Lesson 6

LOCATION STRATEGY
Learning Objectives:

At the end of the chapter, the students will be able to:

1. Determine the factors that affect location decisions;
2. Describe the value of location; and
3. Describe different types of location.

Factors that affect Location Decisions

Once management is committed to a specific location, many costs are firmly in place and difficult
to reduce. For instance, if a new factory location is in a region with high energy cost, even good
management with an outstanding energy strategy is starting at a disadvantage. Management is in a similar
bind with its human resource strategy if labor in the selected location is expensive, ill-trained or has a
poor work ethic. Consequently, hard work to determine an optimal facility location is a good investment.
The location decision often depends on the type of business. For industrial location decisions, the
strategy is usually minimizing cost, whereas for retail and professional service organizations, the strategy
focuses on maximizing revenue. Warehouse location strategy, however, may be driven by a combination
of cost and speed of delivery. In general, the objective of location strategy is to maximize the benefit of
the location of the firm.
Companies make location decisions relatively infrequently, usually because demand has
outgrown the current plant’s capacity or because of changes in labor productivity, exchange rates, costs or
local attitudes. Companies may also relocate their manufacturing or service facilities because of shifts in
demographics and customer demand.
Location options include:
1. Expanding an existing facility instead of moving
2. Maintaining current sites while adding another facility elsewhere
3. Choosing the existing facility and moving to another location.
1. Labor productivity

2. Exchange rates and currency risk. Although wage rates and productivity may make a country
seem economical, unfavorable exchange rates might negate savings. Sometimes, though, firms
can take advantage of a particularly favorable exchange rate by relocating or exporting to a
foreign country.

3. Costs
a. Tangible costs are those costs that are readily identifiable and precisely measured.
b. Intangible costs- a category of location costs that cannot be easily quantified such as
quality of life and government.
 4. Attitudes. Attitudes of national, state and local governments toward private property, zoning,
pollution and employment stability may be in flux. Governmental attitudes at the time the
location decision is made may not be lasting ones. Moreover, management may find that these
attitudes can be influenced by their own leadership.
Work attitudes may also differ from country to country, region to region, and small town
to city. Workers views regarding turnover, unions and absenteeism are all relevant factors. In
turn, these attitudes can affect a company’s decision whether to make offers to current workers if
the firm relocates to a new location.

5. Proximity to markets. For many firms it is extremely important to locate near customers.
Particularly, service organizations, like drugstores, restaurants, post offices find proximity to
market is the primary location factor. Manufacturing firms find it useful to be close to customers
when transporting finished goods is expensive or difficult.

6. Proximity to suppliers. Firms locate near their raw materials and suppliers because of
perishability and transportation cost or bulk. Companies dependent on inputs of heavy or bulky
raw materials face expensive inbound transportation costs, so transportation costs become a major
factor. And goods for which there is a reduction in bulk during production typically need to be
near the raw materials.

7. Proximity to competitors.
Clustering: The location of competing companies near each other, often because of a
critical mass of information, talent, venture capital or natural resources.

Factors affecting country decision

 Government rules, attitudes, stability, incentives
 Labor availability, attitudes, productivity, cost
 Availability of supplies, communications, energy
 Culture and economy
 Location of markets
 Exchange rate

Factors affecting region/community decision

 Attractiveness of region (culture, taxes, climate, etc.)
 Labor availability, costs, attitudes towards unions
 Environmental regulations of state and town
 Proximity to customers and suppliers
 Corporate desires/costs and availability of utilities
 Government incentives
 Land/construction costs

Factors affecting site decision

 Access to air, rail, highway and waterway systems
 Proximity to needed services/supplies
  Site size and cost
 Zoning restrictions
 Environmental impact issues

Factors affecting location

 Labor costs and availability, including wages, productivity, attitudes, age, distribution,
unionization and skills
 Site costs, including land cost, parking, drainage, expansion opportunities
 Proximity to raw materials and suppliers
 Proximity to markets
 Utilities
 Transportation availability (road, rail, water)
 Quality of life issues (education, cost of living, health care, sports, etc.)
 Government

