Why location matters to business

Harvard Business Review's 2007 list of breakthrough ideas is out.  The entire list (click here) is terrific.  I'd like to call attention in my next few posts to several that really caught my eye.   At #15  on the HBR list is Yoko Ishikura of Hitotsubashi University’s Graduate School of International Corporate Strategy in Tokyo on why location matters more now than ever before.

Here’s a paradox of our age: The more global the economy and your business, the more important location and physical proximity become. Yes, issues of location—the choice of a factory site, for example, or the tailoring of a marketing message to a region—have always been of strategic importance. However, the conventional emphasis has been on how location affects a company’s costs and revenues. In today’s knowledge-based economy, we need to reevaluate the very concept of location.

Advances in communication technology have enabled—indeed, require—companies to tap into local information that they can use throughout their businesses. Managers increasingly understand the importance of drawing on diverse sources of information, especially from outside the organization, to spur innovation. For example, ideas that used to emerge from a company’s central lab may now be offered up by researchers far from the home office—or by a lone inventor living in a village halfway around the world. Thanks to the Internet and companies’ global information systems, businesses can acquire such ideas from out-of-the-way places relatively easily and cheaply. For that reason, though, companies must discover and quickly incorporate good ideas from these diverse sources before their rivals do. In fact, they have less time than ever before to take new ideas to market.

This trend reverses a familiar adage: Whereas companies used to be told to “think globally and act locally,” adapting their global strategy to the needs of a particular locality, they must now “act globally and think locally,” harvesting knowledge from various localities and using it to shape their global strategy.

The importance of location in a knowledge-based economy isn’t only about far-flung places; it’s also about those places right outside your door. That’s because another way of tapping diverse sources of knowledge is to draw on people and organizations in your vicinity. Unlike the explicit knowledge that can be gathered and transmitted digitally from anywhere in the world, tacit knowledge—which is difficult to codify and, consequently, has great value—can be shared only through repeated interactions, which are usually face-to-face. This, obviously, requires physical proximity. Even in the digital age, the many interactions that take place in the open and flexible networks linking a company, its suppliers, and its professional-service providers are more effective and efficient within physically proximate regions. Think of the decentralized social networks that fostered both competition and cooperation in Silicon Valley, making it a fertile seedbed of innovation. At the very least, a personal encounter is usually required to start a meaningful discussion that will lead to clear decisions and useful outputs. Once the physical meeting takes place, meetings in virtual space can follow—but the reverse order often doesn’t deliver results.

In the early 2000s, many Japanese manufacturing firms moved their production plants to China in order to take advantage of lower labor costs. Over time, they realized that some activities, such as exchanges between the production-engineering and manufacturing departments, weren’t proving effective—for example, the desired product specifications couldn’t be achieved—when the departments were physically separated. There was just too much subtle back-and-forth that needed to occur in person. Partly because of this, some of the companies have moved some of their manufacturing processes back to Japan. 

It isn’t always easy to know which activities have to be close together geographically. Figuring it out can involve considerable trial and error, as well as constant review to determine when the scope of tacit knowledge—and therefore the necessity of interaction—changes. Companies today need both global reach, in order to spot useful local ideas and incorporate them into strategy, and physical proximity, in order to effectively tap sources of tacit knowledge and thus sustain competitive advantage. For both, location matters.