Cambridge IGCSE0450

Location decisions

Business Studies 0450 Chapter Notes

What this chapter covers

Location decisions - The main factors influencing the location and relocation decisions of a business
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In this chapter

  1. 1Why Location Matters: The Strategic Choice
  2. 2Locating a Manufacturing Business
  3. 3Locating a Service Sector Business
  4. 4Going Global: Locating Overseas
  5. 5Making and Justifying the Final Choice

1. Why Location Matters: The Strategic Choice

A location decision is one of the most important strategic choices a business makes. It's a long-term decision that is difficult and expensive to reverse. The right location can lower costs and boost revenues, while the wrong one can cripple a business. The main goal is to find a location that helps the business achieve its objectives, such as maximising profit. This often involves a 'trade-off', where the business must balance competing factors. For example, a location with high customer numbers might also have very high rent, so the business must decide which factor is more important for its success.

Key term

Location Decision: The process of choosing a geographical site for a firm's operations to minimise costs and maximise other advantages.

Worked example 14 marks

A new coffee shop owner is choosing between two locations. Location A is on a quiet side street with low monthly rent of $500. Location B is on a busy high street with high monthly rent of $2,000. Explain the trade-off the owner faces.

  1. 1

    Step 1: Identify the key factors. The main factors are cost (rent) and potential revenue (customer access).

  2. 2

    Step 2: Analyse Location A. The low rent of $500 reduces the shop's fixed costs, making it easier to break-even. However, the quiet street means fewer potential customers (low footfall), which could limit sales revenue.

  3. 3

    Step 3: Analyse Location B. The high rent of $2,000 significantly increases fixed costs, putting pressure on the business to make high sales. However, the busy high street location means a large number of potential customers, offering a high sales potential.

  4. 4

    Step 4: Explain the trade-off. The owner must trade off the security of low costs (Location A) against the opportunity for high revenue (Location B). Choosing B is a higher-risk, higher-reward strategy, while A is lower-risk but may have limited growth potential.

Recap

  • Location is a strategic, long-term decision.
  • The right location can reduce costs and increase revenue.
  • The main goal is to find a location that best supports the business's objectives.
  • Location decisions almost always involve making trade-offs between different factors.
  • Factors to consider include costs, market access, and labour supply.

Quick check

  1. State two costs that are directly affected by a business's location.2 marks

2. Locating a Manufacturing Business

Manufacturing businesses transform raw materials into finished goods. Their location decisions are heavily influenced by physical and cost factors related to the production process. Key considerations include proximity to raw materials, especially if they are heavy or bulky (like in steel production), as this reduces transport costs. Access to a reliable and affordable supply of labour is also crucial. The cost and availability of suitable land for a large factory is a major factor, as is access to transport infrastructure like ports, railways, and motorways to bring in supplies and ship out finished products. Finally, governments may influence the decision through planning permission rules or by offering grants to locate in certain areas.

Key term

Bulk-reducing industry: An industry where the final product is lighter or smaller than the raw materials, making it cost-effective to locate near the source of inputs.

Examiner insight

Examiners reward answers that clearly link a specific location factor to a logical business reason, such as 'locating near a port reduces the transport costs of imported components'.

Worked example 14 marks

A company produces potato crisps and sells them to supermarkets across the country. Using two factors, explain why it might be beneficial for the company to locate its factory in a rural area known for farming.

  1. 1

    Factor 1: Proximity to raw materials. Potatoes are the main raw material. They are bulky and heavy to transport. By locating near farms, the company can significantly reduce the cost of transporting the potatoes to the factory. This also ensures the potatoes are fresh, which can improve the quality of the final crisps.

  2. 2

    Factor 2: Cost of land. A crisp factory requires a large area of land for the production line, warehouses for potatoes and finished goods, and lorry access. Land in rural areas is typically much cheaper to buy or rent than land in or near cities. This reduces the business's start-up and fixed costs, improving profitability.

Recap

  • Manufacturing locations are often chosen to minimise transport and land costs.
  • Proximity to raw materials is vital for bulk-reducing industries.
  • Good transport infrastructure (ports, roads, rail) is essential for moving supplies and products.
  • The availability and cost of suitable land can determine where a factory can be built.
  • Access to a supply of labour with the right skills is also a key consideration.

