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BUSINESS STUDIES
SHORT NOTES FOR O LEVEL BUSINESS STUDIES

SECTION 4:
Operations Management
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4.1 Production of goods and services

4.1.1 The meaning of production:

The process of converting inputs such as land, labour and capital into
saleable goods, for example shoes and cell phones
In other words production is the process of converting inputs into outputs
Managing resources effectively to produce goods and services
Operations management involves managing business resources (inputs)
to produced finished goods, services and components (outputs) for selling
it to other businesses or customers.
In order to do so operations management must
– Use resources in most cost-effective way.
– Produce the required output to meet consumer demand.
– Meet the quality standard expected by consumers

Difference between production and productivity

• Production:
– Converting inputs to outputs
– Number of units (output) produced in a given period of time.

• Productivity:
– Measure of how efficiently the inputs are changed to output.
– Number of units (output) produced for every unit of input

Labour productivity:
• A measure of the efficiency of labours in the production process.

Labour Productivity is measured as follows

𝑇𝑜𝑡𝑎𝑙 𝑜𝑢𝑡𝑝𝑢𝑡
Labour productivity =
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑤𝑜𝑟𝑘𝑒𝑟𝑠

Benefits of increasing efficiency and how to increase it, e.g.

increasing productivity by automation and technology, improved
labour skills
How to increase productivity:
 Improving the skill level of workers
 Improving the motivation of workers
 Introducing more automation and more or better technology
 Improving the quality of management decisions
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Benefits of increasing efficiency:

 Businesses will try to increase productivity because this will reduce
average cost (cost of each unit of output)
 Reduced average cost will give more profit to the firm

Costs of increasing efficiency:

Cost of the business will be more if it tries to increase productivity by any
means. (Training, introducing schemes for motivation, purchasing new
machinery / technology, hiring experienced managers etc.….)
Productivity is increased to reduce average cost of production and the
increase in output must be greater than the increase in costs due to
increasing efficiency.
Businesses needs to analyze and make sure those benefits of productivity
should be more than costs.
Why businesses hold inventories (stocks)
Inventories are the stock of raw materials, work-in-progress and finished
goods held by a business
All businesses hold inventories (stock) of…
1. Raw material and components: These are inputs for productions
process.
2. Work-in-progress: Part-finished goods which is not yet completed in
production process.
3. Finished goods: Ready to be sold goods to be sold or sent out to
customers.
Costs of holding inventories
When businesses hold inventories it will add costs like…
1. Warehousing costs: Businesses need to rent or purchase a
warehouse to store the inventories.
2. Handling costs: Inventories need to be moved into and out of
warehouse.
3. Shrinkage costs: Damaged, lost or stolen inventories need to be
replaced.
4. Insurance costs: To cover the losses from shrinkage.
5. Obsolescence: Businesses may not be able to sell outdated
products.
6. Opportunity costs: The costs of storing inventories has an
opportunity cost. The next best alternative of money is forgone.

Why do businesses hold inventories?

Businesses hold inventories because….
1. To make raw material available all the time: Businesses need raw
material readily available for smooth production. If raw material is
not available production process will be delayed.
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2. To meet customers demand: If businesses don’t have finished

goods in stock, they cannot supply products when customer’s
demand. For prompt delivery of goods to customers businesses has
to hold stock of finished goods even though it is costly.
3. To achieve economies of scale: When businesses buy stock in bulk
they can receive discounts on purchase and average cost of
inventories will go down. This will help firms achieve economies of
scale.
Businesses have to balance costs of holding inventories with the costs of
not holding inventories in order to minimize the costs.
Concept of lean production; how to achieve it, e.g. just-in-
time inventory control and Kaizen; benefits of lean production
Lean Production: Lean production is the production of goods and
services with the minimum waste of resources.
For firms to improve the business it is necessary to reduce cost of
production without affecting quality of product.

 By increasing productivity, average cost of production can be

reduced.
 Reduced cost will reduce final price of product.
 With lower price of goods and services business will become more
competitive (specially in global market where competition is high)

Lean production aims to lower the cost of production by reducing waste to

a minimum, while maintaining or even improving quality of product.

