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Institute of Business Management, Chhatrapati Shahu Ji Maharaj University, Kanpur ENTERPRENEURIAL DEVELOPMENT Plant Location Submitted To:- Prof. Mukesh Ranga External environment analysis MBA(BUSINESS Submitted By:- ECONOMICS) Abhay Agarwal SESSION (2011-13) Aditya Kumar1
Plant Location Every entrepreneur is faced with the problem of deciding the best site for location of his plant or factory. What is plant location? What is an ideal location?2
What is plant location? Plant location refers to the choice of region and the selection of a particular site for setting up a business or factory. But the choice is made only after considering cost and benefits of different alternative sites. It is a strategic decision that cannot be changed once taken. If at all changed only at considerable loss, the location should be selected as per its own requirements and circumstances. Each individual plant is a case in itself. Businessman should try to make an attempt for optimum or ideal location.3
What is an ideal location? An ideal location is one where the cost of the product is kept to minimum, with a large market share, the least risk and the maximum social gain. It is the place of maximum net advantage or which gives lowest unit cost of production and distribution. For achieving this objective, small- scale entrepreneur can make use of locational analysis for this purpose.4
LOCATIONAL ANALYSIS Demographic Analysis Trade Area Analysis Competitive Analysis Traffic analysis Site economics5
1. Demographic Analysis It involve study of population in the area in terms of total population (in no.), age composition, per capita income, educational level, occupational structure etc. 2. Trade Area Analysis It is an analysis of the geographic area that provides continued clientele to the firm. He would also see the feasibility of accessing the trade area from alternative sites. 3. Competitive Analysis It helps to judge the nature, location, size and quality of competition in a given trade area. 4. Traffic analysis To have a rough idea about the number of potential customers passing by the proposed site during the working hours of the shop, the traffic analysis aims at judging the alternative sites in terms of pedestrian and vehicular traffic passing a site. 5. Site economics Alternative sites are evaluated in terms of establishment costs and operational costs under this. Costs of establishment is basically cost6 incurred for permanent physical facilities but operational costs are incurred for running business on day to day basis, they are also called
Table: Comparative Costs of Alternative Locations Costs Site A Site B Cost of establishments: Amount (Rs.) Amount (Rs.) Land and Buildings 350000.00 230000.00 Equipment 60000.00 60000.00 Transport facilities 20000.00 30000.00 Cost of operations: Materials, freight and carriage 34000.00 24000.00 Taxes and insurance 10000.00 7500.00 Labour 100000.00 70000.00 Water, power and fuel 10000.00 8000.00 Totals 584000.00 429500.007
SELECTION CRITERIA Natural or climatic conditions. Availability and nearness to the sources of raw material. Transport costs-in obtaining raw material and also distribution or marketing finished products to the ultimate users. Access to market: small businesses in retail or wholesale or services should be located within the vicinity of densely populated areas. Strategic considerations of safety and security should be given due importance. Banking and financial institutions are located nearby. Availability of skilled and non-skilled labour and technically qualified and trained managers. Banking and financial institutions are located nearby. Strategic considerations of safety and security should be given due importance. Government influences: Both positive and negative incentives to motivate an entrepreneur to choose a particular location are made available. Positive includes cheap overhead facilities like8 electricity, banking transport, tax relief, subsidies and liberalization. Negative incentives are in form of restrictions for
Table: Factors Affecting Location Decision Entrepreneur’s Response Considerations Hills Plains Total No. % No. % No. % Homeland 15 67 11 39 26 52 Government Incentives 3 14 1 4 4 8 Availability of Raw 0 0 1 4 1 2 material Availability of labour 2 9 0 0 2 4 Availability of market 0 0 5 18 5 10 Availability of 1 5 9 32 10 20 infrastructure Facilities Others 1 5 1 4 2 49 Totals 22 100 28 100 50 100
SIGNIFICANCE From the discussion above, we have already learnt that location of a plant is an important entrepreneurial decision because it influences the cost of production and distribution to a great extent. In some cases, you will find that location may contribute to even 10% of cost of manufacturing and marketing. Therefore, an appropriate location is essential to the efficient and economical working of a plant. A firm may fail due to bad location or its growth and efficiency may be restricted.10
External Environmental Analysis A continuous process which includes Scanning for early signals of potential changes and trends in the general environment Monitoring changes to see if a trend emerges from among those spotted by scanning Forecasting projections of outcomes based on monitored changes and trends Assessing the timing and significance of changes and trends on the strategic management of the firm15
Analysis of the External Environment is divided among followings:- General environment -Focused on the future Industry environment -Focused on factors and conditions influencing a firm’s profitability within an industry Competitor environment -Focused on predicting the dynamics of competitors’ actions, responses and intentions
Purpose of External Environmental Analysis Organizations are affected by conditions in the environment Managers need to be aware of these conditions in order to:- - Be the Market Leaders by working on their Strengths. - Find out Weakness in order to capitalize on available resources. - Take advantage of Opportunities that can lead to higher profits.17 - Reduce the impact of Threats that can harm the organization’s future.
EXTERNAL ENVOIRNMENT FACTORS P olitical factors E conomic factors S ocial factors T echnological factors E nvironmental factors L egal factors
MICHAEL E. PORTER’s 5 FORCES ON EXTERNAL ENVIRONMENT ANALYSIS Rivalry Threat of new among entrants competing Threat of Bargaining substitute power of products suppliers Bargaining power of buyers19
Threat of New Entrants Fundamental question: how easy is it for another company to enter the industry? Factors making easy entry to industry Low economies of scale Low product differentiation Low capital requirements No switching costs for buyer Easy access to distribution channels Little government regulation20 20
Bargaining Power of Supplier Fundamental question: how badly does a supplier need your business? Factors giving power to supplier: Supplier industry dominated by few firms Buyer is not important to customer Supplier’s product is important input to buyer’s product Supplier’s products have high switching costs Supplier can “integrate forward” and become competitor of buyer21 21
Threat of Substitutes Fundamental question: what other products or services could perform the same function as your products or services? Factors indicating high threat of substitutes: Few switching costs for buyer Price of substitute lower or quality higher than for your products Firms offering substitutes have high profitability22 22
Bargaining Power of Buyer Fundamental questions: How badly does a buyer need your products or services? Factors contributing to high buyer power: Few buyers compared to the number of sellers Buyers purchases high relative to seller’s sales Products are undifferentiated Buyer has low switching costs Buyer has low profits Buyer can “integrate backward” and supply the product to itself23 23
Competitive Rivalry Fundamental question: how intense is competition in the industry? Factors leading to high competitive rivalry: Numerous or equally balanced competitors High fixed costs Slow industry growth Lack of differentiation or switching costs High strategic stakes High exit barriers24 24
Examples of Key Success Factors in Selected Industries Pharmaceuticals: Research and personal selling Beer: Advertising and distribution Restaurant: Quality food, service, location Retailer: Location and priced-for-quality25
BIBLIOGRAPHY Drew S, Strategic Direction: Strategic Analysis. Henley Management College 1997 Sondhi, Rakesh. Total Strategy, Airworthy Publications 1999 Senge Peter M. The Fifth Discipline. Century Business. Grant, Robert M. Contemporary Strategy Analysis, 3rd edition .Blackwell Publishers Charantinath M Poornima, Entrepreneurship Development Small Business Enterprises: 6Pearson Education First Impression, 2006 Florence. P. Sargent, Investment, Location and Size of plant, London: Cambridge 8University Press, 198426 Government of India (Office of the Economic Adviser),