Quick check

  1. Identify two reasons why a car assembly plant might locate near a major port.2 marks

3. Locating a Service Sector Business

The service sector provides services rather than physical goods. For many service businesses, such as hairdressers, restaurants, and solicitors, being close to their customers is the most important factor. They need to be convenient and accessible. However, technology has changed this for many others. With reliable, high-speed internet, businesses like call centres, software developers, and online banking services can locate almost anywhere in the world. These are known as 'footloose' businesses. For them, key factors become the availability of skilled labour (e.g., IT specialists), the cost of labour, and the cost of suitable office premises. Government grants and local tax rates can also be influential.

Key term

Footloose industry: An industry that is not tied to a specific location or resource and can locate wherever it chooses, often based on factors like technology or labour costs.

Common pitfall

A common mistake is assuming all service businesses need to be close to customers. Many modern services, like call centres or online consultancies, can be located anywhere with good internet.

Worked example 16 marks

A large insurance company is planning to open a new 500-person call centre to handle customer queries. It is considering locating either in the capital city centre or in a town 100km away with high unemployment. Justify which location is likely to be better.

  1. 1

    Step 1: Analyse the business needs. A call centre does not need to be physically near its customers. Its main requirements are a large supply of labour, reliable technology infrastructure, and low-cost premises.

  2. 2

    Step 2: Evaluate the capital city. The city centre will have high rent and high competition for staff, leading to higher wage costs. It has good infrastructure but the costs are likely to be prohibitive.

  3. 3

    Step 3: Evaluate the distant town. The town with high unemployment offers a large pool of available labour, likely at a lower wage rate. Rents for a large office building will also be significantly cheaper. The government may also offer grants to create jobs in an area of high unemployment.

  4. 4

    Step 4: Conclude and justify. The town 100km away is the better location. The significant cost savings on labour and rent will far outweigh any potential disadvantages, especially as the business is 'footloose' and does not need to be near its customers. This will lead to higher profitability.

Recap

  • For many service businesses, proximity to customers is the number one priority.
  • Technology and the internet have allowed many service businesses to become 'footloose'.
  • Footloose businesses prioritise labour costs, skills, and premises costs over market access.
  • The skill level of the local workforce is often a critical factor for specialised services.
  • Costs like rent and business taxes can vary dramatically between locations.

Quick check

  1. Give an example of a service business that needs to be close to its customers and one that does not.2 marks

4. Going Global: Locating Overseas

Many businesses now operate on a global scale and choose to locate some or all of their operations in other countries. This can be a 'pull' from the new country or a 'push' from the home country. Pull factors include access to new, larger markets to increase sales, access to cheaper or more skilled labour to reduce costs, and the availability of raw materials. Foreign governments may also offer powerful incentives like tax holidays or large grants. Push factors include rising wage costs, high taxes, or strict regulations in the home country. A key reason for producing in another country is to avoid trade barriers like tariffs (a tax on imports), which makes the product cheaper for customers in that market.

Key term

Tariff: A tax imposed by a government on imported goods, which a business can avoid by producing the goods within that country or trade bloc.

Examiner insight

When discussing international location, examiners look for specific, well-explained reasons rather than just listing 'it's cheaper'. For example, specify 'lower minimum wage rates' or 'lower corporation tax'.

Worked example 14 marks

A European clothing brand, 'Chic Threads', is considering moving its manufacturing from France to Vietnam. Explain two potential benefits for Chic Threads of this international move.

  1. 1

    Benefit 1: Lower Labour Costs. Wage rates for factory workers in Vietnam are significantly lower than in France. This will reduce the variable cost per item of clothing produced. This cost saving can be used to lower prices for customers, making the brand more competitive, or be kept as higher profit for the business.

  2. 2

    Benefit 2: Access to Asian Markets. By having a production base in Vietnam, Chic Threads is geographically closer to the large and growing consumer markets in Asia. This can reduce distribution times and costs for selling in these countries. It may also help the brand to better understand and adapt to local tastes and trends.

Recap

  • Businesses locate overseas to access new markets and reduce production costs.
  • Lower labour costs are a major pull factor for international manufacturing.
  • Producing within a country or trade bloc helps to avoid tariffs and other trade barriers.
  • Governments may offer grants and tax incentives to attract foreign investment.
  • High costs or strict regulations at home can 'push' a business to move abroad.

