Business Location the geographical position of a business

Business Location …the geographical position of a business – where it is sited

Why do firms look for new locations? l If they are new businesses l If they need to expand, but have too little space at present l If they need more modern premises l To reduce costs l If they are expanding, ex. to new countries

Quantitative Reasons Are those that can be numerically calculated, such as the cost of purchasing or renting premises.

Quantitative factors affecting location decision l Availability, suitability and cost of land Managers have to consider the cost of land with earning potential; the busier the area, the higher the earning potential but the greater the cost of land l Cheapest location is not necessarily ideal as it is ‘cheap’ for a reason l There is more demand for land in city centers, therefore cost of land is higher l

Quantitative factors affecting location decision l Availability, quality and cost of labor Many manufacturing companies locate to China due to high supply and low cost of labor l Firms requiring highly skilled engineers might locate in Germany where there is a readily available supply of skilled labor l

Quantitative factors affecting location decision l Proximity and access to raw materials Important for Primary and Secondary Industries to consider l Important if raw materials are bulky and expensive to transport l Bulk reducing business (or weight-losing industries) locate near the source of raw materials that are heavier and costlier to transport than the final product l

Quantitative factors affecting location decision l Proximity to the market (customers) Relevant to the Tertiary industries l Important if the product is bulky and expensive to transport l Bulk increasing (or weight-gaining industries) commonly found in businesses that assemble components choose to locate nearer to their markets to avoid high transportation costs l

Quantitative factors affecting location decision l Government incentives and limitations Governments may offer financial incentives such as grants or subsidies to businesses to attract to locate to assisted areas or enterprise zones (areas suffering from high unemployment, low incomes and/or undergoing economic regeneration). l Governments can also impose limitations such as license to trade, planning permission, increase in corporate taxes etc. l

Quantitative factors affecting location decision l Feasibility of using e-commerce E-commerce have a huge impact on reducing the financial cost of location l Many businesses no longer need to be located near their customers as they are now able to sell their products via the Internet l

Qualitative Reasons Are those that deal with the psychological and emotional aspects of location or relocation, such as familiarity with a particular area or consideration for the welfare of workers in the local community. They are not easy to measure.

Qualitative factors affecting location decision l Management preferences Managers may prefer a certain location due to personal reasons, familiarity or gut feeling (instincts) or because they feel that the location will serve workers and the local community better l Manager may also prefer a certain location because of its history l

Qualitative factors affecting location decision l Local knowledge Businesses may locate in a certain area because they know the location and its culture l Inside information gives the business a competitive advantage l A lack of knowledge can prove disastrous l

Qualitative factors affecting location decision l Infrastructure l Transportation networks: l l Communication networks: l l Roads, rail, sea and air Telephone lines (for telecommunications coverage and internet services) & postal services Support networks: l Backup maintenance and complementary services

Qualitative factors affecting location decision l Political stability and economic factors A stable economic and political environment will help a business to trade effectively, thereby reducing the risks of operating overseas. l Countries that offer political harmony free from corruption, a good law and order system, a stable exchange rate system and low rates of taxation will tend to be more attractive to businesses. l

Qualitative factors affecting location decision l Government l restrictions and regulations The difficulty in obtaining licenses, permits, copyright and planning permission may lead to business looking to locate in alternative countries.

Qualitative factors affecting location decision l Ethical issues A business that exerts lots of waste, noise and pollution might choose to locate in outof-town and remote areas to avoid complaints from the local community. l It may be seen as unethical for a business to relocate if this will cause major job losses in certain areas, thereby damaging its reputation, sales and profits. l

Qualitative factors affecting location decision l Comparative l shopping (clustering) Clustering – firms locate near other businesses that cater for similar or complementary markets

Reorganizing Production The following ways of re-organizing both nationally and internationally: outsourcing/subcontracting, offshoring and insourcing

Outsourcing or subcontracting Is the practice of transferring internal business activities to an external organization to reduce costs and increase productivity l Subcontractors can carry out the outsourced work more cost effectively without compromising quality l Examples: office cleaning, accounting, property management, call centers, customer support, security system & ICT maintenance l

Outsourcing or subcontracting Advantages Allows the business to concentrate on its core activities l Quality output can occur l Cut production costs l Limitations Mutual trust between business and subcontractor l Quality is passed onto the external party l Still require a two-way communication and careful coordination l Cause uncertainty among workforce l

Offshoring Extension of outsourcing which involves relocating business functions and processes overseas l Offshored functions can remain within the business (operating overseas) or outsourced to an overseas organization (offshore outsourcing) l Example: Blackberry, Nokia and Apple use offshore outsourcing for the production of their smartphones, using Taiwan’s Foxconn as the subcontractor l

Offshoring Advantages Can help business to avoid trade protectionist measures used by governments l Benefits of outsourcing still apply to offshoring l Limitations May associate to unethical practices (exploitation of labors in low income countries, poor working conditions) l Quality assurance becomes more difficult l External influences – economic and political instability l

Offshoring l Categories Production offshoring – manufacturing l Service offshoring – such as call centers l l Offshoring has brought many benefits for host countries such as job creation, higher wages l Examples: China & Vietnam – production offshoring l India – service offshoring l

Insourcing l The use of an organization’s own people and resources to accomplish a certain function or task which would otherwise have been outsourced l Reasons: Previously outsourced but no longer satisfied with the quality of work being done l There are no longer cost-saving benefits from using subcontractor & task can be assigned to people in-house to cut costs l

International location Reasons for locating overseas may include: l Cost reduction - labor and materials may be considerably cheaper overseas. These have to be compared with the additional distribution costs, however. l Avoiding excessive government regulation and interference - This gives other companies overseas a competitive advantage.

l Avoiding protectionism - import restrictions can be by-passed by manufacturing in the country or community concerned. Are the costs of setting up a branch worth it? l Economies of scale - large international, multinational industries may gain such high levels of economies of scale that international operation becomes the norm.

Problems locating internationally. l Language l Culture - this can be a real problem if it is not considered in advance, and the necessary adjustments made. Dress, food and behaviour are major areas where problems can occur. l Regulations - Health and Safety, transport, ingredients etc will or may have completely different rules and regulations if you are working inside the country rather than just exporting to it.

l Lack of contacts - How do you judge the effectiveness and efficiency and reliability of an agent overseas? l Ethics, morals and social responsibility

Exam Tip! n n n Outsourcing refers to the use of a third-party subcontractor paid to carry out specific work. Offshoring refers to getting business activities or functions done in a different country, usually due to cost advantages of locating overseas. Offshore outsourcing is the hiring of a subcontractor to do the work overseas, usually to lower costs and to take advantage of the vendor’s local expertise.