Business Location Learning Objective – Develop an understanding of the factors which influence the location of a business Learning Outcome ALL students - Identify where specific businesses locate and identify factors which affect where a business chooses to locate – (E grade) MOST students - Explain why specific businesses have located in specific areas – (C grade) SOME students - Analyse the advantages and disadvantages of different locations – (A grade)

Activity Draw a thought shower - What factors affect business location? Example competitors What factors affect where a business locates? Verbal extension question – Should a business locate close to or away from its competitors?

Factors affecting location? Image Availability of and access to raw materials Availability of Government Grants and Incentives The cost of location Access to and nearness to markets (customers) Access to support services Availability of Labour Population Growth of the area Climate and physical geography Transport and Infrastructure Tradition Type or nature of the product or service and business itself Government Policy Exchange rates The location of competitors Greenfield and Brownfield sites Market access Uniform business rates (A type of tax paid by businesses to cover the cost of providing local services) Ethical issues

Government and location Some of the ways the government influences location decisions include: Local government – Local councils often encourage businesses to locate in their area by offering: grants, promoting the area and creating industrial estates or technology parks Enterprise zones – a small area with high rates of unemployment which is given special help by the government to attract new business activity. Assisted areas – a larger geographical area with above average unemployment to which the government encourages business to locate by offering financial and other benefits. Regional development agencies (RDA’s) – established throughout England RDA’s have the responsibility of co- ordinating investment in a region in order to: improve people skills, promote economic development, regeneration and advise on enterprise grants.

The effects of expansion on location Growing businesses often outgrow their premises Choice: expand at current location or relocate Some ways of adding capacity include:  Use upstairs floor  Acquire premises next door  Build an extension Where this isn’t possible, relocation is the only option

Expansion and Location A successful business will want to expand. What are the motives for growth?

Motives for Growth Dominance in the market Economies of scale Greater financial security Businesses will therefore need to consider location, if they need to expand

Methods of making location decisions Take into consideration costs and benefits of particular sites Businesses likely to compare a number of sites Decisions made using a quantitative approach, eg investment appraisal techniques Qualitative factors are also important

Quantitative methods Significant or complex location decisions may benefit from using investment appraisal: Break-even analysis – If the fixed costs of a particular location are lower than another this will reduce the break- even level of output Discounted cash flow – which evaluates a project’s cash flows in terms of the business’ required rates of return on investment (by calculating a net present value for each option) Payback – Also focusing on cash flows; this would help estimate the period of time it takes to repay the investments in the business location Average rate of return – an accounting calculation that looks at the estimated average accounting returns as a percentage of the investment

INVESTMENT APPRAISAL DEFINITION: Investment Appraisal is how a business decides if an investment project is worthwhile, or where alternatives exist, which option is likely to be the best. Investment Appraisal involves several numerical techniques but also takes into account qualitative factors. The techniques include: 1. Payback 2. Average Rate of Return 3. Net Present Value (NPV)

PAYBACK PERIOD This refers to the time it takes for an investment project to recover or payback the initial outlay (cost of investment). It is preferred by small business because of its simplicity. Large businesses may use it as a screening method before embarking on one the more complicated techniques.

Example 1 PAYBACK PERIOD (when the cost of investment has been paid off) 4 YEARS CASHFLOW (£)CUMULATIVE CASH FLOW (£) 0(10,000) 12,000(8,000) 23,000(5,000) 34,000(1,000) 4 YEAR 0 52,000

EXAMPLE 2 YEARMACHINE AMACHINE B 0(10000)

YEARMACHINE A 0(10000) CUMULATIVE CASH FLOW (£) (10000) (7000) (2000) PAYBACK PERIOD IS BETWEEN 2 AND 3 YEARS THEREFORE THE FOLLOWING CALCULATION IS USED. AMOUNT REQUIRED X12 NET CASH FLOW IN YEAR AMOUNT REQUIRED =£2,000 NET CASH FLOW IN YEAR = £3,000 MONTH OF PAYBACK = 8 MONTHS (2000/3000) X12 = 8 PAYBACK PERIOD = 2 YEARS 8 MONTHS

YEARMACHINE B 0(10000) CUMULATIVE CASH FLOW (£) (10000) (9000) (6000) (1000) Now it’s your turn! Calculate the payback period for machine B PAYBACK PERIOD =3 YEARS 3 MONTHS = INCOME REQUIRED X12 NET CASH FLOW FROM NEXT YEAR INCOME REQUIRED =£1000 NET CASH FLOW FROM NEXT YEAR =4000 MONTH OF PAYBACK =3 MONTHS (1000/4000) X 12

The payback period for machine A is 2 years 8 months The payback period for machine B is 3 years 3 months Therefore the business would select machine A However machine B generates £6000 as opposed to £3000 by machine A. This is one of the disadvantages of this method. The advantages and disadvantages will now be examined.

Activity - Use payback to calculate the best location: £ million Location ALocation B Initial cost1215 Annual cost savings / increased cash flow Year 135 Year 235 Year 335 Year 435 Year 535 How long does it take to recoup the initial outlay in location A / location B? Which is the better location? Show your answer on the whiteboard!

Answer: Payback Period £ million Location ALocation B Initial cost1215 Annual cost savings / increased cash flow Year 135 Year 235 Year 335 Year 435 Year 535 Location A: the initial cost of £12m is repaid after 4 years, at £3m savings pa Location B: the initial cost of £15m is repaid after 3 years, at £5m savings pa So, Location B is the best on payback period!

