Location, Layout, and Physical Facilities

Location, Layout, and Physical Facilities

Location

We've moved our company so many times that we consider relocation one of our core competencies.

The president of a small medical services company

There's no place like home. There's no place like home. There's no place like home.

Dorothy, in The Wizard of Oz

Objectives

1.  Explain the stages in the location decision.

2.  Describe the location criteria for retail and service businesses.

3.  Outline the basic location options for retail and service businesses.

4.  Explain the site selection process for manufacturers.

5.  Discuss the benefits of locating a start-up company in a business incubator.

Outline

I. Introduction

A. The Location Decision

1. Few decisions have as big and as lasting an impact on a business as the entrepreneur's choice of location.

2. The location decision plays a major role in many aspects of a company's life--from its cost structure and the quality of its workforce to the size of its customer base.

3. Unfortunately, many entrepreneurs never consider locations beyond their own hometowns.

4. The "secret" to selecting the ideal location goes back to knowing who a company's target customers are and then finding a site that makes it most convenient for those customers to do business with the company.

II. The Logic of Location: From Region to State to City to Site

A. Introduction

1. An entrepreneur's ultimate location goal is to locate the company at a site that will maximize the likelihood of success.

2. The more entrepreneurs invest in researching potential locations, the higher is the probability that they will find the spot that is best suited for their company.

3. Choosing an appropriate location is essentially a matter of selecting the site that best serves the needs of the business's target market.

a) The better entrepreneurs know and understand their target customers' characteristics, demographic profiles, and buying behavior, the greater are their chances of identifying the right location from which to serve them.

4. The logic of location selection is to begin with a broad regional search and then to systematically narrow the focus of the site selection process.

B. Selecting the Region

1. The first step is to focus at the regional level.

2. Common requirements include rapid growth in the population of a certain age group, rising disposable incomes, the existence of specific infrastructure, a nonunion environment, and low operating costs.

3. At the broadest level of the location decision, entrepreneurs usually identify regions of the country that are experiencing substantial growth.

4. One of the first stops entrepreneurs should make when conducting a regional evaluation is the U.S. Census Bureau.

a) The Census Bureau publishes a monthly newsletter, "Census and You," which is especially helpful to business owners.

b) In addition, the Census Bureau makes most of the information contained in its valuable data banks available to entrepreneurs through its easy-to-use World Wide Web site <http:/www.census.gov/>.

c) At this site, entrepreneurs can find vital demographic information for specific locations.

5. The Small Business Administration also has valuable aids to help you throughout your location search.

a) Some of these are "Practical Use of Government Statistics," "Using Census Data to Select a Store Site," and "Using Census Data in Small Plant Marketing."

6. American Demographics magazine has two valuable booklets also: The 1990 Census: The Counting of America and A Researcher's Guide to the 1990 Census.

7. Four other helpful publications.

a) Sales and Marketing Management's Survey of Buying Power, published annually, provides a detailed breakdown of population, retail sales, spendable income, and other characteristics.

b) The Editor and Publisher Market Guide is similar to the Survey of Buying Power, but provides additional information on markets. The guide includes detailed information on key cities.

c) Rand McNally's Commercial Atlas and Marketing Guide reports on more than 128,000 places in the United States, many of which are not available through census reports.

d) The Zip Code Atlas and Market Planner is an extremely useful location and market-planning tool. It combines a breakdown of zip codes (often the basis of psychographic customer profiles) with maps featuring physical features such as mountains, rivers, and major highways.

8. The Small Business Administration's Small Business Development Center (SBDC) program also offers location analysis assistance to entrepreneurs.

9. For many businesses, especially manufacturers, cost considerations are driving factors in the location decision.

10. In other cases, a company's location decision stems from the availability of particular raw materials or natural resources.

11. The task of analyzing potential locations--gathering and synthesizing data on a wide variety of demographic and geographic variables--is one ideally suited for a computer.

a) In fact, a growing number of entrepreneurs are relying on geographic information systems (GISs), powerful software programs that combine map drawing with database management capability, to pinpoint the ideal location for their business.

b) These programs enable users to search through virtually any database and plot the relevant findings on a detailed map of the country, an individual state, a specific city, or even a single city block.

c) Using a GIS program, an entrepreneur could plot her existing customer base on a map, with various colors representing the different population densities.

d) Geographic information system street files originate in the U.S. Census Department's TIGER (Topological Integrated Geographic Encoding Referencing) file, which contains map information broken down for every street in the country and detailed block statistics for the 345 largest urban areas.

C. Selecting the State

1. Every state has a business development office to recruit new businesses to that state.

2. Some of the key issues to explore include the laws, regulations, and taxes that govern businesses and any incentives or investment credits the state may offer to businesses locating there.

3. Other factors to consider include proximity to markets, proximity to raw materials; quantity and quality of the labor supply, general business climate, and wage rates.

4. Proximity to markets

a) Locating close to markets that manufacturing firm's plan to serve is extremely critical when the cost of transportation of finished goods is high relative to their value.

b) Service firms often find that proximity to their clients is essential. If a business is involved in repairing equipment used in a specific industry, it should be located where that industry is concentrated.

c) The more specialized the business or the greater the relative cost of transporting the product to the customer, the more important proximity to the market is.

5. Proximity to needed raw materials

a) A business that requires raw materials that are difficult or expensive to transport may need a location near the source of those raw materials.

b) In situations in which bulk or weight is not a factor, locating close to suppliers can facilitate quick deliveries and reduce inventory-holding costs.

