Chapter 26 - Location and Scale Flashcards
Optimal Location
A business location that gives the best combination of quantitative and qualitative factors.
Quantitative Factors
Issues that managers should consider that can be measured in financial or numerical terms.
Qualitative Factors
Issues that managers should consider that are not measurable in financial or numerical terms.
Quantitative Factors
1) Site and other fixed costs - Ex: Buildings
2) Labor Costs - Capital or Labor Intensive
3) Transport Costs - Supply of raw materials
4) Potential Revenue
5) Government Grants - Foreign governments interested in new firms
6) External Economy and Diseconomy Of Scale - Delve into further detail later
7) Profit Estimations
8) Investment Appraisal - the analysis done to consider the profitability of an
investment over the life of an asset alongside considerations of affordability and strategic fit.
9) Break Even Analysis - How fast, how much to be profitable
Qualitative Factors
1) Safety - Potential risks in the production process
2) Space For Further Expansion - Is it expensive?
3) Manager’s Preference - May want to remain small
4) Ethical Considerations - Workers are redundant if there is relocation. ( Immoral)
5) Environmental Concerns - Sensitive Environment
6) Infrastructure - Quality - Mainly Transport and Communication
7) Planning Restrictions - Local Authorities
8) Advantages Of Multi-Scale Locations - Operations on more than one site.
Off Shoring
The relocation of a business process from one country to another country.
Reasons for Off-Shoring
1) Reduce Costs
2) Supply of well-qualified workforce
3) Access to global markets
4) Avoiding protectionist trade barriers
- Tariffs Or Taxes
- Quotas
5) Government financial support to relocating businesses
6) Exchange Rate
- Fluctuates a lot
- Forced to use a blanket currency
- Price of product is affected
Trade Barriers
Taxis or tariffs or other limitations on the free international movement of goods and services.
Reshoring
Transferring a business operation that was moved overseas back to the country where it was originally located.
Reasons for reshoring
1) Language and other communication barriers - Face to face communication is less likely
2) Cultural differences - Consumer taste and religious beliefs
3) Product quality and level of service concerns - Call centers leading to inferior customer service
4) Supply chain concerns - Loss of control of quality and reliability of delivery
5) Ethical Concerns - Consumer boycott.
Scale of Operations
The maximum output that can be achieved using the available inputs ( resources )
Factors Affecting Scale Of Operations
1) Owners Objectives - Wish to keep the business small and easy to manage
2) Capital available - if limited, growth is less likely
3) Size of market - the firm operates in a very small market , there won’t be a requirement for large-scale productions
4) Number of competitors - the market of each firm may be small if there are many rivals
5) Scope of Economies of Scale - If these are substantial, each business is likely to operate on a large scale.
Internal Economies of Scale
Factors that cause reductions in unit ( average ) costs of production as the business expands its scale of operations.
Types of Internal Economies
1) Purchasing
2) Technical
3) Financial
4) Marketing
5) Managerial
Purchasing Internal Economies
- Bulk buying economies
- Discounts
- Big firms can use this.
Technical Internal Economies
- Flow productions
- Costs are covered
- Lower unit costs
- More technological equipment
Financial Internal Economies
- Banks and lending firms, track record
- Interest rate charges to these firms are lower
- Going public - issuing of shares
Marketing Internal Economies
- Budgets are higher
- High Impact
Managerial Internal Economies
- Can employ specialist managers
- More efficient than generals managers who operate multiple jobs
- Fewer mistakes
Internal Diseconomies of Scale
Factors that cause unit costs of prodction to increase when a business increases its scale of operations.
Types of Internal Diseconomies
1) Communication
2) Alienation of workforce
3) Poor Coordination
Communication ( Internal Diseconomies )
- Poor communication of feedback from and to workers
- Excessive use of non - personal communication media
- Communication overload - greater number of messages being sent
- Distortion of messages caused by long chain of command
Alienation Of Workforce ( Internal Diseconomies )
- Bigger the firm, more difficult to directly involve everyone
- Lack of sense of purpose
- More demotivated
- Flow production overcomes this however
- Team Working
- Job Enrichment
Poor Coordination ( Internal Diseconomies )
- Concentrate on core activities of the business
- Helps reduce coordination and communication problems
- Demerger - Separating one business unit from another, especially to reverse to an earlier management
How to avoid internal diseconomies
1) Management by objectives
- Avoid coordination problems
- Each department has agreed objectives
- Working towards long terms goals
2) Decentralisation
- Divisions some degree of autonomy and independence
- Control is exercised by managers
- However, must avoid pursuing conflicting objectives as this results in poor coordination
3) Reduce Diversification
- Concentrate on core activities of the business
- Helps reduce coordination and communication problems
- Demerger - Separating one business unit from another, especially to reverse to an earlier management
External Economies of Scale
Factors causing unit cost reductions that can benefit a business as the industry expands in one region.
External Diseconomies of Scale
Factors causing unit costs to rise as an industry expands, especially in a given region.
Example for external diseconomies
If an industry continues to grow in one location it can lead to cost increases for other businesses.
There will be increased demand for land and property and suitable labor.
Demand pressures will cause unit costs to rise for businesses in the industry operating in this location.
