5.

4 Location

IB BUSINESS MANAGEMENT
 5.4 Location
By the end of this chapter, you should be able to:
• Explain the reasons for a specific location of production.
• Discuss the different ways of reorganising production, both nationally and
internationally.
 Location of production
• 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.
• Deciding on the optimal location for a business is often crucial to its success.
• An optimal location decision is one
that selects the best site for expansion
of the business or for its relocation,
given current information.
• This best site should maximise the
long-term profits of the business.
 Location of production
Location decisions have three key characteristics:
• They are strategic in nature – long-term and impact the whole business.
• Taken by highest levels of management – never delegated.
• Difficult to reverse – due to costs of relocation.
 Location of production
The optimal site is nearly always a compromise between conflicting benefits and
drawbacks. For example:
• High fixed costs of the site with convenience for customers and potential sales
revenue.
• The low costs of a remote site with limited supply of suitable qualified labour.
• Quantitative factors with qualitative ones.
• Receiving government grants in areas of high unemployment with the risk of
low sales as average incomes in the area may be low.
 Disadvantages of non-optimal location
Problem Disadvantages to the business

High fixed site costs • High break-even level of production.

• Low profits or even losses.
• If operating at low-capacity utilization, unit fixed costs will be high.
High variable costs (e.g. • Low contribution per unit.
labour costs) • Low profits or even losses.
• High unit variable costs.
Low unemployment rate • Problems with recruiting suitable staff.
• Staff turnover likely to be a problem.
• Pay levels may have to be raised to attract and retain staff.
High unemployment rate • Average consumer disposable incomes may be low leading to relatively low demand for
products.

