ABE Level 4 Diploma Introduction to Business Chapter 4

ABE Level 4 DiplomaIntroduction to Business Chapter 4The Influence on Location of IndustryByNaeem AkramNoor College of Business & Sciences

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The Influence on Location of IndustryWhen a firm decides on a location for its activities it makes the decision on the basis of costs and benefits.The costs of alternative locations include those associated with land and buildings, energy supplies, labour and training, transport and communication with suppliers and customers, and compliance with environmental protection.The benefits include the availability at different locations of a trained labour force, a support system of specialist firms providing industry-specific training, information services and design facilities, green field sites where the company can set up exactly as it wishes and the availability of government grants.

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The Influence on Location of IndustryWe can summarise the factors as follows:

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Ancillary (necessary support to the primary activities + accessory)3

Availability of raw materialsThe availability of raw materials often determines a firm's location.Coal mines can only be sited where there is coal, mineral water companies where there is a suitable spring, brick manufacturers where there is the right sort of clay. The extraction industries have limited location options. However, these are not all renewable resources and eventually they become exhausted. This is what happened to the iron mines in Britain, and local ore had to be replaced with imports.4

Availability of raw materialsSteelworks then gradually moved to the coast because of the cost of transport over land of heavy, low-value material. Technology also played its part as new methods of steel making meant that the cost of production could be significantly reduced by keeping the product hot all the way through the process. Integrated steel mills replaced a system where iron ore was turned into blocks, moved elsewhere to be turned into steel, then on to another plant to be rolled into sheet.5

Energy suppliesSometimes the availability of energy supplies is of over-riding importance. Aluminium is rarely made where bauxite, its raw material, is mined.Cheap power is of such great importance that the bauxite is transported half way across the world to countries like Norway and Sweden, which have huge amounts of cheap hydro-electric power.6

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Land costs and availabilityLand costs and availability are important to some industries. There are fewer than thirty possible locations for a new airport in Britain, and very few more potential sites for a new oil refinery. Land is an important part of building costs. In many cases, industrial development is competing with agriculture, particularly for large flat areas. Where land area is restricted, the answer is to build upwards, as in London and New York. This is expensive, though, and can only be justified for high value-added activities, which is why their financial districts have skyscrapers.7

Proximity to the marketIn other industries it is proximity to the market which matters most of all. Furniture is bulky, fragile, and difficult to transport without damage.The manufacturers therefore set up as close as possible to the major cities while still being reasonably close to their raw material. The forests around High Wycombe made it an ideal location close to London. Warehousing and distribution firms tend to set up where motorways meet or where there are good transhipment points between road and rail.

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Skilled labour forceAccess to a skilled labour force may be the most important factor. This is what brings firms to the so-called Silicon Valley between Slough and Reading in England, Silicon Glen in Central Scotland and the original Silicon Valley in California. Each of these areas has a concentration of universities and colleges turning out technologically trained graduates. Over the years this has built up a pool of labour with the right training and skills for computer firms. Co-operation with the research facilities of the universities is an added advantage.9

Poor labour relationsLack of specific skills may be the most important criterion. When an industry has a history of poor labour relations and bad working practices, firms seek out a completely new location to get away from the problems of the past. This is why Japanese car component and assembly plants are found in Wales and North East England well away from the established centres of the industry in central England. Improved transport facilities mean that it is no longer essential to be near suppliers or customers. The availability of green field sites was an added advantage as the firms could design and build exactly what they wanted and have room for future expansion.10

Staff costIn making a relocation decision the organisation has to consider the staff cost very carefully. Key members have to be persuaded to move. The costs of recruitment and training for new workers have to be set against the costs of relocating existing personnel. The help of specialist firms is usually enlisted to find a suitable range of housing, show groups of staff around the new area, organise removals and help people settle in.11

Related industriesThe presence of related industries also plays its part, particularly over time. Once an industry is established in a certain location it attracts all kinds of support, from specialist information services to communication systems. Collectively these are known as external economies of scale. As an industry grows bigger all firms, regardless of their individual size, benefit from the reduction in their unit costs which results from this accumulation of ancillary industry to serve the needs of companies in the main industry.12

