Corporate Location Strategy: Driven by Access and Scale
The United States’ unique combination of access and scale presents unparalleled opportunities
for foreign direct investment.
Gene DePrez, Managing Partner, Global Innovation Partners (Location USA / April 2013)
Several years ago, Novartis, one of the largest pharmaceutical companies in the world, moved forward with its strategy to create a global biomedical research center, by consolidating its most innovative people and research from several countries to a new lead location. The question was where? The answer was the United States, and the headquarters for the Novartis Institutes for BioMedical Research was established first on the campus of MIT in Cambridge, Massachusetts, and later in its own major facility across the street in a former candy manufacturing facility — redeveloped as a world-class R&D center. The Institutes now employ several thousand scientists and technical support people, and work closely with faculty and researchers at MIT and other research universities.
Why was the United States selected, and what can we learn from this and similar location strategy decisions by corporate investors who literally have the world to consider? From my 25 years of advising global companies on location strategy and site selection, most often the decision is driven primarily by a single concept, albeit with many evaluation factors. That concept is access.
In the case of case of Novartis as well as many other life sciences units, location and site selection strategy was driven by several critical success factors, but primarily by the need to be proximate to the largest pharmaceutical and biomedical market in the world, with ready access to regulatory authorities like the FDA. Being able to partner with a leading university with direct access to work collaboratively with academic researchers was a parallel key requirement.
Companies large and small are succeeding in the global markets by operating as globally integrated enterprises, meaning they are constantly looking for competitive advantage by optimizing each of their operating functions, and often this means placing or moving each specialized activity in a location that will have the best combination or tradeoff of qualitative, cost, and risk factors.
To be clear, this goes beyond the decline of the so-called vertical business model over the last decade or two with its international strategy emphasis on simply replicating most of its business operations on a smaller scale in other geographies. Even with supply chain variations involving global outsourcing (mitigated by recent tactical U-turns of near-sourcing and in-sourcing), these traditional business models remained essentially hub-and-spoke in character.
In contrast, today’s most successful globally integrated companies have a far more sophisticated and dispersed networked business model and operate as truly globally based businesses. They will carefully analyze where each operational unit would be most productive based on location, then efficiently networked with other units, each placed in the best geographies for optimal performance.
In some versions they may have multiple “headquarters” with production, business, financial, and other functions spread across the world and located where each unit can be most productive and provide the greatest benefit to the company’s investors and customers. For example, if the greatest share of production is going to be in Asia to meet fast growing demand there, procurement may ideally be focused in that region to better understand and manage supply chains and work with partners. At the same time, R&D or engineering units may be relocated to leverage regions with strong related intellectual capital and innovation, while financial management may need to be close to major investment markets.
Whether a manufacturing function or a procurement, research, financial operations, marketing, or a myriad of other corporation operating units, cost will always be a concern; but with today’s focus on innovation in business models, processes, products, customer relations management, and other predictors of success, critical factors such as talent and proximity to markets and intellectual capital often overshadow short-term financial savings.
Competitive positioning requires constant re-evaluation, typically every few years, to assure that each defined business unit is located or relocated to achieve its optimal performance — assessing the trade-offs between improved performance compared to costs and risks. Investing organizations are not reluctant to make radical changes on a regular basis, if the ROI justifies the disruption and other risks involved.
Access in All Its Forms
This brings us back to the key qualitative factors that drive these decisions that can be summarized as ACCESS. They are weighted differently depending on the specific operation and business strategy, but almost always evaluating:
- Access to markets — proximity and direct interaction with customers, clients, and prospects in existing or untapped developed economies, as well as cultivating emerging and potential high-growth markets. Marketing initiatives may include B2B, B2C, strategic alliances, and joint ventures. Even with the rapid rise of economies like China and India, the United States still remains the largest market with a diverse set of sub-markets and overall scale to support added ROI.
- Access to intellectual capital — innovation, industry sector knowledge, specialized creative/engineering/production talent, university and other research, networks of trade and professional association thought leaders, and large-scale innovation ecosystems
- Access to suppliers — supply-chain partners, sophisticated and efficient logistics systems, strategic/joint venture partners, value-added logistics infrastructure, economies of scale
- Access to a skilled cost-effective work force — geographically well positioned for advantage, specialized industry training, and sensitivity to industry needs, who themselves are consumers
- Access to a refined work and cultural environment — to improve productivity, leadership style, or change perspectives and values of management, work force, or community stakeholders
- Access and proximity to regulators — for example, in the life sciences, in aerospace and automotive, and in other regulated sectors, and to industry licensers, self-regulators, and standards-setters
- Access to a favorable business and/or tax environment — alignment or sensitivity to ethical and cultural issues, business-friendly government, incentive and community support
- Access to financial markets and professional services — the news media and communications channels
- Access to a new national or regional brand platform —
to establish a new identity for attracting/retaining investors, customers, work force
Other points of access may apply to particular industry sectors or business functions.
Investing in the USA
So what makes the United States so attractive in this climate of access-driven location strategy decision-makers?
For many global investors considering growth or expansion, the United States cannot be ignored because objective analysis will typically spotlight unrivaled access to many of the factors that together drive these decisions. And the United States provides a unique combination of access with scale that is unlikely to be matched anywhere else in the world. America — even with all of its size and diversity — operates as a single economy, still the largest in the world. Yet compared with other market regions, the United States offers minimal regulatory, trade, and monetary differences among its states and metro business centers.
This favorable intersection of size and access often reveals the United States as having unparalleled opportunities for foreign direct investment, offering operating options and choice of locations within a single sophisticated and massive market. If a company, large or small, wants access to the world’s largest and most sophisticated, and yet diverse market, then the United States is where to invest.