6. Labor supply

a) Two distinct factors are important for entrepreneurs analyzing the labor supply in a potential location: the number of workers available in the area and their level of education, training, and experience.

b) Business owners want to know how many qualified people are available in the area to do the work required in the business.

c) The size of the local labor pool determines a company's ability to fill jobs at reasonable wages.

d) Knowing the exact nature of the labor needed and preparing job descriptions and job specifications in advance will help business owners determine whether there is a good match between their company and the available labor pool.

e) Checking educational statistics in the state to determine the number of graduates in relevant fields of study will provide an idea of the local supply of qualified workers.

7. Business climate

a) What is the state's overall attitude toward your kind of business?

b) Does the state offer small business support programs or financial assistance to entrepreneurs?

c) Some states are more "small business friendly" than others.

(1) Entrepreneur magazine recently named Minnesota's Minneapolis/St. Paul as one of the best cities for small businesses, citing its positive attitude toward growing and developing small companies as a major asset.

(2) Table 15.1 illustrates a matrix designed to help entrepreneurs score potential locations they are considering.

8. Wage rates

a) Entrepreneurs should determine the wage rates for jobs that are related to their particular industry or company.

b) In addition to published government surveys, local newspapers will give entrepreneurs an idea of the wages local companies must pay to attract workers.

D. Selecting the City

1. Population trends and density

a) By analyzing population and other demographic data, an entrepreneur can examine a city in detail.

b) Using only basic census data, entrepreneurs can determine the value of the homes in an area, how many rooms they contain, how many bedrooms they contain, what percentage of the population own their homes, and how much residents' monthly rental or mortgage payments are.

c) A company's location should match the market for its products or services, and assembling a demographic profile will tell an entrepreneur how well a particular site measures up to her target market's profile.

d) Trends or shifts in population components may have more meaning than total population trends.

e) Population density is another important factor for many small businesses.

(1) Nearly two-thirds of Americans live in high-density, urbanized areas, although these areas make up just 1.7 percent of the nation's land area.

(2) For owners of businesses that depend on high traffic for their success, determining a city's population density can be crucial.

2. Competition

a) For some retailers, locating near competitors makes sense because having similar businesses located near one another may increase traffic flow.

b) Clustering, as this location strategy is known, works well for products for which customers are most likely to comparison shop.

c) Overcrowding of businesses of the same type in an area can create an undesirable impact on the profitability of all competing firms.

(1) Consider the specific nature of the competing businesses in the area.

d) Studying the size of the market for a product or service and the number of existing competitors will help entrepreneurs determine whether they can capture a sufficiently large market share to earn a profit.

(1) The Census Bureau reports can be a valuable source of information.

(2) The bureau's "County Business Patterns Economic Profile" shows the breakdown of businesses in manufacturing, wholesale, retail, and service categories and estimates companies' annual payrolls and number of employees.

(3) The Economic Census, which covers 15 million businesses and is published in years that end in 2 and 7, gives an overview of the businesses in an area, including their sales (or other measure of output), employment, payroll, and form of organization.

3. The Index of retail saturation

a) For retailers, the number of customers in the trading area and the intensity of the competition are essential factors in predicting success.

b) One traditional way to analyze potential sites is to compare them on the basis of the index of retail saturation (IRS), a measure that combines the number of customers in an area, their purchasing power, and the level of competition,

(1) The index is the ratio of a trading area's sales potential for a particular product or service to its sales capacity:

C x RE

IRS = RF

(2) C = Number of customers in the trading area

(3) RE = Retail expenditures (the average expenditure per person [$] for the product in the trading area)

(4) RF = Retail facilities (the total square feet of selling space allocated to the product in the trading area)

c) This computation is an important one for any retailer to make.

d) Locating in an area already saturated with competitors results in dismal sales volume and often leads to failure.

(1) See illustration on page 501.

e) The amount of available data on the population of any city or town is staggering.

f) These statistics allow a potential business owner to compare a wide variety of cities or towns and to narrow the choices to those few that warrant further investigation.

4. Costs

a) For many businesses, especially manufacturers, the primary force driving site selection is cost.

b) A study by Patrick Howie of Regional Financial Associates found that cities offering the lowest costs experienced the greatest growth in business formations and job creation.

c) A growing number of small cities are establishing special technology zones that offer tax exemptions and reduced fees and licensing costs in an attempt to attract high-tech businesses.

5. Local laws and regulations

a) Before selecting a particular site within a city, small business owners must explore the local zoning laws to determine if there are any ordinances that would place restrictions on business activity or that would prohibit establishing a business altogether.

(1) Zoning is a system that divides a city or county into small cells or districts to control the use of land, buildings, and sites.

(2) Its purpose is to contain similar activities in suitable locations.

6. Compatibility with the community

a) One of the intangibles that an entrepreneur can determine only by visiting a particular city is the degree of compatibility a business has with the surrounding community.

b) A company's image must fit in with the character of the town and the needs and wants of its residents.

7. Quality of life

a) One of the most important, yet most difficult to measure, criteria for a city is the quality of life it offers.

b) Entrepreneurs have the freedom and the flexibility to locate their companies in cities that suit not only their business needs but also their personal preferences.

c) When choosing locations for their companies, entrepreneurs often consider factors such as cultural events, outdoor activities, entertainment opportunities, safety, and the city's "personality."

8. Transportation networks

a) Manufacturers and wholesalers in particular must investigate the quality of local transportation systems.

b) For retailers, the availability of loading and unloading zones is an important feature of a suitable location.

(1) Some downtown locations suffer from a lack of space for carriers to unload deliveries of merchandise.