The Value of Location

The growing popularity of mapping web sites and handheld GPS (Global Positioning Satellite)
devices is indicative of the continuing recognition of the value of location. And even with the growth of
online shopping and virtual commerce, all business transactions and events still take place with the parties
located at some physical location. Clearly, the nature of business transactions and events is influenced by
location as well as the associated demographics of the participating parties. And as commerce transitions
to the World Wide Web, the corresponding growing volume of data related to the location of events and
transactions can be analyzed in ways that will contribute business insight among a variety of operational
and analytical dimensions, including influencing consumer behavior, analyzing risk, identifying credible
threats, evaluating tax dependencies, allocating relief funds, planning strategic military deployment, and
many other ways of generating positive business value.

What is Location Intelligence?

Location intelligence blends the analysis of objects (such as people, businesses, points of interest,
or geographic regions) with their spatial attributes (such as average age, median income, average driving
distance, or average educational attainment) to inform decision-making for operational efficiencies,
revenue growth, or more effective management. These location intelligence capabilities can be integrated
with both operational and analytical applications to help increase revenues, decrease costs, and improve
productivity and satisfaction:

Geocoding
As the fundamental location intelligence service, geocoding maps a named location (such as an
address) to specific latitude, longitude (and potentially altitude) coordinates on the earth’s surface.
Geocoding service may extend beyond address mapping; given a data base of named locations and other
points of interest, a geocoding service could map any number of places to their location coordinates,
including airport or railroad station codes, named points of interest, a street intersection, or even
analyzing text to extract place names descriptions.

Reverse Geocoding
 Alternatively, the service can perform the reciprocal operation of reverse geocoding: providing
the nearest address or point of interest given a set of latitude and longitude coordinates.

Address Cleansing and Standardization

Parsing and standardizing street, city, and state information allows an address cleansing service to
match against third-party data to ensure that records meet published standards for
postal addressing.

Geographic Data Enrichment

Many of the business drivers for location intelligence rely on combining location information
with auxiliary data sets to enable risk assessment, identification of taxing authorities, and standardized
representations of regional hierarchies (such as place/township/city/county/state). Matching cleansed
addresses against geographically-enriched data sets appends additional information (such as address
corrections, demographic data imports, psychographic data imports, and household data) in ways that
enable downstream analysis that will inform business decisions.

Mapping

A mapping service essentially combines the geocoding capability with reporting and visualization
to allow identification and tracking of the locations at which business transactions occur. A mapping
service relies on geocoding to transform a conceptual location (address, point of interest, etc.) to its
coordinates and then locate where the position of those coordinates on a map, as well as allowing for
editing, analyzing, and displaying value-added associated data on a map.

Factors affecting the location of a business

There are several reasons why an organization might decide to open new branches or relocate its
existing operations. It might want to expand the business, so it will open branches in cities where the
organization did not previously have a presence.

A business might also want to restructure or modernize its operations. It might do this by bringing
together some existing departments into new purpose built premises. It might decide to shut its less
profitable operations and open branches in locations that offer more business potential.
 A business will have to consider many factors when determining where to locate a new branch or
operation. Usually, it will have to balance several factors in making a decision. Sometimes one factor may
sway the decision:

 It may choose a site with the cheapest land or buildings.

 It might decide on a location that is convenient for key employees. A business needs to be able to
recruit staff with the right skills base.
 It might choose a site that has easy access to raw materials. For example, many frozen food
factories are located near fishing ports to reduce transport time taken and to keep fish fresh.
 The key factor could be the transport and service infrastructure. Many businesses require easy
access to good road and railway links and modern telecommunication services. These ensure that
they can meet service or delivery deadlines.

