Ask anyone the question “How are location decisions made?” and the chances are that they will start by talking about the industry clusters, natural advantages, current market, future market, cost of alternative solutions and other rational parameters. All of these are very valid topics and will come into,
or rather should come into, consideration during the decision process. In summary they consider location decisions to be a “profit-motivated trade-off”. But is that the complete picture? Is it really that rational?
I recently came across a theory which takes the opposite view. Lovaglia’s Law states that: “The
more important the outcome of a decision, the more people will resist using evidence to make it”. While I don’t completely agree with this theory, , there are some elements of truth in it which I recognise from my own experience. Location decisions are like any other business decisions and subject to the quirks and irrationality of the decision making process. Certainly some of the location decisions that I have observed over the years have been influenced more by the power and politics of the organization or personal preference of an individual, rather than by pure analysis. So just how are they really made in practice?
Before we go too far into the debate I want to make a distinction between “Primary Locations Decisions” and “Secondary Location decisions”.
The factors affecting each can be very different. Primary location decisions are usually based on where the key natural resources can be found or where the business owner lives. For example, Steel industries were built around coal and steel deposits. More recently the corporate headquarters of Apple and Microsoft have grown close to the birth places and homes of their respective founders. On the other hand I refer to secondary location decision as being any location decision taken in the expansion of an organisation.
I’d like to share some of my own experience and observations to give a personal perspective on how locations decisions are really made. The comments made in this discussion are confined to secondary location decisions.
What really happens?
I once asked a CEO, a widely known industry figure with a back ground in consulting for some of the world’s most well know companies, why he chose a particular location as the base for his companies first office in Europe. His answer? ........“It was the first advertisement that I saw when I got off the plane!”On closer questioning it became clear that he had up a shortlist of possible areas but had not yet made a final decision. Prompted to go to the location first, he was offered a good deal and signed there and then without going to see the other options. It is somewhat unusual for the CEO to be so directly involved in the search and selection process and be able to make such an instant decision but this anecdote demonstrates the power of advertising when making a choice between otherwise equal alternatives.
It also demonstrates the process of “satisficing” a concept first introduced by American Nobel Prize winner Herbert Simon who derived the word from “satisfying” and “sufficing”. Satisficing is an example of “bounded rationality” and describes how a choice is made from a group of options all of which are acceptable. Humans are unable to evaluate all the available options in full. They therefore choose the first acceptable solution.
The political dimension
All decisions are the subject of the internal politics of the organisation. Of course if you are the founder or owner then your power will override the lower level political dynamics but in most cases there is a political game to be played out to a greater or lesser extent. In our next newsletter we will explore this political dimension to choosing location in more detail and examine the implications for bodies competing for inward investment.