Related industriesThus, banking and financial organisations cluster together in the City of London. Access to their markets brought them together banks set up in Lombard Street in the seventeenth century to be near their merchant customers.More firms were attracted as the financial markets developed and specialists, such as accepting and discount houses to deal in bills of exchange, set up to serve their needs. Nearness to the Bank of England and the other banks was important for getting information quickly and staying in touch with customers.13

Related industriesInformation services grew to meet demands for up-to-date market prices, foreign affairs and shipping news. Dealing facilities were set up, like the Stock Exchange for stocks and shares, Lloyds for insurance, and the commodities exchanges. The foreign exchange market has its own dedicated telephone system linking banks worldwide at the touch of a computer screen.

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Related industriesThis intense concentration of financial activity has brought the development of a huge diversity of ancillary firms specialist solicitors, printers, security transport, recruitment, training, computers, building, catering, investigation and many other businesses exist to serve the financial community in the City.

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Changing technologyThe City is also a good example of how changing technology has affected location. Twenty years ago firms had to have a large headquarters staff to process, manage and retrieve documents. This could mean heavy head-office costs to house a lot of comparatively junior and low-paid workers; they, further, incurred high added costs of travel, which were paid for in the form of London allowances and interest-free loans. Electronic data processing with document storage and retrieval means that nowadays all of these routine tasks can be done at another location.16

Changing technologyThis is why so many insurance companies have relocated part of their head office work to places like Bournemouth. Office costs per square foot there are a tenth of those in the City, staff costs are lower and efficiency does not suffer, as information can be accessed on-line from London. A small office is maintained in the City to provide contacts with other financial institutions and markets and commercial clients.The cost of housing the necessary senior management in a City of London office can be justified.

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Changing technologyOver the years firms have become much less dependent on raw materials and energy sources. Electricity had replaced coal as the source of industrial power by the late 1960s. New products and new manufacturing methods have meant that many industrial companies have become footloose i.e. they are not tied to any specific location. The low weight and bulk of their components make them cheap to transport. The final product, like computers and video cameras, has very high added-value and low bulk, which makes it viable to transport it long distances.18

Changing technologyCommercial firms can set up certain activities anywhere there are suitable communications facilities. Some part of the business still has to be near the market, though, as in the case of insurance firms. Not all commercial enterprises can be footloose, for example, national advertising agencies locate in London to be near their corporate customers.

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What is footloose?They are not tied to any specific location thus they can move its locationFootloose industry is a general term for an industry that can be placed and located at any location without effect from factors such as resources or transport.These industries often have spatially fixed costs, which means that the costs of the products do not change despite where the product is assembled. Diamonds and computer chips are some examples of footloose industries. The low weight and bulk of their components make them cheap to transport. 20

Footloose industriesThe final product, like computers and Diamonds, has very high added-value and low bulk, which makes it viable to transport it long distances.Commercial firms can set up certain activities anywhere there are suitable communications facilities. Some part of the business still has to be near the market, though, as in the case of insurance firms. Not all commercial enterprises can be footloose, for example, national advertising agencies locate in London to be near their corporate customers.21

Footloose industriesThe final product, like computers and Diamonds, has very high added-value and low bulk, which makes it viable to transport it long distances.Commercial firms can set up certain activities anywhere there are suitable communications facilities. Some part of the business still has to be near the market, though, as in the case of insurance firms. Not all commercial enterprises can be footloose, for example, national advertising agencies locate in London to be near their corporate customers.22

Government Influence on LocationThe location of the firm may be significantly influenced by government policy. The UK government provides various forms of assistance to firms setting up in designated Development Areas. Since 2007 the eligible areas are the older industrial areas of Manchester, Liverpool, Glasgow, South Wales, the East Midlands and North East England, and the underdeveloped areas of South West England and the North and West of Scotland. Northern Ireland also receives special assistance.23