What is ARR? Measures the net return each year as a percentage of the capital cost of the investment – ARR % = Net return (profit per annum) x 100 Capital outlay (costs)

How to calculate ARR? The business would need to calculate profit (net cash flow – capital costs) The business would need to then calculate the profit per annum by dividing the profit by the number of years the project runs. Finally the ARR is calculated – ARR % = Net return (profit per annum) x 100 Capital outlay (costs)

For example… Project AProject B Capital Cost50,000100,000 Profit (Net Cash Flow – Capital Cost) £20,00060,000 Profit p.a. (5 years)£4,000 (£20,000/5)£12,000 (£60,000/5) ARR8% (£4,000/£50,000 x 100) 12% (£12,000/£100,000 x100) ARR % = Net return (profit per annum) x 100 Capital outlay (costs) Project B would be the one chosen because it gives a higher ARR than Project A

What is the ARR? ARR % = Net return (profit per annum) x 100 Capital outlay (costs)

What is the ARR? Total cash inflow – £22.6m Total cash outflow – £9.6m £22.6m - £9.6m = £13m We now need to take away the initial cost, to calculate profit £13m - £8m. Profit = £5m over 4 years

What is ARR? Profit per annum = £5m/4 = £1.25m ARR % = Net return (profit per annum) x 100 Capital outlay (costs) Answers - £1.25m/8 x 100 = 15.6%

Business Location Learning Objective – Develop an understanding of the factors which influence the location of a business Learning Outcome ALL students - Identify where specific businesses locate and identify factors which affect where a business chooses to locate – (E grade) MOST students - Explain why specific businesses have located in specific areas – (C grade) SOME students - Analyse the advantages and disadvantages of different locations – (A grade)

Starter Activity Video case study - ss-studies/comments/business-location- entrepreneurs-get-creative-with-where-to- locate-their-bus ss-studies/comments/business-location- entrepreneurs-get-creative-with-where-to- locate-their-bus

Discounted Cash Flow (DCF) When making an investment decision a business might take into account what cash flow or profit earned in future is worth now. For example the table below shows what £50, would be worth at 10% interest – If £50 today is worth £80 in five years, it must be true that £80 in five years time is worth just £50 today. Money in the future is worth less than the same amount now (the present value) as money today could be invested and earn interest. DCF is just concerned with the effects of interest rates. Year12345 Value of £50 £55£60.50£66.55£73.205£80.5

Discount tables Discount tables can be used to show how much a future value must be multiplied by to calculate its present value – see page 295 of the textbook

Activity Question 1 page 344 of the A Level textbook

Qualitative factors Qualitative factors are factors which cannot be measured using numbers. Social, environmental and ethical considerations Quality of life Political stability Quality of the workforce Infrastructure Task – Read through the handout on qualitative location factors

Optimal location The best possible site for the business: Costs are minimised and benefits maximised Benefits include:  Best access to markets; convenient for customers  Lowest site costs (rent, rates, maintenance, servicing costs) – may make break-even output and payback lower  Easy access for staff (commuting can be costly and stressful)  Good working environment improves quality of life and motivation  Overcoming trade barriers may increase sales  It may improve brand image  Competitive advantage; if a business holds the optimal location, its competitors cannot /Land-deals-behind-Tescopoly.html /Land-deals-behind-Tescopoly.html

Multi-site locations It is normal for some businesses to operate from more than one site Retailers need to be close to their market Multi national businesses have worldwide operations and exploit local business conditions Some businesses will have different types of operations in different locations eg Cadbury Diversified businesses may be located in a number of locations See page 345 Advantages and Disadvantages of multi- site locations

International locations Multi-national companies operate in a number of different locations across the world Avoid trade barriers (quotas, tariffs) by locating in the overseas market Financial incentive – regional aid to attract firms, eg Nissan to Sunderland Cost of labour – eg India, China Proximity to markets or suppliers – save on transport costs Exchange rate fluctuations – eliminate risk of currency falls Political stability – some countries will be avoided because of political regimes (boycott) Language barriers – UK is a favoured European location for US companies See handout Risks of operating in different countries

Activity Activity 2 page 346 of the A level textbook

Business Location Learning Objective – Develop an understanding of the factors which influence the location of a business Learning Outcome ALL students - Identify where specific businesses locate and identify factors which affect where a business chooses to locate – (E grade) MOST students - Explain why specific businesses have located in specific areas – (C grade) SOME students - Analyse the advantages and disadvantages of different locations – (A grade)

Offshoring Question - What is offshoring?

Offshoring Offshoring occurs when a business shifts production overseas (off shore). The aim of offshoring is usually to reduce costs. Where are a lot of businesses moving to and why?

Offshoring Printing, toy manufacturers, call centres clothes and show production and a great deal of manufacturing are moving to places such as China, India, Turkey and Vietnam. Businesses move to these countries to benefit from: lower wages, less regulations, less concerns over methods of production and the impact on the environment and lower or fewer taxes. Famous companies such as Dyson, MG and Burberry are a few examples of where production has gone abroad. Activities – Offshoring or Made in Britain page of the Surridge and Gillespie textbook

Location Question – What does it mean to be footloose?

Location Footloose – A business is able to locate anywhere it chooses.

Activity Read the case study on page 120 of the Surridge and Gillespie and answer the following question – Analyse the possible factors that might have influenced the choice of Pramus’ research and development bases Ext – Is outsourcing likely to be a good idea for Pramus?

Review of learning ness-studies/comments/revision-quiz- business-location ness-studies/comments/revision-quiz- business-location

Homework activity Case Study Debenhams, p347