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KNOX ACADEMY

STANDARD GRADE
BUSINESS
MANAGEMENT

UNIT 3

LOCATION OF
BUSINESSES

PUPIL NOTES
CONTENTS

WHAT LOCATION CRITERIA CAN BE IMPORTANT TO A BUSINESS? 3

FINANCING A BUSINESS 5

MAIN TYPES OF INTERNAL FINANCE 5


MAIN TYPES OF EXTERNAL FINANCE 5

GOVERNMENT ASSISTANCE 6

LOCAL GOVERNMENT SUPPORT 6


CENTRAL GOVERNMENT SUPPORT 7

THE EUROPEAN UNION 8

THE SINGLE MARKET 8


INWARD INVESTMENT 8
THE SOCIAL CHARTER 8
REGIONAL POLICY 9
THE EURO 9

GLOBALISATION 10

COMMUNICATION 10
TRANSPORTATION 10
BARRIERS TO TRADE 10
DEVELOPING MARKETS 11
THE PACIFIC ECONOMIES 11
THE GLOBAL MARKET 11
MULTI-NATIONALS 12

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WHAT LOCATION CRITERIA CAN BE IMPORTANT TO A BUSINESS?

When identifying possible locations for a business its owners have to consider a
number of different factors. The list below contains information about the factors
which might influence the owners’ decisions. Not all companies require the same
blend of factors. Some factors are more important to some companies than others.

a Availability of raw materials

Businesses which depend on’ bulky’ raw materials tend to set up close to the source
of these raw materials. eg coal mining, steel production. Once the ‘bulky’ raw
materials have been processed the final product is then transported to the market.
These businesses tend to use huge quantities of raw materials - ie in ‘bulk’ - which
are then processed into a product which is much smaller in size - this is why these
industries are often called ‘bulk reducing’ industries.

b Distance to the market

• Customer orientated - businesses which offer a service to certain types of


people/businesses tend to locate close to their customers’ market eg, butchers,
garages, fast food outlets, lawyers.

• Businesses which deal in products that increase in volume will locate near their
customers to reduce their transport costs. By locating close to their market
they can keep their prices competitive - packaging businesses, soft drinks, beer,
computer assembly. Since these types of businesses take in many different
small deliveries of raw materials which are used to produce a bigger product
they are often called ‘bulk increasing’ industries.

• Perishable fresh products - where a product must be sold within a day(s) of


production, and cannot travel successfully, the business must locate near its
customers eg, lettuce, raspberries, spring onions, eggs. However, improvements
in production and transport have allowed businesses in perishable products to
locate further away from the market

c Availability of labour

All businesses will wish to locate where they can employ workers with the skills they
require. Since labour costs are high, few businesses will want to have to invest in
retraining workers.

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d Availability of land

The size of a business’s premises depends upon the nature of the business.
Premises in cities are more expensive than those of a similar size in the country.

e Transport costs

Transport costs depend on the distance to the market, the type of transport used
eg road, rail, and the bulkiness of the product being transported.

f Infrastructure
The basic facilities, services, and installations needed for the functioning of a
community or society, such as:

Transportation system - road/rail/air links;


Communications system - telecommunications networks;
Utilities - electricity, water, drainage;
Services - schools, post offices, hospitals, sport/recreation;
Housing - there must be enough accommodation in the area;

g Local Council grants and regulations

In an effort to attract businesses into an area, Local Councils may offer reduced
business rates, or provide grants for building premises etc. Planning regulations
and the availability of industrial estates are also key factors.

h Central Government

Grants and loans are offered by Central Government to help businesses train staff
and purchase premises and machinery. These are offered to businesses which are
prepared to locate in areas which have high unemployment.

i Component businesses

Businesses which are dependent on the output of other organisations or businesses


can be limited in their location choice. This often leads to areas being dominated by
one industry.

j Health and Safety regulations


Because of public safety considerations, certain types of businesses may be forced
to locate away from populated areas eg, chemical plants, nuclear power stations.

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FINANCING A BUSINESS

All businesses need money (finance) in order to set up and run


the business. There are 2 ways in which a business can get
finance. These are:

♦ OWNERS – in the form of capital.


♦ BORROWING – from others.

The type of finance will depend on:

♦ The size of the business – the larger the business the easier to raise finance, as it
is seen as a ‘safer bet’. This is because assets can be sold to cover loans, these
assets are known as collateral.
collateral

♦ The purpose of raising the finance eg to expand the business

♦ The amount of money required

Regardless of size, every business which decides to borrow must take into account the:

♦ risk of borrowing - not being able to pay back the money borrowed and therefore
risks going bankrupt.

♦ cost of borrowing - lenders expect to receive a return for money lent in the form
of interest or a dividend. This is a cost for the borrower until the money is repaid.

