Realizing Location Economies

Location economies are the economic benefits that arise from performing a value

creation activity in the optimal location for that activity, wherever in the world that might

be (transportation costs and trade barriers permitting).

Locating a value creation activity in the optimal location for that activity can have

one of two effects:

1. It can lower the costs of value creation, helping the company achieve a low-cost

position, or

2. It can enable a company to differentiate its product offering, which gives it the option

of charging a premium price or keeping price low and using differentiation as a means

of increasing sales volume.

Thus, efforts to realize location economies are consistent with the business- level

strategies of low cost and differentiation. In theory, a company that realizes location

economies by dispersing each of its value creation activities to the optimal location for

that activity should have a competitive advantage over a company that bases all of its

value creation activities at a single location. It should be able to differentiate its product

offering better and lower its cost structure more than its single- location competitor. In a

world where competitive pressures are increasing, such a strategy may well become an

imperative for survival.