1.4.2 Business location — Edexcel GCSE Business revision notes

Factors influencing business location

Location is a long-term, expensive decision — moving is disruptive and costly, so it has to be right at the start. The specification names four proximity factors.

Figure: The four proximity factors

Proximity to	Why it matters	Matters most to
Market	Being close to customers means more passing trade and lower delivery costs	Shops, restaurants, hairdressers — anything customers come to
Labour	Being where the right workers live, with the right skills, at an affordable wage	Businesses needing many staff, or specialist skills
Materials	Being close to suppliers cuts transport costs, especially for heavy or perishable goods	Manufacturers, food processors, furniture makers
Competitors	Being near rivals can bring shared passing trade — or split the customers between you	Retailers; it can cut either way, which is why it is a judgement

Proximity to competitors is the only one that is not automatically good, which is what makes it worth discussing.

Being near competitors sounds like a mistake, but clusters of similar businesses are common — car dealerships on the same road, restaurants in the same quarter. Customers go to where the choice is, so each business benefits from the trade the others attract. The risk is that customers who would have come to you go next door instead. Which effect dominates depends on whether the business has something that distinguishes it.

Other cost factors also matter and are worth mentioning: rent and business rates vary enormously between locations, and a cheaper site further from the market may be the better decision overall.

Proximity to market: how close a business is to its customers; the factor that matters most to a retailer or restaurant, because customers must be able to reach it easily
Proximity to labour: how close a business is to a supply of workers with the skills it needs

The nature of the business activity

Which factor matters most depends on what the business actually does — the specification asks for this directly, and it is what turns a list into an answer.

• A retailer or restaurant needs proximity to the market above all, because customers must be able to reach it easily. It will pay high rent for a busy high street. • A manufacturer usually prioritises materials and labour, and can locate on a cheaper industrial estate because customers never visit. • A service business that travels to customers — a plumber, a mobile hairdresser — needs to be within reach of its area but does not need premises customers can see. • An online business may not need a customer-facing location at all, only somewhere to store and dispatch stock.

The impact of the internet on location decisions

E-commerce has changed the location decision fundamentally, and the specification asks you to compare e-commerce with fixed premises.

With e-commerce, a business can sell nationally or worldwide from anywhere. Proximity to the market matters far less, because the market is reached through a website rather than a door. That allows a business to choose a location on cost instead — cheap warehouse space away from expensive city centres. Start-up costs are lower, since no shop front is needed, and the business can trade 24 hours a day.

But the picture is not one-sided:

• Delivery costs and speed now matter, so proximity to good transport links becomes important instead. • Customers cannot see or try the product, which suits some goods far better than others. • Competition is no longer local — an online business competes with everyone, not just the shops nearby. • Some businesses genuinely cannot operate online: a hairdresser, a restaurant meal eaten in, a gym.

Many businesses use both, with a physical shop and a website — which lets them reach a wider market while keeping the customers who prefer to come in.

Worked example

A business making handmade furniture is deciding between a unit on a cheap industrial estate with an online shop, and an expensive high street showroom. Recommend one.

Identify what the customer needs to do: furniture is expensive and customers usually want to see and feel the quality before buying.
That argues for the showroom, where proximity to market matters.
But identify the cost: high street rent is far higher, which raises fixed costs and so raises the break-even output.
Consider the online option: much lower fixed costs and a national market rather than a local one, and photographs can show craftsmanship reasonably well.
Weigh them and commit, naming what would change the answer.

Answer: The industrial unit with an online shop, because the much lower rent keeps fixed costs and break-even output down while reaching a national market rather than one town — an important advantage for a specialist product with few local buyers. The showroom would be the better choice only if customers proved unwilling to buy expensive furniture without seeing it first.

E-commerce: buying and selling over the internet, which lets a business sell nationally or worldwide from anywhere and makes proximity to the market far less important

Before you practise

The four proximity factors: market, labour, materials and competitors.
Being near competitors can help through shared passing trade, or hurt by splitting customers.
Rent and business rates vary widely and are a major cost consideration.
Which factor matters most depends on the nature of the business activity.
Retailers prioritise the market; manufacturers prioritise materials and labour.
E-commerce reduces the importance of proximity to market and allows a cheaper location.
But delivery, transport links and wider competition become more important instead.
Many businesses combine fixed premises with an online presence.

Now practise it

Reading is the easy half. Answer questions on 1.4.2 Business location and find out which parts you actually know.

Written questions Multiple choice