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Study notes

Business Location (Introduction)

  • Levels: AS, A Level
  • Exam boards: AQA, Edexcel, OCR, IB

Most business studies textbooks can't resist starting a section on business location with the following phrase:

"The three most important things in retailing are – location, location and location".

However, although it is a well-worn cliché – it still has some merit. It was reputedly first said by the former boss of Marks and Spencer (Lord Sieff) to describe the main success factors in his business. And certainly in retailing, if you get the location wrong, it can have a serious and often disastrous effect on the business.

For businesses in some sectors, location really is critically important. For others, it is a relatively minor decision. The key is to consider the main issues faced by a business choosing a business location and to address the most appropriate way of making a choice.

Location decisions are usually pretty important – to both large and small businesses. The location decision has a direct effect on an operation's costs as well as its ability to serve customers (and therefore its revenues).

Also, location decisions, once made, are difficult and costly to undo. The costs of moving an operation are often significant and run the risk of inconveniencing customers and staff. It is always best to get the location decision right first time.

Main factors influencing choice of business location

The main aim of choosing a business location is to achieve a balance between three related objectives:

  • The costs of the operation
  • The customer service that the business wants to provide
  • The potential revenues that can be achieved from the location

The factors that influence the choice of business location can be divided into two broad kinds:

The factors that influence the choice of business location can be divided into two broad kinds:

Supply factors

These are mainly concerned with the operating costs of the location

Demand factors

These factors mainly affect customer service and revenues

Looking at these two groups of factors in a little more details, here are some of the issues a business needs to consider:


SUPPLY FACTORS

Labour costs

Often a major factor, particularly if the decision is to locate in the UK, or overseas. Labour costs vary from region to region in the UK, but the biggest difference is between the UK and low labour cost countries overseas.

Land costs

Sometimes the land will be purchased, but more often it will be rented along with the business buildings and facilities. Rentals can vary enormously depending on the location and the facilities provided. Government grants and other incentives are also often available to reduce the land costs of locating in poorer regions.

Energy costs

Some businesses use substantial amounts of energy (e.g. gas, electricity) but they should be able to negotiate a good price for their energy needs regardless of location in the UK.

Transport costs

Transport includes the cost of getting inputs into the business (e.g. raw materials for the production line or stocks for sale) and also the cost of getting products delivered to customers. A business needs to be close to its source of supply if the cost of transporting raw materials is high or difficult (e.g. food processing is often carried out close to the farms).

For many businesses the cost of distributing to customers is not a significant issue. Delivery firms might carry out the transportation (for which the customer pays). In many cases the customer comes to the business – e.g. in a hotel

Community factors

The costs of a business location can be influenced by many non-financial factors, but which can still be significant when making the choice. These include:

  • Local amenities & services (e.g. schools, professional services)
  • Local government attitude to supporting business (including financial assistance)
  • Language
  • Political stability

DEMAND FACTORS

Customer convenience

Probably the most important factor. Many businesses need to be located where customers find it quick, easy and cheap to access the service being provided. E.g. a fast-food outlet needs to be somewhere close to a strong customer footfall, not hidden away out of sight. Out-of-town retail parks are situated within a convenient short drive from major population centres.

Labour skills

Where specialist skills are required, this can be a big issue. For example, technology firms tend to locate themselves in areas where there is well-established expertise (e.g. M4 corridor and Cambridge in the UK)

Site suitability

A site may need to have some particular characteristics to maximise customer satisfaction and revenues. E.g. a luxury restaurant or hotel needs to be located somewhere that customers find attractive – not in the middle of a trading estate.

Image

This is more intangible, but often important. Some customers associate a product with a certain area and prefer to buy from there (e.g. walking equipment – a business based in the Lake District might enjoy a better perceived reputation

Expansion potential

Future production capacity often has to be taken into account. A location might tick many other boxes, but if it provides limited scope for expansion then it might be rejected. If a location restricts output, then revenues are potentially damaged.

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