Date post: | 21-Dec-2015 |
Category: |
Documents |
View: | 213 times |
Download: | 0 times |
Theories of Plant Location
• Median Location Principle
• Linear Market Competition (Hotelling)
• Weber
• Lösch
• Isard’s Space Economy
• Smiths Spatial Margins
• Webber’s Uncertainty Effect
Median Location Principle:Minimize Transport Cost
A B C D E1 2 3 4 5 6 7
Distance from C
Distance from D
A 3 4B 2 3C 0 1D 1 0E 3 2
Sum 9 10
Hotelling’s Vendors on the Beach Solution to such Competition
Essentially iterative competitive movements within the agglomeration space
A B C D E
If seller 1 starts at A, thenseller 2 jumps to B, then seller 1 jumps to C, and seller 2 could proceed to D, but that is inferiorto also locating at C, splitting the market in half.
Weber’s Model of Manufacturing Industry Production
• Developed in the early 20th Century in southern Germany
• Input factors are not ubiquitous
• This means that:– physical resources are not found everywhere– human labor is differentiated by skill & ability – capital availability varies– other inputs are also differentiated
Weber hypothesized that:
• Given market prices, producers would seek to minimize production costs to maximize profits.
• This leads to a taxonomy of production cost situations, considering
– factor costs– transport costs on products– transport costs on finished goods
In the Weber Model, If producers Minimize Costs, then:
Min: Ipiqi+ Iriqidi +rqqdj
e.g.
Minimize sum of factor costs + transport costs
on factor inputs + transport cost on shipment of product to the market
If factor costs are “given,” then the problem becomes how to minimize transport costs.
The Material Index Principle as a guide to manufacturing location
Material index = weight of localized material
weight of product (unit)
If M.I. < or = 1.0, locate at market
Material types:
“Pure” materials: no weight loss in production
“Weight-losing materials”
“ubiquities”
Weber’s Cost Minimizing Model & the Principle of Material Orientation
Example: 2T local materials
3T ubiquities
MI = 2/5 = .4, locate at market
Alternative Situations
(1) Ubiquities only, MI = 0, locate at market
(2) Pure Materials only
(a) 1 pure material, MI = 1M C
Material Index Cases, Cont.(b) 1 pure material + ubiquities
MI < 1, locate at market
(c) several pure materials only
MI = 1, locate at market
(d) several pure materials + ubiquities
MI < 1, locate at market
(3) Weight Losing Materials
(a) 1 weight losing material
MI > 1, locate at material locationM C
Material Index Cases, Cont. (b) 1 weight losing material + ubiquities
If MI > 1, locate at material site
If MI <1, locate at market
If MI = 1 ?, probably at market
( c) Several weight losing materials
M1
M2
CLocate away from C
An Example of (c)
P1 = 10, q1 = 2, r1 = .1 rq = .1, q = 5
p2 = 5, q2 = 4, r2 = .1 MI = 6/5 = 1.2
M1 C
M2
7
7
5
At M1: 40 + 0 +2.0 + 3.5 = 45.5At M2: 40 + 1 + 0 + 3.5 = 44.5At C: 40 + 1.4 +2.8 + 0 = 44.2At L: 40 + 1.225 + 2.45 + .5 = 44.175
L
6.125
6.125
1
Material Index Situations, Cont.
(d) Several weight-losing materials + pure materials: MI decreases, outcomes as in (b) above
(e) Several weight-losing materials + pure
materials + ubiquities: outcomes as in (d)
Upshot: Most situations are like c, d, and e.
3 classic locational outcomes: 1. Market,
2. Resource, and 3. Intermediate, sometimes “footloose”
Labor Cost Deviation
• M1
• M2
• C
• P
• L1 • L2
P - Transport Cost Minimum LocationL1, L2 - Low Labor Cost LocationsC - MarketM1, M2 - Raw Material Sites
CriticalIsodapane
Weber’s Approach to Agglomeration Economies
Scale of Output
$
Q1 Q2
a1 a2
For some index of agglomeration (e.g. a1 or a2):
A
C
BSeparateMarket Regionse.g. A,B,C,or agglomeration
A B
CCriticalIsodapanes
Competition for Location in Agglomerations
S
T
U
T T
S
SU
U
S1
T1
U1
S, T, and U can get agglomeration savings at T1, S1, and U1,but need to bargain to move to a location realizing them in
S, T, and U are separate Markets, whose critical isodapanes areSS, TT, and UU
Critique of Weber
• Conception of market demand limited
• Transport costs not defined realistically
• Labor is typically mobile, not fixed in space
• Many manufacturing plants produce complex sets of products with complex sets of inputs
• Treatment of agglomeration is rigid
• Lösch: Location based on maximum profit, not minimum cost
Isard’s Substitution Framework
Input-factors can often be used substitutability
although the degree of substitution can vary by scale and by technology
A
B
Q1
Q2
“Perfect” substitutability
A
B
••
•
No substitution
Q1
Q2
Q3
Substitution possibilities
Isoquants - Equal levels of output
Substitution is possible over a range
A
B
Q1
Q2
but factor proportions change
Substitution possibilities
Isocosts - Equal levels of cost, C1<C2<C3
A
B
Q1
Q2
Q1Q2
C1
C1 C2C3
C2
C3
Y
X
X is the ideal amount of A,Y is the ideal amount of Bfor production at level Q1
Expansion Curve - joins optimal factor combinations across scale
of output
Factor X
Factor Y
Q1
Q2
Q3
Q1
Q2Q3
C1
C1
C2
C2
C3
C3
Expansion Path
Spacing of isoquants and scale economies and/or diseconomies
Factor X
Out
put
Diseconomies
Linear
Scale Economies
Isoquants displaying scale economies & diseconomies
Factor XFactor X
Fac
