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A Complete Guide to Locational Strategy

A location strategy is a plan for obtaining the optimal location for a company by identifying company needs and objectives, and searching for locations with offerings that are compatible with these needs and objectives. A company’s location strategy should conform with, and be part of, its overall corporate strategy.

What is Locational Strategy?

Locational strategy differs from other strategies, such as competitive strategy and corporate strategy. When creating an overall corporate strategy, a firm needs to know what it wants to achieve in the marketplace and must decide how to accomplish these objectives. If the company wants to enter a new geographic region, for example, a complete corporate strategy should include a description of how it hopes to achieve sales in the region, which markets it will target, how it will combine its existing resources—logistics, production, and so on—to take advantage of the opportunity.

When it comes to locational strategy, the company still bases its approach on business objectives. In a competitive strategy, a company might decide that it needs to open a manufacturing site overseas to reduce production costs. In a locational strategy, it might determine that it needs to open a manufacturing site overseas to take advantage of a market opportunity. Instead of describing how to enter the market, the locational strategy should describe where the company would want to be located within the market.

What Does a Locational Strategy Look Like?

Like a corporate strategy, a locational strategy should include a description of the geographic region that is being targeted and how the company intends to reach the region. It should also include an assessment of the company’s strengths and weaknesses in the region, a description of what the company hopes to accomplish and how it will reach its goals, and a time frame for when the company hopes to achieve its goals.

To make a locational strategy more recognizable, the company should make the strategy as concise and specific as possible. Consider the following locational strategy that looks for the best possible location for a company that produces a consumer product in a large region:

We plan to enter the sports-drink market in the states of Colorado, Indiana, and New Hampshire. We will build a $3 million beverage production plant in the town of Woodpecker in Morgan County, Indiana. We plan to begin production in Indiana by 2008.

How Can a Company Apply a Locational Strategy?

A company should apply a locational strategy in three phases: Plan Location, Implement Location, and Maintain Location.

Plan Location

As an initial step, the company can analyze the factors that cause some locations to be more desirable than others. The analysis will produce the factors that the company needs to consider.

Environmental

These are the location-specific factors that make some places more desirable (or less desirable) than other. Climate, natural resources, and market size are some examples of environmental factors.

To a large extent, environmental factors, such as climate and natural resources, act as basic inputs into the production process. The more favorable these inputs are, the more productive a business will be. In many cases, environmental factors are localized.

If the sports drink manufacturer were producing a product in sub-Saharan Africa, for instance, then the large size of the market would not matter. The company would have to discover the input factors at the location—its climate, its natural resources, and so on—and use what it learns to decide whether the location should be part of its plan.

In the case of the sports drink manufacturer, the manufacturing site must have its own natural resources, such as water and coal. Woodpecker will need a plentiful water supply so that the plant can produce sports drinks. It would also be desirable for Woodpecker to be served by railroads and highways.

If the resources of Woodpecker, Indiana, were not plentiful, the manufacturer might be better off looking elsewhere. It could, for example, build a plant in another state and ship its products by rail and truck, or it could build a facility along a pipeline (perhaps for natural gas) because the pipeline already includes the water it needs to produce its products.

Physical

These are factors that affect the mobility of people and goods. The closer a site is to the production—and the more easily a company can obtain inputs from there—the more productive the company will be.

In Indiana, it might also be desirable for the sports drink manufacturer to have a facility near a transportation hub, such as a major airport. Sports drink products are perishable. If the facility were along a shipping route that allowed it to ship its products quickly, the manufacturer might reduce its costs.

Social

Social factors are locations’ demographic characteristics. These are often subjective and intangible, but they are still a valid area of inquiry. A manufacturer of sports drinks probably does not want its facility in a location where most of the population prefers salty processed foods over fresh, healthy products.

If the town of Woodpecker, Indiana, has a population of 10,000 and the sports drink manufacturer opens operations there, it might find that a third of its potential customers are too young to be drinking its product.

Economic

Economic factors can directly affect a company’s ability to produce its products to the best of its ability. A sports drink manufacturer, for instance, can save substantial amounts of money by using the cheapest possible components to produce its beverages. In addition, raw materials from a favorable economic environment, such as a country with low wages, may be cheaper than they would be in higher-wage countries.

To take advantage of the best economic conditions, the manufacturer needs to consider where wages are lowest, where taxes are low, and where financing is cheap. Although the plant in Indiana might be the best location for this manufacturer, it is equally likely that a locale in Mexico or an Asian nation would be a better choice.

Legal

Government regulations and laws affect numerous aspects of business, including minimum wages, trade tariffs, and policies that make it difficult for foreign companies to operate in a country. If a manufacturer of sports drinks faces burdensome government regulations and high taxes, it is likely that its rates of return will be lower than they would be if the government were less burdensome.

In the case of the sports drink manufacturer, it would be wise to look seriously at locational options outside the United States. Federal and local governments often place restrictions on how a company can produce its products and what it can build.

Corporate

This is a catchall category for factors that a company might find important in developing its locational plan. A new manufacturing site might be more likely to succeed when the site can provide the company’s corporate headquarters with input it needs.

In the case of the sports drink manufacturer, it would probably make sense for the manufacturer to build its production facility in a location where it can easily obtain a supply of high-quality drinking water. If the company can hire local engineers to work on high-tech equipment at a pay rate that is half that of the engineers in the United States, a production site in that region might be even more desirable.

