the factors that determine location and relocation

9.1.1 Location – Cambridge IGCSE / A‑Level Business

Learning Objective

To understand the factors that determine where a business chooses to locate, the distinction between local, national and international location decisions (including off‑shoring, near‑shoring and reshoring), the influence of scale of operations, and the stakeholder, CSR and financial implications of relocating.

1. Why Location Matters

• Location determines a firm’s ability to reach customers, control costs, access inputs and achieve a competitive advantage.
• It is a strategic decision that must balance internal capabilities with external conditions and the expectations of key stakeholders.

2. Scale of Operations

2.1 Definition

The size and volume of production or service provision required, ranging from a small workshop to a multinational plant.

2.2 Economies & Diseconomies of Scale

• Economies of scale: Average cost falls as output rises (e.g., bulk buying of raw material reduces unit cost).
• Diseconomies of scale: Average cost rises when a firm becomes too large (e.g., coordination problems, excess bureaucracy).

These cost behaviours directly affect the choice of site – a high‑scale operation usually needs good transport links, ample space and a skilled labour pool, whereas a low‑scale operation can be placed closer to a niche market.

3. Types of Location Decisions

• Local: Within a town or city (e.g., a coffee shop on a high‑foot‑traffic street).
• National: Different region or city within the same country (e.g., a retailer moving from a regional centre to a national distribution hub).
• International:
  • Off‑shoring: Locating production in a distant country to exploit lower labour or input costs (e.g., a UK electronics firm opening a plant in China).
  • Near‑shoring: Moving to a nearby country to combine cost advantages with shorter lead‑times (e.g., a German car maker locating a component plant in the Czech Republic).
  • Reshoring: Returning production to the home country to improve brand image, reduce lead‑times or meet CSR commitments.

4. Internal (Firm‑Specific) Factors

Factor	What the firm considers
Business objectives & strategy	Growth targets, market positioning, brand image, CSR goals.
Scale of operations	Required site size, potential for expansion, economies/diseconomies of scale.
Capital availability	Budget for land, buildings, infrastructure, financing costs and working‑capital impact.
Ownership of resources	Existing warehouses, proprietary technology, intellectual property.
Management preferences	Risk tolerance, desire for control, personal or historical ties to a region.

5. External (Environmental) Factors

Factor	Typical considerations
Market access	Proximity to target customers, market size, purchasing power, local demand trends (marketing link).
Labour market	Availability of skilled workers, wage levels, labour relations, training facilities.
Transport & logistics	Road, rail, ports, airports, freight costs, distance to suppliers/customers.
Infrastructure	Electricity, water, broadband, waste disposal, public services.
Regulatory environment	Taxes, incentives, planning permission, health‑and‑safety standards, environmental licences, zoning.
Competitive environment & clustering	Presence of rivals, agglomeration economies (shared suppliers, skilled‑labour pools, research institutions).
Socio‑cultural fit & CSR	Local attitudes, community support, consumer preferences, alignment with corporate social responsibility.
Environmental considerations	Sustainability targets, flood risk, pollution controls, carbon footprint.

6. Stakeholder & CSR Implications of Location Decisions

• Customers: Faster delivery, improved service quality, or enhanced brand perception (e.g., “Made in Britain”).
• Employees: Job creation or loss, commuting distances, health‑and‑safety standards.
• Local community: Economic regeneration, pressure on local services, environmental impact.
• Suppliers: Proximity can reduce lead‑times and inventory holding costs.
• Regulators & NGOs: Compliance with environmental legislation and CSR expectations.

7. Decision‑Making Tools

7.1 Weighted Scoring Model

Most firms compare alternative sites using a weighted scoring model:

\[ \text{Score}_i = \sum_{j=1}^{n} w_j \times r_{ij} \]

• \(w_j\) = weight (importance) assigned to factor \(j\) (total = 100 %).
• \(r_{ij}\) = rating of site \(i\) on factor \(j\) (e.g., 1–5 or 0–10).

