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CHAPTER 26 - LOCATION AND SCALE, depends on if the business is labour or…

- - - - 01 - STRATEGIC IN NATURE - as they are long term and have a hiuge impact on the business
      - 02 - DIFFICULT TO REVERSE IF AN ERROR OF JUDGEMENT IS MADE DUE TO COSTS OF RELOCATION
      - 03 - TAKEN AT THE HIGHEST MANAGEMENT LEVELS - CANNOT BE DELEGATED TO SUBORDINATES
    - - 02 - THE BEST SITE SHOULD MAXIMISE LONG TERM PROFITS OF THE BUSINESS
        
        ITS NOT ALWAYS EASY TO SEECT THE BEST SITE AND NEARLY THE BUSINESS WILL ALWAYS HAVE TO COMPROMISE BETWEEN CONFLICTING BENEFITS AND DRAWBACKS
        
        Ex 01 - 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.
        
        Ex 02 - a factory location on an industrial estate many kilometres from a large city may have relatively low rental costs. However, the business could have problems recruiting employees due to the lack of a suitable trained working population.
    - - 01 - BOTH QUANTITATIVE AND QUALITATIVE FACTORS
      - 02 - HIGH FIXED COSTS OF THE SITE WITH THE CONVENIENCE FOR CUSTOMER AND POTENTIAL SALES
      - OPPORTUNITIES OF RECEIVING GOVERNMENT GRANTS IN AREAS OF HIGH UNEMPLOYMENT BUT WOULD HAVE RISKS OF LOW SALES OF LOW AVERAGE INCOMES IN THE AREA
      - 03 - LOW COST OF A REMOTE SITE BUT WITH THE A POSSIBILITY OF UNTRAINED AND UNSKILLED SUPPLY OF QUALIFIED LABOUR
    - - PROBLEM 01 - HIGH FIXED SITE COSTS
        DISADVANTAGE TO BUSINESS -
        01 - HIGH BREAK-EVEN LEVEL OF PRODUCTIONS
        
        LOW PROFITS OR EVEN LOSSES
        
        IF CAPACITY UTILISATION IS LOW, UNIT COSTS WILL BE HIGH
        
        PROBLEM 02 -
        HIGH LABOUR COSTS
        
        LOW CONTRIBUTION PER UNIT PRODUCED OR SOLD
        
        LOW PROFITS OR EVEN LOSSES
        
        HIGH AVERAGE VARIABLE COSTS REDUCE COMPETITIVENESS
        
        PROBLEM 03 - LOW UNEMPLOYMENT RATE
        
        PROBLEMS WITH RECRUITING SUITABLE EMPLOYEES
        
        LABOUR TURNOVER LIKELY TO BE A PROBLEM
        
        PAY LEVELS MAY HAVE TO BE RAISED TO ATTRACT AND RETAIN WORKERS
        
        04 - HIGH UNEMPLOYMENT RATE -
        
        AVERAGE CONSUMER DISPOSABLE INCOMES MAY BE LOW, LEADING TO RELATIVELY LOW DEMAND FOR INCOME ELASTIC PRODUCTS
        
        05 - POOR TRANSPORT INFRASTRUCTURE
        
        RAISES TRANSPORT COSTS FOR BOTH MATERIALS AND FINISHED PRODUCTS
        
        RELATIVELY INACCESSIBLE TO CUSTOMERS
        
        DIFFICULT TO OPERATE A INVENTORY MANAGEMENT SYSTEM DUE TO UNRELIABLE DELIVERIES
  - - - 02 - LABOUR COSTS
        
        03 - TRANSPORT COSTS
        
        04 - POTENTIAL REVENUE
        
        05 - GOVERNMENT GRANTS
        
        06 - EXTERNAL ECONOMIES AND DISECONOMIES OF SCALE
        
        07 - PROFIT ESTIMATES
        
        2 more items...
        