Poor transport infrastructure • High transport costs for both raw materials and finished products.
• Relatively inaccessible to consumers.
• Difficult to operate a just-in-time (JIT) stock management system due to unreliable
deliveries.
 Factors in locating a business
• Organizations must consider several factors when deciding where to start up
or where to move to.
• There is a distinction between setting up a business for the first time and
moving the business to a new location. However, many of the same factors are
relevant in both cases.
• The main difference involves the objectives of the company at that particular
time. Setting up may be simply to get started, but relocation can be for a
number of reasons, such as expanding or following the market; the business
might also go through a merger and need a new, larger premises.
 Factors in locating a business
• Costs
• Competition
• Type of land
• Markets
• Familiarity with the area
• Labour pool
• Infrastructure
• Suppliers
• Government
 Quantitative factors
These are measurable in financial terms and will have a direct impact on
either the costs of a site or the revenues and its profitability.
• Site and other capital costs
• Labor costs
• Transport costs
• Sales revenue potential
• Government grants
 Qualitative factors
These are non-measurable factors that may influence business decisions.
• Room for further expansion
• Managers’ preferences
• Labor supply
• Ethical considerations
• Environmental concerns
• Infrastructure
• Safety
 Costs
• Costs will be a key factor and will depend on the type of business being started
or relocated.
• Costs may arise from the following, for example:
• Land: if the business is a large manufacturer, it may need a large, flat
surface area, whereas a small home-based office may only require a spare
room.
• Labour: if the business is a technical one (such as a laboratory) requiring
skilled workers, the biggest cost may be labour.
• Transport: if the business is producing large quantities of a physical
product, transport costs could be crucial.
 Costs
In transport, two options are possible:
• If the business is bulk increasing (i.e. buying many components and building
something bigger, such as televisions or cars), it may make sense to set up the
business close to the market, as transporting the finished bigger items would
be more expensive than bringing in lots of small components.
• If the business is bulk decreasing (i.e. buying large quantities of raw materials
and turning them into smaller end products, such as happens at paper mills or
slaughterhouses), it may make sense to set up the business close to the source
of the raw materials.
 Competition
• A balance needs to be made between finding a gap in the market and setting
up not far from the direct competitors.
• Retail outlets, theatres, law firms, and many more businesses often set up
close to their rivals, as the chances of getting passing trade increase if the area
becomes known for a particular product.
• Sometimes, some companies (such as chains of coffee shops) adopt a system
called cannibalistic marketing whereby they set up more than one branch in a
location (such as a shopping mall). They may keep opening more branches in
the same sector, even though each new branch eats up some of the profits of
the existing outlets until eventually there are so many outlets that there is no
more possible extra trade to be generated.
 Type of land
• Different types of land will not only incur different costs, but will also vary in
their suitability for the business.
• For example, some ski resorts may have been popular and successful in the
20th century, but with the onset of climate change and global warming, those
locations might not be appropriate any more, if there is not enough snow for
skiers. Importing artificial snow could be an alternative, though skiers
(consumers) may prefer to go elsewhere.
 Markets
• In the past, for centuries, many businesses had to set up close to their
customers.
• With e-commerce, the need for a physical marketplace has changed, which
may bring considerable advantages to start-up companies.
• Rather than depending on a physical market, they may require only an
efficient distribution system.
 Familiarity with the area
• New businesses are set up in the place that the owners are familiar with.
• This sense of inertia has advantages and disadvantages.
• On one hand, it means that the business owners may already have some
knowledge of the local networks (for example possible suppliers and
customers).
• On the other hand, it means that they may let pass a more appropriate
venue in another area (for example with better access to suppliers or
distribution networks).
• Setting up in your garage may cut down on costs, but it will also restrict your
ability to expand.
 Labour pool
• Critical to any business are its workers.
• Whether the business requires school leavers or university graduates, most
businesses need to take account of the type of workers available and balance this
with the skills and qualifications needed for all the business operations.
• Demographic change could make considerable differences to the type of workers
available – not only in the present but also in years to come. For example, the
increasing number of women in the workplace means that businesses have to
adapt to part-time working, job sharing, flexitime and the provision of crèche
facilities.
• The level of unemployment in the area may be a good indicator of possible
savings on salaries – a higher level could mean that more people may want to
become employed, even on a low salary.
 Infrastructure
• Infrastructure refers not only to the existing transport networks for people and
products, but also to electronic networks (for example telephones, computers,
Internet, and all forms of digital communication).
• In a broader sense, other factors and facilities may need to be taken into
consideration; for example, regarding the provision of services such as education,
housing, health care, and police, as well as utilities such as power and water.
• Access to services is important for the business, as this may affect the welfare and
motivation of staff.
• If staff has to be relocated , this could become a major issue.
 Suppliers
• The availability of a range of good, reliable local suppliers may also 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 otherwise.
 Government
• The role of both local and national governments can be crucial for a business,
especially for a new business or one that is considering locating in a deprived
area.
• In many cases, governments may offer some support (resulting in significant
savings). This could be through 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 the tax to
be paid).
 Government
Laws
• From labour laws and health and safety regulations, to rules on advertising,
and restrictions on sales, laws are crucial for businesses.
• Businesses have to be careful because laws do change.
• Even if there is no regime change, there may well be a change in government
policy.
• Even minor local changes (for example traffic rules or hours of delivery) could
have a major impact on a business (especially with a JIT method of stock
control, if delivery is only possible at some restricted hours.
 Government
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.
• Businesses are more highly taxed in some countries (especially developed
countries) than in others, with different types of taxes.
• They include national corporation tax and local council taxes for the business
itself, income tax for the employees, capital gains tax for the owners, and even
variable taxes and duties payable by the customers.
• All of these will have a major impact not only on the amount of business the
company can conduct, but also on how much profit can be retained and
reinvested; and that, too, may be taxed.
 Quantitative techniques used to aid decision-
making for location choice

