SL-HL 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.

THE IMPACT OF GLOBALIZATION ON LOCATION

• Globalization is a huge topic and there are many different perspectives.

• From a business perspective, whether it is right or wrong, the process appears to be largely irreversible and it important that we look at the reasons why businesses may want to set up organizations in another country.

GLOBALIZATION – PULL FACTORS

• There many external reasons why setting up a business or relocating globally appears to be an attractive option for many businesess.

• These can be seen as pull factors and include; Improved communications Dismantling of trade barriers Deregulation of the world’s financial markets Increasing economic and political power of

multinational companies.

PULL FACTORSImproved Communications

• With “Skype”, email and other digital services it is far easier to communicate in real time than it ever has been.

• In fact the only obstacles seem to be our body checks and time zones.

PULL FACTORSDismantling of Trade Barriers

• More than three quarters of the world’s countries are signatories to the World Trade Organization (WTO) whose commitment to reducing trade barriers makes if far easier for trade to take place.

• China became a member of the WTO in 2000 and since then it has really exploded onto the world stage with US and European companies setting up in China.

• With the money earned, China is now starting to acquire foreign banks and manufacturers and is even sponsoring football teams.

PULL FACTORDeregulation of the world’s financial markets

• This has made the transfer of vast sums of money very easy and in doing so has facilitated quicker start-ups for many businesses.

• Again the rise in Internet Banking has made it easier to keep track of company finance and, allied to the digitalization of the world’s money markets, it is much more common for investors to cross borders.

• This again helps to build up collaboration such as forming joint ventures, strategic alliances or working with venture capitalists.

PULL FACTORSThe Increasing Size of Multinational Companies

• In the past, there might have been companies like the East India company which effectively rain India for 150 years, but now the size and consequently the influence of the world’s biggest companies makes its easier for them to persuade countries to allow them to set up.

• In many ways the attraction for multinational companies is that they can.

PULL FACTORSThe Increasing Size of Multinational Companies

• The enormous power and influence of MNCs can create momentum for other businesses in the same field.

• Eg: The impressive growth of Chinese influence in Africa may have been driven by the need for raw materials, but itself has generated interest in other areas.

PUSH FACTORS

As well as external factors working for MNCS there are a number of internal factors that may help push multinational companies and other businesses to operate overseas. They may be able to:• Reduce Costs• Increase Market Share• Put Extension Strategies into place.• Use Operating Overseas as a defense strategy• Increase others awareness of them.

PUSH FACTORSReduce Costs

• By setting up production facilities abroad, businesses may be able to reduce costs by moving closer to the raw materials or using cheaper labor.

• They may also be able to achieve productive economies of scale.

• Business may also be able to take advantage of more favorable tax regimes and achieve financial economies of scale.

PUSH FACTORSIncrease Market Share

By opening up a business in a new region many organizations hope to tap into a new market.The potential is huge, but of course so are the risks, which include:Language barriersCultural practices and etiquetteLocal Law & Politics, especially labour lawTime & Complexity Being unable to find trustworthy partners.

PUSH FACTORSIncrease Market Share

First Mover Advantage• The rewards can be extremely high, especially

if the business has first mover advantage in a large market.

• Hence, the rush to China with its 1 billion customers and the costs incurred the first time round by many big name companies.

PUSH FACTORSExtension Strategies

• Some businesses may have even reached the saturation point for their product and may not be looking to extend the life cycle of a product.

• McDonalds has found increasing competition not only from other burger outlets, but from pizza suppliers, sandwich bars, Mexican and other fast food outlets.

• This increased competition has had a major impact on McDonalds profits. McDonalds has also been hit the hardest by bad publicity as a result of films like “Supersize Me” and increasing awareness of obesity.

• As result McDonalds has changed its menu.

PUSH FACTORSExtension Strategies

McDonalds-International Reach• McDonalds has targeted areas where people

are more likely to appreciate the service they provide.

• Of the 30,000 or more McDonald stores worldwide, more than two thirds are outside the US.

