It is not always a good idea to rely on your best assumptions or gut instinct. Perhaps it would Be ok for minor risks, such as selecting beer at the supermarket or clothing at a department shop.
But not when considering where to establish a business.
I’m not suggesting you should abandon your instincts entirely. Not at all.
However, if you wish to start a lucrative business and invest your time and savings in it, there are certain considerations to consider during your business planning phase (or even later, when you are reconsidering your strategy).
That is why the business location analysis is one of the vital parts of every business plan, despite often aspiring entrepreneurs neglecting it and favoring profit projections or budgets.
For some businesses, like mine, location is everything.
What is business location analysis?
Business location analysis — it sounds so complicated, doesn’t it? So let’s call it BLA from now on.
Business Location Analysis is a key component of Market Research and business planning that allows you to evaluate the attractiveness of a location, using as basis multiple factors — more about them later.
When business location analysis is done during the start-up phase of a company it will help you validate/dispel your assumptions about the potential markets you can grow in, the types of facilities and infrastructure that need to be in place for your company to run efficiently and even how much money you might make.
It helps to find the most favorable places for a company’s activity.
There are obvious advantages to a good BLA, but some of them are often unpredicted, like reduced travel and transportation costs for employees, new markets for sales, or reduced production costs. Business location analysis requires long-term thinking since it is a business site is not something to be changed in a short time, unless your business is a circus.
How does location affect the success of the business?
Many people think that the major influence on the success of a business is the quality of its services/products. This is only partly true as real estate plays a significant role in the fate of an enterprise.
The location of your business is critical to its success and that can’t be stressed enough.
Bad location is one of the 6 major causes of business failure (the others being lack of market knowledge, flawed business plan, lack of cash flow, over-expansion, and market changes).
The business location determines whether your store will boom or bust based on many different factors like local sales, supply, and demand, competition, consumer spending power, economic conditions, and accessibility.
Real example: In 2017 I opened a touristic hostel downtown. Our guests were mostly backpackers visiting the city. In 2019, we moved to a larger, better building in the vicinity of the largest airport in the country.
Our new area is not popular with backpackers. So I changed our name to Nearby Airport Hostel and redefined the entire business model. Now, we are a hostel for transit passengers, and it was a positive change so far.
6 factors to consider when choosing a business location
- Offer: What is the level of competition? Are they financially successful? What are their distinctions? What competitive advantages should I have over them?
- Demand: Is it sufficient to create a profit? Can I generate more demand through innovation? How can my company meet the demands of its customers?
- Bureaucracy: How specific are the regulatory requirements? What are the chances that the legal framework may cause the project to be delayed?
- Infrastructure: Are the transportation, telecommunications, and other infrastructure resources appropriate for my business today and in the future?
- Government and Private Incentives: What kind of funding are available? Is it simple to receive inexpensive credit? Are there any tax breaks or sectoral incentives for new businesses?
- Distance from Major Markets: Where are my customers? How distant are they from me? How will people get to my goods or service?
These are universal issues since they should be considered and analyzed regardless of where your company is established.
Certain locations may have extra factors to consider, which are not listed above. For example, consider the geopolitical threats of countries in the vicinity of war, like here where I live. Or the strain posed by very large influxes of refugees (another thing I witnessed firsthand).
Let’s dive a bit deeper into each main factor of a business location analysis.
Offer Analysis (or Competitive Analysis)
Due to the nature of competition in business, you need to analyze the offer of your competitors and check if they are selling your product or service (or an alternative/substitute).
I wrote 2 other articles deeper into this subject:
- How to Effectively Analyze Your Competition
- 2 Essential Questions to Ask During a Competitive Analysis
Demand Analysis is a critical customer-level study. It defines a business’s local market demand and requirements. This helps the company design products and services, or decide whether to expand or contract in the global market. It also makes it easier to produce products and services that are unique to the market requirements (meaning: competitive advantage).