• Cash flow forecasts

• Break-even analysis
• Investment appraisal
 National, regional, or international
• The progress in communications over the past 100 years has led to major
changes in where businesses set up.
• In the past, businesses were initially local, serving their immediate vicinity.
• However, as it has become easier to communicate and transport large
volumes of materials, many businesses, when locating or relocating, do not
only think first in terms of their own locality.
• There may well be regional differences, but the distinction between local,
domestic, regional, and even international is changing.
 National, regional, or international
• Besides, the increasing number of regional trading blocs (such as the EU,
Mercosur and NAFTA) has had a major impact on local decisions.
• A final factor is the growth of trading hubs such as Hong Kong, Singapore,
and Dubai, as these can see good options for a business wanting to set up a
regional base or to access global transport networks.
 The impact of globalization
• In business, the process of globalization is irreversible.
• There are many reasons why organizations may want to set up operations in
another country.
• The impact of globalization on location decisions is best analysed in terms of
“push factors” and “pull factors”.
 Pull factors
• Setting up or relocating abroad is an attractive option for many businesses for
the following reasons:
• Improved communications
• Dismantling of trade barriers
• Deregulation of the world’s financial markets
• Increasing size of multinational companies
 Improved communications
• Nowadays, it is far easier not only to transport products around the world, but
also to communicate with suppliers, customers, or co-workers, irrespective of
their own locations and time zones.
• The only obstacles seem to be our body clocks and time zones.
 Dismantling of trade barriers
• More than three quarters of the world’s countries are signatories to the World
Trade Organization (WTO).
• The WTO has a commitment to reducing trade barriers, which makes it far
easier for trade to take place across borders.
• China became a member of the WTO in 2000 and since then it has exploded on
to the world stage, with US and European companies setting up in China.
 Deregulation of the world’s financial markets
• The deregulation of the world’s financial markets has made the transfer of vast
sums of money very easy, which has facilitated quicker start-ups for many
businesses.
• The rise in Internet banking has made it much easier to keep track of company
finance and, allied to the digitization of the world’s financial markets, it is
much more common for investors to cross borders.
• This helps to build up collaboration such as forming joint ventures and
strategic alliances, or working with venture capitalists.
 Increasing size of multinational companies
• The size, and consequently the influence, of the world’s largest companies
(conglomerates) makes it easier for them to persuade countries to allow them
to set up.
• The enormous power and influence of multinational companies can create
momentum for other businesses in the same field. For example, the
impressive growth of the Chinese influence in Africa may have been driven by
the need for raw materials, but itself has generated interests in other areas.
 Push factors
• As well as the external factors, there are a number of internal factors that may
help push companies (especially companies that are already multinational) to
operate overseas.
• They may be able to:
• Reduce costs
• Increase market share
• Use extension strategies
• Use defensive strategies
 Reduce costs
• By setting up production facilities abroad, businesses may be able to reduce
costs by moving closer to the raw materials or using cheaper labour, so they
may be able to achieve productive economies of scale.
• They may also be able to take account of more favourable tax regimes, and so
achieve financial economies of scale as well.
 Increase market share
• By opening up business in a new country, many organizations hope to tap into
a new market (market development in the Ansoff matrix).
• The rewards can be extremely high, especially if the business has first mover
advantage in a large market.
• This partly explains the rush by many big-names companies to China and
India, with over 1 billion potential customers in each country.
 Increase market share
However, there are some risks:
• Language barriers
• Cultural practices and etiquette
• Historical tensions between countries
• Lack of knowledge of local and regional networks
• Local law and politics, especially about labour law
• Time differences and the challenge of working across many time zones
• Possible challenges in finding trustworthy partners
 Use extension strategies
• Some businesses may have even reached the saturation point for their product
and may be looking to extend the life cycle of the product.
• McDonald’s, one of the leading players in the US fast-food industry, has found
increasing competition not only from other burger outlets, but from pizza
suppliers, sandwich bars, and Mexican and other fast-food outlets.
• This increased competition has had a major impact on MacDonald’s profits
and, being a market leader, McDonald’s has also been one of the hardest hit by
bad publicity and by increasing awareness of obesity and the dangers of
overindulging in fast food.
• To counter this, McDonald’s has made major strategic changes.
 Use extension strategies
• The company has introduced healthy food options, diversified into coffee,
published its nutritional values, and reduced the fat and salt content in its
foods.
• Besides these general strategies,
McDonald’s has also targeted areas
where people are more likely to
appreciate the service it provides.
