A good location is a balance between LOW COSTS and good ACCESS to CUSTOMERS (and possibly suppliers).
1. Technology
For small businesses, the development of communication technologies (e.g. the internet, email and mobile phones) means people can work from home and away from a centralised office, distribution or centralised bases. This type of work arrangement is called TELEWORKING.
Teleworking definition: Working in a location that is separate from a central workplace, using telecommunication technologies.
Many start-ups work from home because:
- It is cheaper (lower cost/lack of overheads)
- Flexibility as telecommunications allow a person to stay in contact while travelling.
- Time flexibility. Enables staff to work outside normal office hours.
Internet and e-commerce has allowed small companies to compete with larger competitors.
2. Costs of factors of production
The main assumption made about decisions concerning the costs of factors of production is that the firm will locate at the LEAST-COST SITE.
Least-cost site definition: The business location that allows the firm to minimise its costs (and hence its selling price).
Least-cost sites --> Costs low --> Compete with large competitors --> Lower selling price --> More Sales --> Increase competitiveness of the business --> Business makes a reasonable profit.
Main Costs of Production:
Land Costs
For small businesses land costs are a large percentage of its total costs.
Many retailers chose to locate away from the town centres (as it has lower rent).
Also avoiding expensive areas, such as London.
Being based at home reduces land costs and makes a small business more competitive.
Labour Costs
In the UK there are variations in wage levels between regions. Southeast of England is most expensive region. Further away from London, the lower the wage levels.
On its own, low wage areas should be the least-cost sites. But this is not the only important factor.
A highly skilled Labour force compensates for slightly higher wage levels through greater LABOUR PRODUCTIVITY.
Labour cost per unit is MORE important than wage level.
Many small firms source their materials from abroad because the lower labour costs help to keep their prices low and competitive.
Does the job field require high levels of skill or education? If so, the quality of work is more important than labour costs.
Transport Costs
The location of raw materials is crucial for most primary industries. E.g. Extraction industries like mining must be located where the materials are found.
- BULK-REDUCING/WEIGHT-LOSING INDUSTRIES - A production where the import weighs more than the final product. To reduce costs bulk-reducing industries need to locate near its source of inputs. This is because they are heavy and more expensive to transport than the final product. An example of a bulk-reducing industry is mining.
- BULK-INCREASING/WEIGHT-GAINING INDUSTRIES - A production where the import weighs less than the final product as it gains weight in the production process. For example, bottled water gains weight as water is added into the bottles. To reduce costs bulk-gaining industries need to locate closer to the market than to the raw materials.
Example: Clothing retailer Zara's USP is rapid distribution. It still produces its clothes in Europe so it can distribute the products quicker to its main retailers.
6. Infrastructure
Infrastructure Definition: The network of utilities, such as transport links, sewerage, telecommunication systems, health services and educational facilities.
- Adequate transport links (road, rail, canal, ports) are needed to move raw materials or finished products easily.
- The labour force (workers) also need to be able to easily access their place of work.
- Also need basic services to operate normally (e.g. sewerage and high quality telecommunications systems, e.g. telephone).
For small businesses, the local infrastructure may be more important than the regional/national infrastructure. A small business should consider:
- Are parking spaces available nearby?
- Cost to park?
- Traffic flow good?
- Is it on a bus route or close to a station?
- If the business is a shop, is it isolated or convenient for visits to other shops?
- Is it easy to receive deliveries?
- Being close to the market is about maximising revenues.
- Small companies tend to be in the TERITARY sector - so being close to the market is very important as their customers expect CONVENIENCE and ACCESS.
- Small retailers look at the FOOTFALL and research the type of customers in the area.
- Some organisations locate close to each other e.g. Banks, estate agents, charity shops. This brings potential customers who are drawn to the area by competitors and are then likely to visit their premises.
- Some firms anticipate how customers think and act e.g. Coffee shops near shopping areas or in book shops.
- Transport costs may be saved if firms locate close to their market. E.g. A supplier of raw materials locating near a manufacturer.
- A business may locate in a high rent/exclusive area, if it believes it can charge higher prices.
8. Qualitative Factors
Definition of Qualitative factors: Based on the opinions and wishes of individuals. These factors can influence business decisions because an entrepreneur will want to include his or her own wishes and preferences in decisions taken.
Convenience
Where the entrepreneur lives
Unique Selling Points
Location is its USP. Unusual premises may be an attractive feature of the business.
Quality of Life
Quality of life in an area to the owner and workers. May not be the most least-cost site.
Industrial Inertia
Once established, a firm may be reluctant to relocate elsewhere. Esp. a small business operating from home. Reasons why:
- Desire of owner's family to remain in same place for personal reasons
- Difficulties building up a new customer base in a new location
- Loyalty to its existing labour force
- Desire to keep the same locally based suppliers.
- Fear of change
- Lower morale and productivity before the relocation, as a result of some staff probably losing their jobs.
- The cost of relocation.
- Transitional difficulties while adjusting to the new location and processes.
Government Intervention
The government gives grants (gifts) to firms in Assisted Areas - Parts of England that have relatively low levels of economical activity and high and persistent unemployment.
But this is not a key factor in the location of start-ups or small businesses.
Locating Small Businesses
Research shows:
Poor location is the main cause of small business failure.
Least-cost site is not ideal for small businesses as the tendency to provide services means convenience to the customer is more important than low cost.
Key factors influencing small business locations:
- Demographic Factors - such as whether the local population matches the target market.
- Economic wealth of the local area - Can it support the number of businesses located in the vicinity
- Footfall - High footfall during opening times?
- Parking Factors - Cost and time
- Competitors' locations - Competition fierce? Or will it attract potential customers into the area?
- Location History - Does the individual site have a good track record of successful business activity?
- Council Policies - Such as limiting certain business activities (e.g. nightclubs) to certain areas of town
