the Nano plant. It would bring much-needed jobs and send a message that the state welcomed inward investment. In fact, it had won the plant against stiff competition from rival states.
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The objectives of the location decision
The aim of the location decision is to achieve an appropriate balance between three related objectives:
● the spatially variable costs of the operation (spatially variable means that something changes with geographical location);
● the service the operation is able to provide to its customers;
● the revenue potential of the operation.
In for-profit organizations the last two objectives are related. The assumption is that the better the service the operation can provide to its customers, the better will be its potential to attract custom and therefore generate revenue. In not-for-profit organizations, revenue potential might not be a relevant objective and so cost and customer service are often taken as the twin objectives of location. In making decisions about where to locate an operation, operations managers are concerned with minimizing spatially variable costs and maximizing revenue and customer service. Location affects both of these but not equally for all types of operation. For example, with most products, customers may not care very much where they were made. Location is unlikely to affect the operation’s revenues significantly. However, the costs of the operation will probably be very greatly affected by location. Services, on the other hand, often have both costs and revenues affected by location. The location decision for any operation is determined by the relative strength of supply-side and demand-side factors (seeFig. 6.5).
Controversially, the state government had
expropriated land for the factory using an old law dating from 1894, which requires private owners to sell land for a ‘public purpose’. The government justified this action by pointing out that over 13,000 people had some kind of claim to parts of the land required for the new plant. Tata could not be expected to negotiate, one by one, with all of them. Also financial compensation was offered at significantly above market rates. Unfortunately about 2,250 people refused to accept the offered compensation. The political opposition organized mass protests in support of the farmers who did not want to
move. They blocked roads, threatened staff and even assaulted an employee of a Tata supplier. In response, Ratan Tata, chairman of the Tata group, threatened to move the Nano plant from the state if the company really was not wanted, even though the company had already invested 15 billion rupees in the project.
Eventually, exasperated with being caught in the
‘political crossfire’, Tata said it would abandon its factory in the state. Instead, the company selected a location in Gujarat, one of India’s most industrialized states, which quickly approved even more land than the West Bengal site.
Figure 6.5 Supply-side and demand-side factors in location decisions Spatially variable costs
Supply-side influences
Labour costs. The costs of employing people with particular skills can vary between different areas in any country, but are likely to be more significant when international comparisons are made. Labour costs can be expressed in two ways. The ‘hourly cost’ is what firms have to pay workers on average per hour. However, the ‘unit cost’ is an indication of the labour cost per unit of production. This includes the effects both of productivity differences between countries and of differing currency exchange rates. Exchange rate variation can cause unit costs to change dramatically over time. Yet in spite of this, labour costs exert a major influence on the location decision, especially in some industries such as clothing, where labour costs as a proportion of total costs are relatively high.
Land costs. The cost of acquiring the site itself is sometimes a relevant factor in choosing a location. Land and rental costs vary between countries and cities. At a more local level, land costs are also important. A retail operation, when choosing ‘high-street’ sites, will pay a particular level of rent only if it believes it can generate a certain level of revenue from the site.
Tesco is an international retailer with sales in excess of
£50 billion, operating around 4,000 stores worldwide, employing almost half a million people and serving millions of customers each week. It sells a wide range of items including groceries, petrol, financial services, electrical goods, household items, toys and even furniture. Although based in the UK Tesco now trades all over the world. One of its big successes is Thailand, where it has 476 stores and employs over 36,000 people. Tesco’s expansion strategy is founded on the need to provide quality products, convenient locations and opening hours and value for money. The company has come to realize that international markets need differing local approaches, with local supply chains, different store formats and sensitivity to local traditions. So how does Tesco (branded ‘Tesco Lotus’ in Thailand) adapt its operating practice to local conditions?
Some things are relatively straightforward. For example, those stores with limited opening hours open at 9.09 precisely, as Thais believe these numbers bring good fortune. Other things are based on a thorough understanding of local customers. They discovered that around 5% of their customers were actually small family-run stores taking advantage of Tesco’s lower prices. Rather than discourage this they developed their ‘Club Pack’ products that shopkeepers could break up and sell in their own stores at a good profit. They also investigated the shopping experience their Thai customers really want. ‘We started out by asking our customers what they want our stores to sell and look like. From the responses that we received, we realized that the optimal solution would be best delivered by Tesco Lotus constructing its own malls’ (Mrs Veena Arunyakasem, Mall and Media Director, Tesco Lotus).
So, they developed two new concepts, the Lifestyle Shopping Mall and Community Mall. Lifestyle Shopping
Short case Tesco Thailand
7Malls contain the flagship hypermarket stores and other shops, including restaurants and banks, promoting high-quality local brands rather than expensive imported brands. ‘These “lifestyle shopping malls” provide better service and increased convenience to our customers.
