LOCATION
What is location?
Optimal location- A business location that gives the best
combination of quantitative and qualitative factors.
An optimal location will have to be a compromise of one of the balances:
• High fixed cost of the site with convenience for customers and potential sales
revenue
• Low cost of a remote site with limited supply of quality labour
• Opportunities of receiving government grants in areas of high unemployment
with the risks of low sales as average incomes in the area may be low.
Factors influencing Location decisions:
Quantitative factors- These are measurable in financial term and will have a direct
impact on either the costs of a site or the revenues from it and its profitability.
• Labour costs- Locational factor depends on whether the business is capital or
labour intensive. An insurance company call centre will need many staff, but the
labour costs of a nuclear power station will be a very small proportion to its
total costs.
• Transport costs- Applies to business that use heavy and bulky raw materials such
as steel making will cause high transport costs if suppliers are at a great distance
from the steel plant.
• Sales revenue potential - The level of sales made by a business depends directly
on location. Certain locations can add status and image to a new business and
also allows value to be added to the product through the customers view. For
example high-class retailers situated in London's Bond street.
• Government Grants - Government across the world are keen on attracting new
business to locate their country. Grants are offered to act as an incentive.
Techniques to assist in location decision:
1. Profit Estimates- By comparing the estimated revenues and costs of each location
the site with the highest annual potential profit may be identified.
2.Investment appraisal- Location decisions often involve a substantial capital
investment. Investment appraisal methods can be used to identify locations with
the highest potential returns over a number of years.
3.Break even analysis- A straight forward method of comparing two or more
possible locations. The lower the break-even level of output the better the site is,
other things being equal.
Qualitative factors- these are non-measurable factors that may influence business
decisions.
• Safety-To avoid potential risk to the public and damage to the company's
reputation as a consequence of an accident that risked public safety.
• Room for further expansion-In small businesses, managers personal preferences
regarding desirable work and home environment could influence location
decisions of the business.
• Labour supply- Apart from the cost of Labour, the availability of workers with
appropriate skills will be an important factor for business location decisions.
Environmental concerns- A business might be reluctant to set up in an area
particularly sensitive form an environmental viewpoint which could lead to poor PR
and actions from pressure groups.
Infrastructure- The quality of local infrastructure, especially transport and
communication links, will influence the choice of location.
Other location Issues
Pull of the market- The transport and communication industries have developed
rapidly and the world has become a single market for so many goods. The internet
can achieve a massive amount in terms of rendering location of a retailing business
making it less important.
Example: The cinema used to be the centerpiece of town but is now found
regenerated on the ring roads.
External Economies of scale
These are cost reductions that cam benefit business as the industry ‘clusters’ and
grows in one region. It is common for firms in the same industry to be clustered in
the same region. This makes it easier to arrange co-operation and joint ventures
when the businesses are located closely to each other and attract a qualified pool
of labour to this area.
Advantages
Greater convenience for consumers
Lower Transport costs
Cost advantages of multi-sites in different
countries
Helps to develop staff skills and improve
motivation
Disadvantages

Co-ordination problems between the locations

Potential lack of control and direction from
senior management based at the head office

Different cultural standards and legal systems
in different countries

If sites are too close to each other, there may
be a danger of cannibalism where one
business takes sales away from another.
Masdar city is a project in Abu Dhabi, in the UEA. Its core is a pLanned city being built by
the Abu Dhabi Future Energy Company. The city will rely entirely on solar energy and
other renewable energy sources with a sustainable zero-carbon, zero-waste ecology
and will be a car free city. The city is designed to be become a hub for clean tech
companies.
http://www.youtube.com/watch?v=FyghLnbp20U
In your city you need to locate the following places:
• McDonalds
• Cement factory
• Mall
• Residential area
• School
Activity 34.6