Business location strategy and site selection decisions vary greatly by industry and even among companies within the same industry. These decisions are always a product of a company's unique strategy, situation, and character. Nevertheless, patterns and similarities do emerge among companies with similar requirements and those that are at similar points on the business maturity curve. In this article, we examine the similarities in the location strategy and requirements for companies who find themselves at similar points in the industry life cycle. During the location selection decision process, companies that approach this decision in a rational and thoughtful manner will typically seek to optimize their operating costs, operating conditions, infrastructure, and risk. However, the optimal blend of these costs and conditions will vary both by industry and the maturity of the business. The dynamic in the decision process will be the trade-offs among the factors in these four basic categories.
We find that, generally speaking, mature industries and companies tend to focus on lowering business costs and penetrating new markets when making location decisions. On the other hand, emerging industries and companies are normally more risk-averse; they focus more on securing the right operating conditions in which to grow. Therefore, these two categories of companies treat certain categories and factors differently, especially market access, human resources, key variable costs, intellectual property (IP), and general business risk.
To demonstrate, it is helpful to utilize examples of mature and emerging industries. Good examples of more mature industries across manufacturing sectors include the auto industry, steel production, electronic components, and semiconductor production. The auto and steel industries are long established and their movements have been closely followed for many decades. Some may still view electronic components and semiconductor manufacturing as emerging industries, and compared to steel and auto they are young; however, these industries are well-established, with many of them operating for more than 30 years. Good emerging industry examples include growth areas such as solar and biotech. These industries are typically populated by many new companies and have witnessed recent robust growth.
Nearly all location strategy and site selection surveys (including Area Development's annual Corporate Survey) indicate that market access is most commonly selected as a "very important" location factor. In general, this is true for mature industries and for emerging industries, but in our experience, it is more often a decisive factor for mature industries.
Emerging industries have a myriad of technology and market issues to manage. They typically will have relatively thin management teams, are thinly capitalized, and have relatively limited production capacity. Often, emerging industries and companies develop in areas where a market or customer already exists; finding and accessing new customers is, therefore, a less pressing issue.
For example, by and large, the leading solar companies have begun or thrived in areas that have an existing solar market and customers, or have natural market advantages. In Europe, the Solar Valley in Germany was driven by a government-created market. The German market grew through government incentives to consumers to encourage installation of photovoltaic modules. Likewise, California, which has a number of successful solar operations, can attribute such success to its natural supply advantages and to state-specific incentives, which have drawn many potential customers to the technology.
More mature companies, on the other hand, are often trying to uncover new sources of revenue, lower operating costs, and reduce time to market. For mature U.S. industries, market growth often means finding new customers in other parts of the country or world. Enhancing profitability for mature industries can mean reducing supply-chain costs, for receiving supplies, shipping finished goods, or both. A good example of a mature industry focused on market access is the U.S. and European auto industry, which has seen rapid growth and expansion in China, India, and Russia. Another example is the European food industry, which has experienced continued growth and expansion in the United States.
A focus on human-resource issues is common to nearly all location decisions. But the talent focus varies both by industry and by maturity level. Among our industry examples, all but one will place labor issues near the top of their location-strategy factor list - the exception being independent data centers, which generally employ a relatively small number of technicians. However, the specific focus of the labor analysis will vary greatly among mature and emerging industries and companies.
Mature industries will certainly focus on the availability of required skills, but will want to match that availability with cost reductions relative to their current portfolio of plants, and relative to their competition. The rapid globalization of these industries and the locations they have chosen is a testimony to their focus on optimizing available skills and lower cost.
Mature industries are also more likely to pay close attention to labor-management relations. This is more common with the traditional "heavy" industries like auto, steel, and chemicals, but is also a "check off" item for nearly all mature industries, including the electronics industry. Mature companies and industries may have longstanding agreements with labor organizations, which may in turn make domestic site location or expansion decisions dependent upon their existing labor agreements and relationships. Conversely, past negative labor-management experiences can make this issue a leading location factor, and drive more mature industries to areas where they feel they can decouple from past arrangements.
Emerging industries are not insensitive to labor cost, but the newness of their technologies and processes often provides at least some competition and, therefore, a cost buffer. However, this requires an even greater focus on talent availability and quality. Factors that tend to drive emerging-industry human-resource evaluations include the number of engineers and technicians within the labor shed, the presence of colleges and universities with matching technical programs, the overall educational level of the local work force, and the presence of other higher technology companies and similar industries in the area. These location attributes help assure emerging companies that they will be able to find and train the work force they need, and that their human capital will be able to evolve with the company and its technology.