Government Influence on LocationFirms in these areas can receive grants for capital investment and small firms can get a wide range of help with investment, training and consultancy advice. The European Union also provides additional funding for projects in the assisted areas, and has a number of schemes which provide assistance to firms in areas affected by the decline of traditional industries like shipbuilding and coal. Under EU rules, there are limits to the sums a government can spend on attracting foreign investment, but there can still be very valuable grants and concessions which can exert a powerful pull on a firm wishing to locate in a new area.24

Environmental Change and LocationTwo trends have emerged over the last twenty years concerning the location of business activity and both have important implications for the organisational structure of the firm. They are essentially based on the growth of powerful computer technologies which free certain types of activities from traditional locations.

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Back officeThe back office is the portion of a company made up of administration and support personnel who are not client-facing. People who hold jobs in back office positions carry out functions such as settlements, clearances, record maintenance, regulatory compliance, accounting and IT services. A financial services company, for example, is logically broken up into three parts: the front office makes up sales, marketing and customer support personnel; the middle office manages risk; and the back office provides administrative and support services.

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Back office functionsLarge firms have been accustomed to operating from many different sites for a long period. The basis for these different establishments tended to be partly historical merged or taken-over firms remained in their current sites, unless and until there was good reason to relocate and partly to take advantage of locational benefits for production where these existed. The general pattern was for each distinct subsidiary or division to retain its administrative functions at its main production site, with central administrative work carried out at a separate head office, usually located in London or another major commercial city. 27

Back officeThe significant change that has been taking place has been to locate as much as possible of the "back office" administrative work routine finance, IT support and development and human resources with or without central managerial staff, at a single site, sufficiently distant from the major cities for the company to gain reduced land and labour costs. With computer-based administration, linked by internal networks and modern telecommunications such as email and mobile technologies, the administrative centre of the organisation can be located anywhere that costs are relatively low and where there is access to the main national transport networks of rail, motorway and, increasingly, air.

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Home-based workA growing number of people are now working from home doing work arranged and paid for by one or more firms. This process is now often termed telecommuting.It is at its most advanced in computer software production, where software houses can operate an international marketing service, arranging what to produce and then organising the production of the software by commissioning individuals or teams of software writers.29

Home-based workThe software house is the equivalent of the 18th century merchant who linked the producers to the market and organised the production chain.The software writers are the equivalent of the spinners and weavers who actually made the woollen cloth. Notice that the actual maker of the product under this latest version of the outwork system has regained control over the production process.The writer can choose when and how much to work provided, of course, there is sufficient demand for the writer's work.30

Home-based workBook production relies heavily on editors and designers and fewer of these now go to work in the publisher's offices. More work at home, often for several publishers. It is difficult to think of any industry where at least some of its production could not be performed by people working at home.the latest technological revolution is having a two-fold effect on the production process. On the one hand it makes it possible for many specialised, non-routine activities to be carried out by individuals in their own homes.31

Home-based workAt the same time, it also makes it possible for much large-scale, repetitive work to be carried out by automated machinery, cared for by very few workers.The employing organisation in this kind of production system becomes essentially a co-ordinating body.Management in such a body is still concerned with taking decisions under conditions of uncertainty, but the nature of the decisions is changing.In the factory-based system, production is largely concerned with control and discipline.32

Home-based workThere is a stock of equipment and labour which has to be adapted to the production requirements that senior management has opted for in co-operation with the marketing and purchasing functions. Adaptation, modification and from time to time, changes in both equipment and labour are often difficult, time-consuming and costly processes.The new style organisation is likely to have fewer constraints imposed by a fixed stock of equipment and labour.

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Home-based workManagerial success is more likely to depend on knowledge for example, knowing what and where equipment and labour are available, what their capabilities are and what the cost of various operations is likely to be. The knowledge must, of course, be applied and this involves co-ordination and, in many cases, persuasion. Many different operations, taking place in many different locations, will have to be brought together to satisfy the requirements of the ultimate consumer.34