Theories of Plant Location - PowerPoint PPT Presentation

View by Category
About This Presentation
Title:

Theories of Plant Location

Description:

Theories of Plant Location Median Location Principle Linear Market Competition (Hotelling) Weber L sch Isard s Space Economy Smiths Spatial Margins – PowerPoint PPT presentation

Number of Views:937
Avg rating:3.0/5.0
Slides: 39
Provided by: geog167
Category:

less

Write a Comment
User Comments (0)
Transcript and Presenter's Notes

Title: Theories of Plant Location


1
Theories of Plant Location
  • Median Location Principle
  • Linear Market Competition (Hotelling)
  • Weber
  • Lösch
  • Isards Space Economy
  • Smiths Spatial Margins
  • Webbers Uncertainty Effect

2
Median Location PrincipleMinimize Transport Cost
3
Hotellings Vendors on the Beach Solution to such
Competition
Essentially iterative competitive movements
within the agglomeration space
If seller 1 starts at A, then seller 2 jumps to
B, then seller 1 jumps to C, and seller 2
could proceed to D, but that is inferior to also
locating at C, splitting the market in half.
A
E
B
C
D
4
Webers Model of Manufacturing Industry Production
  • Developed in the early 20th Century in
    southern Germany
  • Input factors are not ubiquitous
  • This means that
  • physical resources are not found everywhere
  • human labor is differentiated by skill
    ability
  • capital availability varies
  • other inputs are also differentiated

5
Weber hypothesized that
  • Given market prices, producers would seek to
    minimize production costs to maximize profits.
  • This leads to a taxonomy of production cost
    situations, considering
  • factor costs
  • transport costs on products
  • transport costs on finished goods

6
In the Weber Model, If producers Minimize Costs,
then
  • Min ?Ipiqi ?Iriqidi rqqdj
  • e.g.
  • Minimize sum of factor costs transport costs
  • on factor inputs transport cost on shipment of
    product to the market
  • If factor costs are given, then the problem
    becomes how to minimize transport costs.

7
The Material Index Principle as a guide to
manufacturing location
  • Material index weight of localized material
  • weight of product (unit)
  • If M.I. lt or 1.0, locate at market
  • Material types
  • Pure materials no weight loss in production
  • Weight-losing materials
  • ubiquities

8
Webers Cost Minimizing Model the Principle of
Material Orientation
  • Example 2T local materials
  • 3T ubiquities
  • MI 2/5 .4, locate at market
  • Alternative Situations
  • (1) Ubiquities only, MI 0, locate at market
  • (2) Pure Materials only
  • (a) 1 pure material, MI 1

C
M
9
Material Index Cases, Cont.
  • (b) 1 pure material ubiquities
  • MI lt 1, locate at market
  • (c) several pure materials only
  • MI 1, locate at market
  • (d) several pure materials ubiquities
  • MI lt 1, locate at market
  • (3) Weight Losing Materials
  • (a) 1 weight losing material
  • MI gt 1, locate at material location

M
C
10
Material Index Cases, Cont.
  • (b) 1 weight losing material ubiquities
  • If MI gt 1, locate at material site
  • If MI lt1, locate at market
  • If MI 1 ?, probably at market
  • ( c) Several weight losing materials
  • M1

C
Locate away from C
M2
11
An Example of (c)
  • P1 10, q1 2, r1 .1 rq .1,
    q 5
  • p2 5, q2 4, r2 .1 MI 6/5
    1.2

7
M1
C
6.125
L
5
1
6.125
7
M2
At M1 40 0 2.0 3.5 45.5 At M2 40 1 0
3.5 44.5 At C 40 1.4 2.8 0 44.2 At
L 40 1.225 2.45 .5 44.175
12
Material Index Situations, Cont.
  • (d) Several weight-losing materials pure
    materials MI decreases, outcomes as in (b)
    above
  • (e) Several weight-losing materials pure
  • materials ubiquities outcomes as in (d)
  • Upshot Most situations are like c, d, and e.
  • 3 classic locational outcomes 1. Market,
  • 2. Resource, and 3. Intermediate, sometimes
    footloose

13
Labor Cost Deviation
M1
C
P
Critical Isodapane
L1
L2
M2
P - Transport Cost Minimum Location L1, L2 - Low
Labor Cost Locations C - Market M1, M2 - Raw
Material Sites
14
Webers Approach to Agglomeration Economies

a1
a2
Scale of Output
Q1
Q2
For some index of agglomeration (e.g. a1 or a2)
B
Separate Market Regions e.g. A,B,C, or
agglomeration
A
B
A
C
C
Critical Isodapanes
15
Competition for Location in Agglomerations
S, T, and U are separate Markets, whose critical
isodapanes are SS, TT, and UU
S
U
U
S
S1
U1
T
T
T1
S
U
T
S, T, and U can get agglomeration savings at T1,
S1, and U1, but need to bargain to move to a
location realizing them in
16
Critique of Weber
  • Conception of market demand limited
  • Transport costs not defined realistically
  • Labor is typically mobile, not fixed in space
  • Many manufacturing plants produce complex sets of
    products with complex sets of inputs
  • Treatment of agglomeration is rigid
  • Lösch Location based on maximum profit, not
    minimum cost

17
Isards Substitution Framework
  • Input-factors can often be used substitutability
  • although the degree of substitution can vary by
    scale and by technology