Nonetheless, mature and emerging industries/companies share the desire for industry-specific education. Emerging industries tend to be knowledge-intensive; therefore, they desire and benefit from specialized industry research and technology, e.g., photovoltaics and material sciences for the solar industry, material sciences for carbon fiber manufacturing, and biochemistry and nanotechnology for the biotechnology industry. Mature industries will also seek industry-specific skills and training; however, these industries will often either have an internal training platform that can be used to ramp-up new employees with transferable experiences, and/or they can tap into established private or government training programs with long track records for delivering trained workers.
location selection, operating costs that vary by geography typically
include labor, taxes, real estate/infrastructure, utilities, and
freight movement. Naturally, managing these costs is important to all
businesses, but there are significant differences between the costs
that typically drive mature and emerging industries and companies and
the importance these variable costs have in the overall decision
For the most part, more mature industries and companies
are more cost-conscious during a location selection. Due to ever
increasing competition and rising structural costs in their home
locations, they will seek to lower variable costs in their new
locations. The specific costs that mature industries seek to lower will
vary tremendously by industry, and even by company. The electronic
components industry, for example, is very labor-cost sensitive, while
semiconductors and pharmaceuticals are more tax sensitive and often
sensitive to the cost of electric power as well. The automotive
industry is very focused on overall supply-chain costs and the
infrastructure costs supporting a new site. Emerging industries, on the
other hand, are more driven by the costs that affect short-term growth
and investment. Therefore, the cost of capital, site development costs,
and supply-chain costs can often trump other cost concerns for these
industries and companies.
importance of intellectual property protection has risen significantly
over the years, parallel of course with the rapid globalization of
industry. IP is clearly an important consideration for all companies
expanding globally, but it is an acutely sensitive topic for emerging
industries, and for new technologies or processes for mature industries.
manufacturing industries are, almost by definition, engaged in the
production of established products, so IP is not always a priority,
especially relative to market access and cost reduction. However, even
for these industries, IP is certainly a concern for their new or
cutting-edge processes or production technologies. Although IP may not
be the determinant in their final location decision, it may, in fact,
determine which processes are located in the new location if management
feels critical IP is at risk there.
The semiconductor and life
sciences industries provide good examples. Although these industries
have expanded greatly in emerging countries in recent years, it is
often with older technologies or products. Such expansions are
generally for those products where IP is already lost, or the threat of
loss for such IP is outweighed by market-access or cost-reduction
But for emerging industries, IP is a significant
competitive advantage and, therefore, a differentiating factor in
location decisions. Take for example the solar wafer/cell and biotech
industries. The value of their IP, whether it is product or process, is
often a leading factor in determining the countries that these
companies will evaluate for new operations. Therefore, these industries
- or at least the leading technologies within these industries - tend
to locate in the more developed countries and those that have the most
robust IP protection regulations.
General Business Risk
business risk encompasses a wide range of factors, such as the ability
to quickly implement a decision; the ability to sustain operations;
political and social compatibility and stability; currency and economic
stability; and natural disasters. All companies, of course, hope to
avoid undue risk, but mature and emerging industries will typically
have different tolerance levels.
Ordinarily, emerging industries
and companies are more risk-averse than their mature counterparts.
Mature companies, as pointed out earlier, are driven by access to new
revenue sources and cost reduction. These objectives - combined with
more established supply chains, broader production capacity, and deeper
management teams - allow them to withstand more risk to achieve their
primary business goals. Locating in a low-cost, but challenging new
market on the other side of the world is much more feasible and
palatable when you know that you have the experience and support
infrastructure, not to mention additional production capacity to fall
back on, should the risks become reality.
often have less stable technologies along with management and
technology teams that are stretched thin by growth and ongoing business
operations. Although developing countries and markets may be equally
attractive to them, the risk of a new operation missing its start-up
deadline, being unable to attract and sustain required talent, or not
being able to manage unfamiliar political, social, or economic
situations is often too great for new industries or companies. Whereas
the mature company would find a failed new plant in a developing
country painful, the emerging company would likely find it to be fatal.
Maturity level affects the way an industry or company approaches its location strategy and the factors most critical to the site selection decision. Mature industries will more typically focus on market access and cost reduction due to their lower product margins, ever increasing competition, need to grow market share, lower risk of catastrophic IP loss, and greater ability to absorb other location-related risks. Emerging industries and companies are generally less driven by variable cost reduction or by penetrating new markets and are more risk-averse, seeking certainty that they can properly implement and execute new capital investments. They seek to secure their talent base, especially for key technical skills, and to ensure that their products are cutting-edge, of high quality, and available to the market in a timely fashion. IP is often extremely important to emerging industries and companies, as it differentiates them from competitors and from other industries.
Deloitte Consulting's Global Expansion Optimization (GEO) is a service offering designed to drive shareholder value through strategic and tactical advisory support with respect to location strategy, site selection, and facility footprint optimization. The GEO team has completed thousands of projects, helping clients determine the business case and feasibility for extending domestically and globally, the optimal methods for globalization, and in which countries and locations they can achieve the optimal balance of low costs, high quality, market opportunity, and manageable risk.
Phil Schneider is a Principal with Deloitte Consulting and the lead for its GEO group. He leads location strategy, offshoring, and site selection engagements, a field in which he has 20+ years of experience, and where he has conducted some 250 engagements throughout the world for clients across the industry and functional spectrum. He has also authored numerous articles, speeches, white papers, and presentations on location strategy, offshoring, site selection methods, and economic development.
Raj Vohra is a consultant with Deloitte's GEO group. He has more than six years of business and consulting experience and two years of global location strategy experience. He has been involved with a wide range of domestic and global site selection projects including site selection in Asia, Europe, and North America.