Of the 35,000 McDonald’s
restaurants worldwide, more than
two-thirds are now outside the
United States.
 Defensive strategies
• Many businesses make the decision to move overseas, not so much because
they need to, but because they do not want their competitors to do it first.
• Growth and expansion are key drivers for businesses, and the fear that rivals
might steal a lead can act as a catalyst for locating overseas.
• The rush for oil companies to set
up on Central Asia to secure oil and
gas reserves is a recent example,
and so is the emergence of China
as a big player in Africa, as China
has felt the need to secure the
supply of raw materials to feed its
growing industries.
 The impact of globalization
• 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.
• The impact of globalization on location decisions affects the four areas of
operations management, marketing, human resources, and finance.
 Operations management
• Globalization can lead to cheaper costs as business can locate closer to their
source of raw materials, or where labor costs are lower, or indeed where there
is a more favorable tax system.
• Multinational companies 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.
 Marketing
• Businesses can make creative marketing campaigns to make use of the “global
village”.
• 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.
 Human resources
• Many businesses fail to take account of cultural differences when setting up
business in a different location.
• Distance learning, exchange programs 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.
• Local societies can often benefit from the absorption of different cultures and
practices.
 Human resources
• When deciding on locating a business 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; for example, with family issues such as
schooling. However, they may have wider contacts and a better appreciation
of the “big picture”.
• Finally, there is the idea of a third culture where children who have lived out of
their home countries all their lives, and have little identity with one place, find
themselves looking for opportunities. They will have also acquired language
skills from living overseas they may have advantages over others.
 Finance
• The global financial system is much more integrated these days.
• It is easier to finance start-ups outside a home country but it is also easier to
lose money too.
• 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, but just as the process has speeded up so too has the
practice of fraud.
 Outsourcing
• Outsourcing (subcontracting) refers to the practice of using another business
(as a third party) to complete part of the work (literally, subcontracting refers
to the idea of contracting out work).
• This can enable the organization to focus on its core activity, by employing
another business.
• Can help a business cut costs (and consequently lower prices) in order to earn
a competitive advantage.
 Outsourcing
There are examples of activities that are commonly outsourced:
• In marketing: using an advertising agency.
• In production: licencing a producer to make your product.
• In HR: employing an agency to “headhunt” potential staff.
• In finance: hiring accountants to run an external audit.
 Outsourcing - Advantages
• It can reduce costs by losing employees and other assets.
• It can allow the business to focus on its core activities.
• The quality of the core products or activities should improve, as the business
may now focus on them.
• It can lead to improved capacity utilization.
• Delivery time can be reduced.
• It can lead to transfer of expertise.
 Outsourcing - Disadvantages
• The business becomes more dependent on the supplier. Reliability, for
example, for delivers, could be an issue. What if the transporters go on strike?
• The business has less control of the final product. What if a key component is
not at the expected standard?
• Dilution of the brand could be a problem if the consumer realizes that product
“x” is not produced by company “y”.
 Outsourcing
• A school, for example, would regard teaching as its core activity – and it could
then outsource other services, such as:
• Catering
• Transport
• Administrative duties and examination invigilation
• Excursions, visits, and expeditions
• Staff recruitment and training
• Security
• Cleaning and maintenance
 Offshoring
• An extension of outsourcing.
• A business outsources outside the home country.
• With improved global communication, this has been a growth area in the
modern business environment.
• India, for example, has seen a massive growth in IT offshore contracts, such as
call centres and help desks.
 Offshoring – International aspects
• There may be cultural differences between the companies, both in terms of
national cultures and corporate cultures.
• Communication could sometimes be difficult, especially when people have to
deal with different languages and time zones.
• There may be issues of quality and ethics; for example, the use of sweatshops.
 In-housing and reshoring
• A recent trend can be observed in the business world; some companies have
now started to reverse outsourcing, to stop this approach and to start
performing peripheral activities internally again.
• In-housing is the opposite of outsourcing.
• The business decision to stop outsourcing may be motivated by the desire to
regain full control, or to reduce costs of taxes, labour and transportation.
• Reshoring is the opposite of offshoring.
• It refers to the practice of taking back jobs lost to subcontracting overseas, in
order to refocus on the quality end of the market.
 Sources
• Stimpson, P., Smith, A. (2015) Business Management for the IB Diploma.
Cambridge
• Lominé, L., Muchena, M., and Pierce, R. (2014) Business Management. Oxford