MAIN TYPES OF INTERNAL FINANCE

The main source of internal finance is profit. No need to:

♦ pay interest;
♦ convince others that it is a ‘safe bet’.

MAIN TYPES OF EXTERNAL FINANCE

External sources of finance are available from a wide range of financial institutions
outside the business such as Banks. The main types include:

♦ Shares ♦ Debentures
♦ Mortgage ♦ Loan
♦ Hire Purchase ♦ Factoring
♦ Overdrafts ♦ Leasing
♦ Trade Credit ♦ Small Business Loans Guarantee
Scheme

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GOVERNMENT ASSISTANCE

Businesses are encouraged to locate in ‘depressed areas’ through local


government support or central government support. These areas may
suffer from:

♦ high unemployment
♦ derelict buildings caused by industrial closures
♦ poor infrastructure
♦ few occupational skills
♦ high crime rates as a result of the above.

The European Union has identified “Assisted Areas” which are those
locations where regional aid may be granted under EU legislation. The
current Assisted Areas Map came into effect on 13 February 2007, and
remains in force until 31 December 2013; it includes most of the
Highlands and Islands of Scotland.

The European Union’s main instruments for supporting social and economic
restructuring across the EU are known as:

EU Structural and Cohesion Funds (see separate EU Notes)

Used to support regional development through actions including:

♦ developing infrastructure and telecommunications


♦ developing human resources
♦ supporting research and development.

LOCAL GOVERNMENT SUPPORT

Assistance is provided in the form of:

♦ grants for starting up a business and research;


♦ job creation grants;
♦ grants to relocate within a designated area;
♦ free or reduced rent, rates and loans;
♦ business advice;
♦ help to find finance and premises;

Those who receive help are small to medium-sized businesses.

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CENTRAL GOVERNMENT SUPPORT

Scottish Enterprise (a Government Agency) can provide financial assistance to new and
existing businesses in Scotland through its “innovation” (SMART: SCOTLAND) and
“investment” (RSA) grants.

SMART:SCOTLAND – innovation grants

Projects which represent a significant technological advance within an industry sector


may qualify for a SMART : SCOTLAND grant. SMEs must:

• be independent;

• have less than 250 employees; and

• have an annual turnover of less than €50 million or an annual balance sheet total
of less than €43 million

Support for Research and Development projects is available on a discretionary basis at


35% of the eligible project costs. Projects must last between 6 and 36 months and the
maximum grant is £600,000.

Regional Selective Assistance (RSA) – investment grants

This is the main investment grant scheme for businesses in designated areas of
Scotland (Assisted Areas). The aim is for overall gains in net employment in Scotland.

A grant of up to £2 million for an investment project that will create or safeguard


jobs, or for training new skills.

HM Revenue & Customs

Provide Research and Development (R&D) Tax Relief. This is a Corporation Tax relief
that may reduce an organisation's tax bill if they qualify.

Alternatively, if your organisation is small or medium-sized, you may be able to choose


to receive a tax credit instead, by way of a cash sum paid by HM Revenue & Customs.

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THE EUROPEAN UNION

THE SINGLE MARKET

The European Union is a very large single market containing over 400 million potential
customers.

It offers businesses that locate within it the following advantages:

♦ no limit to the quantity of goods or services they can sell within any member EU
country, ie no quotas;
♦ free movement and larger supply of both workers and capital;
♦ a larger choice of suppliers;
♦ european wide protection of patents and trademarks;
♦ simplified procedures when moving goods;
♦ collaboration between businesses is possible.

The disadvantages of the Single Market include:

♦ possible shortages of skilled labour;


♦ language barriers;
♦ distance difficulties - particularly in transport.

The opportunities can be enormous if a business plans its production, marketing and
distribution policies to take advantage of EU membership.

INWARD INVESTMENT

Inward investment comes from non-EU countries like Japan and the USA setting up
businesses within EU countries. This allows them the same benefits and advantages of
European businesses as well as avoiding external tariffs.

THE SOCIAL CHARTER

The objectives of the Social Chapter are:

♦ to promote employment opportunities eg the minimum wage;

♦ to establish equal pay for men and women;

♦ to introduce a maximum 48 hour week - normal working plus overtime;

♦ to improve living and working conditions through social benefits and health and

safety;

♦ to improve working relationships through collaboration and participation;

♦ to encourage vocational training;

♦ to protect the rights of children, adolescents, the elderly and the disabled.

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These objectives all have consequences for businesses since costs will rise:

♦ either through taxation to meet the welfare targets; or

♦ through higher wage bills to meet the minimum wage.

REGIONAL POLICY

There are various funding procedures to aid businesses in the poorer regions of Europe.
These are generally referred to as ‘Structural Funds’.

♦ European Regional Development Fund (ERDF) provides financial aid and assistance
for businesses involved in infrastructure and telecommunications projects.

♦ European Social Fund (ESF) - this provides finance for projects designed to
improve training and so solve labour supply difficulties in the market.

