CHAPTER 5.

4 LOCATION

Analyse and
Apply

Anaa
Evaluate
 LOCATION
It is the geographical position of a business.
Location decision is one of the most important
decision made by senior management team and has
important implications on the profitability and
survival of the business.
The decision is regarded as a long term strategic
goal.

Factors that affect location decision

Qualitative factors
Quantitative factors
QUANTITATIVE FACTORS - measurable in financial terms and
has direct impact on cost, revenue and its profitability
Site and capital costs – cost of building (includes shop fittings)
on developed/undeveloped site
Labour costs – whether it is labour or capital intensive
Transport costs – proximity to suppliers and markets
Market potential – (level of sales) small shops provide
convenient shopping to potential customer. It adds status to
business that contribute to added value
Government grants – given to businesses as an incentive to
locate in deprived areas where there is high employment.

TECHNIQUES USED TO ASSIST IN LOCATION DECISION

Profit Estimates – compare revenues & costs of each location
Investment Appraisal – pay back method and annual profit as a
percentage of original cost of each location
Break even analysis – business will benefit with low overheads
QUALITATIVE FACTORS - non-measurable factors that influence
business decisions

Safety – locate in remote areas to avoid risk & accident to

public though it will increase transport costs
Room for further expansion – difficult to expand if area is
small, needs to be considered for long term expansion
Manager’s preferences – managers of small businesses have
personal preference regarding work and home environment
Ethical considerations - relocation may make workers
redundant which is considered as unethical and immoral
Environmental concerns – unwilling to set up in an area that is
sensitive from an environmental point of view
Infrastructure – transport and communication links. Online
stores is an answer for addressing this issue
 OTHER LOCATION ISSUES
Development of transport and communication has made it
possible for the retail business to survive amidst online business.
Government encourages setting up of industrial estates,
business parks and convention centres
External economies of scale – pooling of businesses in one
area facilitates further growth
Multi-site locations
Many businesses start and continue to trade from just one
business location but growth of the business necessitates the
opening of locations on more than one site.
A retailer who expands in other locations nearby and then
across a country
A manufacturer who establishes regional distribution centres
A franchisor that expands by selling geographical territories to
franchisees
 WAYS OF REORGANISING PRODUCTION – NATIONALLY
AND INTERNATIONALLY OUTSOURCING

OUTSOURCING – using another business to undertake a part

of the production process rather than doing it within the business
using the firm’s own employees
SUBCONTRACTING – assigning to another business part of
the contract e.g. specialist activity
OFFSHORING – the relocation of a business process done in
one country to the same or another company in another country
INSOURCING – undertaking a business function or process
within a business rather than contracting it to another business
INSHORING – ending offshore contracts with overseas
suppliers and returning functions back to business in the home
country. OR Inshoring is the opposite of Offshoring. It is the
process of moving a business operation from overseas to the
local country.
Advantages of multi-site locations
Most importantly – closer to customers; the business operates
in the geographical markets when it can compete
Greater potential for promotion amongst junior management
Recruitment may be easier, particularly is done locally
Marketing and management economies of scale – costly
resources can be spread across
Easier to flex capacity – by adding or removing locations
Less risk of business disruption from problems at one location
Better understanding of local market cultures & conditions
Disadvantages of multi-site locations
Potential duplication of activities (diseconomies of scale)
Harder to control operations – though IT systems can make
this much easier
Communication across the business is more challenging
Increased strategic risk – the risk that the business does not
understand the local market which it is entering
Insourcing - Delegating a job to someone within a company, as
opposed to someone outside of the company (outsourcing). One
reason for insourcing to occur is if a company had previously
outsourced a certain task, but was no longer satisfied with the
work being done on that task, so the company could therefore
insource the task and assign it to someone within the company
who they believe will do a better job.

Insourcing is a business practice in which work that would

otherwise have been contracted out is performed in house.
house. Insourcing often involves bringing in specialists to fill
temporary needs or training existing personnel to perform
tasks that would otherwise have been outsourced. An example is
the use of in-house engineers to write technical manuals for
equipment they have designed, rather than sending the work to
an outside technical writing firm.