26: Location and scale
Eva: factor influence relocation
Why business want to increase scale of production
Economies, diseconomies of scale and unit cost
The optimal location should be balanced between cost and advantages
High rental cost = high customer traffic, but sell more
Cheap rental cost = remote site, but hard-to-hire employees and customers
Operate in high unemployment, risks of low sales = but get government grant
Best location will not always be competitive → competitor’s move,… can change over time => that’s why business relocate
Quantitative factor affecting location / relocation
Rental cost
Transport cost (being close to supplier)
Low cost is not most important. Worker skilled,… other factors also important
Whether business is capital or labor-intensive
(If capital, then can put factory in remote area for cheaper rent)
(Telephone call centers are in India because lower minimum wage)
Potential revenue
(Compare estimated revenue and cost = highest annual potential profit will be chosen)
Investment appraisal
(Location with highest return over investment)
Estimation is hard and risky
Break-even analysis
The lower the break-even level of output, the less risk of break-even
Important for business with high fixed cost, they need location of lower variable costs
Government grants (area of high unemployment)
External economies & diseconomies of scale
Qualitative factors affecting location / relocation
Safety
Factories might make waste → shoud locate in remote area with no resident
Infrastructure
Quality of local infrastructure (roads, IT,…)
Manager’s preferences (for small business only)
Work, home environment,…
Ethical issues
Relocation might cause redundancies, stakeholders view it as immoral
Business park
An area dedicated to business office and warehouse
Rental cheaper rental and lots of customer
Why multi-site operation is good
Primary producer (oil producer) operate in different locations in case 1 site have problem and can not produce oil
Tertiary service (hotels) must have branches in various cities if they want to offer convenience
Offshoring
relocation of business from one country to another
Avoid protectionist trade barriers
(Toyota have car factory in France, to avoid trade barrier on Japanese imports)
Worker skills
Worker wage
Avoid exchange rates fluctuation
(If a business need import goods, but the exchange rate is bad, then offshore their production in that country right away to save extra cost from exchange rate)
Access global market
Reshoring
Move business from foreign company back to original country
Cultural difference
Ineffective communication (online, language barrier)
Product quality
(Language barrier, time difference)
Supply-chain problem
(Reliability of delivery is not guaranteed, fast-fashion business needs to update its clothing frequently, Just-In-Time need close contact with supplier)
Ethical issues
(Redundancy for employee in host country, exploit worker in another country with lower wage)
How globalisation help multinational business
Free movement of capital between countries
Reduce trade barrier
Scale of operation
Internal economies of scale
Factors that reduce unit costs as a business expands
Purchase economies
Buying material in bulk
Technical
Large business only
Buy the most expensive machinaries, but high output means the fixed cost is spread over more products
Financial
Big business obtain loans easier
Issuing shares is expensive (professional advisor fee, publishing cost). The costs are similiar no matter if the business is big or small. So big business sells more shares with same cost
Marketing
Advertising cost can be spread over the high units sell
Managerial
Big business can hire specialist → make less mistake
Internal diseconomies of scale
Factors that cause unit cost to increase when a business expands
Problem of managing a huge business with lots of employees
Communication problem
Communication overload, too many message
Distortion of message cause long chain of command
Poor feedback
Isolation of workforce
Big business = harder to invovle every employees
Feel insignificant in business, lack sense of purpose
Poor coordination
A company grows, its organisational structure get more complex
(Work in different countries → more divisons)
Coordinate all departments is hard
E.g: 2 R&D departments in different countries might do the same research → waste money
How to avoid these?
Management by objective
Give each department objectives that are small part of whole business plan
Decentralization (give authority to employees)
Departments are like small business, with their own freedom and power
*Should avoid conflicting objectives*
Delayering
Reduce diversification
Concentrate on core activities, make business simpler
Demerger : divide business into smaller units
External economies of scale
Factors that reduce unit cost as the indsutry expands in a region
Industry grow and get richer = more people want to have a job there → easier to find quality labor
Benefited from infrastructure get better (roads,…) → reduce transportation cost
External diseconomies of scale
Competition between businesses for material, land and labor
Business grows, make more products, transport more, roads get more crowded, more transportation cost