ABE Level 4 Diploma Introduction to Business Chapter 4

1. The Influence on Location of Industry
By
Naeem Akram
Noor College of Business & Sciences
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2. The Influence on Location of Industry
 When a firm decides on a location for its activities it makes
the decision on the basis of costs and benefits.
a) The costs of alternative locations include those
associated with land and buildings, energy supplies,
labour and training, transport and communication with
suppliers and customers, and compliance with
environmental protection.
b) The benefits include the availability at different locations
of a trained labour force, a support system of specialist
firms providing industry-specific training, information
services and design facilities, green field sites where the
company can set up exactly as it wishes and the
availability of government grants.
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3. The Influence on Location of Industry
We can summarise the factors as follows:
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4. Availability of raw materials
The availability of raw materials often determines a
firm's location.
Coal mines can only be sited where there is coal,
mineral water companies where there is a suitable
spring, brick manufacturers where there is the right
sort of clay.
The extraction industries have limited location
options.
However, these are not all renewable resources and
eventually they become exhausted.
This is what happened to the iron mines in Britain,
and local ore had to be replaced with imports.
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5. Availability of raw materials
Steelworks then gradually moved to the coast because
of the cost of transport over land of heavy, low-value
material.
Technology also played its part as new methods of
steel making meant that the cost of production could
be significantly reduced by keeping the product hot all
the way through the process.
Integrated steel mills replaced a system where iron ore
was turned into blocks, moved elsewhere to be turned
into steel, then on to another plant to be rolled into
sheet.
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6. Energy supplies
Sometimes the availability of energy supplies is of
over-riding importance.
Aluminium is rarely made where bauxite, its raw
material, is mined.
Cheap power is of such great importance that the
bauxite is transported half way across the world to
countries like Norway and Sweden, which have huge
amounts of cheap hydro-electric power.
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7. Land costs and availability
Land costs and availability are important to some
industries.
There are fewer than thirty possible locations for a new
airport in Britain, and very few more potential sites for a
new oil refinery.
Land is an important part of building costs.
In many cases, industrial development is competing with
agriculture, particularly for large flat areas.
Where land area is restricted, the answer is to build
upwards, as in London and New York.
This is expensive, though, and can only be justified for
high value-added activities, which is why their financial
districts have skyscrapers. 7

8. Proximity to the market
In other industries it is proximity to the market which
matters most of all.
Furniture is bulky, fragile, and difficult to transport
without damage.
The manufacturers therefore set up as close as possible
to the major cities while still being reasonably close to
their raw material.
The forests around High Wycombe made it an ideal
location close to London.
Warehousing and distribution firms tend to set up
where motorways meet or where there are good
transhipment points between road and rail.
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9. Skilled labour force
 Access to a skilled labour force may be the most important
factor.
 This is what brings firms to the so-called Silicon Valley
between Slough and Reading in England, Silicon Glen in
Central Scotland and the original Silicon Valley in
California.
 Each of these areas has a concentration of universities and
colleges turning out technologically trained graduates.
 Over the years this has built up a pool of labour with the
right training and skills for computer firms.
 Co-operation with the research facilities of the universities
is an added advantage.
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10. Poor labour relations
 Lack of specific skills may be the most important criterion.
 When an industry has a history of poor labour relations
and bad working practices, firms seek out a completely new
location to get away from the problems of the past.
 This is why Japanese car component and assembly plants
are found in Wales and North East England well away from
the established centres of the industry in central England.
 Improved transport facilities mean that it is no longer
essential to be near suppliers or customers.
 The availability of green field sites was an added advantage
as the firms could design and build exactly what they
wanted and have room for future expansion.
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11. Staff cost
In making a relocation decision the organisation has to
consider the staff cost very carefully.
Key members have to be persuaded to move.
The costs of recruitment and training for new workers
have to be set against the costs of relocating existing
personnel.
The help of specialist firms is usually enlisted to find a
suitable range of housing, show groups of staff around
the new area, organise removals and help people settle
in.
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12. Related industries
The presence of related industries also plays its part,
particularly over time.
Once an industry is established in a certain location it
attracts all kinds of support, from specialist
information services to communication systems.
Collectively these are known as external economies of
scale.
As an industry grows bigger all firms, regardless of
their individual size, benefit from the reduction in
their unit costs which results from this accumulation
of ancillary industry to serve the needs of companies
in the main industry.
