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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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Location decisions notes

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In this chapter

  1. 1Location factors for a manufacturer
  2. 2Location factors for a service business
  3. 3Choosing which country to locate in
  4. 4Legal controls on location
  5. 5Recommending and justifying a location

1. Location factors for a manufacturer

A location decision is the choice of where a business will operate. A manufacturer makes goods, so its factors are the ones that affect production: cost of the site, availability of labour, and access to raw materials or components.

Good transport links matter when the finished product is bulky. They are needed to bring materials in and to deliver the finished goods.

Develop each factor for the business in the question. High rent raises fixed costs, which a small business might not be able to afford. A manufacturer may need trained employees to maintain the quality of its products.

Examiner insight

“Better candidates were able to identify specific factors that would apply to a car manufacturer such as the availability of components or access to transport given the bulky nature of the finished product.” “One common mistake was to identify factors such as competition and demand, which are not classed as significant factors for a manufacturing business.”

Worked example 16 marks

Hartley Furniture is a small business that makes handmade oak tables. It is choosing a site for a new workshop. Explain two factors it should consider when choosing the location.

  1. 1

    Knowledge: the cost of the site, such as rent, is a location factor. [1]

  2. 2

    Application: Hartley is a small business, so it might not be able to afford a site with a high rent. [1]

  3. 3

    Analysis: rent is a fixed cost, so a dearer site means Hartley must sell more tables before it makes a profit. [1]

  4. 4

    Knowledge: the availability of trained labour is a location factor. [1]

  5. 5

    Application: its oak tables are handmade, so Hartley needs skilled workers living near the workshop. [1]

  6. 6

    Analysis: without them the quality of the tables falls, so Hartley could lose customers and sales. [1]

2. Location factors for a service business

A service business sells a service, not a made product. A shop, a salon or a café depends on its customers coming to it, so its key factor is access to customers.

Other factors are the cost of rent and competition nearby. A rival close by sells to the same customers. Transport links matter too, because customers have to reach the business.

Leave out factors that suit a manufacturer. Access to raw materials does not apply to a service business, so that point is not credited.

Examiner insight

“Others ignored that the question referred to a service business, so points related specifically to manufacturing businesses were not credited.” “Many used single words, such as transport or access, which needed further clarification to be credited.”

Worked example 16 marks

Brightside Dental is a new dental clinic. It is choosing between a town-centre site and a quiet site on the edge of town. Rent is higher in the town centre. Explain two factors it should consider when choosing the location.

  1. 1

    Knowledge: access to customers is a location factor for a service business. [1]

  2. 2

    Application: patients have to travel to the clinic for treatment, and more people pass a town-centre site. [1]

  3. 3

    Analysis: a new clinic has no patients yet, so being seen by more people brings more bookings and more revenue. [1]

  4. 4

    Knowledge: the cost of rent is a location factor. [1]

  5. 5

    Application: the town-centre site has the higher rent of the two. [1]

  6. 6

    Analysis: higher rent raises the clinic's fixed costs, so it needs more patients before it makes a profit. [1]

3. Choosing which country to locate in

A business may choose to operate in another country. It compares the countries on factors such as labour costs, availability of labour and access to raw materials.

The government also has an influence. Government grants and subsidies, job creation schemes and environmental concerns can all affect the choice. A grant might lower start-up costs and reduce the amount the business needs to borrow.

A business that will also sell in the country looks at its customers. High unemployment makes workers easier to recruit, but customers then have less to spend.

Examiner insight

“Knowledge of government influences on the location of business was generally weak.” “Government grants and subsidies, job creation schemes and environmental concerns could all have been discussed in this context.”

Worked example 16 marks

Norvik Shoes makes leather shoes. It is deciding whether to open a factory in Country A or Country B. Wages are lower in Country B and its government offers grants to new factories. Explain two reasons why Norvik Shoes might locate in Country B.

  1. 1

    Knowledge: lower labour costs are a reason to choose a country. [1]

  2. 2

    Application: wages are lower in Country B, so Norvik pays its factory workers less there. [1]

  3. 3

    Analysis: each pair of shoes costs less to make, so Norvik's profit margin is higher. [1]

  4. 4

    Knowledge: a government grant is a reason to choose a country. [1]

  5. 5

    Application: Norvik would be opening a new factory, which is what Country B's grant is for. [1]

  6. 6

    Analysis: the grant lowers the start-up cost, so Norvik needs to borrow less and pays less interest. [1]

5. Recommending and justifying a location

A recommendation needs a clear choice of one location. Weigh the factors against each other. Say which matters most to this business, and why.