        they directly influence a firm's operational costs and efficiency, even if they are outside the firm's direct control (better infrastructure and skilled labour that decrease external economies of scale and traffic congestion that could increase cost and economies of scale)
        
        many governments are very keen to encourage new businesses to locate in their country
        
        grants may be offered to act as an incentive
        
        exisitng businesses operating in a country can also be provided with grants to relocate to high areas of unemployment
        
        the revenue achieve by a business is influenced by location
        
        confectionary shops and convenience stores have to be convenient to customers
        
        some locations can add status and image to a business
        
        this may lead to customers believing that the products have higher perceived value
        
        higher prices could be charged in these locations
        
        this is true for high-class retailers situated in London's Bond Sreet as well finance specialist in wall street
        
        businesses that use heavy bulky raw material such as steelmaking will have high costs if suppliers are at a great distance from a steel plant
        
        goods that increase in bulk during production reduce transport costs by locating close to the markets
        
        service industries, need to conveniently located for customers, so transport costs have little significance to them
      - they vary from region within a country and between different countries too
        
        the best office and retail sites are expensive so most likely the largest companies have the finance to afford them
        
        the costs of building on a "greenfield" site (one that has never been developed) must be compared with the csots of adapting existing buildings on a developed site
  - - - its expensive to relocate if a site proves to be to small to accommodate an expanding business
        
        it a location has space for further expansion, then this might be an important long-term decision
    - - in small businesses, managers personal preferences regarding desirable work and home environments could influence location decision of the business
        
        in larger organisation, such as plc this is unlikely to be a factor
        
        earning profits and increasing returns to shareholders will be key priorities in location decisions
    - - a business deciding to relocate from its existing site is likely to make workers redundant
        
        this can cause bad publicity
        
        it could also be against the ethical code of the business and stakeholders may view it as being immoral
        
        if the relocation to another country has weaker regulations on worker welfare and the environment by the government, they could be claims that a business is acting unethicially
        
        this can lead to negative pressure group activities
    - - a business might be reluctant to set up in an area that is particularly sensitive from an environmental viewpoint, such as near a public park
        
        locating in a beautiful area could lead to poor public relations and actions from pressure groups
    - - the quality of the local infrastructure, especially transport and communication links, will influence the choice of location
        
        ex --> singapore huge port facilities have encouraged many of the world largest shipping firms to set up bases there
        
        the quality of information technology infrastructure varies considerably around the world
        
        the is an important consideration for companies that need quick communication with customers or different sites
        
        the growth of online shopping may lead to some retailers opening fewer higher stores but setting up warehouse operation to supply directly to customers
    - - local authorities want businesses and industry located in their area because jobs are created
        
        however, these authorities want to protect the environment of the town and villages
        
        in some areas, large development corporations have been set up to develop a town and city into a much more successful of dwellings and industry activity
        
        in most countries, local or central government have set up industrial estates and business parks that both the business and customer find very attractive.
    - - most large businesses operate on more than one site
        
        major retailing companies, for ex --> expand mainly by opening new sites in new locations
        
        it would be pointless trying to serve the whole country from one shop unless they sell over the internet
        
        amazon --> has one giant warehouse might prove to be inadequte to provide supplies to consumers throughout a relatively small country
        
        primary producers such as oil exploration companies and mining businesses, operate in more than one location to avoid the risk of exhaustion of supplies from just one site
        
        very large secondary manufacturing businesses operate from more than one location despite the cost advantages of operating on one site
        
        banks or service providers must operate from more than one site if they wish to expand beyond a certain size by offering convenient services in several locations
    - - The production method may create potential risks to the public and damage to the company's reputation if there is an accident.
  - - - distance is often a problem for effective communication
        
        ex --> direct face-to-face is less likely
        
        this problem is made worse when some operations are abroad and when company employees, suppliers and customers use different languages
    - - different consumer tastes, cultures and religous beliefs impact on marketing decisions when selling products abroad
        
        cultural differences also exist in workplace
        
        toyota found that the typical mexican worker is self reliant and that does not align greatly with their teamwork and cooperation culture
        
        effective employee training may be necessary to ensure that cultural differences do not prevent successful overseas expansion
    - - this applies particularly to the offshored international customer call centres, technical support centres and business functions such as accounting
        that might offer bad service and after sales service
        
        some business analysts argue that offshoring of these services has led to inferior customer service due to time difference problems, time delays in phone messages, language barriers and different practices and conventions
    - - there may be some loss of control over quality and reliability of delivery with overseas manufacturers being part of the supply chain
        
        zara can be used as an example --> the clothing company and their decision not to offshore clothing production to cheaper countries
        
        fast fashion requires very close contact with suppliers
        
        using JIT manufacturing may become much riskier if important supplies have to be shipped thousands of miles to an assembly plant
    - - there may be loss of jobs when a company locates all or some of its operations abroad and this may lead to a consumer boycott
        
        when burberry clothing shut down its factory in Wales, there were claims by some pressure groups that the company's decision was not the right thing to do
        
        in addition, many high street clothing retailers have been accused of sourcing supplies from asian factories that use child labour and very low wages
        
        this might lead to pressure groups taken actions and bad publiticity which is might not be worth the competitive advantage
        
        this important consideration is another reason why many businesses are considering reshoring some operations
        
        this might involve higher costs but carries less risk of unethical practices
  - - - OFFSHORING - the relocation of the business process from one country to another country
    - - 02 - SUPPLY OF WELL-QUALIFIED WORKFORCE
        
