Outline ContinuedFactors That Affect Location DecisionsLabor ProductivityExchange Rates and Currency RisksCostsAttitudesProximity to MarketsProximity to SuppliersProximity to Competitors (Clustering)

Outline ContinuedMethods Of Evaluating Location AlternativesThe Factor-Rating MethodLocational Break-Even AnalysisCenter-of-Gravity MethodThe Transportation Method

Outline ContinuedService Location StrategyHow Hotel Chains Select SitesThe Telemarketing IndustryGeographic Information Systems

Location StrategyOne of the most important decisions a firm makesIncreasingly global in natureLong term impact and decisions are difficult to changeThe objective is to maximize the benefit of location to the firm

Location and InnovationCost is not always the most important aspect of a strategic decisionFour key attributes when strategy is based on innovationHigh-quality and specialized inputsAn environment that encourages investment and local rivalryA sophisticated local marketLocal presence of related and supporting industries

Location DecisionsLong-term decisions Decisions made infrequentlyDecision greatly affects both fixed and variable costs Once committed to a location, many resource and cost issues are difficult to change

Location DecisionsCountry DecisionCritical Success FactorsPolitical risks, government rules, attitudes, incentivesCultural and economic issuesLocation of marketsLabor availability, attitudes, productivity, costsAvailability of supplies, communications, energyExchange rates and currency risksFigure 8.1

Location DecisionsRegion/ Community DecisionCritical Success FactorsCorporate desiresAttractiveness of region Labor availability, costs, attitudes towards unionsCosts and availability of utilitiesEnvironmental regulationsGovernment incentives and fiscal policiesProximity to raw materials and customersLand/construction costs

Location DecisionsSite DecisionCritical Success FactorsSite size and costAir, rail, highway, and waterway systemsZoning restrictionsNearness of services/ supplies neededEnvironmental impact issues

Factors That Affect Location DecisionsLabor productivityWage rates are not the only costLower productivity may increase total cost

Factors That Affect Location DecisionsExchange rates and currency risksCan have a significant impact on cost structureRates change over timeCostsTangible - easily measured costs such as utilities, labor, materials, taxesIntangible - less easy to quantify and include education, public transportation, community, quality-of-life

Factors That Affect Location DecisionsAttitudesNational, state, local governments toward private and intellectual property, zoning, pollution, employment stabilityWorker attitudes towards turnover, unions, absenteeismGlobally cultures have different attitudes towards punctuality, legal, and ethical issues

Factors That Affect Location DecisionsProximity to marketsVery important to servicesJIT systems or high transportation costs may make it important to manufacturersProximity to suppliersPerishable goods, high transportation costs, bulky products

Factors That Affect Location DecisionsProximity to competitorsCalled clusteringOften driven by resources such as natural, information, capital, talentFound in both manufacturing and service industries

Growth Competitiveness Index of Countries

Clustering of Companies

IndustryLocationsReason for clusteringWine makersNapa Valley (US) Bordeaux region (France)Natural resources of land and climateSoftware firmsSilicon Valley, Boston, Bangalore (India)Talent resources of bright graduates in scientific/technical areas, venture capitalists nearbyRace car buildersHuntington/North Hampton region (England)Critical mass of talent and information

Clustering of Companies

IndustryLocationsReason for clusteringTheme parksOrlandoA hot spot for entertainment, warm weather, tourists, and inexpensive laborElectronic firmsNorthern MexicoNAFTA, duty free export to USComputer hardware manufacturersSingapore, TaiwanHigh technological penetration rate and per capita GDP, skilled/educated workforce with large pool of engineers

Clustering of Companies

IndustryLocationsReason for clusteringFast food chainsSites within one mile of each otherStimulate food sales, high traffic flowsGeneral aviation aircraftWichita, KansasMass of aviation skills

Factor-Rating MethodPopular because a wide variety of factors can be included in the analysisSix steps in the methodDevelop a list of relevant factors called critical success factorsAssign a weight to each factorDevelop a scale for each factorScore each location for each factorMultiply score by weights for each factor for each locationRecommend the location with the highest point score

Factor-Rating Example

Location Break-Even AnalysisMethod of cost-volume analysis used for industrial locationsThree steps in the methodDetermine fixed and variable costs for each locationPlot the cost for each location Select location with lowest total cost for expected production volume

Location Break-Even Analysis ExampleThree locations:Total Cost = Fixed Cost + Variable Cost x Volume

Location Break-Even Analysis ExampleFigure 8.2

Center-of-Gravity MethodFinds location of distribution center that minimizes distribution costsConsidersLocation of marketsVolume of goods shipped to those marketsShipping cost (or distance)

Center-of-Gravity MethodPlace existing locations on a coordinate gridGrid origin and scale is arbitrary Maintain relative distances Calculate X and Y coordinates for center of gravityAssumes cost is directly proportional to distance and volume shipped

Center-of-Gravity Methodwheredix=x-coordinate of location idiy=y-coordinate of location iQi=Quantity of goods moved to or from location i

Center-of-Gravity Method

Center-of-Gravity Method

Center-of-Gravity Method

Transportation ModelFinds amount to be shipped from several points of supply to several points of demandSolution will minimize total production and shipping costsA special class of linear programming problems

Worldwide Distribution of Volkswagens and Parts

Service Location Strategy1. Purchasing power of customer-drawing area2. Service and image compatibility with demographics of the customer-drawing area3. Competition in the area4. Quality of the competition5. Uniqueness of the firms and competitors locations6. Physical qualities of facilities and neighboring businesses7. Operating policies of the firm8. Quality of management

Location StrategiesTable 8.4

Location StrategiesTable 8.4

Location StrategiesTable 8.4

How Hotel Chains Select SitesLocation is a strategically important decision in the hospitality industryLa Quinta started with 35 independent variables and worked to refine a regression model to predict profitabilityThe final model had only four variablesPrice of the innMedian income levelsState population per innLocation of nearby colleges

Telemarketing/Internet IndustriesRequire neither face-to-face contact nor movement of materialsHave very broad location optionsTraditional variables are no longer relevantCost and availability of labor may drive location decisions

Geographic Information Systems (GIS)New tool to help in location analysisEnables more complex demographic analysisAvailable data bases includeDetailed census dataDetailed mapsUtilitiesGeographic featuresLocations of major services

Geographic Information Systems (GIS)

Answers

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