LOCATION

The aim of the location decision is to achieve an appropriate balance between three related objectives:
 the spatially variable costs of the operation (spatially variable means that something changes with
geographical location);
 the service the operation is able to provide to its customers;
 the revenue potential of the operation.
The location decision for any operation is determined by the relative strength of supply-side and demand-side
factors: changes in demand for their goods and services and changes in supply of their inputs.
Supply-side influences
Labour costs: The costs of employing people with particular skills can vary between different areas in any
country, but are likely to be more significant when international comparisons are made. Labour costs can be
expressed in two ways. The ‘hourly cost’ is what firms have to pay workers on average per hour. However, the
‘unit cost’ is an indication of the labour cost per unit of production. Labour costs exert a major influence on the
location decision, especially in some industries such as clothing.
Land costs: The cost of acquiring the site itself is sometimes a relevant factor in choosing a location. Land and
rental costs vary between countries and cities. Eg: A retail operation, when choosing ‘high street’ sites, will pay
a particular level of rent only if it believes it can generate a certain level of revenue from the site.
Energy costs: Operations which use large amounts of energy can be influenced in their location decisions by
the availability of energy. Eg: Aluminium smelters look for inexpensive energy. This may be direct, as in the
availability of hydroelectric generation in an area, or indirect, such as low-cost coal which can be used to
generate inexpensive electricity.
Transportation costs: It includes both the cost of transporting inputs from their source to the site of the
operation and the cost of transporting goods from the site to customers. However, not all operations transport
goods to customers; rather, customers come to them (Eg: hotels). Even for operations that do transport their
goods to customers (Eg: most manufacturers), transportation is considered as a supply-side factor because as
location changes, transportation costs also change.
Sources of supply: Proximity to sources of supply dominates the location decision where the cost of
transporting input materials is high or difficult. Eg: Food processing and other agricultural-based activitiesare
often carried out close to growing areas.
Community factors: Community factors are those influences on an operation’s costs which derive from the
social, political and economic environment of its site. These include: local tax rates, capital movement
restrictions, government financial and planning assistance, political stability, local attitudes to ‘inward
investment’, language, availability of support services, environmental restrictions and waste disposal, etc.
Demand-side influences
Labour skills: The abilities of a local labour force can have an effect on customer reaction to the products or
services which the operation produces. Eg: ‘science parks’ are usually located close to universities because
they hope to attract companies which are interested in using the skills available at the university.
The suitability of the site itself: Different sites are likely to have different intrinsic characteristics which can
affect an operation’s ability to serve customers and generate revenue. Eg: location of a luxury resort hotel
which offers up-market holiday accommodation is largely dependent on the intrinsic characteristics of the site.
If it’s located next to the beach, surrounded by waving palm trees and overlooking a picturesque bay, the hotel
is very attractive to its customers.
Image of the location: Some locations are firmly associated in customers’ minds with a particular image. Eg:
The product and fashion design houses of Milan and the financial services in the City of London also enjoy a
reputation shaped partly by that of their location.
Convenience for customers: Of all the demand-side factors, this is, for many operations, the most important. Eg: locating a
general hospital in the middle of the countryside may have many advantages for its staff and even perhaps for its costs, but
it clearly would be very inconvenient to its customers. Those visiting the hospital would need to travel long distances.
Because of this, general hospitals are located close to centres of demand. Similarly with other public services and
restaurants, stores, banks, petrol filling stations, etc