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Location Decisions Essay

Deciding on the best location for a new business or relocating an existing one is often crucial to its success. Location decisions choosing new sites for expansion or relocation of the business are some of the most important decisions made by management teams. Selecting the best site will have a significant effect on many departments of the business and, ultimately, on the profitability and chances of success of the whole firm. Location decisions have three key characteristics: They are strategic in nature as they are long term and have an impact on the whole business.

•They are difficult to reverse if an error of judgment is made due to the costs of relocation.

•They are taken at the highest management levels and are not delegated to subordinates.

An ‘optimal’ location decision is one that selects the best site for expansion of the business or for its relocation, given current information. This best site should maximize the long-term profits of the business. The optimal site is nearly always a compromise between conflicting benefits and drawbacks. For example:

•A well-positioned high-street shop will have the potential for high sales but will have higher rental charges than a similar sized shop out of town. •A factory location which is cheap to purchase due to its distance from major towns might have problems recruiting staff due to lack of a large and trained working population.

So an optimal location is likely to be a compromise one that balances:

•high fixed costs of the site and buildings with convenience for customers and potential sales revenue •the low costs of a remote site with limited supply of suitably qualified labor •quantitative factors with qualitative ones

Factors influencing location decisions

•Site and other capital costs such as building or shop-fitting costs These vary greatly from region to region within a country and between countries. The best office and retail sites may be so expensive that the cost of them is beyond the resources of all but the largest companies. The cost of building on a Greenfield site one that has never previously been developed must be compared with the costs of adapting existing buildings on a developed site. •Labor costs

The relative importance of these as a locational factor depends on whether the business is capital or labor intensive. An insurance company call center will need many staff, but the labor costs of a nuclear power station will be a very small proportion of its total costs. The attraction of much lower wage rates overseas has encouraged many European businesses to set up operations in other countries – for example, bank and Insurance Company call centers. •Transport costs

Businesses that use heavy and bulky raw materials such as steel making will incur high transport costs if suppliers are at a great distance from the steel plant. Goods that increase in bulk during production will, traditionally, reduce transport costs by locating close to the market.


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