Strategic

This is the category for factors that address a company’s strategic objectives. In the case of the sports drink manufacturer, a key strategic objective is to keep its cost of production as low as possible. That way, the company can use the proceeds from its sales to cover its manufacturing costs and make a profit on the sale of a product that does not include salt.

For the manufacturer’s production facility, a strategic factor would be to build the plant in an area where local wages are low enough to enable the company to remain competitive.

After the company identifies and ranks its various alternatives, it can select the least expensive to use as the basis for its production plan.

The company might also want to consider whether a suitable, acceptable location is available nearby. If the manufacturer needed to ship its products long distances, for example, the cost of freight might reduce the company’s profits. If the manufacturer, however, could produce its products much closer to its markets, so that it did not have to ship them over great distances, it might be able to keep its prices lower and its sales rising.

The company also would have to consider whether it is easier to sell to more customers if the facility is near a large city. Perhaps it makes better sense to site the manufacturing facility in the center of a region that has the largest population. In many cases, the company might have to weigh its choices and make a compromise.

Having a production facility as close to its markets as possible is a major advantage. Once the company has determined that, it can set out to select the best location or locations for its new plant.

Location Types

In the discussion above, the term site has been used to refer to the set of factors over which a company might have some control. Clearly, a company cannot control a location’s climate. But in many cases, a company does have some control over such factors as property and labor costs.

The sites that are used in this book refer to the eight major sites in which production facilities are located. No site is ideal; each has its advantages and disadvantages.

Many factors affect a company’s decision about what locations to consider. Cost and potential profit are the two biggest. Other considerations, however, are often as important as these.

Cost

The factors that affect a company’s total cost at the production site include materials, labor, insurance, taxes, transport, energy, and plant construction and operation costs.

Materials

Materials include the raw materials that go into the product, as well as the packaging of the product. For a sports drink, the materials would include water, sweeteners (such as sugar, high fructose corn syrup, or artificial sweeteners), and high-fructose corn syrup (if there is any). Packaging costs would include the bottle, cap, label, and plastic tubing.

Labor

Labor costs include the wages and salaries of factory workers, toll operators, maintenance engineers, and security personnel.

Taxes

Taxes include any taxes on imported raw materials and packaging material, as well as taxes on real estate and on the company itself.

Insurance

Insurance costs for a manufacturing facility might include worker’s compensation insurance, shopkeeper’s insurance, and fire and theft insurance.

Transport

Transport costs include the freight charge for bringing raw materials to the plant, the cost of getting the finished product to the factory, and the fee for transporting the product to warehouses and distribution centers.

Energy

Energy costs include the utility costs, such as for steam, electrical power, natural gas, or water, plus any costs for heat generated by electricity and natural gas.

Plant Construction and Operation

Plant construction and operation costs include the costs of decontaminating the site, fumigating the site, construction of buildings (or purchase of land to build the buildings on), and fees for architects, engineers, and contractors.

Taxes

Taxes that inhibit a company’s operations include tariffs and any taxes that a company has to pay on materials and final production.

Taxes on materials include sales taxes on materials, stamp taxes on imported materials, and excise taxes on materials.

Stamp taxes refer to the tax on imported goods that was put into place to protect local manufacturers from foreign competition. The duty tax was originally a tax on goods that entered the country. That tax was replaced by the tariff, which refers to a tax that is added to an imported good before it is allowed to cross the border. In the United States, the tariff was gradually reduced or eliminated on a one-by-one basis until it was no longer an important part of the country’s tax collection system. In addition to the tariff, however, other taxes, including import duties and excise taxes, continued to be added to imported goods.

Excise taxes are added to certain goods. They are heavily favored by the alcohol, tobacco, and firearms industries, although they are also added to items such as air conditioners, toilet paper, and tires.

Taxes on production include income taxes, Social Security deductions, workers compensation deductions, and pension deductions.

Income taxes are the main tax in the United States. They are based on earned income, including salaries and wages. Social Security deductions are taken from wages or salaries in order to pay for the social security program. Workers compensation deductions refer to insurance premiums, paid by employers, for workers who have been disabled by work accidents or occupational diseases. Pension deductions are taken out of an employee’s pay by the employer to pay for the employee’s pension benefits when the employee retires.

In addition to the taxes listed, however, other payroll deductions might be taken out of an employee’s wages, including deductions for health insurance, savings plans, and stock purchase plans.

A company’s payroll taxes include taxes on employee pay, such as income taxes, Social Security taxes, and workers compensation insurance premiums.

In addition to the taxes listed, however, other payroll deductions might be taken out of an employee’s wages, including deductions for health insurance, savings plans, and stock purchase plans.

The final payroll tax is unemployment insurance. This is a legal obligation that every company must meet when its employees are temporarily laid off.

Other factors that might affect a company’s tax obligation include the company’s taxable income, the break-even point for the plant, and whether the company anticipates making large capital improvements at the site.

Profit

The company’s profit might be as high as possible and growth might be as rapid as possible.

Growth

The company might want to grow so that revenue grows at the same rate that profit does, or more slowly. Growth could be slowed to give the company the chance to offset its maturing stages.

The company decides upon its ultimate size by choosing a product that has a certain growth potential. Any growth potential less than that of the product’s main competitors would not be in the company’s best interest.

The company must then pick a location that matches its goals.

For example, if the company wanted to select a plant with the potential for high growth, it would first have to consider the loyalty that a plant location could have for a particular product category.

If a product type had high growth potential in the overall market, the plant in that location might be able to play an important role in the company’s operations.

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