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.
Quantitative reasons for a specific location of production
Quantitative factors in location selection are measurable in financial terms and directly impact a site’s costs, revenues, and overall profitability. These factors can be expressed numerically and typically analyzed by the finance department and senior management during the decision-making process for locating or relocating an organization.
Quantitative factors influencing location include the following:
1. Sales revenue potential. Location directly impacts sales potential for certain businesses. Convenience stores and confectionery shops need to be readily accessible to customers. Specific locations can enhance brand image and potentially add value to products. Examples include high-end retailers in London’s Bond Street or financial firms on Wall Street.
2. Availability, suitability and cost land. The quantity, quality, and affordability of land play a crucial role. Busy areas offer higher earning potential but also come with higher land costs. Densely populated areas have high land prices due to limited supply and increased demand. Businesses requiring extensive land, like hypermarkets, often locate away from central business districts due to cost and availability. Factors like infrastructure and the need for customer proximity can influence location choice. The global landscape offers cost advantages, with examples like Audi and Coca-Cola relocating to countries with lower land costs. Industrial areas often shift to suburbs or city edges due to cheaper land for new industries. It is expensive to relocate if a site proves to be too small to accommodate an expanding business. If a location has room for further expansion of the business, then this might be an important long-term consideration.
3. Site and other capital costs. Building or shop-fitting costs can vary significantly depending on location. Prime locations may be cost-prohibitive for smaller businesses. The cost of developing a new site (greenfield) needs to be compared to adapting existing buildings (brownfield).
4. Availability, suitability and cost of labor. The availability and skill level of labor significantly impact wage levels and location decisions. Tenneco, an auto parts manufacturer, chose Shanghai due to the high supply and low cost of labor. Industries requiring highly skilled labor, like aircraft manufacturing, may locate in areas with a skilled workforce. Location choice can vary based on the need for skilled labor. For example, Germany has a readily available supply of skilled engineers. Mass production industries like Nike often locate in countries with abundant and relatively low-cost labor, like Indonesia. The importance of labor costs as a location factor depends on the industry. Labor-intensive businesses, like call centers, may prioritize locations with lower labor costs. This has led to many European businesses setting up operations overseas to benefit from lower wage rates.
5. Transportation costs. Businesses using bulky raw materials, like steel producers, incur higher transport costs when suppliers are distant. Businesses with products increasing in bulk during production benefit from locating near markets to mitigate transportation costs. Service industries, like hotels, prioritize convenient locations for customers, making transportation costs less significant.
a. Proximity to the market (customers). Certain businesses need to consider the impact of transportation costs on bulky or weight-gaining products. Businesses like bottlers or alcohol manufacturers may benefit from locating closer to markets to avoid high transportation costs. Firms relying on just-in-time production often locate near suppliers to minimize delivery delays. Service industries like hotels and restaurants prioritize customer convenience and need to be conveniently located near their target market.
b. Proximity and access to raw materials. For primary and manufacturing industries, proximity to raw materials is critical for cost-efficiency. Bulk-reducing businesses, like steel producers, benefit from locating near raw materials due to lower transportation costs. Extracting raw materials like oil at source is often cheaper than transporting them to manufacturing sites due to weight and waste factors.
6. Government incentives and limitations. Governments often offer financial incentives like grants and subsidies to attract businesses. These incentives may target specific areas facing high unemployment or economic regeneration. On the other hand, governments can also impose limitations, such as licensing requirements or planning permission difficulties, affecting business location. Corporation TAX rates can also influence international location decisions.
NOTE: Firms that produce dangerous or harmful by-products need to be located away from highly populated areas. For example, chemicals, explosives, ammunition, oil, electricity, fireworks and nuclear.
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.
