Locate to Gain Advantage

Businesses must frequently make decisions about where to locate operations, home offices, and sales locations. These decisions impact the design of supply chains and the ability of companies to reach important customers, attract and retain employees, improve their environmental outcomes, and to manage their cost structures. Many firms must decide whether to centralize operations to gain economies of scale or to decentralize operations to become more responsive (by being closer to customers).

The impact of the natural environment on a firm’s competitiveness is not often a frequent consideration. Many firms have the option of locating in areas where they have access to natural resources, resulting in the reduction of negative natural environmental impacts. For example, the North Carolina coastal area is eroding rapidly due to increases in sea levels; many of its businesses are contemplating moves to avoid the risk of having to halt operations and lose valuable property due to unusual weather events.

The geographic scope of competition is a strategic variable. Geographic scope is a general measure of the number of different locations, regions, or countries in which a company operates. Companies often define their boundaries of competition by geography unless they operate in a global environment (or overcome location restrictions by reaching customers mainly through catalogues, the Internet, or mail). Given the dramatic decrease in costs of transportation and communication over the past 50 years, companies are finding that their breadth of competitive space is increasing rapidly.

  • The cost of a phone call, for example, has become virtually free with systems like Skype.
  • Taking a flight from New York to Frankfurt, Germany could cost as little as $500. (Since passenger deregulation in 1978, airline prices have fallen 44.9 percent in real terms).
  • Doctors in developing nations can watch new surgical techniques performed at a Los Angeles hospital live on the Internet and download supporting medical information in an instant.  If the local doctor were to lack the necessary medical tools to perform a surgery, the necessary items could be shipped in a day.  Some surgeries can be performed remotely via computers and robots.
  • Multinational corporations can monitor operations throughout the world in real time and track shipments via GPS.

Couple these changes with three important principles of technological change and the capabilities of a modern company become sufficiently clear:

  1. Moore’s Law: computer-processing speed doubles every 18 months with transistor improvements.
  2. Gilder’s Law: communication bandwidth grows at least three times faster than computer power. (This means that if a computer’s power doubles every 18 months [according to Moore’s Law], the communication power doubles every six months according to Gilder’s Law).
  3. Metcalf’s Law: the usefulness or value of a network rises exponentially with the number of users.

These laws present a paradox about location. On the one hand, location matters greatly for access to resources and customers. On the other hand, technological advances and price changes make location somewhat irrelevant. Thus, the significance of location probably depends upon the type of business you have and the nature of the business model you use. For example, one can easily perceive that some retail operations could occur entirely online and not be dependent on location; however, other retail operations depend on location (e.g., small service companies that need to service appliances, barbers and hairdressers, and local food stores). Clearly, one would have a hard time imagining Starbuck’s delivering its product totally online as much of what they are offering is the experience of the place, not just the coffee. For this reason, companies such as Starbuck’s, McDonald’s, and Lowe’s Home Improvement spend unusual amounts of money on their real estate operations.

Companies are often called upon to make location decisions in foreign countries. This type of analysis is difficult, at best. Motivations for choosing a location vary and include customer contact, resource availability, and whether outsourcing options will reduce costs or increase competitiveness. One useful analysis is to calculate the “distance” from a company’s usual base of operations. Distance refers to more than geographic distance and includes culture, administrative processes, and economic differences. For example, a business may be inclined to locate manufacturing operations in an emerging market due to cheaper labor costs; however, when considering the administrative process, cultural differences, and economic volatility of the location, the business may change its mind and locate in a less distant place.  China has proved to be one such location.

So, are you sure of your location for your business; for you is the best place where you are to increase your chances for competitive outcomes?

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