Sentry Page Protection

IB BUsiness MAnagement:
5.4 Location

Location refers to the geographical position of a business; i.e., where it is sited. The location decision will depend on many factors such as the nature of the business, the nature of the product and the nature of human resources. The relocation decision occurs when managers need to consider moving to alternative premises. The location decision is one of the most important that any manager has to take.

Key Learning Outcomes:

  • Explain reasons for a particular production location
  • Discuss outsourcing as a method of restructuring production, both at a national and an international level
  • Discuss offshoring as a method of restructuring production, both at a national and an international level
  • Discuss insourcing as a method of restructuring production, both at a national and an international level

Location, location, location

Deciding on the best location for a new business - or relocating an existing one - is often crucial to its success. Location decisions - choosing new sites for expansion or relocation of the business - are some of the most important decisions made by management teams. Selecting the best site will have a significant effect on many departments of the business and, ultimately, on the profitability and chances of success of the whole firm.

Location decisions have three key characteristics:

Picture
3 key characteristics of business location decisions
An 'optimal' location is one that selects the best site for expansion of the business or for its relocation, given current information. The best site should maximise the long-term profits of the business. The optimal site is nearly always a compromise between conflicting benefits and drawbacks; for example:
  1. A well-positioned high-street shop will have the potential for high sales but will have higher rental charges than a similar sized shop out of town.
  2. A factory location which is cheap to purchase due to its distance from major towns might have problems recruiting staff due to a lack of a large and trained working population.

An optimal location will be a balance between

  • High fixed costs of a site and buildings with convenience for customers and potential sales revenue.
  • The low costs of a remote site with limited supply of suitable qualified labour.
  • Quantitative factors with qualitative ones (see below).
  • The opportunities for receiving government grants in areas of high unemployment with the risks of low sales as average incomes in the area may be low.

Disadvantages associated with Suboptimal location decisions

What makes a location great for business? click the picture  below to find out why

Picture
The World's best countries for conducting business

What makes a location terrible for business? click the picture  below to find out why

Picture
The World's worst countries for conducting business

Quantitative factors influencing location decisions

Quantitative factors: These are measurable in financial terms and will have a direct impact on either the costs of a site or the revenues and its profitability.
Picture
Quantitative factors in the choice of location

Quantitative techniques in location choice

Picture
Quantitative techniques used in the location choice

The origins of Silicon Valley

Qualitative factors influencing location decisions

Qualitative factors: Non-measurable factors that may influence business decisions. Qualitative factors are not necessarily subordinate to quantitative financial factors.
Picture
Qualitative factors in the choice of location
+ good educational standards
+ highly qualified staff
+ avoidance of the problems associated with exchange rate fluctuations

Clustering

A business cluster is a geographic concentration of interconnected businesses, suppliers, and associated institutions in a particular field. Clusters are considered to increase the productivity with which companies can compete, nationally and globally. Silicone Valley in California is the best known example. Other countries are trying to emulate this success.
Ever wonder why car yards tend to cluster together? Listen to this super interesting pod-cast below.

Changing location to by-pass rules and regulations

Bribery is a common cost to doing business in some countries

The European Union should be a bastion of effective government 

Russia is a notoriously difficult place to locate a business

Globalisation and  location decisions

One of the main features of globalisation is the growing trend for businesses to relocate completely to another country or to set up new operating bases abroad. This process is often referred to as 'offshoring'. The world's largest corporations are now virtually all multinationals. 

Offshoring: The relocation of a business process done in one country to the same or another company in another country.

Multinational:  A business with operations or production bases in more than one country.

When previously offshored business functions or processes are insourced back to the country of domicile, then this is termed re-shoring.

An increasingly common practice

A foreign country = foreign practices

Countries trying to attract businesses

The benefits of international locations

Picture
There are benefits of choosing an international location

The limitations of international locations

Picture
There are limitations of choosing an international location

The art of apologising in Japan

Foreign country/language!

Reorganising production

IB Business Management requires students to discuss and evaluate the following methods of reorganising production: outsourcing, offshoring and insourcing. The summary notes below explain the key features and provide an evaluation of each method of reorganising production by considering the advantages and disadvantages of each.

Outsourcing

Outsourcing: A practice used by different companies to reduce costs by transferring portions of work to outside suppliers rather than completing it internally.

Outsourcing is an effective cost-saving strategy when used properly. It is sometimes more affordable to purchase a good from companies with comparative advantages than it is to produce the good internally. An example of a manufacturing company outsourcing would be Dell buying some of its computer components from another manufacturer in order to save on production costs. Alternatively, businesses may decide to outsource book-keeping and accounting duties to independent accounting firms, as it may be cheaper than retaining an in-house accountant.

Business operations that are commonly outsourced include:
  • Cleaning
  • Accounting and book keeping
  • IT support and ICT maintenance
  • Manufacturing, either component parts or complete products

Generally, business functions and processes outsourced to an external company bring cost savings and/or productivity gains. For example, a specialist accountancy firm may be contracted to prepare tax returns and investor reports at a cost far less than having to employ an accountant to do this internally. Likewise, specialist manufacturers will be able to supply components and products far more cost effectively and efficiently than a firm who does not have that area of expertise.

The inevitable future of offshoring!

iNSOURCING

Assigning a project to a person or department within the company instead of hiring an outside person or company to do the work. While outsourcing is commonly thought of as a way for companies to save money, it is sometimes more cost effective to have the work done in-house. Another reason for insourcing is that a firm may not be happy with the quality of the service or manufacturing they have outsourced. Bringing that process back ‘in house’ provides better control of the process at all levels as long as the company has the resources and knowledge to re-establish these effectively.

When previously offshored business functions or processes are insourced back to the country of domicile, then this is termed re-shoring. As the relocation decision is likely to be costly, insourcing will not be entered into likely. In fact, industrial inertia (geographical) describes a stage at which an industry prefers to run in its former location although the main alluring factors are gone

Outsourcing and offshoring

Explain the difference between outsourcing and offshoring (two easily confused concepts). The audio track above is an easy to understand explanation of the key differences between outsourcing and offshoring. 

Offshoring

The practice of basing some of a company's business functions (account and book-keeping), processes (manufacturing) or services (IT solutions) overseas, usually so as to take advantage of lower costs. Offshored functions can remain within the functional control and ownership of the business or they can be entirely outsourced to a separate offshore organisation – this is termed offshore outsourcing. Offshoring is outsourcing to a firm in a different country. The same advantages apply, and these advantages can likely be boosted. Costs can be further reduced (a Philippine-based call centre is likely less expensive than one based in the US. This could be from additional economies of scale being achieved, lower operating costs (especially labour costs) and lower tax rates.

Manufacturing (production) and services are the two categories of offshoring.  Call centres, IT and accountancy services are common examples of business functions that are offshored. Factories producing entire products or component products account for a much larger share of the world’s offshored business processes than services do.

Very Unethical offshoring

Reshoring

5.4 Location: 
PowerPoint summary notes

5.4 Location: 
Mr Burton explains 

Case Study: Location I

Case Study: Location II

Progress check - test your understanding by completing the activities below

You have below, a range of practice activities, flash cards, exam practice questions and an online interactive self test to ensure you have complete mastery of the IB Business and Management requirements for the Operations Management 5.5 Location topic.

Test yourself

Use the Flashcards in ALL THREE STUDY MODES

IB BUSINESS MANAGEMENT QUIZZES AND TWO CLASSROOM GAMES

Test how well you know the IB Business Management Operations Management 5.4 Location topic with the self-assessment tool. Aim for a score of at least 80 per cent.