Location decisions occur in many different situations. Businesses look for new locations when they are new businesses, need to expand but have too little space at present, need more modern premises, to reduce costs or if they are expanding to new countries.
Therefore, the decision about where to locate a new business, or relocate an existing business, is one of the most important decisions a modern business organization needs to make.
Why is choosing suitable location important?
The reason for choosing a particular business location can be different between different types of businesses. The place where a business is located can affect costs of business operation as well as how it makes sales and delivers customer service.
Factors affecting location decision depends on the development stage of the business. Let’s take a look at a few examples:
- New business. New firms need to consider the location of their first premises. This probably the single largest expense when setting up a new business that will significantly impact on the number of customers, its sales revenues and profit levels. It is also often an irreversible decision. Once a location decision is made, it will be difficult and costly to change the location.
- Expansion of existing business. Firms planning to expand, domestically and internationally, will also have to choose between different locations. Most likely these firms will end up operating in multiple locations.
- Changing location of existing business. For those businesses that consider relocation of their business activities, the costs of doing so can be extremely high. That is why many businesses simply cannot afford to relocate if things do not work out as planned.
In short, the decision on business location of any firm may be critical to its survival, development and growth. Typically, businesses will seek locations that maximize sales revenue and minimize Total Costs (TC).
Impact of business location on profit
Location decisions will have an impact on all aspects of the profit equation:
- Sales Revenue. Revenue earned by the business, especially if in a service industry, will be influenced by location proximity to market.
- Total Costs (TC). Fixed Costs (FC) of different sites, such as purchase or rent of land and salaries of managers can vary greatly. Variable Costs (VC), such as cost of raw materials labor wage rates, and transport costs of raw materials, will depend greatly on location.
This applies especially to many new businesses for which the location decision incurs a highly significant proportion of their costs. It is unlikely that most of these costs can be every recovered, if the firm is unsuccessful. Hence, the location decision can have profound implications on the survival and profitability of the business organization.
Case Study 1: Anyone involved in the surveying property business will tell you that the three most important factors affecting the success of a business are location, location, and location! Although somewhat of an over-generalization, there is a large degree of accuracy in this saying. Consider the issue facing Shell, the oil company, when deciding where to locate its oil refineries. It must consider a multiplicity of factors, e.g. how easily the crude oil can be transported to the refinery, which obviously depends on where the oil has been found, then it must consider the availability of suitably qualified labor within a particular area, along with the cost of building the plant and hiring the labor. It must also consider the location of its customers, in that the petrol retailers will need to gain access to fuel at short notice. Shell might even consider that the government provide finance for the refinery, but with the condition that it locates in a particular area of high unemployment. Shell will arrive at the decision only by balancing the various benefits and cost of available sites and evaluating each factor in terms of its importance within the overall decision. Access to the North Sea oilfields may well be more important that being close to its retailers, because the cost of transporting from the oilfields to the refinery may be much cheaper per mile traveled than the cost of moving the petrol in road tankers to the petrol stations. Alternatively, if the government is providing grants for creating jobs, but the unemployed do not possess the technical skills, and the training cost outweigh the government grant, this will also affect the decision.
Reasons for choosing a particular location
There are any reasons why a business might move away from, or towards a location.
- Push factors. Push factors in the choice of location include rising competition in an area, rising costs, poor communications systems, falling demand. Car parts producer Cooper Standard Automotives quotes falling demand for transferring work away from South Wales to France and Poland.
- Pull factors. Pull factors in the choice of location include government incentives, low labor costs, good communication systems, developing markets. Barclays bank in Jersey is relocating some backroom operations from Jersey to India in part because of lower labor costs.
Example 1: Online businesses still need a physical location where they operate from. Amazon.com operates from huge warehouses in out-of-town areas. With many large multinational companies are located throughout the world, their managers have a crucial role in weighing up the costs and benefits of a specific location.
Example 2: Switzerland seems the place to move to if you are thinking about moving your business headquarters. Kraft, the world's second-largest food and drinks firm, relocated its European offices away from the UK in 2007. The company followed firms like General Motors, Hewlett-Packard, Procter & Gamble, and Pfizer which had also moved their European headquarters to Switzerland, known for its low corporate TAX rates.
Ask yourself, as a business manager, whether you want to go national, regional or international with your business?
Due to globalization and changes in trade barriers, businesses expand internationally more now than ever! Think about exchange rates! If a currency becomes stronger, it can make it harder to export goods as foreign customers will have to pay more for the same goods.
