Factors influencing the choice of business Location
The most-used location cliché Lord Sieff Ex Boss of M&S “ The three most important things in retailing are – location, location and location”
Why location matters <ul><li>Choice of location has direct effect on operational costs </li></ul><ul><li>Location also potentially affects ability to generate sales and deliver customer service </li></ul><ul><li>A poor choice of location is costly to change </li></ul>
The three key location factors Costs of the operation Desired customer service level Potential revenues Supply factors These are mainly concerned with the operating costs of the location Demand factors These factors mainly affect customer service and revenues
Supply factors (1) Labour costs Often a major factor, particularly if the decision is to locate in the UK, or overseas. The biggest difference is between the UK and low labour cost countries overseas. Land & building costs Usually business buildings and facilities are rented. Rentals can vary enormously depending on the location and the facilities provided. Government grants and other incentives reduce the land costs of locating in poorer regions. Energy costs Some businesses use substantial amounts of energy (e.g. gas, electricity); security of supply likely to be more important than price
Supply factors (2) Transport costs Includes the cost of getting inputs into the business (e.g. raw materials for the production line) and getting products delivered to customers. Location needs to be close to the source of supply if the cost of transporting raw materials is high or difficult (e.g. food processing is often carried out close to the farms). For many businesses the cost of distributing to customers is not a significant issue. Delivery firms might carry out the transportation (for which the customer pays). In many cases the customer comes to the business – e.g. in a hotel Community factors The costs of a business location can be influenced by many non-financial factors, but which can still be significant when making the choice. These include: Local amenities & services (e.g. schools, professional services) Local government attitude to supporting business (including financial assistance) Language & political stability
Demand factors (1) Customer convenience Probably the most important factor. Many businesses need to be located where customers find it quick, easy and cheap to access the service being provided. E.g. a fast-food outlet needs to be somewhere close to a strong customer footfall, not hidden away out of sight Labour skills Where specialist skills are required, this can be a big issue. E.g. technology firms tend to locate themselves in areas where there is well-established expertise Site suitability A site may need to have some particular characteristics to maximise customer satisfaction and revenues. E.g. a luxury restaurant or hotel needs to be located somewhere that customers find attractive – not in the middle of a trading estate.
Demand factors (2) Image This is more intangible, but often important. Some customers associate a product with a certain area and prefer to buy from there (e.g. walking equipment – a business based in the Lake District might enjoy a better perceived reputation Expansion potential Future production capacity often has to be taken into account. A location might tick many other boxes, but if it provides limited scope for expansion then it might be rejected. If a location restricts output, then revenues are potentially damaged.
Decisions are based on both quantitative and qualitative factors Based on data Suitable for investment appraisal Harder to identify Based on opinions
Making a balanced location decision <ul><li>Are cost (supply) issues more important than customers and revenues (demand)? </li></ul><ul><li>Is the decision strategically important (i.e. it could affect the achievement of corporate objectives) or is it a relatively minor decision? </li></ul><ul><li>Can quantitative methods be used to evaluate alternative location options (e.g. by using investment appraisal techniques?) </li></ul><ul><li>Do qualitative factors , including senior management preferences, outweigh the financial considerations? </li></ul>
Quantitative techniques <ul><li>Significant or complex location decisions may benefit from using investment appraisal: </li></ul><ul><li>Discounted cash flow – which evaluates a project’s cash flows in terms of the business’ required rates of return on investment (by calculating a net present value for each location option) </li></ul><ul><li>Payback – Also focusing on cash flows; this would help estimate the period of time it takes to repay the investments in the business location </li></ul><ul><li>Average rate of return – an accounting calculation that looks at the estimated average accounting returns as a percentage of the investment </li></ul>
Benefits of a good business location <ul><li>Competitive unit costs – through a combination of a productive and efficiency labour supply, acceptable location overheads and cost-effective access to inputs (raw materials, components etc) </li></ul><ul><li>Optimal revenue opportunities – customer service is not inconvenienced through the choice of location </li></ul><ul><li>An acceptable rate of return on investment – all business projects compete for scare cash resources; a business location decision is no different </li></ul><ul><li>Sufficient production capacity to meet demand and future flexibility in capacity management decisions </li></ul><ul><li>Access to a labour force which enables the business to achieve the objectives of its workforce planning </li></ul>