Quick check

  1. State one 'push' factor and one 'pull' factor that might encourage a business to locate overseas.2 marks

5. Making and Justifying the Final Choice

Choosing the best location is rarely simple. The process requires a logical approach. First, the business must identify the factors that are most important for its success (e.g., cost, customer access, labour skills). Second, it should gather information on several potential locations, comparing them against these key factors. Third, the business must analyse the information and weigh up the pros and cons of each option. This involves recognising 'trade-offs' – for example, Location A has lower rent, but Location B has better transport links. The final step is to make a recommendation and be able to justify it. The justification is the most important part; it should explain not only why the chosen location is good, but also why it is better than the other alternatives, linking the decision back to the overall objectives of the business.

Key term

Trade-off: A situation where having more of one thing means having less of another; in location decisions, this often means sacrificing low rent for better market access, or vice versa.

Common pitfall

Simply listing the pros and cons of each location without making a clear, justified final recommendation. The justification, explaining WHY one option is superior, is where most marks are awarded.

Worked example 18 marks

A business that makes high-quality, handmade wooden furniture needs a new workshop. It has narrowed its choice to two locations.

Location X: A rural unit with very low rent. It is large, but public transport is poor and it is far from major towns. Location Y: A smaller unit in a town's 'artisan quarter'. Rent is high, but it is surrounded by other craft businesses and galleries, with good transport links.

Recommend which location the business should choose and justify your answer.

  1. 1

    Step 1: Identify key factors. For a high-quality furniture maker, key factors are likely to be workshop space, skilled labour, cost (rent), and access to customers who will pay high prices.

  2. 2

    Step 2: Analyse Location X. The main advantages are low rent and a large space, which reduces costs and allows for production efficiency. The disadvantages are significant: poor transport makes it hard to attract skilled workers and deliver furniture. Being far from towns makes it difficult to attract wealthy customers.

  3. 3

    Step 3: Analyse Location Y. The main disadvantage is high rent, which increases fixed costs. The space is also smaller. However, the advantages are strong. Being in an 'artisan quarter' attracts the right type of customer willing to pay premium prices. It is also easier to recruit skilled craftspeople due to good transport links. Clustering with other craft businesses can create a buzz and attract more visitors.

  4. 4

    Step 4: Make a justified recommendation. Location Y is the recommended choice. Although the rent is higher, the business produces a high-value product. Its success depends more on finding the right customers and skilled staff than on minimising rent. The benefits of being in a prime location with a target customer base and a good labour pool outweigh the higher cost. The business can charge premium prices to cover the higher rent, making this location more profitable in the long run. Location X is too isolated and risks the business failing due to a lack of staff and customers.

Recap

  • The location decision process involves identifying factors, comparing options, and making a choice.
  • A good justification explains why one location is better than the alternatives.
  • Recognising and explaining the trade-offs between different factors is a key skill.
  • The final choice should always be linked back to the business's main objectives, like profit or growth.
  • There is often no single 'perfect' location, only the 'best fit' for a particular business.

Quick check

  1. What is meant by a 'trade-off' in a location decision?2 marks

End-of-chapter exercise

Test yourself on the whole chapter. Work through these before moving on.

  1. Define 'footloose industry' and give one example.2 marks
  2. Identify two reasons why a business might choose a location with high unemployment.2 marks
  3. Explain two factors a luxury hotel chain would consider when choosing a new city location.4 marks
  4. Explain why a government might offer financial incentives to a business to locate in a specific area.4 marks
  5. A company makes heavy steel girders for the construction industry. Explain two factors that will be critical to its location decision.4 marks
  6. Analyse the potential benefits for a UK-based car manufacturer of moving its production to a country in South-East Asia.6 marks
  7. Discuss the importance of 'access to markets' for a bakery compared to a software development company.6 marks
  8. A new online-only fashion retailer is starting up. Advise the owner on the three most important location factors they should consider for their office and warehouse. Justify your advice.8 marks
  9. 'For a retail business, being close to customers is the only location factor that matters.' Do you agree? Justify your answer.10 marks
  10. A company that assembles wind turbines wants to build a new factory. The parts are large and imported by sea. The finished turbines are sold to wind farms across the country. The company is considering three locations: Location A: Next to a major port, but with high land costs and a shortage of skilled engineers. Location B: In a rural area with low land costs and government grants available, but 150km from the nearest port. Location C: On the edge of a large city with a good supply of skilled engineers, but with high wage rates and significant road congestion. Recommend and justify which location the company should choose.12 marks

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