Global Opportunities in Business Location -- Being in the Right Place at the Right Time

Consider the auto industry. U.S. and European automakers are building productive capacity in China, where Volkswagen now makes 200,000 vehicles a year in Shanghai. Most Japanese autos sold to U.S. consumers are made in the United States. Asian manufacturers are expanding production in Brazil and throughout Latin America. Service companies are also deploying globally. American Express does travel services accounting in the United Kingdom, India and Arizona in the United States. Our own firm, Arthur Andersen, has software development activity in South Asia, as well as France and in the United States.

The pace of foreign direct investment (FDI) flows continues to expand, reaching $205 billion in 1994 with more than a third of this headed for the emerging markets. Of the FDI going into Europe, an estimated 20 percent is being directed into Eastern Europe; China, Singapore and Argentina account for 60 percent of the overall emerging market share. The United States, however, remains the overall leader, receiving some $40 billion annually. Cross border merger, acquisition and joint venture account for much of the activity within the OECD countries. But, as new business units are developed, the need for rationalizing location strategy becomes increasingly important in the search for improved performance. Increasingly, business executives tell us that relocations or expansions to new locations are an integral part of their plans.

Arthur Andersen partnered with Fortune magazine in developing the "Best Cities for Business" listing last year, and will establish that same knowledge base for the ranking in 1996. The research illuminates what cities or regions tell the most compelling story to attract businesses to locate -- or relocate -- their enterprises. At the same time, this joint initiative has cast light on larger trends at work in the global marketplace which are reshaping how companies make location decisions that stand a strategic and economic test. Clearly, globalization has irrevocably changed how companies must deploy resources. Technology has made it possible for companies to locate operations at far-flung sites linked electronically, rather than by physical proximity. Businesses practices, in turn, are changing virtually as fast as technology. In a time of rapid and unpredictable change, the challenge is to ensure that location decisions create competitive advantage today, while serving an organization's strategic interests in the future -- regardless of how difficult that "future" might be to forecast. An examination of trends affecting business location decisions can be a highly useful tool to illuminate the complex array of issues management faces. At the core lies a central question -- how can business location support corporate strategy and ultimately improve performance and shareholder value?

A "Best Practices" Approach to Business Location

The Arthur Andersen survey on business location conducted last year revealed that two-thirds of senior executives managed companies contemplating a change of location or expansion. In citing factors important to selecting cities, workforce suitability was at the top of the list (72 percent) followed by market access (65 percent) and cost structure (39 percent). (See Exhibit: Factors Important in Selecting Cities).

Location strategies adopted by individual companies typically balance a complex array of factors. To fully secure the strategic benefits, however, location strategy must be linked to corporate strategy to ensure that facilities and where they are located contribute to meeting corporate goals. (See Exhibit: Strategic Business Location Framework) A "best practices" approach to these decisions involves identifying how location relates to critical business drivers, as well as its effect on a company's key performance indicators such as revenues, costs and profitability. In the process, the business must be examined functionally so that the "success of the parts" and the "success of the whole" are reflected in where operations are located and how they are connected.

One of our technology clients has examined its location strategy, and as it makes its decisions about where to do what work, it will be concentrating its highest order of development work in California's Silicon Valley and the Boston 128 region in Massachusetts. The company, however, plans to, move lower order development work to high-tech centers more affordable for middle-tier engineers, as well as outsource and move production to still less costly places. Management also plans to position accounting and other support tasks where they believe they can get good value for money in terms of internal and external customer responsiveness, and place all-important customer support centers in the regions of the world where they are and will be selling their technology. The linkage among all of these activities is enabled and supported by advances in telecommunications and transportation technologies; the management challenge will be in extending this linkage to assure the shared vision they had in one place can remain shared as they grow in many places.

The Disaggregation of the Corporation

With modern technology and transportation serving as enablers, then, companies increasingly separate business functions to capture location benefits specific to these activities. Indeed, the "disaggregation" of the corporation is one of the most significant trends in business location globally, as well as one of the most important options available to companies today. Some notable consultants contend that companies should develop a strong "home base" before venturing cautiously to separate functions. The benefits of positioning business functions in locations with the most beneficial attributes is often too alluring to pass up, however. Separating business functions -- while developing the critical links needed for the organization to function coherently as a whole under a single mission -- may be a "best practice" for many, but not all, international companies.

The changing nature of work provides the basic framework for examining how business location needs vary for different corporate functions. The four primary business functions -- headquarters, operations/back office, research and development and manufacturing -- call for varying types of location support. (See Exhibit: Changing Work Matrix).

Headquarters -- Since the role of a headquarters and its staffing vary considerably, the location attributes needed to support this mission vary as well. Nevertheless, headquarters sites have been downsized drastically in recent years, and that trend will clearly continue. As the source of vision, strategy and leadership, the headquarters location of the future may be more a function than a place.

Cities and regions attempting to attract headquarters sites need to understand the key attributes required by companies. Among the most important factors are professional services support and an environment that allows companies to attract top flight personnel, which are increasingly multi-cultural. Cultural and recreational amenities enhance a city's attractiveness for this function. Excellent global air transportation is generally also essential. From the corporate side, the marginal cost of a more expensive headquarters location may not make a material difference. Companies can calculate the amount of additional revenue needed and determine whether there is a long-term strategic impact that accrues from being in a place that enables recruiting and retaining the talent needed to generate that revenue. ABB's incremental cost of being headquartered in Zurich is a small price to pay if their other strategic needs are served.

