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The Business Life Cycle Effect

An industry's and company's life cycle has a direct bearing on its location strategy and site selection decisions.

Aug/Sep 08
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Variable Costs
In 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 process.
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.

Intellectual Property
The 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.

Mature 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 benefits.

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
General 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.

Emerging industries 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.

In Sum
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.

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