        03 - ACCESSING GLOBAL MARKETS
        
        04 - AVOIDING PROTECTIONIST TRADE BARRIERS
        
        05 - OTHER OFFSHORING REASONS
        
        01 - GOVERNMENT FINANCIAL SUPPORT FOR RELOCATING BUSINESSES
        02 - OVERCOMING PROBLEMS FROM EXCHANGE RATE FLUCTUATIONS - it is difficult to make pricing decisions for imported products when currency rates fluctuates considerable the solution is to locate production in the country where products are being solds
        
        barriers to free international trade are rapidly being reduced
        
        however some still exist notably between the large trading blocs such as the EU and the association of ASEAN (trading bloc - which is a group of countries that agree to reduce or eliminate barriers like tariffs and quotas)
        
        to avoid trade barriers on imported goods, operations can be located within the country where trading bloc is concerned
        
        rapid economic growth in less-developed countries have created market potential for most consumer products
        
        access to these markets is often best achieved by direct operation in the countries concerned
        
        this happened in Carrefour example now in thailand and eastern europe, but its expanision in China helped with slow supermarket sales growth in the home country of France
        
        low labour costs are not always the most important factor in international location decisions
        
        skill levels and aavailable of qualified employees are important too
        
        countries in india china and pakistan which have invested in education and training of workers have benefited most from companies offshoring operations to them
      - Labour wages is Asian labour wage rates are a fraction than those of European countries, so its not suprising to remain competitive to relocate operation to reduce costs
  - - - 01 - refer to one branch or office located near a owners homes and their decisions involving this location
        02 - business could be even located inside a owners home such as website designers or hairdressers
        03 - the business owners preferences to live and work in a particular place is the major influencing factor on location
    - - 01 - decision refers to much larger business that operate in several or many branches in different regions of the same country
        02 - case for many supermarket groups
        03 - the major influencing factors for retail location decisions on a national level is the site costs, convenience to customers and the size of the target market in that region
    - - 01 - refer to decisions for businesses that has operations in more than one country - also known as multinationals
        02- the reasons for multinational locations are the same as those for the rapid growth for offshoring
        
        LINK WITH MULTINATIONAL DECISIONS
  - - - The pandemic example --> it make governments and companies consider:
        01 - Freer movement of people around the global as a result of globalisation makes controlling of the viruses and other health issues more difficult
        02 - over dependence on intenational suppliers or offshore operations should be reduced. when they are closed down by government control to stop the spread of diseases --> supply chains fail. to avoid this even further, more reshoring of business processes can be expected in the future.
- - - - 02 - the decision to expand the scale of operations of a business is a long-term strategic one
        
        03 - there will be high costs involves (purchasing land, buildings, equipment and employing more people) and capital needed for this will always have alternative uses
        
        04 - business expansion, by employing more of all factors of production, is referred to as an increase of scale of production
        
        05 - business expand to increase capacity to satisfy customer demand, but they also benefit from the advantages of large-scale production which are called internal economies of scale
  - - - the cost benefits can be so substantial in some industries that small businesses are unlikely to survive due to lack of competitiveness
    - - 02 - TECHNICAL ECONOMIES
        
        03 - FINANCIAL ECONOMIES
        
        04 - MARKETING ECONOMIES
        
        05 - MANAGERIAL ECONOMIES
        
        01 - small businesses often employ general managers who have a range of management functions to perform
        02 - business expansion provides finance to be able to employ specialist functional managers who should operate more efficiently than general managers
        03 - the extreme case of a small businesss not benefits from this economy would be the sole trade that is just managed by the owner
        06 - the skills of specialist managers and the chance of them making fewer mistakes because of their training is a potential economy for larger organisations
        
        01 - Marketing costs obviously rise with the size of a business, but not at the same rate
        02 - even small business will need a sales force to cover the whole sales area
        03 - using an advertising agency to design adverts and arrange a promotional campaign is expensive
        04 - these costs can be spread over a higher level of sales for a big business and this offers a substantial economy of scale
        