Factor	Weight (%)
Market access	30
Labour cost & availability	20
Transport & logistics	15
Infrastructure quality	10
Tax & incentives	10
Agglomeration economies	5
Socio‑cultural fit	5
Environmental risk	5

7.2 Numerical Illustration

Assume a UK‑based manufacturer is comparing two sites:

Factor	Weight	Site A (Score 0‑5)	Site B (Score 0‑5)
Market access	30%	4	3
Labour cost & availability	20%	2	5
Transport & logistics	15%	5	3
Infrastructure quality	10%	4	4
Tax & incentives	10%	3	5
Agglomeration economies	5%	5	2
Socio‑cultural fit	5%	4	4
Environmental risk	5%	3	5

Weighted scores:

• Site A = (0.30×4)+(0.20×2)+(0.15×5)+(0.10×4)+(0.10×3)+(0.05×5)+(0.05×4)+(0.05×3) = 3.65
• Site B = (0.30×3)+(0.20×5)+(0.15×3)+(0.10×4)+(0.10×5)+(0.05×2)+(0.05×4)+(0.05×5) = 3.85

Site B scores slightly higher, mainly because of lower labour costs and better tax incentives, despite a weaker market‑access rating.

7.3 Total Cost of Ownership (TCO)

TCO = Up‑front capital costs + hidden/indirect costs.

• Up‑front costs: Land purchase, construction, fit‑out, moving expenses, legal fees.
• Hidden costs: Higher utility rates, increased insurance, longer freight distances, employee turnover, opportunity cost of production downtime.

Example: Relocating to a site where labour falls from £15 h⁻¹ to £8 h⁻¹ saves £7 h⁻¹. For 2 000 hours per year, the annual saving is £14 000. If the total relocation cost (including TCO) is £120 000, the pay‑back period is ≈ 8.5 years, which must be weighed against strategic benefits.

8. Relocation – When and Why?

• Need for larger or more specialised facilities (scale change).
• Desire to reduce operating costs – cheaper rent, lower labour rates, tax incentives.
• Strategic shift to a new market or to be closer to key customers (local, national or international).
• Changes in government policy, incentives or regulatory environment.
• Physical constraints at the current site – congestion, environmental limits, capacity ceiling.
• Off‑shoring to exploit global cost advantages or reshoring to improve brand image, reduce lead times, meet CSR commitments.

9. Costs and Risks of Relocation

Cost / Risk Category	Typical Items
Direct financial costs	Land purchase, construction, fit‑out, moving expenses, legal & professional fees.
Total Cost of Ownership (TCO)	All direct costs plus hidden costs – e.g., higher utility rates, longer transport distances, insurance, working‑capital impact.
Operational disruption	Production downtime, loss of sales, supply‑chain interruptions, inventory holding costs.
Human‑resource impact	Staff turnover, recruitment & training, morale, possible union issues.
Strategic risk	Mis‑judging market potential, over‑estimating cost savings, future regulatory changes.
Reputational risk	Negative perception by customers or local community, damage to brand equity, CSR implications.

10. Relocation Process – Step‑by‑Step

1. Strategic review – Re‑assess objectives, scale requirements and the need to relocate (local, national or international).
2. Site search & appraisal – Identify candidate sites; collect data on all internal and external factors; apply the weighted scoring model.
3. Feasibility study – Conduct detailed financial analysis (including TCO), risk assessment, and stakeholder consultation (employees, suppliers, local authorities).
4. Decision & planning – Secure board approval, negotiate purchase/lease, obtain planning permission and any environmental licences; develop a detailed relocation timetable.
5. Implementation – Manage construction/fit‑out, arrange logistics for moving equipment and inventory, communicate with staff and customers, and monitor operational continuity.
6. Post‑move review – Compare actual performance against targets (costs, productivity, market access); address any issues; capture lessons for future location decisions.

11. Summary Checklist for a Location Decision

• State clear strategic objectives (growth, cost reduction, market entry, CSR).
• Define the required scale of operations and any future expansion plans.
• Identify all relevant internal and external factors; assign appropriate weights.
• Collect reliable, comparable data for each potential site.
• Apply a weighted scoring model (include an example table for reference).
• Calculate the total cost of ownership – not just the upfront expenditure.
• Consider agglomeration economies, clustering benefits and the regulatory environment.
• Evaluate socio‑cultural fit and CSR implications for customers, employees, community and NGOs.
• Link the decision to financial outcomes (cash‑flow, working‑capital) and marketing considerations (market‑access, brand image).
• Assess long‑term flexibility, risk exposure and the impact of globalisation (off‑shoring/near‑shoring/reshoring).
• Engage key stakeholders early to manage risk and build support.