Phil Schneider, Principal, Global Expansion Optimization and Location Strategy, Deloitte (Aug/Sep 08)
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.