PUSH FACTORSDefensive Strategies

• Many businesses make the decision to move overseas, not because they need to but because they don’t want their rivals to corner the market if they don’t go for it.

• Growth and expansion are main drivers for businesses and the fear that rivals might steal a lead can act as a catalyst for many.

• The rush for oil companies to set up in Central Asia to secure oil and gas reserves is a recent example.

• At times, this resembles the “scramble for Africa” by European power in the late 19th century.

• Perhaps a modern equivalent is the emergence of China as a big player in Africa today, as China has felt the need to secure the supply of raw materials to feed its growing industries.

IMPACT OF GLOBALIZATION OF BUSINESS FUNCTIONS

• Globalization is not a one-way process.• Businesses can learn as well as teach.• Interacting in a new business environment

may bring a number of opportunities for both the business setting up in another country and also for those external to the business.

IMPACT OF GLOBALIZATIONProduction

• Globalization can lead to cheaper costs as business can locate closer to their source of raw materials or where labor costs are lower o indeed where there is a more favorable tax system.

• MNCs can stimulate training and introduce new production techniques to other countries – or they can offload obsolete practices that they would not be able to continue in their home country.

IMPACT OF GLOBALIZATIONMarketing

• Businesses can make creative marketing campaigns to make use of the “global village”.

• Eg: HSBCs popular advertising campaign – “the world’s local bank” cleverly played on local cultures with a global backdrop.

• However, businesses should also be wary of simply transferring existing marketing ploys to a new location.

• Different markets have different cultures and the need to be careful and perhaps to use local parties is important.

IMPACT OF GLOBALIZATIONMarketing

International Marketing Failures• When Chevrolet introduced the “Nova” car to Spain

it failed miserably – try the car’s name in Spanish!.• The Toyota MR2 in French.• A Wrigley’s chewing gum in Russian offended

sections of the Chinese community in Guangzhou because the backing music was the Chinese National Anthem.

• Sales of Chewing Gum in Guangzhou fell by up to a quarter.

IMPACT OF GLOBALIZATIONHR

• Many businesses fail to take account of cultural differences when setting up a business in a different location.

• A classic case study was why US bosses working in China could not understand why their workers would not talk to them and tell them their problems – because this is a common practice in the US, the bosses expected it in China.

IMPACT OF GLOBALIZATIONHR

• Distance learning, exchange programmes and easier access to information about the world’s universities has made more people more geographically mobile.

• In fact even for semi-skilled and manual workers it is easier to move and work in other countries.

• Parts of the UK, for instance, has been transformed since the influx of Eastern Europeans since 1990s.

• The same in true regarding people originally from Latin America now in the US, Africans in France and Spain and Asians in Australia.

IMPACT OF GLOBALIZATIONHR

• Local societies can often benefit from the absorption of different cultures and practices.

• Globalization is both a cause and effect in this case. • When deciding on a location overseas, a key decision

is how to staff it and what proportions of expatriate and local staff to have.

• Expatriates can bring expertise and transferable skills but they are more expensive and they will need much more support – eg: with family issues like schooling

• However, they may have wide contracts and better appreciation of the “big picture”.

IMPACT OF GLOBALIZATIONHR

Third Culture• There is the ideas of a `Third Culture`, where

children who have lived out of their home countries all their lives, have little identity with one place, find themselves looking for opportunities.

• In the same vein, as they will have acquired language skills from living overseas they may have advantages over others.

IMPACT OF GLOBALIZATIONFinance

• The global financial system is much more integrated these days.

• The can have advantages and disadvantages.• It is easier to finance start ups outside a home country,

but it is also easier to lose money too.• The credit squeeze of 2008 is an excellent example.• The transfer of funds is much quicker because of

deregulated markets, the computerization of the world’s stock exchanges and the introduction of internet banking.

IMPACT OF GLOBALIZATIONFinance

• Businesses need to be wary about financing a project in another location if they do not have the local knowledge.

• Also one system, that has not been integrated is the world’s accounting system and although the Enron scandal forced the US market to tighten its practices, this may not have been the case elsewhere.