tor
Y
Fac
tor
Y
10 2030
1020 30 40
Diseconomies
Economies
Isard’s Substitution Model: two point location model - pure materials
M C
Transformation Line
Distan
ce from M
Distance from C
Isard’s Substitution Model, 3 point location problem
Market
Material A
Material BS
O
R P
Distance from B
Dis
tan
ce f
rom
A
O
P
R
S
T
UW
Y
V X Distance from B
Dis
tan
ce f
rom
A X
Y
V
W
T
U
OP
RS
Smith’s Space-Cost Curve•Weber’s isodapane concept: equal transport costs from a reference point
• Formed by adding transport costs for individual factors - mapped as “isotims”
X and Y are the “spatial margins of profitability”
Tot
al C
ost
(M
ater
ial &
Pro
du
ct)
Material Source Market
Area of Profit
$
X Y
Webber’s Uncertainty Effect
• In reality, we do not have perfect knowledge about markets and factor costs
• Uncertainty deters (large) investments
• Uncertainty enhances the importance of external economies - new entrants get the benefits caused by existing sellers
• Ex ante versus ex post evaluations, leading to satisficing behavior
Businesses in a Volatile Environment: A Two-Way Relationship
Business as a “black box”: unpacking the contents
Inputs Firm OutputsMaterials,CapitalLabor
Finished orsemifinishedproducts
Motives for behaviorin space:
profit: maximum?Or: a “satisficing” level“bounded rationality”
HerbertSimon
Competing elementsinternal to the firm
Forces influencing the decision-making process
Organized G
roups
Values of societyEXTERNAL
Objectives
Expectationsof Individuals
Expectatio
ns
of Stakeh
oldersExpectations
of Coalitions
Hist
ory
and
age
Leade
rshi
p
and
mgt
.styl
eSt
ruct
ure
and
syst
ems
CU
LTUR
E
Market Situation Products and technology
NATURE OF BUSINESS
Organizing with regard to the value chain
Vertically integrated versus specialized in parts of the value chain
Determination of scope via transactions costs - Coase’s theorem: The firm will carry out a particular task up to the point at which “the costs of organizing an extra transaction within the firm are equal to the costs involved in carrying out the transaction in the open market, or to the costs of organizing by another entrepreneur.”
Williamson: internal activities organized hierarchically; external organized horizontally
Dynamism: vertical integration & disintegration related to changes in transactions costs
The Uncertain and Volatile Business Environment
BusinessOrganization
Firm EnvironmentBoundary
Task EnvironmentDomain Environment
Societal Environment
Global EnvironmentMacroenvironment
The Task Environment
FIRMSuppliers Customers
Regulators
Government Labor Unions
Competitors
IndustryCompetitors
PotentialEntrants
SubstituteProducts
BargainingPower
BargainingPower
But, Production Networks are Inherently Unstable
• Factor prices change
• Factor supply availability changes
• Market tastes change
• Market demand mix/levels change
• Process and product technology changes
• In the globalized and oligopolistic market environment, organizational change is rampant
Upshot: Trajectories & Adjustment
Turbulent Environments
ComplexTurbulentConditions
SimpleStaticConditions
Low levelsof uncertainty
IncreasingUncertainty
Increasing complexity
Increasing dynamism
A Common Outcome of this Turbulence: The Product Life Cycle
DemandConditions
Very fewbuyers
Growingnumber of
buyers
Peakdemand
Decliningdemand
Steep falloffin demand
CompetitiveStructure
Very fewcompetitors
Entry of newcompetitors
Shakeout ofweakest
competitors
Stablepopulation
ofcompetitors
Exit of somecompetitors
Technology Rapidchange
Less rapidchange
Some change, but increasingly stabletechnology
SalesVolume
Initial Growth Maturity Decline Obsolescence
development
Examples of the Product Life Cycle
Fashion clothes
Automobiles
Generations of Boeing airplanes
…….but not all products follow this trajectory:
Levi 501 shrink-to-fit jeans
“Coke” & name brands that play off product stability: Tiffany; L.L Bean; Campbell’s Soup
Like Schumpeter, Freeman’s view that economic systems experience “creative gales of destruction: Campus computing as an example
Era Mode of Interface Mode of Output~1959 to ~ 1975 Hollerith Cards 11 x 17 line printer paper
(FORTRAN)~ 1970 to ~ 1988 Magnetic Tape 11 x 17 line printer paper,
mainframe files (FORTRAN)~ 1983 to now CD’s for data Laser Printers & PC files
(early EXCEL; SPSS)~ 1993 to now The WWW; CD’s start to
dieLaser Printers & PC FilesVast Expansion of Modes ofanalysis
~ 1997 to now The WWW Multi-mode display devices;Huge expansion of analyticalenvironments
Where next? Who knows Technology will driverestructuring
Mode of Input: varied also over time!
Impacts of IT in the Current Business World
• Are we in a new era of techno-economic adjustment due to IT?
• Symptoms: Geographic realignments of employment, industrial power, and multiplier effects
• Consequences: reshaping of political, social, and economic systems
• Consequences that we cannot forecast!
So, do big businesses really have advantage?
Yes, and No.
Yes, as measured in most narrowly defined industrial categories, but within many are powerful competitors in the small firm cohort
Scale economy factors that we covered are important in creating advantage, but they can also be an impediment.