The Location of Factories as a Decision-Making

Process

The Location of Factories as a Decision-Making

Process

By Nirveen Basra & Connie Guo

By Nirveen Basra & Connie Guo

Behaviour Approach to Decision Making

Behaviour Approach to Decision Making

Realistic vs. Neoclassic: looking at the “real world”

Satisficers: collect, code and evaluate info Pred, Townroe &Stafford: behavioural understanding of

location as strategy, long term investment, without capabilities of Homo Economicus

Different firms with and without restrictions Optimization, maximization and minimization as

theories Key is that reality is Uncertain Reality: personal judgment, perception, with various

decision makers

Realistic vs. Neoclassic: looking at the “real world”

Satisficers: collect, code and evaluate info Pred, Townroe &Stafford: behavioural understanding of

location as strategy, long term investment, without capabilities of Homo Economicus

Different firms with and without restrictions Optimization, maximization and minimization as

theories Key is that reality is Uncertain Reality: personal judgment, perception, with various

decision makers

ComparisonComparison

Satisficer Real World Decision Maker Limited Time Bound Rationality Limited Evaluations Uses Decision Making

Process:Goal setting, ID, Time Frames, Decision Making Structure

Satisficer Real World Decision Maker Limited Time Bound Rationality Limited Evaluations Uses Decision Making

Process:Goal setting, ID, Time Frames, Decision Making Structure

Homo Economicus Economic Theory of

Man Self Interested, Obtains

Goals Efficiently Uses available Info:

Opportunities &Constraints

Experience

* Is rational, avoids unproductive labour and makes judgments.

Homo Economicus Economic Theory of

Man Self Interested, Obtains

Goals Efficiently Uses available Info:

Opportunities &Constraints

Experience

* Is rational, avoids unproductive labour and makes judgments.

Firm-Environment Relations in Behavioural

Landscape

Firm-Environment Relations in Behavioural

Landscape

Behaviour TheoryBehaviour Theory

Firms consider choices, search & evaluate alternatives, choose solution that is “Satisfactory”

Problem: reflect more individual perception vs. objection reasoning Culture, background, social status, experience, aspiration

Spatial Preference: connection with core regions Toronto Example Location decision needs to be based on info and strategy

Small and Big Firms: Personalized vs. Extensive

Firms consider choices, search & evaluate alternatives, choose solution that is “Satisfactory”

Problem: reflect more individual perception vs. objection reasoning Culture, background, social status, experience, aspiration

Spatial Preference: connection with core regions Toronto Example Location decision needs to be based on info and strategy

Small and Big Firms: Personalized vs. Extensive

The Behavioural MatrixThe Behavioural Matrix

Behaviour MatrixBehaviour Matrix

Availability of Info vs. Ability to Use info Based on environment and how to deal with

situations

Optimum vs. Firm with Poor Abilities Ability to locate closer to core, spatial margins

Bad luck outcome: Unexpected Changes

Availability of Info vs. Ability to Use info Based on environment and how to deal with

situations

Optimum vs. Firm with Poor Abilities Ability to locate closer to core, spatial margins

Bad luck outcome: Unexpected Changes

UncertaintyUncertainty

Impact on Behaviour Better or Worse

Scenarios Imperfect Competition Future is not predicted

Impact on Behaviour Better or Worse

Scenarios Imperfect Competition Future is not predicted

Program Decisions Non-ProgrammedHigh Frequency, uniform, SRLess Investment/Uncertainty

Non-frequent, unique, LRLR Investment, Future Gains

Knowledge GapsKnowledge Gaps

Knowledge Gap (Beg) What is Needed to Know

Learned Knowledge from Experience

True UncertaintyAssumptions about the futureChanges: government, tech, regional stabilityFailure/Success: technology (R&D) and Marketing

(Research, consumer behaviour analysis)

Knowledge Gap (Beg) What is Needed to Know

Learned Knowledge from Experience

True UncertaintyAssumptions about the futureChanges: government, tech, regional stabilityFailure/Success: technology (R&D) and Marketing

(Research, consumer behaviour analysis)

LearningLearning

Smart Decisions from Past Experience: location conditions

Decision Makers: range of group/personal choice

Failures: Many due to Managerial Inexperience

Ex. Apple Strudel Store: apple supply, labour forces, proximity to market, transportation costs, marketing, research local tastes, predict future sales in region, who makes decisions?

Smart Decisions from Past Experience: location conditions

Decision Makers: range of group/personal choice

Failures: Many due to Managerial Inexperience

Ex. Apple Strudel Store: apple supply, labour forces, proximity to market, transportation costs, marketing, research local tastes, predict future sales in region, who makes decisions?