My article 3 Essential Questions brings some things to be asked during a demand (and offer) analysis.
The term bureaucracy is frequently associated with a plethora of regulations and necessary paperwork. The form-filling frenzy stifles innovation and decision-making. New businesses are burdened by external bureaucracy, which originates in government offices and regulatory bodies.
While large organizations have an extensive legal department and a plethora of lobbyists, smaller enterprises do not have the same benefit.
The good news is… Not every place is like that. The Heritage Foundation’s annual Index of Economic Freedom (IEF) is a reputable indicator of how awful a country’s bureaucracy is. Government bureaucracy will be less of an issue if your destination is near the top of the IEF list, in places such as Singapore, Hong Kong, or New Zealand.
I was born and raised in Brazil (144th in the IFE rating) in an entrepreneurial family. Since very young, I was exposed to the complexities of legal hurdles and fluctuating rules early on. I felt a sense of relief after relocating to Poland (44th in the IFE ranking), although the Polish business environment is regarded as one of the most bureaucratic in Europe — here you can check 10 business-friendly countries with low taxes and little bureaucracy.
Infrastructure analysis is frequently overlooked during long-term plans. The necessity to put the company to work overshadows potential structural bottlenecks.
Because long-term planning is tough, and it rarely comes to 100% realization. As a result, individuals may believe they are superfluous.
But structural impediments are difficult to remove. As a result, while designing your business, consider not only if your communications and physical infrastructures are adequate for your current needs, but also whether they are adequate even in the most positive scenario where your business grows above your ordinary expectations.
Government Incentives and Subsidies Analysis
When planning the fundraising (or capital-raising) phase, entrepreneurs (including myself) often overlook government incentives for new businesses.
I made this error since I had saved enough money to fund my project.
I never checked the local tourism incentives (my company was a touristic hostel). I missed out on some cheap funds by not using a regional development bank’s preferential credit lines. Money that later could be used to gain competitive advantages. In my case, this could mean, for example, a better-equipped lounge.
You will be at a competitive disadvantage if you do not take benefit of cheap credit lines from subsidized banks, or if you ignore sectoral tax breaks. Meanwhile, your competitors, using all these benefits, will have the financial protection to outperform you or withstand a disaster that you would not.
Although saving money for your business is fantastic, having access to low-cost loans in case of emergency or future opportunities is even better. During economic downturns, mega-investors like Warren Buffett keep cash on hand to acquire good companies cheaply.
Do not overlook federal and foreign financing opportunities, as well as tax exemptions. This financial backup will strengthen your firm afterward.
Distance from Major Markets Analysis
To talk about geographic distance seems obsolete in an era where remote work is popular and outsourcing is common.
But videoconferences and calls alone cannot always win a client. Dr. Albert Mehrabian of the University of California estimated that just 7% of human communication is verbal, with the rest being voice tone and facial expressions.
Aside from the professional issues of distance and location, there is a personal issue: time zone. People underestimated how different time zones complicate human contact. In my first book, Moving Out, Working Abroad and Keeping Your Sanity, I discussed how this contributes to a sense of detachment.
Factors for business location analysis: Conclusion
You can never know too much about your market, but entrepreneurs frequently know too little.
When considering a long-distance venture, the business plan is the first document I advise you to create. It is there that you will determine whether your intuition was correct and whether the business is viable.
Don’t be scared to change your mind, your location, or even your business idea if the numbers and conclusions from your business plan are not viable.
You will spend almost nothing on the planning phase, so to find anything wrong and fix it is a low-cost effort. When your firm is already up and going, this cannot be said. Make a good business plan to identify any wrong assumptions as soon as possible.
This will be easier if you do a PROPER business location analysis, and the major factors you should consider are:
- Offer (or Competition)
- Local Bureaucracy
- Local Infrastructure
- Local Government and Private Incentives
- Distance from Major Markets
Do you have a business case to share? I would be glad to read it in the comments!
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