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13. Related industries
Thus, banking and financial organisations cluster
together in the City of London.
Access to their markets brought them together –banks
set up in Lombard Street in the seventeenth century to
be near their merchant customers.
More firms were attracted as the financial markets
developed and specialists, such as accepting and
discount houses to deal in bills of exchange, set up to
serve their needs.
Nearness to the Bank of England and the other banks
was important for getting information quickly and
staying in touch with customers.
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14. Related industries
Information services grew to meet demands for up-to-
date market prices, foreign affairs and shipping news.
Dealing facilities were set up, like the Stock Exchange
for stocks and shares, Lloyds for insurance, and the
commodities exchanges.
The foreign exchange market has its own dedicated
telephone system linking banks worldwide at the
touch of a computer screen.
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15. Related industries
This intense concentration of financial activity has
brought the development of a huge diversity of
ancillary firms –specialist solicitors, printers, security
transport, recruitment, training, computers, building,
catering, investigation and many other businesses
exist to serve the financial community in the City.
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16. Changing technology
The City is also a good example of how changing
technology has affected location.
Twenty years ago firms had to have a large headquarters
staff to process, manage and retrieve documents.
This could mean heavy head-office costs to house a lot of
comparatively junior and low-paid workers; they, further,
incurred high added costs of travel, which were paid for
in the form of London allowances and interest-free
loans.
Electronic data processing with document storage and
retrieval means that nowadays all of these routine tasks
can be done at another location.
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17. Changing technology
This is why so many insurance companies have
relocated part of their head office work to places like
Bournemouth.
Office costs per square foot there are a tenth of those
in the City, staff costs are lower and efficiency does not
suffer, as information can be accessed on-line from
London.
A small office is maintained in the City to provide
contacts with other financial institutions and markets
and commercial clients.
The cost of housing the necessary senior management
in a City of London office can be justified.
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18. Changing technology
 Over the years firms have become much less dependent on
raw materials and energy sources.
 Electricity had replaced coal as the source of industrial
power by the late 1960s.
 New products and new manufacturing methods have
meant that many industrial companies have become
footloose –i.e. they are not tied to any specific location.
 The low weight and bulk of their components make them
cheap to transport.
 The final product, like computers and video cameras, has
very high added-value and low bulk, which makes it viable
to transport it long distances.
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19. Changing technology
Commercial firms can set up certain activities
anywhere there are suitable communications facilities.
Some part of the business still has to be near the
market, though, as in the case of insurance firms.
Not all commercial enterprises can be footloose, for
example, national advertising agencies locate in
London to be near their corporate customers.
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20. What is footloose?
They are not tied to any specific location thus they can
move its location
Footloose industry is a general term for an industry
that can be placed and located at any location without
effect from factors such as resources or transport.
These industries often have spatially fixed costs, which
means that the costs of the products do not change
despite where the product is assembled.
Diamonds and computer chips are some examples of
footloose industries.
The low weight and bulk of their components make
them cheap to transport.
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21. Footloose industries
The final product, like computers and Diamonds, has
very high added-value and low bulk, which makes it
viable to transport it long distances.
Commercial firms can set up certain activities
anywhere there are suitable communications facilities.
Some part of the business still has to be near the
market, though, as in the case of insurance firms.
Not all commercial enterprises can be footloose, for
example, national advertising agencies locate in
London to be near their corporate customers.
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22. Footloose industries
The final product, like computers and Diamonds, has
very high added-value and low bulk, which makes it
viable to transport it long distances.
Commercial firms can set up certain activities
anywhere there are suitable communications facilities.
Some part of the business still has to be near the
market, though, as in the case of insurance firms.
Not all commercial enterprises can be footloose, for
example, national advertising agencies locate in
London to be near their corporate customers.
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23. Government Influence on Location
The location of the firm may be significantly
influenced by government policy.
The UK government provides various forms of
assistance to firms setting up in designated
Development Areas.
Since 2007 the eligible areas are the older industrial
areas of Manchester, Liverpool, Glasgow, South Wales,
the East Midlands and North East England, and the
underdeveloped areas of South West England and the
North and West of Scotland.
Northern Ireland also receives special assistance.
