Being in the right location is a key ingredient in a business's success. If a company selects the wrong location, it may have adequate access to customers, workers, transportation, materials, and so on. Consequently, location often plays a significant role in a company's profit and overall success. A location strategy is a plan for obtaining the optimal location for a company by identifying company needs and objectives, and searching for locations with offerings that are compatible with these needs and objectives. Generally, this means the firm will attempt to maximize opportunity while minimizing costs and risks.
A company's location strategy should conform with, and be part of, its overall corporate strategy. Hence, if a company strives to become a global leader in telecommunications equipment, for example, it must consider establishing plants and warehouses in regions that are consistent with its strategy and that are optimally located to serve its global customers. A company's executives and managers often develop location strategies, but they may select consultants (or economic development groups) to undertake the task of developing a location strategy, or at least to assist in the process, especially if they have little experience in selecting locations.
Formulating a location strategy typically involves the following factors:
Depending on the type of business, companies also may have to examine other aspects of prospective locations and communities. Based on these considerations, companies are able to choose a site that will best serve their needs and help them achieve their goals.
The initial part of developing a location strategy is determining what a company will require of its locations. These needs then serve as some of the primary criteria a company uses to evaluate different options. Some of the basic requirements a company must consider are:
Besides these basic requirements, companies must take into consideration their unique requirements of prospective locations. These requirements may correspond to their overall corporate strategy and corporate goals and to their particular industries.
Several techniques exist that can be used as part of a location strategy to determine the merits of prospective sites. Location strategists often divide assessment of prospective locations into macro analysis and micro analysis. Macro analysis encompasses the evaluation of different regions and communities, whereas micro analysis includes the evaluation of particular sites. The main macro analysis techniques are factor-rating systems, linear programming, and center of gravity.
Factor-rating systems are among the most commonly used techniques for choosing a location, because they analyze diverse factors in an easily comprehensible manner. Factor-rating systems simply consist of a weighted list of the factors a company considers the most important and a range of values for each factor (see Table 1). A company can rate each site with a value from the range based on the costs and benefits offered by the alternative locations, and multiply this value by the appropriate weight. These numbers are then summed to get an overall "factor rating." Then a company can compare the overall ratings of alternative sites. This technique enables a company to choose a location systematically based on the best rating.
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Linear programming provides a method for evaluating the cost of prospective locations within a production/distribution network. This technique uses a matrix of production facilities and warehouses that shows the unit shipping costs from a manufacturing location designated by a variable, such as X, to prospective destinations, such as warehouses designated by other variables— E, F, and G —and the total amount of goods the prospective manufacturer, X, could produce. Other prospective manufacturing locations and the same information for each are also included in the matrix. After computing the total costs for each prospective location, a company can determine which one has lower total costs in terms of the entire production/distribution network.
The center of gravity method is useful for identifying an individual location by considering existing locations, the distances between them, and the volume of products to be shipped. Companies use this method mostly for locating distribution warehouses. To use this technique, companies plot their existing locations on a grid with a coordinate system (the particular coordinate system used does not matter). The idea behind this technique is to identify the relative distances between locations. After the existing locations are placed on the grid, the center of gravity is determined by calculating the X and Y coordinates that would have the lowest transportation costs.
Since service businesses generally must maintain a number of sites to remain close to customers, the location selected should be close to the targeted segment of the market. The market also can influence the number of new locations, as well as their size and features.
A simple technique for determining service locations is to establish a set of minimum criteria for opening new outlets. These criteria should be developed so that the locations selected have strong chances of success. A company could assess the potential of prospective locations based on primary criteria such as:
After selecting locations that satisfy these criteria, a company might further evaluate the potential locations based on a set of criteria that considers the location's industrialization, person/car ratio, labor availability, population density, and infrastructure.
Globalization and technology have been the biggest drivers of change in the location decision process over the last thirty years. Location activity has been very high in recent decades as a result of technology improvements, economic growth, international expansion and globalization, and corporate restructuring, mergers and acquisitions.
The top five location factors for global companies are costs, infrastructure, labor characteristics, government and political issues, and economy. Key sub-factors are the availability and quality of the labor force, the quality and reliability of modes of transportation, the quality and reliability of utilities, wage rates, worker motivation, telecommunication systems, record of government stability, and industrial relations laws. Other sub-factors—protection of patents, availability of management resources and specific skills, and system and integration costs—are of increasing importance.
Whereas wages and the industrial relations environment are significant factors in multinational location decisions, by far the main determinant is the host country market size. Furthermore, global economic considerations have become paramount in location strategy as companies contemplate the advantages afforded by various locations in terms of positioning in international markets and against competitors.
When companies seek new sites they generally strive to keep operating and start-up costs low, and so they often choose locations in collaboration with economic development groups to achieve these goals. Companies also now expect to move into new facilities more quickly than in the past, so they tend to focus more on leasing facilities than purchasing land and building new facilities. Also, by leasing facilities, companies can relocate every few years if the market requires it.
Technology, especially communications technology, has not only been a driver of change, but has facilitated the site selection process. Managers can obtain initial information on alternative locations via the Internet and promotional software. Site selections agencies increasingly use geographical information system (GIS) technology, and e-mail has become a dominant mode of communication in location research and negotiation.
Location databases have enabled companies to do initial screening themselves, hence reducing their need to rely on economic developers to providing only very specific information and details on locations—such as commuting patterns and workforce characteristics.
Telecommunications technology has created the "virtual office" of employees working from remote locations. The growth of the virtual office has impacted location strategy in that some companies no longer need as much workspace because many employees work from remote sites. When these employees need to work at the office, they can call and reserve office space for themselves. The decrease in facility size can lead to millions of dollars worth of savings each year, while increasing productivity.
Revised by R. Anthony Inman
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Spee, Roel, and Wim Douw. "Cost-Reduction Location Strategies." Journal of Corporate Real Estate 6, no. 1 (September 2003): 30–38.
Talley-Seijn, Margaret. "30 Years of Location Strategies." Plants, Sites and Parks 31, no. 3 (July 2004): 26–29.