9/3/2012

1
Location
Business Location
In general a business will look to locate its
activities where the costs of production are
minimised
The nature of the business will heavily
influence location decisions:
Type and nature of market
Type of business production of goods or
services, retail, wholesale?
Sector primary, secondary, tertiary, quaternary?
Factors determining location
The market
Land
Raw materials
Government support
Labor
Communication
Power supplies
Ancillary industries
Transportation
Planning permission
Environment factors
Safety requirements
Managements
preference
Amenities

The market
How close is your market?
Depends on the type of business.
A business which produce items which are
fragile and bulk in quantity and difficult to
transport without damage would likely to
locate near its market. (furniture)
Most businesses want to locate near its
customers especially retail outlets and super
markets.
9/3/2012
2
Land
The availability and the cost of land.
Expansions.
Firms which need large areas of land might
consider cost of land before locating.
Automobile manufacturing plants need large
chunks of land.

Raw materials
Locating where there is easy access to raw
materials required for the business
Coal mines near coal, brick manufacturers
near clay, mineral water companies near
spring etc.
The extraction industries such as coal mines
have limited location options
Also depends on the transportation and
bulkiness of the raw materials.

Government Support
Government regulations
Regional policy
Government helps in terms of providing grants
and loans for the businesses
Tax reliefs, EU
Labor
Easy access to skilled labors
The cost of labors
Taking work to workers or taking workers to
work
Many multi nationals often target the
countries where there is cheap labor
9/3/2012
3
Communication
Easier and faster access to all kinds of
communication is essential
This especially important for firms such as
multinational companies and the businesses
which have so many branches across the
country
Ancillary industries
Ancillary industries are those which
manufacture parts and components to be
used by larger industries. E.g.- Companies like
GE (ancillary) produce engines for the aircraft
industry.
These are small firms providing support
services to the businesses.


Transportation
Depends on the nature of the business
For instance, a large assembly plant must have
good road, rail and sea links for easy access for
its access for its suppliers as well as for
distribution of finished cars, especially if they
are exporting across the nations.
Supermarkets, the location of workers etc.
Environmental/Climate factors
The environmental climate is very important
depending on the nature of the business
Agriculture businesses, earth quakes etc
9/3/2012
4
Amenities
Availability of water, electricity and gas is vital
for location of the businesses
Other services such as banking and insurance
are also very important when choosing a
locations
Managements preference
Many of the location decisions are often
influenced by the management's view about
the locations.
They would consider factors such as the
current workers, current market especially
when relocating.
International Location
Ease of access to international markets
Possible language and cultural issues
Political stability of the location
Economic stability of the location
Perception about the amount of red tape
associated with the location
Existence of trade barriers



Economies of scale
and
Diseconomies of scale
9/3/2012
5
Economies of scale
The advantages of large scale production that
result in lower unit (average) costs (cost per
unit)
'the reduction in average costs of production,
that occur as a firm increases its scale of
production'
Economies of scale spreads total costs over a
greater range of output

Internal Economies of scale
Internal Reductions in average or unit cost
because of increasing internal efficiencies of the
firm.
Technical
Marketing
Financial
Managerial
Risk Bearing
Purchasing

Technical
As businesses grow they are able to use the latest equipment
and incorporate new methods of production.
Specialisation large organisations
can employ specialised labour.
Indivisibility of plant machinery is available only
in minimum sizes. Small firms often are not able to
utilize fully even smallest size available.
Principle of multiples If output is expanded by a
certain proportional use of all machines, they could be
fully utilized and the average cost may be lower. Firms
using more than one machine of different capacities
Increased dimensions bigger containers can
reduce average cost. Cost wont increase
proportionality with size.

Marketing
Can spread its advertising and
marketing budget over a much
greater output and it can also
purchase its factor inputs in bulk
at discounted prices
Large firms may have advantages
in keeping prices higher because
of their market power
9/3/2012
6
Financial
Large firms able to negotiate
cheaper finance deals
Large firms able to be more
flexible about finance share
options, rights issues, etc.
Financial institutions often regard
large firms as less risky so they
will attract finance easier than
small firms.

Managerial

Use of specialists accountants,
marketing, lawyers, production,
human resources, etc.
Division of labour among
management staffs.

Purchasing
Bulk buying
Bulk discounts
Favourable credit terms
Special prices and offers
Risk Bearing
Diversification
Markets across regions/countries
Product ranges
R&D
Splitting risk by having more
suppliers
9/3/2012
7
External Economies of Scale
External economies of scale exist when the long-term
expansion of an industry leads to the development of ancillary
services which benefit all or the majority of suppliers in the
industry
A labour force skilled in the specific crafts of the industry
Components suppliers equipped to supply the right parts re-locate close to
production centres reducing transportation costs
Trade magazines in which all firms can advertise cheaply and disseminate
information
Local colleges will set up training schemes suited to the largest employers
needs, giving an available pool of skilled labor, this reduces recruitment
and training costs
External economies partially explain the tendency for firms to
cluster geographically
Good examples to quote
Car industry in the West Midlands
Silicon Valley & its pool of computer experts
Financial services industry in London and New York
Is Bigger Really Better?
As with all things, as industries get bigger
so does the infrastructure and the
problems associated with economies of
scale.
There is a fine line between making
money and losing money.
This can result in:
Internal Diseconomies of Scale
External Diseconomies of Scale
Internal Diseconomies of Scale
These occur when the firm has become too large and
inefficient. As the firm increases production, eventually
average costs begin to rise because:
The disadvantages of the division of labour take effect- too
many people doing different jobs add to costs. (poor morale)
Management becomes out of touch with the shop floor and
some machinery becomes over-manned- costs increase.
Decisions are not taken quickly and there is too much form
filling. (delay in responding to market changes)
Lack of communication in a large firm means that management
tasks sometimes get done twice. (longer chain of command)
Poor labour relations may develop in large companies.
Bureaucracy, which will result in excessive administration costs.
Information overload for managers results in poor decisions.
External Diseconomies of Scale
These occur when too many firms have located in one
area
Local labour becomes scarce and firms now have to bid
wages higher to attract and retain new workers
Land and factories become scarce and rents begin to
rise
The local traffic infrastructure become congested and
so transport costs begin to rise
Breakdown of relationships with suppliers and buyers.

9/3/2012
8
Survival of small firms
Some industries do not require use of heavy
equipments. So there is a lack of technical
economies of scale. E.g. hair dressing, window
cleaning
The size of the market is small
Personal service
Frequent changes in the market
Filling the niche
Individual skills craft work
To be your own boss