Industrial inertia Where a business, once established, decides to stay in its original location even if other factors suggest a new location would be beneficial
Industrial inertia & economies of scale <ul><li>A positive reason is that the existing location provides advantages from external economies of scale </li></ul><ul><li>Over a long period of time, a location or region that has become associated with a particular industry develops specialist skills and experience </li></ul><ul><li>The pool of potential recruits is like to contain many people with relevant training and experience </li></ul><ul><li>Specialist suppliers are also likely to be nearby </li></ul>
The costs of relocation <ul><li>Recruiting and training staff in the new location </li></ul><ul><li>Duplicated property costs – e.g. remaining periods on the original lease + upfront payments on a new lease </li></ul><ul><li>Costs of physical transfer – moving production equipment, transferring stocks, lost revenues </li></ul><ul><li>Intangible (but important): </li></ul>
Examples of multi-site growth <ul><li>Retailer expands by launching the same format in other locations nearby and then across the UK </li></ul><ul><li>Manufacturer establishes regional distribution centres </li></ul><ul><li>Franchisor expands by selling geographical territories to franchisees </li></ul><ul><li>UK bank opens a call centre operation overseas </li></ul>
Advantages of multi-site locations <ul><li>Most importantly – closer to customers; the business operates in the geographical markets when it can compete </li></ul><ul><li>Greater potential for promotion amongst junior management </li></ul><ul><li>Recruitment may be easier, particularly is done locally </li></ul><ul><li>Marketing and management economies of scale – costly resources can be spread across more business locations, customers and revenues </li></ul><ul><li>Easier to flex capacity – by adding or removing locations </li></ul><ul><li>Less risk of the business disruption from problems at just one location </li></ul><ul><li>Better understanding of local market cultures & conditions </li></ul>
Disadvantages of multi-site locations <ul><li>Potential duplication of activities ( diseconomy of scale ) </li></ul><ul><li>Harder to control operations – though IT systems can make this much easier </li></ul><ul><li>Communication across the business is more challenging </li></ul><ul><li>Increased risk – the risk that the business does not understand the local markets in which it is operating </li></ul>
Reasons why business increasingly operate overseas <ul><li>Cross-border mergers and acquisitions (e.g. a UK business buys US competitor) </li></ul><ul><li>Organic growth overseas (e.g. Tesco opening superstores in Thailand) </li></ul><ul><li>Moving production overseas – to enable faster lead times to customers or reduce costs </li></ul><ul><li>Increasing use of offshoring </li></ul>
Some issues of overseas locations Issue Key Points Exchange rates Operating in another country almost certainly exposes a business to the effects of fluctuating exchange rates Trade barriers Protectionism varies around the world, but locating a business to avoid trade barriers is certainly important for businesses looking to compete effectively. Common types of trade barrier include quotas, tariffs on imported goods and government subsidies for domestic industries. Political stability Most developed economies enjoy relative political stability – i.e. there are no sudden or dramatic changes in the political landscape which impact on businesses. Other territories are less predictable.
Offshoring or outsourcing? Off-shoring Outsourcing The work is done overseas Someone else does the work for us
Some examples to illustrate the difference Operations Decision Offshoring? Outsourcing? A UK business sets up its own call-centre in Bangalore (India) to serve UK customers Yes No A toy manufacturer contracts with overseas suppliers to produce certain components which it imports into the UK Yes Yes A UK-based firm hands over its payroll and IT transaction processing activities to a specialist supplier in the UK No Yes A UK supermarket retailer opens its first stores in the USA managed by a team based in the USA Yes No
Offshoring – the classic example Plastic from Taiwan Hair from Japan Assembled in China & Indonesia Clothing from China Designed in the USA
Offshoring example - Reuters Covers Wall Street news With 15,000 journalists in Bangalore http://news.bbc.co.uk/1/hi/business/6289521.stm
Some risks of offshoring Customer service Combination of poor training, cultural differences and local management sometimes lead to worse customer satisfaction Higher than expected costs Low-wage economies like India and China might seem attractive, but there are many hidden costs associated with offshoring and some firms find that lower productivity from the overseas location actually means higher unit costs Public and employee relations A decision to “move jobs” from the UK to a low-wage economy is a sensitive one. Handled poorly, the damage to public and employee goodwill can be significant Protection of intellectual property The legal protections for business information, processes and brands are not as strong in many countries as they are in the UK. A risk of offshoring is that intellectual property (know-how, trade secrets) is lost and that a potentially stronger future competitor is born.
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