Q3

A
A

Q2

Q1
Q2
Q1
B
B
No substitution
Perfect substitutability
18
Substitution possibilities
  • Isoquants - Equal levels of output
  • Substitution is possible over a range

but factor proportions change
A
Q2
Q1
B
19
Substitution possibilities
  • Isocosts - Equal levels of cost, C1ltC2ltC3

Q2
X is the ideal amount of A, Y is the ideal amount
of B for production at level Q1
Q1
C3
C2
A
C1
X
Q2
Q1
C3
C1
C2
Y
B
20
Expansion Curve - joins optimal factor
combinations across scale of output
Q3
Q2
C3
C2
Q1
Factor Y
C1
Expansion Path
Q3
Q2
C3
Q1
C2
C1
Factor X
21
Spacing of isoquants and scale economies and/or
diseconomies
  • Output

Scale Economies
Linear
Diseconomies
Factor X
22
Isoquants displaying scale economies
diseconomies
  • Factor Y

Diseconomies
Economies
Factor Y
30
40
30
20
20
10
10
Factor X
Factor X
23
Isards Substitution Model two point location
model - pure materials
C
M
Transformation Line
Distance from M
Distance from C
24
Isards Substitution Model, 3 point location
problem
X
O
?
Market
V
P
?
Distance from A
O
T
R
?
?
S
?
Y
?
P
Material B
?
?
S
U
R
W
X
V
Distance from B
O
?
T
?
P
Material A
R
?
Distance from A
?
S
Y
W
U
Distance from B
25
Smiths Space-Cost Curve
  • Webers isodapane concept equal transport
    costs from a reference point
  • Formed by adding transport costs for individual
    factors - mapped as isotims
  • X and Y are the spatial margins of profitability


Area of Profit
Total Cost (Material Product)
Y
X
Market
Material Source
26
Webbers Uncertainty Effect
  • In reality, we do not have perfect knowledge
    about markets and factor costs
  • Uncertainty deters (large) investments
  • Uncertainty enhances the importance of external
    economies - new entrants get the benefits caused
    by existing sellers
  • Ex ante versus ex post evaluations, leading to
    satisficing behavior

27
Businesses in a Volatile Environment A Two-Way
Relationship
  • Business as a black box unpacking the
    contents
  • Inputs Firm Outputs

Competing elements internal to the firm
Materials, Capital Labor
Finished or semifinished products
Motives for behavior in space profit
maximum? Or a satisficing level bounded
rationality
Herbert Simon
28
Forces influencing the decision-making process
Structure and systems
Values of society
EXTERNAL
CULTURE
Expectations of Individuals
Leadership and mgt.style
Objectives
Organized Groups
Expectations of Stakeholders
History and age
Expectations of Coalitions
Products and technology
Market Situation
NATURE OF BUSINESS
29
Organizing with regard to the value chain
  • Vertically integrated versus specialized in parts
    of the value chain
  • Determination of scope via transactions costs -
    Coases theorem The firm will carry out a
    particular task up to the point at which the
    costs of organizing an extra transaction within
    the firm are equal to the costs involved in
    carrying out the transaction in the open market,
    or to the costs of organizing by another
    entrepreneur.
  • Williamson internal activities organized
    hierarchically external organized
    horizontally
  • Dynamism vertical integration disintegration
    related to changes in transactions costs

30
The Uncertain and Volatile Business Environment
Global Environment
Macroenvironment
Societal Environment
Domain Environment
Task Environment
Business Organization
Firm Environment Boundary
31
The Task Environment
Industry Competitors
Potential Entrants
Substitute Products
Competitors
FIRM
Bargaining Power
Customers
Bargaining Power
Suppliers
Regulators
Government
Labor Unions
32
But, Production Networks are Inherently Unstable
  • Factor prices change
  • Factor supply availability changes
  • Market tastes change
  • Market demand mix/levels change
  • Process and product technology changes
  • In the globalized and oligopolistic market
    environment, organizational change is rampant
  • ? Upshot Trajectories Adjustment

33
Turbulent Environments
Complex Turbulent Conditions
Increasing complexity
Increasing dynamism
Simple Static Conditions
Increasing Uncertainty
Low levels of uncertainty
34
A Common Outcome of this Turbulence The Product
Life Cycle
Sales Volume
Initial Growth Maturity
Decline Obsolescence development
35
Examples of the Product Life Cycle
  • Fashion clothes
  • Automobiles
  • Generations of Boeing airplanes
  • .but not all products follow this trajectory
  • Levi 501 shrink-to-fit jeans
  • Coke name brands that play off product
    stability Tiffany L.L Bean Campbells Soup

36
Like Schumpeter, Freemans view that economic
systems experience creative gales of
destruction Campus computing as an example
Mode of Input varied also over time!
37
Impacts of IT in the Current Business World
  • Are we in a new era of techno-economic
    adjustment due to IT?
  • Symptoms Geographic realignments of
    employment, industrial power, and multiplier
    effects
  • Consequences reshaping of political, social,
    and economic systems
  • Consequences that we cannot forecast!

38
So, do big businesses really have advantage?
  • Yes, and No.
  • Yes, as measured in most narrowly defined
    industrial categories, but within many are
    powerful competitors in the small firm cohort
  • Scale economy factors that we covered are
    important in creating advantage, but they can
    also be an impediment.
About PowerShow.com