Stages in Locational Decision Making Based on

the Decision Process

Stages in Locational Decision Making Based on

the Decision Process

Decision Making ProcessDecision Making Process

Location (Investment) involves choices: Plant size, # of employees, finance, managers,

marketing, engineering, construction Behaviour: Soft (Intangible) is more EMPHASIZED

than Hard (Tangible)

Nishioka & Krumme: disaggregation of process ID of stimuli, evaluate, make decision, post location

assessment and learning Relation to geography, selection of communities,

regions, countries

Location (Investment) involves choices: Plant size, # of employees, finance, managers,

marketing, engineering, construction Behaviour: Soft (Intangible) is more EMPHASIZED

than Hard (Tangible)

Nishioka & Krumme: disaggregation of process ID of stimuli, evaluate, make decision, post location

assessment and learning Relation to geography, selection of communities,

regions, countries

Decision Stimulus/TriggerDecision Stimulus/Trigger

Satisficer firms are open learning systems and their market relation with other firms is governed by information exchange

Decision situations-problems to by solved Caused by: “Stresses”

any influence which comes from the internal/external environment that interferes

with satisfaction of basic needs

Satisficer firms are open learning systems and their market relation with other firms is governed by information exchange

Decision situations-problems to by solved Caused by: “Stresses”

any influence which comes from the internal/external environment that interferes

with satisfaction of basic needs

Location Decision as an AlternativeLocation Decision as an Alternative

Expand Pros

Keep Management togethor Achieve Economies of Scale with expansion Capacity can be more quickly added Overhead costs are more effectively spread

Cons Increase problems to do with material handling, congestion

and complexity of production control Lack of Space and labour problems at plants support the

idea of new plant locations Expansion and New Site location are not mutuallly

exlusive!

Expand Pros

Keep Management togethor Achieve Economies of Scale with expansion Capacity can be more quickly added Overhead costs are more effectively spread

Cons Increase problems to do with material handling, congestion

and complexity of production control Lack of Space and labour problems at plants support the

idea of new plant locations Expansion and New Site location are not mutuallly

exlusive!

Location Search ProcessLocation Search Process

Spatial Biases/Mental Maps influence location decisions especially for small firms who are restricted geographically choose places within close proximity

Search Process of New-Sites Conducted/closely monitored by owner-managers, senior

executives, or managers Involves time and cost

Rees and Townroe suggest a time usually between 6 months to half a year

Consider more than one region Ex// Krumme- Volkswagen plants

Identify more Sites than regions Ex// Townroe sample branch plants

Spatial Biases/Mental Maps influence location decisions especially for small firms who are restricted geographically choose places within close proximity

Search Process of New-Sites Conducted/closely monitored by owner-managers, senior

executives, or managers Involves time and cost

Rees and Townroe suggest a time usually between 6 months to half a year

Consider more than one region Ex// Krumme- Volkswagen plants

Identify more Sites than regions Ex// Townroe sample branch plants

Location EvaluationLocation Evaluation Locational Choice-several decisions made at different geographical scales

(countries, regions, towns, communities and sites) Scales vary along with the importance of location factors Principle Factors governing Selection:

Region Government regional policy Labour relations-Cost, supply and training Markets and strategic communications Access to services, local amenities

Site Physical Characteristics of land Tenure Conditions Is it a city? Availability of services Land Prices

Stafford study: found labour to imply different concerns at different scales Labour productivity imp at all scale Labour availability and wages more influential at regional/local scales

Locational Choice-several decisions made at different geographical scales (countries, regions, towns, communities and sites)

Scales vary along with the importance of location factors Principle Factors governing Selection:

Region Government regional policy Labour relations-Cost, supply and training Markets and strategic communications Access to services, local amenities

Site Physical Characteristics of land Tenure Conditions Is it a city? Availability of services Land Prices

Stafford study: found labour to imply different concerns at different scales Labour productivity imp at all scale Labour availability and wages more influential at regional/local scales

Methods of Locational EvaluationMethods of Locational Evaluation

Large firms-engage in formal, systematic analysis over small firms

More likely to be conducted at community/site scales over regional or international scales MNC’s take a more international approach

Locational requirements Weight ranking schemes-measure “soft factors” Kepner and Tregoe:

Identify “musts”/ “min requirements”Identify “wants”-desirable location featuresAssign them weights of importanceSites are give scores

Ex// pulp mills in BC use this process

Large firms-engage in formal, systematic analysis over small firms

More likely to be conducted at community/site scales over regional or international scales MNC’s take a more international approach

Locational requirements Weight ranking schemes-measure “soft factors” Kepner and Tregoe:

Identify “musts”/ “min requirements”Identify “wants”-desirable location featuresAssign them weights of importanceSites are give scores

Ex// pulp mills in BC use this process

Investment Decisions and Post-Locational Assessments

Investment Decisions and Post-Locational Assessments

North America/ Britain have a history or making decisions in economic upswings-NOT RATIONAL!

Pulp Mills Start-Ups and how the mill performs soon after

measures adequacy of decision Problems experienced serve as a learning process Smoothness of start-up evaluates effectiveness of

planning process

North America/ Britain have a history or making decisions in economic upswings-NOT RATIONAL!

