International Commodity Management, IIPMB

1. Theories of Industrial Location

2. 4 main Classifications
• Theories can be related to certain factors:
• Cost factors (Weber 1909)
• Locational interdependence (Hotelling 1929)
• Demand (Losch 1939)
• Profit (Smith and Pred (1971))

3. Alfred Weber (1909)
Least Cost Theory
• Industry is located where the transportation
costs of raw materials and final product is a
minimum.
• He had two cases:

4. The Weight Losing Case
• The weight of the final product is less than the
weight of the raw material going into making
the product

5. The Weight Losing Case
• The weight of the final product is less than the
weight of the raw material going into making
the product

6. The Weight Losing Case
• The weight of the final product is less than the
weight of the raw material going into making
the product

7. The Weight Losing Case
• The final product is heavier than
the raw material that require
transport.
• Usually this is a case of some
ubiquitous (everywhere
available) raw material such as
water

8. The Weight-gaining Case

9. The Weight-gaining Case

10. The Weight-gaining Case

11. Location Triangle
• Alfred Weber used a location triangle to illustrate
his approach
• His example being that only 2 raw materials are
needed. Logically a firm will locate within the
triangle joining the two points where the market
is situated. Each point having a pull on the
factory depending on its transport costs.
• Weight loss industries are raw material
orientated
• Weight Gain industries are market orientated.

12. • He devised the material index
• Material Index = Weight of Raw Material
Weight of Finished Product
Weber built on his idea to use Isotims
(concentric rings that connect equal-cost
points)
And Isodapanes (Variations in total transport
costs)

13. Isotims and Isodapanes

14. Have a go!
• According to Weber, where will you locate the new brewery
and why?
Materials per
case
Rail Transport
cost
Road transport
cost
Hops & Grain £1 per mile £1.10 per mile
Spring Water 15p per mile 10p per mile
Bottled Beer 25p per mile 28p per mile

15. Material (per case) Rail Transport Cost Road Transport Cost
Iron £1.50/mile £1.62/mile
Coal 75p/mile 82p/mile
Steel 67p/mile 75p/mile
Booming Town
Now put Weber's theory to work in deciding where to locate a new
steel factory for a growing town:

16. Hotelling 1929
Locational Interdependence
• This is the impact of demand upon location
• The interaction of entrepreneurial decisions
• He used two ice cream sellers on a beach as
an example

17. As with all models It made certain
Assumptions
• Evenly distributed population
• Market served by two competing
entrepreneurs, with equal production costs
and capable of supplying the entire market,
producing two identical products.
• Infinitely Elastic demand
• Costs of production are the same everywhere
• Entrepreneurs capable of relocating without
cost

18. • Hotelling believed that for a time each seller
would want to out do each other by cutting prices
or changing position on the beach.
• After failing to oust each other, (Since they are
equally able to compete) they would agree to
compromise by agreeing to sell at the same price
at different locations therefore each would have a
50% share of the market.
• They would position themselves at the centre of
the two market areas.

19. • If another seller entered the market a similar
process would take place.
• ISSUES:
• The initial assumptions were seen as
unrealistic and very rare in business.
• Nevertheless it did look at the principle of
decision making based on competing
organisations.

20. Group work
• Note down the good and bad points that you
foresee with these models.
• Discuss the evolution of industrial location
theory.
• Try to find the meaning for the term ‘Friction of
Distance’
• Left wing find out which Commodities fit into the
theory
• Right wing find out which commodities do not fit
in.

21. Discussion Points &
Learning Values