Types of Locations

The type of location you choose depends largely on the type of business you're in, but there are
enough mixed-use areas and creative applications of space that you should give some thought to each
type before making a final decision. For example, business parks and office buildings typically have retail
space so they can attract the restaurants and stores that business tenants want nearby. Shopping centers
are often home to an assortment of professional services-medical, legal, accounting, insurance, etc.-as
well as retailers. It's entirely possible some version of nontraditional space will work for you, so use your
imagination.

1. Homebased: This is perhaps the trendiest location for a business these days, and many entrepreneurs
start at home, then move into commercial space as their business grows. Others start at home with no
thought or intention of ever moving. You can run a homebased business from an office in a spare
bedroom, the basement, the attic-even the kitchen table. On the plus side, you don't need to worry about
negotiating leases, coming up with substantial deposits or commuting. On the downside, your room for
physical growth is limited and you may find accommodating employees or meetings with clients a
challenge.

2. Retail: Retail space comes in a variety of shapes and sizes and may be located in enclosed malls, strip
shopping centers, free-standing buildings, downtown shopping districts or mixed-use facilities. You'll
also find retail space in airports and other transportation facilities, hotel lobbies, sports stadiums, and a
variety of temporary or special event venues.

3. Mobile: Whether you're selling to the general public or other businesses, if you have a product or
service that you take to your customers, your ideal location may be a car, van or truck.

4. Commercial: Commercial space includes even more options than retail. Commercial office buildings
and business parks offer traditional office space geared to businesses that do not require a significant
amount of pedestrian or automobile traffic for sales. You'll find commercial office space in downtown
business districts, business parks, and sometimes interspersed among suburban retail facilities. One office
option to consider is an executive suite, where the landlord provides receptionist and secretarial services,
faxing, photocopying, conference rooms and other support services as part of the space package.
Executive suites help you project the image of a professional operation at a more affordable cost than a
traditional office and can be found in most commercial office areas. Some executive suites even rent their
facilities by the hour to homebased businesses or out-of-towners who need temporary office space.
5. Industrial: If your business involves manufacturing or heavy distribution, you'll need a plant or
warehouse facility. Light industrial parks typically attract smaller manufacturers in nonpolluting
industries as well as companies that need showrooms in addition to manufacturing facilities. Heavy
industrial areas tend to be older and poorly planned and usually offer rail and/or water port access.
Though industrial parks are generally newer and often have better infrastructures, you may also want to
consider any free-standing commercial building that meets your needs and is adequately zoned.

Things to Consider in Choosing a Business Location

In choosing a business location therefore firms need to weigh up the following range of push and pull
factors:

1.Closeness to market. This is the case with fresh produce - so that for example, many supermarkets
operate their own bakeries.

2.Communications links. Transport is an important factor supporting access to markets. Modern

companies also need to locate where they have access to excellent information technology links.

3.Closeness to raw materials. Locating close to the raw material supplies can reduce where raw
materials are heavy and large quantities are used up in production costs. This is particularly true for
industries like steel, which uses large quantities of iron ore in the production process.

4.Availability of appropriately skilled employees. Some industries rely heavily on a highly skilled
workforce. In contrast, other industries that require cheap labour will seek locations where there are a lot
of people looking for work that are prepared to accept low wages.

5.Opportunity for waste disposal. Waste is an important side effect of modern industrial processes.
Firms that produce a lot of toxic material (e.g. some chemical plants) will seek to locate where there are
facilities available for recycling and safe disposal of their products.

6.Availability of power supplies. Large firms are able to negotiate bulk discounts when they purchase
power from energy retailing companies. Being able to negotiate a good deal in a particular location might
be influential as a locational factor.

7.Availability of land is increasingly important today. Land is becoming increasingly scarce particularly
in urban locations, forcing rental prices up. Companies like Land Securities are developing new sites that
are suitable for modern businesses to locate to.

8.Government incentives are important in reducing costs of locating in certain areas.

A footloose business - is the term used to describe a business that is not tied down by particular
locating factors. It can more or less set up anywhere.

Industrial inertia - describes a situation where a business sets up in a particular location and then the
original factors that led it to locate there become no longer significant - but the firm does not move