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24. Government Influence on Location
Firms in these areas can receive grants for capital
investment and small firms can get a wide range of
help with investment, training and consultancy advice.
The European Union also provides additional funding
for projects in the assisted areas, and has a number of
schemes which provide assistance to firms in areas
affected by the decline of traditional industries like
shipbuilding and coal.
Under EU rules, there are limits to the sums a
government can spend on attracting foreign
investment, but there can still be very valuable grants
and concessions which can exert a powerful pull on a
firm wishing to locate in a new area.
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25. Environmental Change and Location
Two trends have emerged over the last twenty years
concerning the location of business activity and both
have important implications for the organisational
structure of the firm.
They are essentially based on the growth of powerful
computer technologies which free certain types of
activities from traditional locations.
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26. Back office
 The back office is the portion of a company made up of
administration and support personnel who are not client-
facing.
 People who hold jobs in back office positions carry out
functions such as settlements, clearances, record
maintenance, regulatory compliance, accounting and IT
services.
 A financial services company, for example, is logically
broken up into three parts:
1) the front office makes up sales, marketing and customer
support personnel;
2) the middle office manages risk; and
3) the back office provides administrative and support
services.
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27. Back office functions
Large firms have been accustomed to operating from
many different sites for a long period.
The basis for these different establishments tended to
be partly historical –merged or taken-over firms
remained in their current sites, unless and until there
was good reason to relocate –and partly to take
advantage of locational benefits for production where
these existed.
The general pattern was for each distinct subsidiary or
division to retain its administrative functions at its
main production site, with central administrative work
carried out at a separate head office, usually located in
London or another major commercial city.
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28. Back office
The significant change that has been taking place has
been to locate as much as possible of the "back office"
administrative work –routine finance, IT support and
development and human resources –with or without
central managerial staff, at a single site, sufficiently
distant from the major cities for the company to gain
reduced land and labour costs.
With computer-based administration, linked by internal
networks and modern telecommunications such as email
and mobile technologies, the administrative centre of
the organisation can be located anywhere that costs are
relatively low and where there is access to the main
national transport networks of rail, motorway and,
increasingly, air.
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29. Home-based work
A growing number of people are now working from
home doing work arranged and paid for by one or
more firms.
This process is now often termed telecommuting.
It is at its most advanced in computer software
production, where software houses can operate an
international marketing service, arranging what to
produce and then organising the production of the
software by commissioning individuals or teams of
software writers.
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30. Home-based work
The software house is the equivalent of the 18th
century merchant who linked the producers to the
market and organised the production chain.
The software writers are the equivalent of the spinners
and weavers who actually made the woollen cloth.
Notice that the actual maker of the product under this
latest version of the outwork system has regained
control over the production process.
The writer can choose when and how much to work
provided, of course, there is sufficient demand for the
writer's work.
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31. Home-based work
Book production relies heavily on editors and
designers and fewer of these now go to work in the
publisher's offices. More work at home, often for
several publishers.
It is difficult to think of any industry where at least
some of its production could not be performed by
people working at home.
the latest technological revolution is having a two-fold
effect on the production process.
On the one hand it makes it possible for many
specialised, non-routine activities to be carried out by
individuals in their own homes.
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32. Home-based work
At the same time, it also makes it possible for much
large-scale, repetitive work to be carried out by
automated machinery, cared for by very few workers.
The employing organisation in this kind of production
system becomes essentially a co-ordinating body.
Management in such a body is still concerned with
taking decisions under conditions of uncertainty, but
the nature of the decisions is changing.
In the factory-based system, production is largely
concerned with control and discipline.
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33. Home-based work
There is a stock of equipment and labour which has to
be adapted to the production requirements that senior
management has opted for in co-operation with the
marketing and purchasing functions.
Adaptation, modification and from time to time,
changes in both equipment and labour are often
difficult, time-consuming and costly processes.
The new style organisation is likely to have fewer
constraints imposed by a fixed stock of equipment and
labour.
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34. Home-based work
Managerial success is more likely to depend on
knowledge –for example, knowing what and where
equipment and labour are available, what their
capabilities are and what the cost of various operations
is likely to be.
The knowledge must, of course, be applied and this
involves co-ordination and, in many cases, persuasion.
 Many different operations, taking place in many
different locations, will have to be brought together to
satisfy the requirements of the ultimate consumer.
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