Do not just list the differences. Explain the significance of each: how it affects this business, and why. Rent that is higher in A and lower in B is only a fact until you say what it does to profit.

Finish with a justified decision that also says why the other location is less suitable. Do not repeat earlier points.

Examiner insight

“Many answers simply listed the differences between the two locations, such as more competition from the café or more/less customers from offices, rather than explaining the significance of these points to the location decision.” “Better responses included a conclusion that chose one location and justified this choice but also included why the alternative location was rejected.”

Worked example 18 marks

Peak Outdoors sells walking boots and jackets to well-off hikers. Site A is in a mountain town: rent is textdollar4000 a month and many hikers pass by. Site B is in an industrial estate: rent is textdollar1500 a month and few shoppers pass by. Recommend which site Peak Outdoors should choose. Justify your answer.

  1. 1

    Knowledge: access to customers and the cost of rent are location factors. [1]

  2. 2

    Application: many hikers pass Site A, and hikers are Peak's target customers. [1]

  3. 3

    Analysis: more of its target customers see the shop, so sales and revenue should be higher. [1]

  4. 4

    Analysis: but rent of textdollar4000 raises fixed costs, so Peak must sell more before it makes a profit. [1]

  5. 5

    Application: Site B's rent is textdollar4000 − textdollar1500 = textdollar2500 a month lower, but few shoppers pass by. [1]

  6. 6

    Analysis: lower rent cuts costs, but with few customers sales may be too low to make any profit. [1]

  7. 7

    Evaluation: choose Site A, because Peak's customers are well-off hikers and the mountain town is where they are, so high sales can justify the high rent. [1]

  8. 8

    Evaluation: Site B is less suitable, because a saving of textdollar2500 a month is worth little if hikers do not come to an industrial estate. [1]

Recap

  • A location decision is the choice of where a business will operate.
  • Manufacturer: cost of the site, availability of labour, access to raw materials or components, transport links.
  • Service business: access to customers, cost of rent, nearby competition. Not raw materials.
  • Country: labour costs, availability of labour, access to raw materials, government grants and subsidies.
  • Legal controls can limit where or when a business can operate. Explain the effect on the business.
  • Recommend one location, explain the significance of each factor, and say why the other is less suitable.
  • Apply every point to the named business, and give a different application for each point.

End-of-chapter exercise

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

  1. Varga Steel makes steel beams. Identify two factors it should consider when choosing a location for a new factory.2 marks
  2. Nadia is opening a hair salon. Identify four factors she should consider when choosing its location.4 marks
  3. Identify two ways legal controls could affect the location decision of a business.2 marks
  4. Delta Fabrics makes cotton cloth in heavy rolls. Outline two factors it should consider when choosing a location for its factory.4 marks
  5. Midnight Munch is a burger bar in the town centre. It sells most of its food after 10 pm. The council brings in a law that stops town-centre food shops opening after 10 pm. Outline two ways this legal control could affect Midnight Munch.4 marks
  6. Cobble Lane Cafe is a new café. It plans to sell coffee and cakes to office workers at lunchtime. Explain two factors it should consider when choosing a location.6 marks
  7. Rivera Toys makes plastic toys. It plans a new factory in Country M, where wages are lower than in its home country and the government gives grants to new factories. Explain two benefits to Rivera Toys of locating in Country M.6 marks
  8. Sunvale Solar makes solar panels. Machines do most of the work, so its factories have few workers. It is choosing a country for a new factory. Do you think labour cost is the most important factor for Sunvale Solar to consider? Justify your answer.6 marks
  9. Kettle & Co roasts coffee beans. Its sales are textdollar20 000 a month: 90% are deliveries by van to cafés and 10% are to people who walk into its shop. It has to move and has two sites to choose from. Site A is on the high street. Rent is textdollar3500 a month and many shoppers pass by. A local law bans delivery vans from the high street between 8 am and 6 pm. Site B is on an industrial estate beside the main road. Rent is textdollar1500 a month and few people walk past. Recommend which site Kettle & Co should choose. Justify your answer.12 marks
  10. Orchard Foods makes jam and sells all of it in its home country. It will build one factory abroad to make 500 000 jars a year and ship them home. The factory costs textdollar1 000 000 to build in either country. In Country P the law allows new factories only in a zone far from the port. In Country Q the government gives a grant of textdollar200 000 to new factories. The table gives the costs for each jar. Recommend which country Orchard Foods should choose. Justify your answer. | Cost per jar | Country P | Country Q | | --- | --- | --- | | Labour | textdollar0.20 | textdollar0.50 | | Fruit | textdollar0.55 (imported) | textdollar0.30 (grown nearby) | | Transport to the port | textdollar0.15 | textdollar0.05 |12 marks

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