Business Studies (0450) | Location decisions

Location Decisions: Finding the Perfect Spot for Your Business

Hello future Business Experts! Welcome to the crucial chapter on Location Decisions. Don't worry, this isn't about choosing where to sit in the classroom; it's about one of the most important choices a business ever makes: where should we set up shop?

The location you choose affects everything—from your costs and efficiency to how many customers you attract. A bad location can ruin a great business idea. A good location can give a business a massive advantage!

In this section, we will learn the specific factors businesses consider, whether they are making cars, serving coffee, or selling T-shirts.

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1. The Importance of Location Decisions

What is a Location Decision?

A Location Decision is the choice of where to set up the operations of a business (factory, office, or shop). This is part of Operations Management because it determines the physical efficiency of the production process.

A good location helps a business meet its objectives, such as:

• Minimising Costs (e.g., transport costs, rent).
• Maximising Revenue (e.g., choosing a high footfall area for retail).
• Accessing key resources (e.g., skilled labour or raw materials).

Analogy: Think about choosing a place to meet your friends. If you choose a location that's too far for everyone, it costs time and money (transport) and people might not turn up (lost revenue). Business location works the same way!

Key Takeaway

The location decision is usually a long-term decision. Once a business builds a factory or signs a long lease on a shop, it is very expensive and difficult to move!

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2. Location Factors for Manufacturing Businesses

Manufacturing businesses (like a car factory or a furniture maker) focus heavily on minimising production costs. They need to be near things that help them make their products cheaply and efficiently.

Factors Influencing Industrial Location:

To remember these points, think of the acronym R.A.T.S. E.C.G. (Raw materials, Availability of labour, Transport, Supplies, External benefits, Costs, Government incentives).

A. Costs and Resources

1. Raw Materials/Supplies:

• Need for Proximity (Closeness): If the raw materials are heavy, bulky, or perishable (go bad quickly), it's often cheaper to locate the factory near the source of the materials.
• Example: Factories that process sugar cane or extract steel often locate near the mines or fields to reduce the cost of transporting heavy, unprocessed materials.

2. Labour Supply:

• The business needs to locate where the right type of employees are available.
• If the production requires highly skilled workers (e.g., for aerospace), the firm needs to be near cities or universities.
• If the production is unskilled/semi-skilled (e.g., basic assembly), the firm looks for areas with high unemployment where wages might be lower.

3. Power and Utilities:

• Manufacturing uses huge amounts of energy (electricity, gas) and often needs large volumes of water (for cooling or cleaning).
• A firm needs to ensure the chosen site has reliable and affordable access to these utilities.

B. Infrastructure and Access

4. Transport Links:

• Efficient transport is vital for bringing in materials and sending finished goods out.
• This includes access to roads, railways, ports, or airports. Poor transport links increase distribution costs and lead to delays.
• Example: A soft drinks bottling plant might locate near a major motorway junction to quickly distribute products nationwide.

5. External Economies of Scale:

• Sometimes, it's beneficial to locate near other similar businesses (called clustering). This can mean better access to specialist services or shared infrastructure.
• Did you know? Silicon Valley in California is a cluster of tech companies, meaning they all benefit from a massive supply of specialised labour and related suppliers in the same area.

C. Legal and Environmental Factors

6. Government Incentives and Controls:

• Governments often provide grants or subsidies to businesses that locate in areas with high unemployment (known as 'development areas').
• However, there are also strict planning laws and environmental controls. A polluting factory cannot usually be built near a residential area.

Quick Review: Industrial Location

Manufacturers are generally cost-driven. They locate where production inputs (materials, labour, power) and distribution costs are lowest.

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3. Location Factors for Service and Retail Businesses

Service (like banking, insurance, or haircuts) and Retail (shops) businesses are different. They don't usually move heavy raw materials. Their main focus is Customer Contact.

The key driver for service and retail location is maximising sales and revenue.

Factors Influencing Retail and Service Location:

A. Customer Access and Visibility

1. Proximity to Customers (Footfall):

• Footfall means the number of people walking past the location. Retail shops (e.g., clothing stores) need a very high footfall area, such as a busy shopping street or mall, to maximise impulse buying.
• Example: A high-street coffee shop relies entirely on passing trade, so it must be on a main route.

