Chapter 8 Location Strategies 8 -1 Outline

Chapter 8: Location Strategies 8 -1

Outline u The Strategic Importance of Location u Factors That Affect Location Decisions u Labor Productivity u Exchange Rates and Currency Risks u Costs u Political Risk, Values, and Culture u Proximity to Markets u Proximity to Suppliers u Proximity to Competitors (Clustering) 8 -2

Outline – Continued u Methods of Evaluating Location Alternatives u The Factor-Rating Method u Locational Break-Even Analysis u Center-of-Gravity Method u Transportation Model 8 -3

Outline – Continued u Service Location Strategy 8 -4

Location Strategy The objective of location strategy is to maximize the benefit of location to the firm 8 -5

Location Strategy u One of the most important decisions a firm makes u Increasingly global in nature u Significant impact on fixed and variable costs u Decisions made relatively infrequently u The objective is to maximize the benefit of location to the firm 8 -6

Location and Costs u Location decisions based on low cost require careful consideration u Once in place, location-related costs are fixed in place and difficult to reduce u Determining optimal facility location is a good investment 8 -7

Location and Innovation u Cost is not always the most important aspect of a strategic decision u Four key attributes when strategy is based on innovation u High-quality and specialized inputs u An environment that encourages investment and local rivalry u A sophisticated local market u Local presence of related and supporting industries 8 -8

Location Decisions u Long-term decisions u Decisions made infrequently u Decision greatly affects both fixed and variable costs u Once committed to a location, many resource and cost issues are difficult to change 8 -9

Location Decisions Country Decision Key Success Factors 1. Political risks, government rules, attitudes, incentives 2. Cultural and economic issues 3. Location of markets 4. Labor talent, attitudes, productivity, costs 5. Availability of supplies, communications, energy Figure 8. 1 6. Exchange rates and currency risks 8 - 10

Location Decisions Region/ Community Decision Key Success Factors 1. Corporate desires 2. Attractiveness of region 3. Labor availability and costs MN 4. Costs and availability of utilities WI 5. Environmental regulations MI IL IN OH 6. Government incentives and fiscal policies 7. Proximity to raw materials and customers Figure 8. 1 8. Land/construction costs 8 - 11

Location Decisions Site Decision Key Success Factors 1. Site size and cost 2. Air, rail, highway, and waterway systems 3. Zoning restrictions 4. Proximity of services/ supplies needed 5. Environmental impact issues Figure 8. 1 8 - 12

Global Competitiveness Index of Countries Country Switzerland USA Japan Canada UK Israel China Italy India Mexico Russia 2009 Rank 1 2 8 9 13 27 29 48 49 60 63 2005 Rank 4 1 10 13 9 23 48 38 22 59 53 Table 8. 1 8 - 13

Factors That Affect Location Decisions u Labor productivity u Wage rates are not the only cost u Lower productivity may increase total cost Labor cost per day = Cost per unit Productivity (units per day) 8 - 14

Factors That Affect Location Decisions u Exchange rates and currency risks u Can have a significant impact on costs u Rates change over time u Costs u Tangible - easily measured costs such as utilities, labor, materials, taxes u Intangible - less easy to quantify and include education, public transportation, community, quality-of-life 8 - 15

Factors That Affect Location Decisions u Exchange rates and currency risks u Can have a significant impact on cost Location structure decisions u Rates change over time based on costs alone u Costs can create u Tangible - easily measured costs such as difficult ethical utilities, labor, materials, taxes u Intangible - less easysituations to quantify and include education, public transportation, community, quality-of-life 8 - 16

Factors That Affect Location Decisions u Political risk, values, and culture u National, state, local governments attitudes toward private and intellectual property, zoning, pollution, employment stability may be in flux u Worker attitudes towards turnover, unions, absenteeism u Globally cultures have different attitudes towards punctuality, legal, and ethical issues 8 - 17

Ranking Corruption Rank 1 2 5 6 8 10 12 14 16 24 32 43 60 75 112 © 2011 Pearson Education 143 Country 2011 CPI Score (out of 10) New Zealand 9. 5 Least Corrupt Demark, Finland 9. 4 Singapore 9. 2 Norway 9. 0 Australia, Switzerland 8. 8 Canada 8. 7 Hong Kong 8. 4 Germany, Japan 8. 0 UK 7. 8 USA 7. 1 Taiwan 6. 1 Most South Korea 5. 4 Malaysia. Corrupt 4. 3 China 3. 6 Vietnam 2. 9 Russia 2. 4 8 - 18

Factors That Affect Location Decisions u Proximity to markets u Very important to services u JIT systems or high transportation costs may make it important to manufacturers u Proximity to suppliers u Perishable goods, high transportation costs, bulky products 8 - 19

Factors That Affect Location Decisions u Proximity to competitors u Called clustering u Often driven by resources such as natural, information, capital, talent u Found in both manufacturing and service industries 8 - 20