        01 - large organisations have 2 distinct cost advantages when raising finance
        02 - firstly, banks and other lending institutions often show preference for lending to a big business with a proven track record and a diversified range of products
        03 - interest rates charged to these firms may be lowers than the rates charged to smaller especially newly formed businesses
        04 - secondly, raising finance by going public limited companies is very expensive
        05 - professional advisers fees, prospectus publishing costs and advertising charges will not vary greatly whether it is a large or a small issue of shares
        06 - therefore, the average cost of raising finance will be lower for large businesses selling many millions of dollars worth of shares
        
        01 - large businesses are more likely to be able to justify the cost of flow production lines
        02 - if these are worked at a high capacity level, then they offer lower unit costs than other production methods
        03 - the latesst and most advanced technical equipment such as computer systems, is often expensive
        04 -it can usually only be affected by big firms
        05 - such costs can be justified when the output is high so that fixed costs can be overaged over a high number of units
        06 -a lower level of output would raise the unit fixed costs
        07 - it is often the case that such equipment is indivisible - this means that it cannot be purchased in the form of smalled models with a lower total capacity
      - 01 - these economies are also known as bulk buying economies
        02 - suppliers will often offer disounts for large orders
        03- it is cheaper for them to process and deliver one large order rather than order small several ones
        04- they also want to keep a large customer happy due to profits being made from the quantity sold
        05 - big firms employ specialist buyers who may travel the globe to obtain the best possible deals for materials and components at the lowest possible prices
        06 - there is a growing trend of businesses buying supplies over the internet
        07 - this process is a form of B2B (business-to-business trading)
        08 -cheaper deals are offered if greater quantities are sold
  - - - factors that cost unit (average) costs of production to increase when a business increases its scale of operations
    - - 02 - ALIENATION OF THE WORKERFORCE
        
        03 - POOR COMMUNICATION
        
        01 - poor communication of feedback from and to workers in large scale production
        02 - excessive use of non-personal communication media in a large scale production
        03 - information overload because a great number of messages are being sent in a large scale production
        04 - disortion of messages caused by a long chain of command in a large scale production
        05 - these communication inefficiencies may lead to poor decisions being made, due to inadequate or delayed information
        06 - poor feedback reduces employees motivation
        07 - communication overload is "noise" that may prevent really important messages from being acted on first
        08 - all of these factors reduce management efficiency that can lead to higher average costs
        
        ARE INTERNAL DISECONOMIES OF SCALE AVOIDABLE ?
        
        01 - MANAGEMENT BY OBJECTIVES
        
        02 - DECENTRALISATION
        
        2 more items...
        
        01 - This will assist in avoiding coordination problems by giving each division and department agreed objectives to work towards that are components of the long-term aims of the whole business
        
        01 - the bigger the organisation is, the more difficult it becomes to directly involve every worker
        02 - this can lead to a lack of sense of purpose and achievement in their work
        03 - employees may feel so insignificant to the overall business plan that they become demotivated and fail to give their best
        04 - large manufacturers are most likely to adapt to flow-line production, and workforce alienation is a real problem resulting from this operations method
        05 - the use of cell working, teamworking and other job enrichment methods has helped to minimise this problem, but the risk of workers alienation is ever present in large businesses
      - 01 - Business expansion is often associated with complex organisational structure, with more departments and decisions of products
        02 - the number of countries a business operates in often increases too
        03 - senior management will have difficulties coordinating these operations to ensure that all divisions of the business are aiming to achieve the same objectives
        04 - adapting the same ethical code now is important too
        05 - for ex--> if one division of an oil company in one country adopts a weaker ethical stance on issues such as pollution than the decisions in other countries, poor publicity willl result for the business as a whole
        06 - another problem could be the existence of more than one research department, with wasteful duplication of research into similar products
        07 - these are all issues that result from poor coordination that lead to higher production costs substantially than for a businesses with much tighter control over operations.
  - - - 02 - CAPITAL AVAILABLE - if this is limited, growth will be less likely
        
        03 - SIZE OF THE MARKET - the firm operates in - a very small market will not require large-scale production
        
        04 - NUMBER OF COMPETITORS - the market share of each firm may be small if there are many rivals
        
        05 - SCOPE OF SCALE ECONOMIES - if these are substantial, as in water supper, each business is likely to operate on a large scale