5.4 Flashcards
Factors in Locating a Business
Costs Invved (land, labour, transport)
Competition
Type of land required
Markets
Familiarity with the area
Labour Pool
Infrastructure
Suppliers
The Government
Factors in Loacting a Business - Costs Involved
- Land: if the business is a large manufacturer, then a large surface area may be required whereas a technology firm may only require a small office space initially
- Labour: if the business is technical in nature (a laboratory will need highly skilled workers)
- Transport: transportation costs vary depending on the amount of products transported. Bulk buying, Bulk decreasing
Bulk Increasing
Buying in many components and building something bigger.
E.g. televisions or cars, you may locate close to the market as transporting the finished bigger items would be more expensive than bringing in lots of small components.
Bulk Decreasing
Buying in large quantities of raw materials and turning them into smaller end products.
E.g. papermills, the business may be located close to the raw materials toreduce cost of transportation.
Factors in Loacting a Business - Competition
A balance needs to be made between finding a gap in the market and setting up not far from direct competitors. Retail outlets, cinemas and restaurants often set-up close to their competitors to increase their chance of passing trade if the area is known for a particular product.
Factors in Loacting a Business - Type of Land Required
Global warming may mean locations that were once appropriate are no longer appropriate.
Ski resorts may be located in the alpes while beach resorts on the coast.
Factors in Loacting a Business - Markets
Businesses have always located close to their customers and target market, because of e-commerce a physical marketplace is not needed anymore. Rather than depending on a physical market, businesses may now only require an efficient distribution system (amazon).
Factors in Loacting a Business - Familiarity with the area
Setting up as a sole trader in your home city means yo have knowledge of local networks such as suppliers and possible customers. However, other areas may be larger and research and understanding of the area is needed to reduce risks.
Factors in Loacting a Business - Labour Pool
The business needs to consider the skill level and quantity of potential candidates available in a particular area. If unemployment is high in an area, this could indicate possible savings on salaries (supply and demand).
Factors in Loacting a Business - Infrastructure
Includes transport networks such as roads and airports as well as electronic networks such as internet and other forms of digital communication. Improvements in infrastructure make it easier to do business.
Factors in Loacting a Business - The Government
Governments may offer support if a business locates in a deprived area resulting in significant savings. This may include:
- Non-returnable one time only funds such as grants
- Subsidies to offset the cost of production
- Soft loans at preferential rates of interest
- Tax rebates
The impact of Globalisation on Location
Pull Factors: External Factors make relocating abroad an attractive option
Push Factors: Internal Factors make relocating abroad an attractive option
The impact of Globalisation on Location - External Factors
Improved Communication
Removal of Trade Barriers
Deregulation of Financial Markets
Increasing size of MNC’s
External Factors - Removal of Trade Barriers
Trade across the world has been liberalised due to WTO regulations and also the development of trading blocs such as the EU and NAFTA.
External Factors - Deregulation of Financial Markets
Capital transfers are a lot easier now facilitating FDI, joint ventures and strategic alliances. Internet banking has also made it easier to transfer money from one country to another.
External Factors - Increasing size of MNC’s
The size and influence enables MNC’s to convince countries to allow them to set up operations and have access to government grants reducing their costs due to the number of jobs they bring to the area.
Internal Factors - Reduced Costs
Cheaper labour, more lax legislation and economies of scale make operations abroad more lucrative.
Internal Factors - Increased Market Share
Tap into new markets that are not saturated. Having first mover advantage can be very lucrative, hence why so many businesses are entering China and India.
Internal Factors - Defensive Strategies
Moving overseas so your competitors don’t do it first. This enables the business to grow and increase market share.
Outsourcing
Paying other companies to fulfill certain activities. Used when the business doesn’t have the specialist equipment or expertise for the task. The business focuses on their core activities rather than peripheral activities, enabling them to be more productive and efficient.
E.g a bank hosting a charity
Outsourcing Advantages
- Higher quality work as outsourcing company are specialists
- Recruitment and training costs are reduced
- Less equipment and staff members needed
- Do not need to invest in expensive technology/equipment
Outsourcing Disadvantages
- Less control over outsourced work
- Communication between the two businesses must be very clear
- May have to share sensitive information (accountancy and legal oursourcing)
Offshoring
Involves the relocation of business activities from the home country to a different international location.
E.g. from the US to China or UK to Poland
Offshoring Advantages
- Access lower manufacturing costs
- To access potentially better skilled and higher quality supply
- To make use of existing capacity overseas
- To take advantage of free trade areas and avoid protectionism
- To make it easier to supply target international markets
Offshoring Disadvantages
- Risk of poorer quality
- Longer lead times for supply
- Additional management costs (time, travel)
- Impact of exchange rates
- Communication (language and time zones)
Reshoring
The reverse of offshoring. It involves a business returning production or operations to the host country that had previously been moved to a different international location.