Pulp Mills Start-Ups and how the mill performs soon after

measures adequacy of decision Problems experienced serve as a learning process Smoothness of start-up evaluates effectiveness of

planning process

Location Preference of Foreign FirmsLocation Preference of Foreign Firms

MNC’s responsibility of information monitoring and assesment

MNC’s typically have prior experience, resources, and financial ability

Mobility of Capital “The World is our Oyster Hypothesis”-largest MNC’s

are already global and familiar with all cultures and territories

Communication is virtually spatially costless Promote homogenization/standardization of tastes and

production and cultural differences will decline Assumes no restrictions of national Boundaries

“Power of Geography” Thesis-nations are influential forms of organizing territory

Local culture will resist universalizing tendencies

MNC’s responsibility of information monitoring and assesment

MNC’s typically have prior experience, resources, and financial ability

Mobility of Capital “The World is our Oyster Hypothesis”-largest MNC’s

are already global and familiar with all cultures and territories

Communication is virtually spatially costless Promote homogenization/standardization of tastes and

production and cultural differences will decline Assumes no restrictions of national Boundaries

“Power of Geography” Thesis-nations are influential forms of organizing territory

Local culture will resist universalizing tendencies

Foreign Branch Plant Locations-6 Theories

Foreign Branch Plant Locations-6 Theories

1. Foreign firms favour established core regions of ‘host’ countries Centres of communication and tranportation Personal contacts with host countries decision

makers Highest market potential Well-known reduces uncertainty Easier to get investment proposals

2. Foreign firms invest in peripheral areas over core areas Signals are offered to attract companies such as

incentives and information packages

1. Foreign firms favour established core regions of ‘host’ countries Centres of communication and tranportation Personal contacts with host countries decision

makers Highest market potential Well-known reduces uncertainty Easier to get investment proposals

2. Foreign firms invest in peripheral areas over core areas Signals are offered to attract companies such as

incentives and information packages

Foreign Branch Plant Locations-6 Theories

Foreign Branch Plant Locations-6 Theories

3. Firms prefer to concentrate in particular regions of the country Pioneering firms, latecomers can reduce costs and

percieved risks of locating in unfamiliar places Ex// Japanese auto assemblars located in a central corridor in

the 80’s/90’s where existing auto production plants were already in place

Ex// Japanese assemblars now will avoid these areas for smaller regions to develop unique relations and avoid unionized workers

4. National Culture is important in understanding the location preferences of foreign firms Corporate motivations are also differend

3. Firms prefer to concentrate in particular regions of the country Pioneering firms, latecomers can reduce costs and

percieved risks of locating in unfamiliar places Ex// Japanese auto assemblars located in a central corridor in

the 80’s/90’s where existing auto production plants were already in place

Ex// Japanese assemblars now will avoid these areas for smaller regions to develop unique relations and avoid unionized workers

4. National Culture is important in understanding the location preferences of foreign firms Corporate motivations are also differend

Foreign Branch Plant Locations-6 Theories

Foreign Branch Plant Locations-6 Theories

5. Firms may exercise the equivalent of personal preference in choosing locations Distinct corporate cultures shape strategies

Ex// MacMilan Bloedell insisted on pulp mill locations being on tidewater

Ex// Michelan known for being secretive-plants would therefore be in small, isolated communities

6. Firms change locational preferences after initial entry into a country Growing awareness of location possibilities as branch

plants seek out local suppliers and markets

5. Firms may exercise the equivalent of personal preference in choosing locations Distinct corporate cultures shape strategies

Ex// MacMilan Bloedell insisted on pulp mill locations being on tidewater

Ex// Michelan known for being secretive-plants would therefore be in small, isolated communities

6. Firms change locational preferences after initial entry into a country Growing awareness of location possibilities as branch

plants seek out local suppliers and markets

Industrial Location-Behavioural Landscape

Industrial Location-Behavioural Landscape

Industrial Location incentives can change locational preferences in two ways:

1. Incentives serve as signals to firms to encourage them to at leas consider designated regions

2. Given that decision making process is timely and costly-industrial location policies offer compensation for any additional learning costs or uncertainties firms incur by looking at unfamiliar regions

Ex// subsidies and tax breaks-agencies are proactive in getting

information to investors and follow-up services

-this increases economically rational behaviour

-increase chances of attracting short-term opportunists

Industrial Location incentives can change locational preferences in two ways:

1. Incentives serve as signals to firms to encourage them to at leas consider designated regions

2. Given that decision making process is timely and costly-industrial location policies offer compensation for any additional learning costs or uncertainties firms incur by looking at unfamiliar regions

Ex// subsidies and tax breaks-agencies are proactive in getting

information to investors and follow-up services

-this increases economically rational behaviour

-increase chances of attracting short-term opportunists

ConclusionConclusion

Imperfect information and bounded rationality modify the decision-making capabilities of Homo-Economicus

Neoclassical cost and revenue surfaces are similarly modified with information and mental maps

Interests of the economy are reflected in the goals of individual firms

Imperfect information and bounded rationality modify the decision-making capabilities of Homo-Economicus

Neoclassical cost and revenue surfaces are similarly modified with information and mental maps

Interests of the economy are reflected in the goals of individual firms