The task of business owners and managers is to select the best location for a business organization.
It is never easy because every location will have factors which are a benefit and others which are a limitation. Selecting the optimal location for any business venture is a complex endeavor. Every option comes with its own set of advantages and drawbacks, creating a constant tug-of-war between potential benefits and limitations.
This initial analysis often starts with quantitative factors, the measurable aspects that directly impact a location’s financial viability and potential profitability as well as qualitative factors, the non-measurable aspects that deal with the psychological and emotional aspects of location.
Other reasons for a specific location of production
Beyond the traditional quantitative factors and qualitative factors, several other considerations can influence the choice of a production location.
Other factors influencing location include the following:
1. Financial criteria. Choosing a location is an investment, and similar to acquiring equipment, various regions may offer financial incentives to attract businesses. Businesses should perform appropriate investment appraisals, considering factors like Payback Period (PBP), average annual return (ARR), and Discounted Cash Flow (DCF). Additionally, potential property purchase or rental costs should be factored into Break-even Analysis.
a. Profit estimates. Compare revenues and costs for each location and determine potential profit opportunity
b. Investment appraisal. Calculate the payback of capital investment to prepare each location
c. Break-even Analysis. The lower break-even, the better the site, if all other things being equal.
2. Shifting market landscape. While physical proximity to customers was traditionally critical, advancements in transportation and communication, coupled with globalization, have diminished its absolute importance for certain sectors. The internet has empowered businesses, particularly in retail, to reach wider audiences irrespective of location. However, for service industries and businesses relying on brick-and-mortar customer interactions, market access remains crucial. For example, the rise of automobiles led to cinemas and other service businesses relocating from city centers to more accessible locations on ring roads.
3. Planning restrictions. Local authorities are responsible for ensuring the well-being of their communities. This often leads to a balancing act between encouraging business activity for job creation and protecting the environment. In some cases, dedicated development corporations are established to create a sustainable balance between residential areas and industrial zones. Additionally, governments often create designated industrial estates and business parks offering attractive advantages for businesses and consumers alike.
4. Feasibility of E-Commerce. E-Commerce allows businesses to sell online, potentially reducing the dependence on physical location. This is particularly beneficial for businesses like insurance companies or book retailers who can reach a global audience virtually. However, not all businesses can fully rely on e-commerce, as certain products, like aircraft, cannot be purchased online.
5. Public opinion. Â Public opinion and government policies often significantly influence the location decisions of certain industries, especially those with potential environmental or security concerns, such as power stations or defense facilities. Additionally, governments might prioritize the balanced economic development of different regions, offering incentives to attract businesses to specific areas. However, the effectiveness of such policies can be limited due to inherent disadvantages of certain locations that might outweigh short-term financial benefits.
Remember, the lowest-cost location may not always be the optimal location. While it can be tempting to prioritize cost savings, other factors such as quality and brand image can have a significant impact on a company’s long-term success.
