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CHP 21 Location Decisions

Location decisions are important for businesses. Manufacturing firms consider factors like raw materials, labor, transportation infrastructure, and government incentives. Service firms focus on customers and labor availability. Retailers locate near customers and other shops. Businesses may locate overseas for new markets, cheaper costs, or to avoid trade barriers. E-commerce allows location flexibility but requires online marketing and delivery logistics. Governments influence locations through subsidies and restrictions.

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416 views

CHP 21 Location Decisions

Location decisions are important for businesses. Manufacturing firms consider factors like raw materials, labor, transportation infrastructure, and government incentives. Service firms focus on customers and labor availability. Retailers locate near customers and other shops. Businesses may locate overseas for new markets, cheaper costs, or to avoid trade barriers. E-commerce allows location flexibility but requires online marketing and delivery logistics. Governments influence locations through subsidies and restrictions.

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CHAPTER 21 LOCATION DECISIONS

Owners need to decide a location for their firm to operate in:


• at the time of setting up,
• when it needs to expand operations, and
• when the current location proves unsatisfactory for some reason.

Location is important because it can affect the firm’s costs, profits,


efficiency and the market base it reaches out to.

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Factors that affect the location decisions of a manufacturing firm:
• Production Method: when job production is used, the business will
operate on a small scale, so the nearness to components/raw
materials won’t be that important. For flow production, on the
other hand, production will be on a large scale- there will be a huge
amount of components and transport costs will be high- so
components need to be close by.
• Market: if the product is a consumer good and perishable, the
factories need to be close to the markets to sell out quickly before
it perishes.
• Raw Materials/Components: the factories may need to be located
close to where raw materials can be acquired, especially if the raw
material is to be processed while still fresh, like fruits for fruit juice.
• External economies: the business may locate near other firms that
support the business by provide services- eg: business that install
and maintain factory equipment.
• Availability of labour: Businesses will need to locate near areas
where they can get workers of the skills they need in the factory. If
lots of unskilled workers are needed in the factories firms locate in
areas of high unemployment. Wage rates also vary by location and
firms will want to set up in locations where wage rates are low.
• Government Influence: the government sometimes gives
incentives and grants to firms that set up in low-development, rural
and high-unemployment areas. There may also be govt. rules and
restrictions in setting up, e.g.: in some areas of great natural
beauty. The business needs to consider these.
• Transport & Communication infrastructure: the factories need to
be located near areas where there are good road/rail/port/air
transport systems. If goods are to be exported, it needs to be set
up near ports.
• Power and water supply: factories need water and power to
operate and a reliable and steady supply of both should be ensured
by setting up in areas where they are available.

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• Climate: not the most important factor but can influence certain
sectors. Eg: the dry climate in Silicon Valley aids the manufacturing
of silicon chips.
• Owner’s personal preferences

Factors that affect the location decisions of a service-sector firm:


• Customers: service-sector businesses that have direct contact with
customers need to locate in customer-accessible and convenient
places. Eg; restaurants, hairdressers, post offices etc.
• Technology: today, with increasing use of IT to shop and make
payments, customers do not need direct access to services and
proximity to the market/customer is not a very important factor in
location decisions. They locate away from customers in places
where there are low rent and wage rates. Eg: banks
• Availability of labour: if large number of workers are required in
the firm, then it will need to locate close to residential areas. If they
want certain types of worker skills, they will need to locate in places
where such skilled workers can be found. However, with work-
from-home and technology, this is not that big of a factor
nowadays.
• Climate: tourism services need to be located in places of good
climate.
• Nearness to other business: some services serve the needs of large
companies, such as firm equipment servicing and so they need to
be very close to such businesses. Businesses may also set up where
close competitors are to watch them and snatch away their
customers.
• Rent/taxes
• Owner’s personal preferences

Factors that affect the location decisions of a retailing firm:


• Shoppers: retailers need to be located in areas where shoppers
frequent, like malls, to attract as many customers as possible.
• Nearby shops: being located to other shops that are visited
regularly will also attract attention of customers into the shop.

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Being near competitors also helps keep an eye on competition and
snatch away customers.
• Customer parking availability: when parking is available nearby,
more people will find it convenient to shop in that area.
• Availability of suitable vacant premises: Obviously, there needs to
be a vacant premise available to set up the business. Vacant
premises can also help the business expand their premises in the
future.
• Rent/taxes: rents and taxes on the locations need to be affordable.
• Access to delivery vehicles: if the retailer has home delivery
services, then delivery vehicles will be required.
• Security: high rates of crime and theft can happen in shops.
Shopping complexes with security guards will thus be preferred by
firms.

Why businesses locate in different countries?


• New markets overseas.
• Cheaper or new raw materials available in other countries.
• Cheaper and/or skilled workers are available overseas.
• Rent/ taxes are lower.
• Availability of government grants and other incentives
• Avoid trade barriers and tariffs: when exporting goods to other
countries, there will be some tariffs, rules and regulations to get by.
in order to avoid this, firms start operating in the country itself,
since there is no exporting/importing involved now.

Overseas location decisions


Setting up a business overseas involves a number of challenges
including:
• cultural and language barriers where managers are unfamiliar with
local customs
• legal issues where local laws are different
• exchange rate issues - unexpected changes in the value of sterling
can have an impact on prices, costs and profits

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The role of legal controls on location decisions
Governments influence location decisions:
• to encourage businesses to set up and expand in areas of high
unemployment and under-development. Grants and subsidies can
be given to businesses that set up in such areas.
• to discourage firms from setting in areas of that are overcrowded
or renowned for natural beauty. Planning restrictions can be put
into place to do so.

E-commerce and/or fixed premises


E-commerce is any transaction that takes place through the internet.

M-commerce is any transaction that takes place using mobile


technologies, for example a mobile phone app.

E-commerce and m-commerce allow businesses to choose cheap


locations, because there is no requirement to be located near to
customers.
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These businesses are able to sell items online and then send them to
customers using couriers. Common examples of businesses that
operate online are clothing companies, designers, bloggers and
influencers.

Some companies choose to have both an online business and a fixed


retail premises. This is common in retail industries such as clothing
shops. Many new, small businesses focus on e-commerce and m-
commerce when they are starting out in order to keep their costs low.

The main benefits of e-commerce and m-commerce are:


• lower costs
• flexible working hours
• access to a much larger market of potential customers
• ability to be open 24 hours a day, seven days a week
• relatively low-price marketing and promotion

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