Why geography still matters – take 2.

I previously talked a bit about the continuing importance of where your operations are.  But it’s been bothering me a bit because I didn’t really drill into it much.  I’d like to break the concept into a few pieces:

1. Why do large companies look to put their HQs in large cities?

This one is simple at least:  labor pool and image.  A large headquarters operation can require lots of high end talent.  You don’t want to put it in a city where you can’t hire the people you need.  Also, after you reach a certain size your customers may have an expectation that you if you aren’t in a large city it implies you are still a small time operation (back to the psychological bit).

2. Why do companies choose to outsource certain functions?

Outsourcing, whether it be manufacturing or call centers or HR, is a drive to achieve lower cost in either a non-strategic function or a function that significantly impacts the cost of goods sold.  With manufacturing and call centers companies typically aim to reduce their total costs by driving down specifically materials and labor.  These are also functions that is not geographically driven – meaning they don’t deal with anyone in the markets where they are located other than the employees that work there.

3. How do companies enter a market and sell to customers?

Typically this requires a presence – either in the form of a building where people can interact or a person flying there and meeting with their potential customer base.  One way presence is permanent and the other it is occasional.  You achieve a higher penetration with the actual building than you would with the fly in/out concept.  Regardless, you’ve now established a geographic presence.  If you choose to go with the fly in/out in all likelihood you aren’t having that person fly from outside of the country on a regular basis which means you really can’t go all that far away.

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To boil this down – if your business requires you to deal with customers you will have a presence in their market.  There are some exceptions to this, but they are going to be few and far between (typically they would focus 100% on number 2 above).  Geography matters and in this economy – both the digital economy and the economy post Great Recession – it is important to be smart and strategic about where you are.

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2 thoughts on “Why geography still matters – take 2.

  1. Regarding outsourcing many companies are realizing there are many more factors to consider beyond lower COGS. Perhaps COGS will go down but many times costs associated to managing the relationships (transaction costs) increase significantly. It takes a lot of work to identify and organize partners. It is difficult to ensure the partners are working in the interest of the partnership rather than their own. And when there’s a lack of trust between the partners, considerable energy is wasted trying to determine each others motivations.

    Reference the Nature of the Firm by RH Case for more info on an insource/outsource discussion.

  2. Exactly! COGS is one part of the equation – but the only one that is obvious on the balance sheet. This is also why the Triple Bottom Line financial reporting continues to increase in popularity. It’s about more than just chasing low costs.

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