5.4 Location

Revision Notes – 5.4 Location

Location of a Business

Business location refers to the geographical site where production or service provision takes place. The decision is vital because it affects costs, accessibility to customers, staff recruitment, and competitiveness. A poorly chosen location can make an otherwise strong business model fail. Location factors are generally divided into quantitative (financial, measurable) and qualitative (subjective, strategic) considerations.

Quantitative Factors Affecting Location

• Availability, Suitability, and Cost of Land

• Land prices vary significantly depending on proximity to city centres, transport hubs, or rural areas.

• Urban land is more expensive due to higher demand, but provides better access to customers and workers.

• In contrast, rural land may be cheaper, but lower footfall or poor accessibility might limit profitability.

• Businesses must balance cost savings with potential lost revenue opportunities.

• Availability, Suitability, and Cost of Labour

• Labour supply influences wages, skills availability, and employee turnover.

• High-skill industries (e.g., technology, engineering) may prefer developed economies like Germany with strong talent pools.

• Labour-intensive industries (e.g., textiles, assembly work) often relocate to countries with low wages, such as Bangladesh or Indonesia.

• Businesses must consider training costs and the risk of labour shortages.

• Proximity to Market (Customers)

• Firms selling directly to customers (retail, restaurants, services) require high-traffic areas close to their target market.

• Bulk-increasing industries (e.g., beverages, furniture) should be near consumers to reduce high distribution costs.

• Businesses that sell online may have more flexibility but still need warehouses near major transport links.

• Proximity and Access to Raw Materials

• Industries that use heavy raw materials, such as steel manufacturing or paper production, prefer locations near suppliers to save on transport costs.

• Bulk-reducing industries (where inputs are heavier than outputs) benefit most from this, e.g., mining or timber.

• A lack of reliable raw material access can disrupt production and increase costs.

• Government Incentives and Limitations

• Governments offer incentives (tax breaks, grants, subsidies) to attract firms into certain regions, often to create jobs.

• For example, enterprise zones in the UK and Wales provide financial and infrastructural benefits.

• However, governments may also impose restrictions, such as higher taxes, environmental regulations, or bureaucratic licensing, which may push firms away.

• Feasibility of E-commerce

• The rise of e-commerce reduces the importance of physical location for some businesses.

• Online retailers may only need warehouses with good transport access rather than retail outlets.

• However, some businesses (e.g., convenience stores, airlines, car dealerships) require physical presence to meet customer needs.

Qualitative Factors Affecting Location

• Management Preferences

• Decisions can be influenced by the instincts, experiences, or personal wishes of senior managers.

• A manager may choose a location near their hometown, or in an area where they believe the company can integrate better with the community.

• Such subjective choices may not always be the most cost-efficient but can influence long-term culture and stability.

• Local Knowledge

• Familiarity with an area reduces risks in operations, hiring, and market access.

• Entrepreneurs often start businesses in locations they know well, leveraging contacts and insider knowledge.

• Local experience can also help in dealing with cultural and legal issues.

• Infrastructure

• Refers to the transport, communication, and utility systems available.

• Good infrastructure reduces operating costs and improves efficiency.

• For example, access to ports and airports is vital for export-heavy businesses.

• Reliable utilities (water, electricity, internet) are essential for production continuity.

• Political Stability

• Businesses need stable environments to avoid disruptions from strikes, corruption, or policy changes.

• Indicators of stability include strong law enforcement, consistent taxation, minimal corruption, and steady exchange rates.

• Political unrest or weak governance discourages foreign investment, even if costs are low.

• Government Restrictions and Regulations

• Every country has its own rules, licences, and bureaucratic systems that affect ease of doing business.

• Countries with lengthy and complex regulatory frameworks may deter investment.

• Some governments impose labour or environmental restrictions that increase costs.

• Ethical Issues

• Businesses often face ethical considerations when deciding on location.

• For instance, a company may avoid relocating production if it would cause mass unemployment in a local community.

• Firms may move operations to remote areas to limit noise or pollution complaints.

• Reputation and corporate social responsibility influence long-term sustainability.

• Comparison Shopping (Clustering)

• Some firms deliberately locate near competitors to attract more customers.

• For example, car dealerships often cluster together so consumers can compare easily.

• This can create competitive pressure but may increase overall demand for the area.

Reorganizing Production (National and International)

• Outsourcing (Subcontracting)

• Involves contracting another company, often in the same country, to handle certain tasks.

• Allows businesses to focus on core activities while external specialists handle non-core work.

• Example: An Australian bank outsourcing customer service to a call centre in Perth.

• Risks include quality control issues and dependence on third parties.

• Offshoring

• A form of outsourcing but involves moving tasks to another country.

• Often motivated by lower labour costs or access to specialist expertise abroad.

• Example: The same Australian bank offshoring online banking maintenance to India.

• Risks include cultural differences, communication barriers, and ethical concerns over labour practices.

• Insourcing

• Bringing previously outsourced activities back in-house.

• Often done when quality issues arise with contractors or when cost savings diminish.

• Example: A company may insource IT services to regain control and improve performance.

• Reshoring

• The reverse of offshoring, bringing previously offshored activities back to the home country.

• Driven by rising transport costs, political pressures, supply chain disruptions, or the need for better quality control.

• Governments often provide support for reshoring to encourage job creation domestically.

Advantages of Outsourcing/Offshoring

• Reduced costs through cheaper labour or economies of scale.

• Improved efficiency and flexibility by focusing on core activities.

• Access to specialised expertise and technology.

• Possibility of higher quality from expert providers.

Disadvantages of Outsourcing/Offshoring

• Quality may suffer without strict monitoring.

• Hidden costs in supervising and coordinating subcontractors.

• Job losses at home can reduce employee morale.

• Ethical risks, such as unsafe conditions or child labour abroad, can damage reputation.

Reasons for Insourcing

• Dissatisfaction with external contractors’ quality or reliability.

• Costs of outsourcing no longer justify savings.

• Strategic desire for greater control over operations.

• Protecting sensitive or confidential business processes.

Reasons for Reshoring

• Rising global transport and logistics costs.

• Political pressure and government incentives to bring jobs back.

• Customer concerns about ethical sourcing and sustainability.

• Greater flexibility and closer control over production.