5.
4 Location
Reasons for a specific location of productions
Because it affects (in general)
1. Costs
2. Demand
3. Image
4. Ability to attract employees for work
5. Reflection of value of business
—→ A location decision can involve high levels of investment and can have a major impact
on competitiveness
Right locations for a business may affect:
1. Costs of production
2. Tax rates paid
3. Availability of employees and skilled labor
4. demand for products
5. ease of accessing markets
6. ease of accessing supplies (supply chain?)
7. access to natural resources
—→ Given the impact that a location decision has on the costs and revenues of the business,
a location decision will likely involve an assessment of the break even output and likely
financial returns.
Benefits of the optimal location
1. Lower costs
2. Being closer to the customers
a. possibly lead to getting more customers —> more sales and profits (cause higher
footfalls)
5.4 Location 1
3. Overcoming trade barriers
a. May increase sales. It is diff to export to some countries cause of trade barriers, so if
based in a customs union like EU a firm can be able to sell to a particular country
4. Add to brand image
a. Having flagship store in fifth avenue NYC, stuff like that
Factors affecting the decision of where to locate:
1. Geographic factors
2. Infrastructure of the region - availability of transport facilities and energy resources will
affect ease, speed and cost of production
3. Political factors (political stability) - eg. brexit
4. Cost of a particular location relative to another
a. Cost of land varies area to area
b. cost of labor varies area to area
c. cost of services (electricity) varies area to area
d. Taxes vary area to area
i. these all have an impact on the firms profits
5. Availability of lower cost locations abroad
a. This has been a major factor for many European and American firms which have
relocated their production over seas to Asia like in India or Taiwan as its very
financially attractive due to the low wage employees aka CHEAP LABOR
6. Availability of govt grants and incentives
a. Some governments create tax incentives such as tax free zones to attract foreign
MNC’s.
7. Nature of the business itself
a. Determines the extent to which a business has freedom over its location
8. Marketing factors
a. Aka market access. A firms location may affect its ability to trade in particular
markets. (Firms outside of EU have to pay a tax to sell their goods within the EU
market where as firms located in the EU don't needa)
5.4 Location 2
9. Exchange rates
10. Demographic factors
a. Availability of labor with the right skills in an area
11. Legal factors
12. Resources
a. Human resource
b. Natural resource
13. Image
14. Quality of life
15. Ethical issues
a. some businesses from relatively high income economies like UK have avoided
locating in low wage areas for fear of being criticized for exploiting the local staff or
taking away jobs from the home region
Qualitative factors affecting location:
1. Whether the location appeals to the manages and the quality of life in the area
2. culture of the country and the extent to which a business thinks it understands its
traditions, ways of working, and customers are all very important.
Note: When one MNC settles into a new country MNCs from that parent country might be
more attracted to go settle in that host country as it is now more attractive and there are
possible networking opportunities
3. Image
Problems when relocating
1. Staff don't wanna move/firm doesn't wanna pay to relocate
2. there could be a period of lost production during the time of relocating
3. costs of notifying customers and suppliers and administrative costs such as changing the
firms literature to the new address
A new location may be part of an expansion process, a firm could be building new production
facilities or opening up a new outlet. The acquisition of new premises ultimately will bring
5.4 Location 3
issues with management structure and control.
Ways of re-organizing production, both nationally and
internationally (AO3)
Globalization has enabled businesses to locate in different places around the world and has
made it easier to do so. Globalization has increased due to factors such as
1. better communications
2. lower transport costs
3. fewer trade barriers
Outsourcing/subcontracting
occurs when a business uses other producers to undertake some if its operations. A
business can benefit from the scale of others
A business only outsources certain aspects of it - eg: security, customer enquiry help
lines.
A business may outsource key parts of its process to help expand its capacity and
ability to deal with customer orders
Pros:
1. Use the specialist services of another business
2. benefit from lower costs - doesn't have to learn how to do it
3. increase capacity
What to consider when deciding
1. The overall impact on costs
2. The impact on quality
3. The reliability of delivery
4. The response of the workforce
a. outsourcing means moving production away from the business itself - this could
mean potential job losses as there isn't a requirement for the job internally. This
could be met with resistance from the workforce
5. Any ethical issues
5.4 Location 4
Offshoring
When a business moves its production out of its own country to another
Pros:
1. Less restrictions on issues such as
a. Health and safety
b. Environmental protection
c. Employee rights.
Management can take advantage of a country where it is easier to hire and fire staff and
employment costs are lower
2. Government incentives are used to attract foreign investment
a. Tax advantages
b. subsidies
3. Avoiding protectionist measures if the product is to be sold within the region
a. Tariffs, quotas
4. Being closer to markets where products are sold
5. A more skilled workforce
—> Offshoring can increase the competitiveness and profitability of a business. But the
business moving production overseas could raise ethical issues such as being criticized for
moving jobs away overseas and for exploiting employees abroad
Cons:
1. Risk of delays —> as the product has to travel further there may be a risk of delays in
production
2. More difficult to manage operations overseas
a. Like communication issues due to diff timezones
3. Exchange rate risk —> changes in the exchange rate may reduce the cost advantage of
being located overseas and introduce financial risk
4. Political change risk —> This could remove advantages of being there.
5.4 Location 5
Reshoring:
Occurs when a business brings back production into the country from an offshore
location
Reasons for reshoring:
1. Cost advantage of being overseas has reduced
a. Wages in the overseas country could be raising
2. Domestic (home) government provides incentives to businesses that bring back
production
3. Quality issues —> business thinks it may be easier to monitor and control the quality if
production is nearby
4. Changes in overseas that makes staying unattractive
a. Removal of subsidies
b. Removal of grants from govt
c. Political instability
Pros:
1. Reduced supply chain risk: Less reliance on international supply chains, reducing risks
related to transportation delays, geopolitical tensions, or trade barriers.
2. Improved quality control: Easier to monitor and control production quality when it's
closer to the company's headquarters.
3. Public relations benefit: Reshoring can improve a company's image by supporting local
jobs and the economy.
Cons:
1. Higher labor costs: Labor costs in developed countries are usually higher, which can
reduce profit margins.
2. Initial investment: Setting up new operations or facilities in the home country can be
expensive.
Insourcing:
When a business retains a particular task within the business rather than outsourcing it.
could be because Business is worried about quality
5.4 Location 6
The goal of insourcing is often to gain more control over quality, timelines, or costs, or
to utilize existing resources more effectively.
Pros:
1. Control over processes: Better control over product quality and service delivery.
2. Improved communication: Easier collaboration within the organization.
3. Utilization of internal resources: Maximizes the use of existing capabilities and talent.
Cons:
1. Higher costs: Often more expensive because of the need to invest in equipment, training,
or facilities.
2. Limited flexibility: If the company lacks expertise, it may take time to build the
necessary capabilities.
5.4 Location 7