Being in the right location is a key ingredient in a business’s success. If a company selects the wrong location, it may have adequate access to customers, workers, transportation, materials, and so on. Consequently, location often plays a significant role in a company’s profit and overall success. A location strategy is a plan for obtaining the optimal location for a company by identifying company needs and objectives, and searching for locations with offerings that are compatible with these needs and objectives. Generally, this means the firm will attempt to maximize opportunity while minimizing costs and risks.
Factors Affecting Location Strategy
- Environmental Factors: These include, but are not limited to, zoning ordinances, land use restrictions, development and zoning plans, and the condition of public infrastructure, including roads, railways, waterways, port and harbor facilities, and airports.
- Regulatory Factors: These include factors related to labor, taxes, political environments, and protection of government services, the environment, and citizens.
- Competitive Factors: These include the demands of other firms for the same resources, the ease, cost, and efficiency at which these resources can be obtained, and the ability of the firm to control these resources as well as other factors that are important to its competitive position.
- Social Factors: These include public opinion, the immigration and citizenship status of firm workers, the cultural diversity of the area, the availability of affordable housing, education levels of the populace, and the general life-style of the inhabitants.
- Legal Factors: Company capital investments, labor relations, zoning, labor, intellectual property, public and employee safety, interest payments on debt, taxes, and foreign exchange controls all may need to be addressed when a company decides whether and where to locate facilities.
- Company Factors: These questions involve the company’s costs, size, structure, and management. How important is a lack of concentration of competitors in the area? What are the prices and availability of factors such as labor, materials, and energy? How will a relocation affect an existing company location and what are the costs and risks involved?
There is no single perfect location in terms of factors affecting location strategy. A company must examine its needs and objectives first to determine what factors it is trying to optimize.
- Industry Factors: Industry factors such as competitors, suppliers, nature of product, industry size, and others must be considered when a company analyzes locations. Tariff and trade restrictions, communication and transportation costs, government regulations and policies, a country’s tax structure, and potential currency risks are industry factors that can be important in determining where to locate a business.
Determining which location factors are most important, and how to weigh each against the others, is difficult. Consequently, most companies have a location strategy that is based on obtaining the best overall package of environmental, regulatory, competitive, social, legal, company, and other factors. Each factor selection is developed using quantitative estimating techniques and then a final evaluation of the estimated cost and benefits of each option is completed. In the end, the company has a list of locations that meet its needs and objectives and the location strategy is selected from that list.
Selecting the best overall location takes a great deal of planning and analysis. However, it is very important not to overlook or underrate the power of gut instinct when making decisions on capital investments.
Location-strategy models are increasingly being utilized as a business tool. The location-strategy model is a planning technique that concentrates a market analysis with the location decision. It consists of a mathematical model with two main requirements.
Location-strategy models typically exploit the investment-revenue model. The model plots net revenue as a function of the timing of the investment, the level of investment costs, and the impact of various location factors. If you are a farmer, you can use this model to determine the most cost-effective level of land investment. The model also answers the question, “What if …” For example, “What if the price of diesel fuel increases by $2 per gallon per year for 5 years?” The first step in the model is to determine the variable costs associated with different levels of investment. The next step is to use the model to determine net revenues for each level of investment.
The location-strategy models are used widely in transportation and logistics industries by companies such as DHL and UPS. They allow transport and logistics companies to do cost-benefit analysis and determine the most suitable location for a new hub or distribution center.
Some typical investment-revenue models used in this industry are shown below:
- Investment-Revenue Model
- Investment-Revenue Model with Local Demand
This article is an example of a location strategy. We look at the needs of the business and the location factors to determine the best location. In this case, we have chosen a city of over a million inhabitants, with several airports, a city university and a large non-English speaking population. We also look at the factors that we need to take into account when deciding whether or not to relocate. These include wages (we will be able to hire a native English-speaking workforce for a reasonable rate), the minimum distribution cost (a good transportation infrastructure, including highways, ports and an airport), labor composition (a large non-english speaking population to take advantage of economies of scale in training), and local government (a liberal student visa policy to ensure a flow of qualified and motivated workers and a tough stance against immigration fraud to ensure timely immigration processing).
A location strategy designed to account for the above factors has the potential to increase the company’s profit by taking advantage of economies of scale in training, thus ensuring a skilled workforce with low turnover rates, and tapping into a cheap and rich source of material (the population of the city).