Factors Affecting Location Decisions

Quantitative Reasons for a Specific Location

Availability, Suitability and Cost of Land

The business must consider the land available to them, and whether it is affordable and suitable for their operations. Land in prime locations is often very expensive, so the business will have to do a trade-off based on which option will hold the greatest benefit for the business in the long term. The nature of the business will determine the type of land they should have, and how far from the city.

Availability, quality and cost of labour

Labour is also another thing for the business to consider. Depending on the nature of the work, the business will require different levels of skill. The production facilities should be located close to areas where the appropriate labour is in supply.

Proximity to market (customers)

- Bulk increasing businesses

Mining Copper

Proximity and access to raw materials

Production facilities near raw materials can save on transport costs. However, this need to be balanced against the need to be near to the market. A bulk reducing business, whose products are less to transport than the original parts, should be located close to the raw materials as these transport costs will be higher. On the other hand, a bulk increasing business should locate closer to the market, as the transport costs to the market are greater than for the raw materials.

Government incentives and limitations

In some countries, the government has incentives and policies that are beneficial for business activity. For a business operating nationally, they may be eligible for grants or subsidies to support local business. In addition, if the move to a location where the government is trying to encourage growth, they may also receive other benefits. Government policy might be good for business, too. Assisted Areas are regions identified by the government to be suffering from relatively high unemployment and low incomes, so are in need of regeneration through financial assistance.

Feasibility of E-Commerce

E-commerce can also be a way for businesses to reduce their costs. The internet is much cheaper than physical land, especially considering they can reach people who do not live in that area. However, this is not appropriate for all businesses.

Qualitative Reasons for a Location

Management preferences

The management of the firm will have personal preferences of location for a number of reasons. This will affect their decision.

Local Knowledge

The business should also consider the local knowledge they have of various areas, which gives a competitive advantage. If they know it well, they reduce their risks and will be able to make better decisions.

Do the citizens of Windsor have any particular local knowledge that would be appealing for an international business? How did the citizens of this region acquire this knowledge? What other regions might have a high concentration of the labour force with a distinct skill-set or body of knowledge?

Silicon Valley

Infrastructure

The area will have a certain level of infrastructure, which will directly affect the business’ ability to do business. If there is no electricity or road access for deliveries of raw materials, then the business will not be able to operate effectively.

The communication links vary depending on the area, and can be an essential deciding factor for the business. They will need to be able to access the internet or telephone lines.

Political stability

In countries that are politically stable and have a sound economy, business can be done safely. A war-torn country with poor infrastructure, corrupt government, high taxes and poor exchange rates will not benefit the firm. The political stability of the country will affect the business, as will its economy. These things can alter employment and costs of production. Taxes and infrastructure are affected by this.

Government restrictions and regulations

The business may have to obtain licences and permits for many of their activities, and the longer the time delay for receiving these, the greater the delay on commencing operations. Other government restrictions and regulations will have similar effects.

Change in smoking laws, tanning laws - impact on business

Ethical issues

The business should ensure that their activities are ethical and comply with industry standards. Unethical behaviour can cause problems with the local people and earn the business a bad reputation.

Comparative shopping (clustering)

Finally, the firm may try to locate near other businesses with similar operations, called clustering, in order to attract customers to their store.

Relocation of The Business

Firms may relocate their premises to an area with greater advantages for their operations. However, this can be very difficult to do. Often a business has acquired many benefits in a certain area that would take time to establish in a new area.

Relocation, despite the benefits it may offer, still has many disadvantages:

• Relocation costs
• Lower morale and anxiety in the workforce
• Loss of skilled and loyal workers
• Damage to corporate image
• Loss of links with the community
• Redundancy payment costs
• Problems during the transition time

The firm should also consider the financial consequences of relocation, including their forecasted revenue.

However, some businesses are not so restricted to a certain area. Firms that use e-commerce will maintain their online presence whilst they move, so they are not tied to a single location. In addition, with globalisation, businesses can move internationally with greater ease. Nevertheless, there are still many issues to consider attached to this kind of decision.

The location for the production facilities of a business is a very important decision, affected by many factors. Overall, the location should be in a place where they will be productive and have high revenue. It should be:

• near the market to improve demand
• close to a skilled labour force
• near high value raw materials to improve productivity
• close to the point of sale
• away from busy areas if the plant is noisy or environmentally unfriendly
• have space to expand in the future as necessary
• good communication links, such as telephone reception

A Footloose Organization is a business that does not gain any cost-reducing advantages from locating in a particular location. Hence a firm can locate in almost any location. Consider the production of computer chips - does this process really need to be anywhere near the final consumer? The chips are not particularly heavy, and do not require much raw material to produce.

Consider https://www.snorgtees.com - Is their location particularly important?

International Issues with Location

• Setting up business overseas can be quite difficult. The business must consider whether there is sufficient affordable land in the area. However, lower land costs may enable the business to reduce costs and gain higher profits. This can be an incentive for moving overseas.
• Some countries do not have the same availability and quality of communication devices such as phone connections, internet, etc. Therefore, the business may not choose to move there as a result.
• Some production facilities have been moved overseas because labour is cheaper, reducing the costs of production. However, this labour may not be as skilled, so the business may need to stay in countries where skilled labour is available. Costs of living in each country and the socio-economic will affect the wages the people require.
• As in national production location, the business should locate closer to the market or the raw materials, depending on which has the higher transport costs. A business may move overseas because they are able to have better access to the raw materials. The consequent transport costs will affect the overall costs of production.
• The business should analyse the international trade barriers in place to prevent outside companies competing with local business. The business may be at a disadvantage by entering a certain country because all the local businesses receive subsidies to allow them to compete. This may cause the business to have greater difficulty entering this area, and find that their costs are high. However, many countries still encourage international companies to enter their areas to boost employment, and will offer them benefits. Some countries may restrict business activity and land development, preventing the business from increasing in size as demand increases.
• E-commerce is one way of overcoming many of these issues, as the business can trade on a global level without having to pay for all the physical land for all their facilities. However, the limitation of this is that certain areas may not have internet, restricting their access to these markets.
• The business should consider what cultural understanding they have of the area to avoid bad mistakes. This will usually entail market research before they enter the area.
• The infrastructure of the area will alter the ability of the business to operate in that area. They will need the necessary services, including water and electricity, and transport networks for deliveries of materials. Without this, the production will be inefficient and the business will lose competitiveness. In addition, it will affect how well the employees can travel to work.
• Other government regulations will affect business activity. Setting up the business overseas may be difficult, expensive and time consuming. They should compare which countries have the best conditions when making the decision.
• Finally, ethical issues can vary between countries, so the firm need to ensure that they have researched any differences and accounted for these in their activity. This will preserve their reputation in that area.
• Overall, the choice of location needs to consider all these factors and how they apply to the business.