2. Accessibility and Parking:

• Customers must be able to easily reach the location.
• If a business requires customers to visit (like a supermarket or cinema), adequate parking or excellent public transport links are essential.

3. The Right Image:

• The location must fit the brand. A high-end luxury jeweller needs to be in an expensive, prestigious area, not next to a noisy bus station.

B. Costs and Competition

4. Costs (Rent/Lease):

• Prime locations with high footfall (like the centre of a mall) are very expensive.
• A small business must balance the increased revenue from a good location against the higher rental costs.

5. Competition:

• Some businesses deliberately avoid strong competitors (e.g., you wouldn't open a tiny bakery right next to a giant, established one).
• However, some businesses benefit from locating near competitors (called 'comparative shopping'). Example: Many car dealerships or fast-food restaurants group together, as customers like to compare options easily.

Don't worry if this seems tricky at first! Just remember: Manufacturers look for low costs; Retailers look for high customers.

C. Specific Service Needs

Professional Services (e.g., Accountants, Lawyers):

• They often locate in Central Business Districts (CBDs) because they need to be accessible to other businesses they serve, not just the general public.

Warehouse/Call Centres:

• These don't need high footfall, so they are often located in out-of-town industrial parks where rent is much cheaper and there is space for parking. They still need good road access and reliable IT infrastructure.

Key Takeaway

For retail and service firms, revenue potential is usually more important than cost savings. They are willing to pay higher rents for the 'perfect' spot.

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4. National vs. International Location Decisions

In today's global economy, businesses often consider locating operations not just in their home country (national) but abroad (international).

Why Locate Internationally (Globalisation)?

When a business chooses to set up operations (like a factory or a call centre) in another country, it is often called offshoring.

Advantages of International Location:

1. Cheaper Labour Costs:

• Wages are often significantly lower in developing countries, drastically reducing the total cost of production.

2. Access to New Markets:

• Locating a factory inside the target country avoids expensive tariffs (import taxes) and reduces transportation costs, making the product cheaper for local consumers.

3. Government Incentives:

• Many foreign governments offer attractive tax breaks, grants, or cheap land to encourage international businesses to invest in their country (this is called Foreign Direct Investment or FDI).

4. Fewer Legal Restrictions:

• Environmental or health and safety regulations might be less strict in certain countries, leading to lower compliance costs. (However, this raises ethical considerations.)

Disadvantages and Risks of International Location:

1. Communication Barriers:

• Differences in language, time zones, and culture can make management and communication challenging.

2. Infrastructure Problems:

• Some foreign countries may have unreliable electricity supply, poor road networks, or slow internet, causing frequent disruptions to production.

3. Political and Economic Instability:

• Changes in government, strikes, or sudden changes in exchange rates can make the cost of running the foreign factory unpredictable.

4. Quality Control Issues:

• It can be harder to monitor and maintain the high quality standards expected by the home country's management.

Common Mistake to Avoid!

Students sometimes forget that when a company locates abroad to access a *new market* (selling cars in India), the location decision is revenue-driven. If they locate abroad to find *cheaper labour* (making clothes in Vietnam), the decision is cost-driven.

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5. Evaluating the Best Location

After considering all the factors, how does a business actually make the final choice?

The Final Decision Process

1. List and Weight the Factors:

• The business must first decide which factors are most important (the weight). For a bakery, access to customers is 90% of the decision; for a coal mine, it's 0%.

2. Quantitative Assessment (Calculating Costs):

• Businesses calculate the projected total costs for a few potential sites. This includes:
  • Cost of land/rent.
  • Cost of transporting raw materials to the factory.
  • Cost of transporting finished goods from the factory to customers.
  • Labour costs (wages).

3. Qualitative Assessment (Non-Monetary Factors):

• These factors are harder to put a price on but are vital:
  • Is the local government stable?
  • What is the quality of life for managers who might relocate?
  • Are there local amenities (shops, schools)?
  • What is the environmental impact of the move?

The final decision involves balancing the quantitative (measurable costs) and qualitative (non-measurable impact) factors against the importance of the initial business objectives (cost minimisation vs. sales maximisation).