• Created by: lyd_kate
  • Created on: 22-11-16 09:55

Setting Up Costs


  • Planning permission;
  •  Purchasing or rental/leasing;
  •  Refurbishment;
  •  Business rates;
  •  Labour costs;
  •  Transport costs.
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Why Costs Are Important

A new business may be unable to choose their ideal location due to lack of funds. Therefore new businesses will often consider locating elsewhere.

In the longer term they may have an objective to relocate when they have built up a customer base and have increased capital.

A new business will need to consider the importance of location on its success. Depends on its products/services and the market it will operate in.

Because a new business may be limited in its choice of a suitable location due to costs, it will need to consider the other key location factors and determine what the most important factor is for them.

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Proximity to Customers

The market is the place where buyers and sellers meet. Most commercial B2C exchanges (buying and selling in consumer markets) still take place face-to-face, so a physical location is required.

Retail location should be driven by access to customers, but there will be a balance between customer footfall and rental/lease costs.

Costs of location will vary according to likely sales/customer potential, but within each price band there will be good and bad locations. Identical stores from the same chain with the same staffing levels and sales square footage can have significant variations in annual turnover.

Regional markets also apply to B2B (Business to Business) relationships. Manufacturers of components in many industries need to be located close to the users of their products. This has become more true with the increased use of just-in-time systems, where being ‘on the doorstep’ is now the expected norm.

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Proximity to Competitors

Normally, the further away from competitors you are, the higher the price you can charge and profit gained - though this isn't always true.

Retail location is not just about footfall, it is about type of footfall. If a new retail store is looking to locate in a shopping centre, it is a must to look carefully at the image of the anchor tenant (usually the first and the leading tenant in a shopping centre whose prestige and name recognition attracts other tenants and, hopefully, shoppers).

The anchor tenant sets the tone/image of a shopping centre, so the business owners need to examine the demographics of customers and whether their product would match the customer profile. Sometimes being near similar stores can help as a business can benefit from their marketing efforts.

Large businesses spend a larger proportion of their advertising budget on driving consumer traffic to their locations, that a competitor business can take advantage of. Congregation in one area can also attract a wider customer base.

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Infrastructure used to mean roads, rail and shipping. Now a more modern definition includes electronic communication systems, training agencies & financial services.

For many modern businesses, i.e. those that are e-commerce based, quality infrastructure means something very different than that understood by road hauliers & heavy goods manufacturers. In the UK, there is a major imbalance between SE England and everywhere else.

Economies of concentration/agglomeration occur when a number of businesses in the same/related industries, locate close together. They can gain mutual advantages. New businesses are attracted by existing infrastructure clusters. In high-tech industries it's often worthwhile for specialist businesses/universities to undertake research, provide education, training & information, from which all businesses can benefit.

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In context = cost of labour, availability of labour, and the skills of labour.

Businesses can be attracted to certain areas by the skilled labour that may be available. E.g. the aero technology workers in Coventry & Bristol, or the thriving community of software developers in Cambridge, linked to the university. Cardiff is rapidly developing a booming media industry which is attracting new international investors looking to recruit talented workers.

The cost of labour is also a determining factor. International location has a habit of following low-cost labour to wherever it is available. Many UK manufacturing businesses have relocated to the Far East and China where labour costs are very low; although there is some evidence that this trend will be reversed as wage rates in these areas start to increase.

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Goverment Influences

The cost of labour can be affected by the availability of government grants, giving incentives to move to particular regions of a country, and by government taxation policies.

The availability of low cost and suitable land resources can also be an important factor when determining location.

National governments, along with regional development agencies, often work hard to ensure that planning permission is available to allow large developments to proceed.

They also offer incentives such as tax breaks and help with recruitment and training of workers.

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Social Influences

Managers want to live in an environment that suits them and their families. They want leisure facilities, good schools, and low crime.

Alternatively managers can often retain a commitment to their existing workforce, even when it makes economic and business sense to relocate a business.

This could save on recruitment costs as well save time that would have been spent on administraton that could then be invested into the business. This is especially true for graduate jobs/jobs that require a lot of training.

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Increased Choice in International Location

Footloose businesses move from location to location, basing themselves wherever best suits their needs at a particular point in time:

Changing patterns of trade; Improved communications; Freer flows of capital.

This means that larger businesses do have the alternative of locating their production facilities virtually anywhere in the world (with a stable political background and available workforce). More of a national choice than regional.

Maximising economies of scale is also important. If businesses are able to have a single plant supplying all their requirements for a type of product/range of components, the business’s average costs of production can fall.

The falling costs of internatiomal transport have allowed this. In the 1950s the final cost of selling imported goods included transport costs (made up around 25% of selling price). With containerisation & increased efficiency of systems - 5%

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Tariff & quota-free access to trading blocs such as the EU, or NAFTA (North American Free Trade Association) may depend on setting up a production facility within that trading bloc. Far Eastern companies such as Toyota and Honda, wanting free access to European markets, have large production units in the UK today.

Companies sometimes establish head office operations where taxation levels are lower. This is transfer costing, a process by which businesses are able to inflate their profits in countries where taxation levels are relatively low & vice versa.

Comparative international wage levels also need to be considered. High-tech industries can choose from willing & skilled workforces from different global locations.

Freedom from restrictions which would otherwise increase costs or constrain production methods can be a driver of location. Businesses can reduce their costs if they locate operations in countries where red tape is less present or employment law is less strict. Clearly, there are ethical issues to consider here.

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