Locational change is a process according to which the number, capacity, nature, and location of production are modified to make a production unit more productive, cost-effective, and accessible. The above figure represents a simplification of the process with four locations and four products with their respective markets and four possible outcomes:
- Intensification. Based on the more intensive use of the same labor to increase production, or a reduction of labor to produce the same quantity. It is often the result of changes in labor practices, technological innovation, and more capital-intensive production (e.g. mechanization). Locations and markets do not change, only the intensity of each location.
- Specialization. With growing competitive pressures, a locational specialization process may occur where each location produces the most comparative advantages in the sector. The resulting productivity gains are often accompanied by labor reductions (sometimes more labor if the location has low labor costs). Specialization also forces market expansion and flows between regional markets as the geography of distribution is modified. This is the type of locational change that relies the most on transportation and supply chains as parts need to be distributed.
- Concentration. This implies the closing of the least productive units. If the same level of output is required, then other units will have to increase their production accordingly. Additional production often takes place at the most productive location, allowing it to further its economies of scale. It is also common for concentration to take place when demand is declining as the least productive unit is closed.
- Rationalization and relocation. Represents the most important locational change, as several existing production units are closed, and production moves to a new lower-cost location. The market often becomes global for the production unit. While low labor costs have been a dominant driver in recent decades, it can be the outcome of a notable technological change, such as automation, that allows entirely new locations to be considered.
These four processes are not exclusive, as firms can apply more than one strategy at once. For instance, concentration and specialization are often concurrent.