabour Pool

Demographic Change • Demographic change can make huge

differences to the type of worker available.• Eg: The increasing number of women in the

workplace, means that more and more businesses have to adapt to part time working, job sharing, flexi-time and provision of childcare facilities.

LOCATION ISSUESInfrastructure

• This not only means the communication network for transport products, but also urban transport for workers and the provision of networks for phones, faxes and all forms of digital communication.

• Also infrastructure covers a much wider field as it includes facilities that support industry and this can mean the provision of services such as education, healthcare and all sorts of local utilities such as power, phones, water, post, housing and police.

LOCATION ISSUESInfrastructure

• Transport may include road, rail, air and water network.• As we become more environmentally conscious, the

extent of a products carbon footprint has to be weighed against each distribution option.

• Services are an important for the business as they will affect the welfare of the staff.

• In particular, if staff have to be relocated, this becomes a big issue.

• Utilities are also important for a business, not only in terms of costs, but also reliability.

LOCATION ISSUESSuppliers

• The availability of a range of local suppliers may be very important for the business especially, if it is using the JIT system of stock control, which implies a greater degree of coordination than normal.

LOCATION ISSUESGovernment

• The role of both local and national government can be crucial for a business – it may receive incentives to locate in a deprived area.

Support• This can be anything from promises by politicians to some

significant savings. • A government can often be a big purchaser so securing a

tender to a government department can bring secure and profitable contracts.

• In the UK for example, many British companies have a right to promote their product with a “Supplier to the Queen” label that my impress some consumers.

LOCATION ISSUESGovernment

In what form is government support?• Government support can come in the form of

grants (non-returnable, one time only funds) or subsidies (funds to be offset against the cost of production), soft loans (loans at preferential rates of interest) or even tax rebates (a cut in tax to be paid)

LOCATION ISSUES Government

Laws• From labour laws about health and regulation, to rules

on advertising and restrictions on government sales, laws are crucial for business.

• Businesses have to be careful because laws can change.• Even if there is no regime change, there may well be a

change in government policy.• To the end, many businesses keep political lobbyists on

their payroll.• However, even small changes (eg: traffic rules) can have

a major effect on deliveries for a business.

LOCATION ISSUESGovernment

Taxes• The amount of money a business is liable to pay in tax will

have a major effect on where a business may wish to locate.• Eg: In the UK, businesses need to be aware of a number of

possible taxes: national corporation tax and local council taxes for the business, income tax for their employees and capital gains tax for their owners.

• The ad valorem taxes and duties payable by customers – all of these will have a major impact not only on the amount of businesses the company can conduct, but also how much profit can be retained and reinvested.

Changes in Communication & its impact on Location

• The huge changes in communication over the past 100 years has seen remarkable changes in where a business sets up.

• In the past businesses were very much local and served the immediate vicinity.

• However, the distinction between local, domestic, regional and even international locations is changing.

Regional Trading Blocks & Location

• The increasing importance of regional blocs (such as the EU and NAFTA) has had a major impact on location decisions.

• For example, Nissan built a car factory in the north of England to circumvent EU import duties.

• A final factor is the growth of trading hubs such as Hong Kong, Singapore or Dubai – these can seem good options for a business wanting to set up a regional base.