The biggest beneficiaries will be our upcountry customers who have previously lived a long way from the nearest cinema’ (Gwyn Sundhagul, Tesco Lotus Director and Chief Marketing Officer).
Community Malls are smaller and emphasize easy access to local neigbourhoods.
Other local developments take account of cultural sensitivities. Thais greatly admire individuals and organizations that help the poor. So Tesco set up
‘Tesco for Thais’, a non-profit charitable foundation.
The green agenda is also important in Thailand and large organizations are expected to lead the way. In 2004 Tesco opened its first ‘green’ superstore in Bangkok.
This store includes a range of energy-saving initiatives including recycling and the use of rainwater, with its air conditioning run by solar panels, the size of three football pitches, on the roof.
Energy costs. Operations which use large amounts of energy, such as aluminium smelters, can be influenced in their location decisions by the availability of relatively inexpensive energy.
This may be direct, as in the availability of hydroelectric generation in an area, or indirect, such as low-cost coal which can be used to generate inexpensive electricity.
Transportation costs. Transportation costs include both the cost of transporting inputs from their source to the site of the operation, and the cost of transporting goods from the site to customers. Whereas almost all operations are concerned to some extent with the former, not all operations transport goods to customers; rather, customers come to them (for example, hotels). Even for operations that do transport their goods to customers (most manufacturers, for example), we consider transportation as a supply-side factor because as location changes, transportation costs also change. Proximity to sources of supplydominates the location decision where the cost of transporting input materials is high or difficult. Food processing and other agriculture-based activities, for example, are often carried out close to growing areas. Conversely, transportation to customersdominates location decisions where this is expensive or difficult. Civil engineering projects, for example, are constructed mainly where they will be needed.
Community factors. Community factors are those influences on an operation’s costs which derive from the social, political and economic environment of its site. These include:
● local tax rates
● capital movement restrictions
● government financial assistance
● government planning assistance
● political stability
● local attitudes to ‘inward investment’
● language
● local amenities (schools, theatres, shops, etc.)
● availability of support services
● history of labour relations and behaviour
● environmental restrictions and waste disposal
● planning procedures and restrictions.
Figure 6.6 A major influence in where businesses locate is the cost of operating at different locations. But, total operating cost depends on more than wage costs, or even total labour costs (which includes allowances for different productivity rates). The chart illustrates what makes up the cost of shirts sold in France. Remember, the retailer will often sell the item for more than double the cost8
Demand-side influences
Labour skills. The abilities of a local labour force can have an effect on customer reaction to the products or services which the operation produces. For example, ‘science parks’ are usually located close to universities because they hope to attract companies that are interested in using the skills available at the university.
The suitability of the site itself. Different sites are likely to have different intrinsic character- istics which can affect an operation’s ability to serve customers and generate revenue. For example, the location of a luxury resort hotel which offers up-market holiday accommoda- tion is very largely dependent on the intrinsic characteristics of the site. Located next to the beach, surrounded by waving palm trees and overlooking a picturesque bay, the hotel is very attractive to its customers. Move it a few kilometres away into the centre of an industrial estate and it rapidly loses its attraction.
Image of the location. Some locations are firmly associated in customers’ minds with a particular image. Suits from Savile Row (the centre of the up-market bespoke tailoring dis- trict in London) may be no better than high-quality suits made elsewhere but, by locating its operation there, a tailor has probably enhanced its reputation and therefore its revenue. The
Similar companies with similar needs often cluster together in the same location. For example, knitted garment manufacturers dominate parts of Northern Italy.
Perhaps the most famous location cluster is in the area south of San Francisco known as Silicon Valley, acknowledged as the most important intellectual and commercial hub of high-tech business. Yet Silicon Valley is being challenged by up-and-coming locations, especially in developing countries. Here are two examples.
Bangalore in India has for many years been attractive in the computer industry. Back in the 1980s the area attracted software code-writing business from Western multinationals attracted by the ready availability of well-educated, low-cost English-speaking software technicians. Now the area has attracted even more, and even more sophisticated, business. Companies such as Intel, Sun Microsystems, Texas Instruments and Cisco have a presence in the area and are using their Bangalore development centres to tackle cutting-edge projects. The biggest draw is still India’s pool of high-quality, low-cost software engineers. Each year Bangalore alone graduates 25,000 computer science engineers, almost the number who graduate in the entire USA. More significantly, the average wage of a top-class graduate software engineer is around one fifth of that in the USA. Nor is there any lack of multinational experience. For years Western (especially US) high-tech companies have employed senior Indian-born engineers. Equipped with Silicon Valley experience, some of these engineers are happy to return home to manage development teams.