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Production location - locating a new business

Author: Jim Riley  Last updated: Sunday 23 September, 2012

Production & operations - Business location for a new business

Where to start a new business?  It is a tough question that often leaves an entrepreneur agonising over the decision.

A small business starting up 10-15 years ago would soon be agonising over a key decision.  Where can I find some premises?  What kind of premises do I need and what will they cost?

These days the decision about locating a start-up business is a very different one.  It is possible to run a new business, even with several people, without ever having separate business premises.

The so-called “virtual business” is now a reality, made possible by easy communications and the enthusiasm of many people to work from home, as freelancers or consultants.  Setting up a virtual business, often from home, is not without its problems.  However, this is a very popular approach to locating a new business.

Not every kind of start-up can be based at home.  When addressing the question of business location, the textbooks often use the example of a new retail business.  For retailing, the search for a good location is vitally important.

In general, the most important consideration for a start-up is the cost of the business location. In your exam, it is best to assume (unless you are told otherwise) that a start-up has limited financial resources and that it will seek to minimise the start-up costs.  Setting up in a new business location can add significantly to overheads – a business will incur rent, rates, insurance and many other on-going costs simply from the decision to take some premises.

Factors affecting the choice of location

Whatever the business, there are several general factors that influence the choice of location.  These are:

Factor

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Communications

This includes transport facilities (road, rail, air) as well as information infrastructure.  Transport links are particularly important if the business delivers products, sells direct using a sales force or is dependent on import and export.  Information technology is less of an issue these days – most start-ups can quickly establish reliable broadband Internet connections.

Labour

When a start-up needs to hire employees, then access to a reliable pool of staff with relevant skills is important.  Businesses that are labour-intensive often look to locate in areas of traditionally low wages.

Market - customers & population

A start-up may need to be located near particular centres of population.  For example, if the product is a service targeted at affluent older-aged people, then it is important to be located where there is a sufficient population of such people.  Franchise businesses often analyse the population characteristics of a potential new territory before setting up in a new location.

Suppliers

The business may be dependent on supplies of a particular raw material, so costs will be lower if the business is located near the source of supply (e.g. where the raw material is grown or where a distributor is based). This factor tends to be more important for manufacturing businesses rather than service businesses.

Government assistance

Government policy has often been designed to influence the locations of new businesses.  If the start-up is “location-independent” (i.e. the other factors above don’t really make a difference to the choice of location), then it may be that deals and incentives offered by Government can influence the choice.
Some poorer areas of the UK are designated as “assisted areas”.  These include many parts of north-east England, Wales, East Yorkshire, Cornwall etc.  Locating a new business in one of these areas potentially makes government grants and loans available.

There is no magic formula which can be applied to decide the most important factors in choosing a location. 

Where two possible locations have been identified, it might be that the availability of government grants or other incentives is the deciding factor.

Making a choice of location involves drawing up a list of criteria of what the start-up is looking for from business premises and then using qualitative judgement about what will work best.








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