♦ European Agricultural Guidance and Guarantee Fund (EAGGF) – this fund


concentrates on providing job opportunities in farming areas.

♦ European Investment Bank (EIB) - this offers loans at


attractive rates to firms who are prepared to set up in
depressed areas.

These ‘Structural Funds’ have assisted with funding in several areas in Scotland
including;

♦ the Edinburgh City by-pass;

♦ Edinburgh Women’s Training Centre;

♦ extensions to the rail network in Strathclyde;

♦ the Time Capsule in Monklands;

♦ the Scottish Maritime Centre at Irvine.

THE EURO

The ‘Euro’ is the single European currency which is used by most of the countries in
Europe. This will:

♦ reduce costs - saving on the costs of currency conversions;

♦ make it easier to compare prices across Europe;

♦ help create stable prices and lower interest rates;

♦ give economically poor regions a better chance of catching up.

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GLOBALISATION

Globalisation is the term used to describe the world becoming part of one world
market. Globalisation of the market place is possible because of the following:

COMMUNICATION

Technological developments like the television and the electronic highway, allows
businesses to effectively communicate with:

a) their staff;
b) their customers.

Communications has ‘shrunk’ the world and created global brands - products that are
equally acceptable in any part of the world, such as:

♦ McDonalds;
♦ Levi;
♦ Nike;
♦ Coca-Cola

The speed with which business information can be communicated enables multinational
organisations to plan their production and marketing strategies to:

♦ respond to ‘local’ needs - ‘local’ being the UK or Brazil; and

♦ run different operations in different countries.

TRANSPORTATION

Businesses which are able to get the product to the customer at the right price are
normally successful. New methods have enabled businesses to be competitive in the
global market place with goods being transported quickly and relatively cheaply
through:

♦ super freighters;

♦ containerisation

BARRIERS TO TRADE

Trade barriers - tariffs and quotas - are continually being reduced. This has enabled
businesses to deliver their products to foreign markets at competitive prices. 90% of
world trade is now covered by the trade agreements negotiated through:

♦ GATT (General Agreements on Trade and Tariffs)

♦ WTO (World Trade Organisation).

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DEVELOPING MARKETS

Several countries have entered the international market place for the first time.
These include:

♦ Russia/Eastern Europe;
♦ China;
♦ India.

These countries represent a huge market place for businesses wishing to expand into
both new areas and new products. The demand for goods, services and ‘know-how’ in
these areas creates opportunities for businesses prepared to operate globally eg HSBC
‘the worlds local bank’.

THE PACIFIC ECONOMIES

The Asian Pacific countries contain the world’s most dynamic countries. The operation
of low cost mass production in a range of goods - TVs, cars, computers - has made many
Japanese, Korean and Malaysian businesses globally successful.

The competition created by these so-called ‘Tiger Economies’ has created a global
business environment, which is cost effective.

World wide competition between businesses in different countries has


helped create a global market place.

THE GLOBAL MARKET

Benefits Problems

o a wide range of markets; o language barriers;


o higher potential earnings and profits; o cultural differences;
o possible volume increases in o difficulties of collecting accurate
production; market information;
o lower unit costs; o the need to develop an export division;
o a reduction of business risk, o developing suitable distribution
particularly if the home market is in methods.
decline

Global markets are only open to large businesses since:

♦ the risks involved in setting up overseas are greater than


operating in the home market;

♦ the costs involved in research and development to establish an


overseas market are high.

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To operate successfully in the global market place businesses can either be:

Decentralised to: Centralised to:

o respond to the local needs of each o concentrate on developing a global


area the business trades in; product;
o motivate their staff who operate in o extend their product life cycle by
overseas markets; diversifying the product eg polo -
o identify the ‘niche’ in each of their original, spearmint, strong and sugar
overseas operation; or be free.

MULTI-NATIONALS

Multi-nationals generally provide a range of products. Often their size is a result of


takeovers and mergers of businesses in other countries. In order to control:

♦ production facilities;
♦ distribution outlets;
♦ office space.

Ford, Matsui, Unilever, Mobil, Sony, Exxon, General Motors, Virgin, Glaxo are all
multinationals.

Multi-nationals operate on a global basis which allows them to:

♦ switch production from plant to plant and country to country when profit levels
change;
♦ move into production where cheap labour and cheap materials are available;
♦ locate where tax advantages can be gained.

Advantages Disadvantages

o investing in plant and equipment; Unemployment


o introducing new technology;
o employing new management techniques; o to uncompetitive local businesses;
o creating employment opportunities. o to businesses they take-over by
downsizing.
Multi-nationals encourage the process of
globalisation since they can operate: Exploitation

o without regard to national boundaries; o by paying low wages;


o by creating global brand goods. o by failing to meet health and safety
standards;
o by producing and selling unsuitable
products;
o by failing to train local staff.

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