Chapter 26 - Location and Scale
Learning Objective: To further understand location decisions and economies/diseconomies of scale
You now know that there are plenty of factors (quantitative and qualitative) influencing location decisions:
Cost and revenue;
Transportation costs;
Labor costs;
Government grants;
Safety;
Room for further expansion;
Ethical factors;
Infrastructure.
You also know the quantitative techniques that aid on location-decisions:
Profit estimates;
Investment appraisal (payback period);
Break-even analysis.
And you even know understand other considerations influencing this decision:
Market-pull demand, planning restrictions, and external economies of scale.
You also understand that location decisions are strategic (long-term decisions) which are difficult to reverse. Plus, you are aware of the multi-site strategy which can bring advantages (convenience, lower transportation costs, lower risk of disruption, and chance for regional delegation) and disadvantages (diseconomies of scale, lack/loss of control, cannibalism, and legal and cultural challenges).
Sometimes, however, it's inevitable, businesses relocate internationally for various reasons:
Costs: specially labor cost reductions;
Market Saturation: international relocation is an extension strategy for gaining access to international markets (specially developing and growing markets).
To avoid protectionist trade barriers:
- Tariffs and taxes are sometimes imposed by countries onto products/services;
- Businesses try avoiding those by relocating to those locations (avoiding tariffs and taxes);
- Example: Toyota relocating factories to Mexico to enter the North-American market for cars without tariffs/taxes.
Other reasons for relocating internationally include:
Foreign governments financial incentives for relocation;
Good educational/technical standards (e.g. Tesla relocating to China);
To avoid exchange rate fluctuations.
Relocating internationally is not easy task though, it comes with many challenges:
Cultural Differences:
- Marketing fails are not uncommon (e.g. Dove Japan);
- Product fails can happen (e.g. Groupon in China).
Level of Service Concerns:
- Sometimes relocating some parts of the business can damage a business reputation (e.g. customer service);
- The standards on how to treat customers differ from culture to culture
.
Availability of Supply Chain:
- The availability of suppliers in certain locations may be a challenge;
- Example: Mc Donald's in Mongolia.
Ethical Considerations:
- Several different ethical considerations come into play when a business relocates internationally:
Job loss in the home country (can lead to pressure groups actions and boycotts);
Many businesses relocate internationally for cheap labor: considerations regarding child labor, slavery, or poor working conditions (can harm business reputation).
Some few examples of fashion businesses involved in forced labor:
Business in Action 26.5 - Discussion
What tells whether a business should increase its scale of operations?
Owners' objectives;
Capital availability (or not) for expansion;
Size of the market where the business operates.
The main reason behind why businesses aim to increase the scale of their operations is to achieve economies of scale (technical, financial, marketing, purchasing, and managerial):
However, diseconomies of scale are not uncommon:
When businesses increase scale - (internal) diseconomies of scale happen for several reasons:
Communication Problems leading to inefficiencies:
- Non-personal communication, information overload, long chain of command - all of which will negatively impact communication and lead to businesses becoming less efficient.
Alienation of the Workforce:
- When workers feel disconnected from the result of their own work;
- No sense of purpose or achievement;
- Demotivation;
- Example:
Poor Coordination:
- Coordination and control in very large businesses is complex:
- Multiple departments;
- Multiple markets;
- Multiple geographical locations.
It's difficult for managers to identify the moment in which diseconomies of scale come to happen. It is common for businesses to experience both: economies and diseconomies of scale simultaneously.
The difficulty on identifying diseconomies of scale make it so that managers continue invested in expansion while hurting the business efficiency unknowingly.
Managers can work towards reducing the chances of diseconomies of scale to happen by:
Implementation of MBO:
- It helps avoiding coordination problems;
- Each function, department, and team have clear objectives;
- All objectives added up = corporate objective.
Decentralizing Decision-Making:
- Giving autonomy to functions, divisions, and departments;
- Keeping only strategic (long-term) decisions centralized.
Reducing Business Diversification:
- Business can focus on their core businesses - what they do best;
- Option to outsource non-core activities to other businesses.
Avoiding diseconomies of scale is not a black and white solution: different situations leading to diseconomies of scale require different measures.
To-Do-List:
Decision-Making Question #1 HiSonic
Chapter 26 - Location and Scale
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