LOCATION &
SCALE
Location
Optimal location – a business location that gives the
best combination of quantitative & qualitative factors.
Location decisions have three key characteristics. They are:
• strategic in nature, as they are long term and have an impact on
the whole business
• difficult to reverse if an error of judgement is made, due to the
costs of relocation
• taken at the highest management levels, not delegated to
subordinates.
Location
Quantitative factors
- issues that managers should consider that can be measured in financial or
numerical terms.
Qualitative factors
- issues that managers should consider that are not measurable in financial
or numerical terms.
Location
Quantitative factors that determine location and relocation
1. Site and other fixed cost such as building
2. Labour costs
3. Transport costs
4. Potential revenue
5. Government grants
6. External economies and diseconomies of scale
7. Profit estimates
8. Investment appraisal
9. Break even analysis
Location
Qualitative factors that determine location and relocation
1. Safety
2. Space for further expansion
3. Manager’s preferences
4. Ethical considerations
5. Environmental concerns
6. Infrastructure
7. Planning restrictions
8. Advantages of multi – site locations
Differences between local, national and
international location decisions
Local location decisions
- business that often have one branch or office and are located close
to the owner’s home.
National location decisions
- apply to much larger businesses that operate several or many branches in
different regions of one country.
International location decisions
- apply to businesses with operations in more than one country
(multinational)
Reasons for and impact of offshoring
Offshoring
- the relocation of a business process from one country to another country
- it has been encouraged by the trend towards globalization and the
pressure on businesses to reduce costs to remain competitive.
Reasons for and impact of offshoring
1. Reducing costs
2. Supply of well – qualified workforce
3. Accessing global markets
4. Avoiding protectionist trade barriers
5. Government financial support
6. Overcoming problems from exchange rate fluctuations.
Reasons for and impact of reshoring
Reshoring
- transferring a business operation that was moved overseas back to the
country where it was originally located.
Reasons for and impact of reshoring
LIMITATIONS OF OFFSHORING
1. Language and other communication barriers
2. Cultural differences
3. Product quality and level of service concerns
4. Supply chain concerns
5. Ethical consideration
The impact of globalisation on location
and relocation decisions
- one of the main features of globalization is the growing trend for
businesses to relocate completely to another country or to set up new
operating bases abroad.
- globalization has made this process easier by:
a. Allowing free movement of capital between countries
b. Reducing trade barriers to allow capital and consumer goods to be
traded more freely
c. Making it easier for businesses to legally establish subsidiaries and
operation in other countries.
The impact of globalisation on location
and relocation decisions
- the global recession in 2020 caused by COVID – 19 has raised doubts in
the minds of some analyst about the future of globalization.
- This pandemic has made governments and companies consider that :
a. The freer movement of people around the globe as a result of
globalization makes controlling the transfer of viruses and other health
issues much more difficult.
b. Overdependence on international suppliers or offshored operations
should be reduced.
Scale of operation
- the maximum output that can be achieved using the available input
(resources)
- Factors that influence the scale of operations of a business include:
• owners’ objectives – they may wish to keep the business small and easy
to manage
• capital available – if this is limited, growth will be less likely
• size of the market the firm operates in – a very small market will not
require large-scale production
• number of competitors – the market share of each firm may be small if
there are many rivals
• scope for scale economies – if these are substantial, as in water supply,
each business is likely to operate on a large scale
Causes and examples of internal and
external economies and diseconomies
of scale
INTERNAL ECONOMIES OF SCALE
- factors that cause reduction in unit (average) costs of production as the
business expands its scale of operations.
INTERNAL DISECONOMIES OF SCALE
- factors that cause unit costs of production to increase when a business
increases its scale of operation.
Causes and examples of internal and
external economies and diseconomies
of scale
EXTERNAL ECONOMIES OF SCALE
- factors causing unit costs reductions that can benefit a business as the
industry expands in one region.
EXTERNAL DISECONOMIES OF SCALE
- factors causing unit costs to rise as an industry expands, especially in a
given region.
Causes and examples of internal and
external economies and diseconomies
of scale
INTERNAL ECONOMIES OF SCALE
1. Purchasing economies
2. Technical economies
3. Financial economies
4. Marketing economies
5. Managerial economies
Causes and examples of internal and
external economies and diseconomies
of scale
INTERNAL DISECONOMIES OF SCALE
1. Communication problems
2. Alienation of the workforce
3. Poor coordination
Causes and examples of internal and
external economies and diseconomies
of scale
EXTERNAL ECONOMIES OF SCALE
1. Labour
2. Joint ventures
3. Government support
Causes and examples of internal and
external economies and diseconomies
of scale
EXTERNAL DISECONOMIES OF SCALE
1. Overcrowding
2. Supplier
3. Technology