Operations/Back Office -- Job content for back office and customer service activities varies considerably, but technology continues to transform these operations worldwide. Some companies find current work forces adapt well to these changes; others decide that a new start offers a markedly better business solution. Operations and customer service functions rely heavily on a quality labor force with functional skills that span accounting and finance to customer service. State-of-the-art telecommunications is clearly critical, as are affordable living costs and competitive labor rates. Significantly, the search for lower costs and well-qualified employees are not incompatible. Companies find advantages in places with relatively low housing costs, strong community college or post-baccalaureate training programs, and marked underemployment in retail and other services. The growth of service center clusters in the U.S. mountain West, the Canadian Maritimes, the Netherlands and the United Kingdom all reflect the presence of modern, telecom investments, as well as what might be described as a community ethos that prizes customer service. LL Bean, for example, has been able to bring its core service orientation from the small town of Freeport, Maine, to Tokyo, Japan.

Research & Development (R&D) -- The clustering of research-related activity in the well-known technology capitals appears to be well-established and workable. Technology has given companies new ways to be closer to the customer, but face-to-face contact still counts. R&D activities appear to require that people work in proximity for the creativity, camaraderie and the cross pollination of ideas -- at least to a certain extent. In the future, an emphasis on the "development" portion of the R&D equation will require that these activities be located in proximity to production functions. For a company with short product cycles, the challenge is to find places that provide both competitive production economics, and an attractive environment for recruiting and retaining engineering talent. And for both the "research" and "development" sides of the equation, companies need to distinguish between how much high-end talent they need and where a middle-brow technology center might suffice. The top of the research hierarchy may remain in proximity to the leading research universities of the world. But, for R&D engineers who do not command the highest levels of compensation, the more affordable technology centers -- such as Raleigh, Austin and Phoenix in the United States, and Aachen, Germany, and Heerlen, The Netherlands, in Europe -- will undoubtedly be sustained and replicated.

Manufacturing -- Where products are manufactured involves familiar assessments of sources of raw materials, markets, logistics, costs and labor quality, cost and availability These assessments can and do change as a result of changes in a company's community, and its industry, as well as the internal strategic response. In the future, location decisions regarding manufacturing facilities will increasingly involve global assessments of whether locations can sustain the infrastructure and energy sources critical to manufacturing processes. As our clients expand into Viet Nam, for example, their location options are constrained not just by specific government planning requirements, but by the practical limits of few places with appropriate infrastructure. In all of the emerging markets, such is still the case. Economic nationalism also becomes more crucial as countries adopt regulations to control participation of domestic "partners," with the general intent that these countries or local areas share in the economic gain. There will be continuous government pressure to produce markets where companies plan to sell products. And, while in some industries, there is a continuous search for low cost labor, the magnet of most international investment seems to be the size and growth of the regional market itself, rather than to export back home.

The attention companies pay to logistics often begins at the back door -- the "distribution" side of the house. The distribution decisions are dictated by the drive to deliver value. This is increasingly the case with just-in-time delivery demanded by retailers and industrial customers, and with global markets being served from "best places" for producing.

Implications for the Public Sector

The ability of a city, region or nation to compete successfully for new companies, corporate expansions and relocations represents a critical aspect of maintaining vital economies. As companies embrace new opportunities to deploy business activities worldwide, competitive opportunities for the public sector also change. Cities increasingly find they can be effective in promoting economic growth by creating an environment that supports specific corporate functions. This represents a metamorphosis from the time when local areas might compete exclusively for industries -- capitalizing on a suitable labor force or proximity to raw materials. A city or region competing for operational or customer service centers, for example, has a significantly different profile than an area seeking to attract manufacturing plants or headquarters sites. Workforce suitability, cost of living and political climate are but three of many factors that compel companies to locate specific functions in different areas. In the United States, many cities and regions today compete aggressively for back office, customer service and "call" centers that have become the backbone of local economies, driving significant job creation. In Europe such operational centers have just begun to surface as a potential way to organize a business and deploy resources. The deregulation of telecommunications and improved equipment will lay the foundation for these types of enterprises, which can be located in far-flung locations from other business functions.

Clearly, the old rules of thumbs may no longer hold. Clustering of companies with similar business interests or activities has spawned new types of centers distinct from the traditional business or commercial centers. Industries may overlap in varying configurations that defy traditional practices, much as they do in the new centers for multimedia. The multimedia "gulch" south of Market Street in San Francisco, for example, involves the convergence of high technology and the artistic community required to develop programming content for these products. DreamWorks SKG -- the partnership launched by Steven Spielberg, Jeffrey Katzenbach and David Geffin -- has opted for a site in Southern California for its $200 million studio -- opting against six alternative sites in other states. It is here on the Los Angeles Westside that media, entertainment, artists and high technology companies have converged to create a fertile ground for these growing industries.

Nevertheless, even in a time of dramatic change driven by technology, a fundamental principle holds true. In a virtual world, where a company locates all or parts of operations still plays a critical role in how well it performs.

(Dan Malachuk is managing director of Arthur Andersen's Business Location Services, which serves companies globally on location strategy, change assessment, location selection and implementation. The practice is headquartered in New York. David Spraul is area director of the firm's Real Estate Services Group for Europe, and is based in London. Tom Sturgeon directs the firm's real estate services for Asia. He is based in Hong Kong.)

By Dan Malachuk, New York

David Sproul, London

Tom Sturgeon, Hong Kong

Arthur Andersen