How resources are wasted?

1. Production defects
2. Over production
3. High inventories (blocking working capital)
4. When resources are kept idle
5. While transporting goods

When resources are wasted…

1. Cost of business will increase

2. Increase cost of production will increase the price of goods
3. With high prices business will not remain competitive and loose its
profit.

Benefits of Lean Production

Introduction of lean production techniques like just-in-time (JIT), and

Kaizen will bring following benefits.

1. New products can be brought to the market more quickly

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2. Quality is improved
3. Wastage of time and other resources is reduced or eliminated
4. The costs of holding the inventories are eliminated.
5. Unit cost is reduced which increase profit, reduce prices, makes firm
more competitive. (sales, revenue and profit will increase)

Just-In-Time (JIT):
This is an inventory control system where no inventories are held by
business.
Inventories (raw material and components) arrive from supplies just as
they are needed by production process
Inventories (Finished goods) are sent to customers immediately after
production process. (No work-in-progress as goods is sent directly after
manufacturing).
Note:

 Cost of holding inventories is removed (which will reduce average

cost of production)
 Need to have good relationship & communication with the suppliers
 Raw material and components needs to be supplied in time.
 Quality and quantity of raw material has to be accounted else it will
destroy reputation of business and increase cost respectively.
 Machinery and workers need to be flexible to switch products while
manufacturing as goods has to be moved out immediately after
manufacturing and raw material has to be moved in immediately to
avoid wastage of time.

Kaizen:
Japanese term for continuous improvement.
In this technique workers are given opportunity to give suggestions to
improve quality and productivity to make it more efficient.
It is because workers who work in production know the areas of
improvement to improve quality and productivity.
These suggested changes may be very small but it can lead to huge
improvement and efficiency.

4.1.2 The main methods of production: (Features, benefits and

limitations of job, batch and flow production)

Methods of production:

Business must decide on the most suitable methods of production. The

objective is to minimize the cost per unit i.e. productivity and efficiency.
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There are 3 methods of production

1. Job production
2. Batch production
3. Flow production

Job production: Job production is producing one item at a time. In this

method small batches of various products in different sets and sequences
are produced.

In this method a single worker of group of workers handle the complete

job. Some jobs may require little or no technology and some may require
complex use of technology.

Example of job production:

 House construction
 Wedding suit designing
 Designer jewellery
 Restaurant making meals to customers

Characteristics of job production:

1. Useful when high variety of products (custom design) and low

volume of products
2. General purpose machines and facilities are used
3. Skilled operators needed to accept each job as challenge due to
uniqueness
4. Large inventory of material, tools and parts
5. Detailed planning is needed for
a) Sequencing of process
b) Process requirement of product
c) Capacity of each work
d) Order priorities etc….

Benefits of job production:

1. Main advantage of using job production is that the product / output is

of high quality.
2. Producers will be able to meet / satisfy customers need.
3. Greater job satisfaction involved in all stages of production.

Limitations of using job production:

1. Cost of producing one unit / job is higher

2. It is labour intensive production
3. Requires investment in skills and training
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Batch production: Batch production is the method where products are

manufactured in groups called batches rather in a continuous fashion.
In this method many similar items are produced together. Each batch
goes through one stage of the production process before moving onto
next stage.
Example of batch production:

 Cricket bat manufacturing

 Medicine pills manufacturing
 Bread and bakery items manufacturing

Characteristics of batch production:

1. Products are manufactured in batches as per the specific order
produced.
2. Division of labour is possible
3. Flow of material is continious
4. Process layout is used
5. Automation of process and mechanization of materials handling can
be done
6. Maintenance of machinery and equipment is essential
7. Process and product planning is done for each batch

Benefits of batch production:

1. Better utilization of plant and machinery.
2. Cost per unit is lower as compared to job production (due to large
capital used)
3. Job satisfaction exist for operators
4. Raw material can be bought in bulk, providing economies of scale to
the business.
5. Slight variation can be made between batches which gives
businesses flexibility to produce range of products.
6. Can still address specific customer needs (e.g. size, weight, style)
7. Productivity can be increased
Limitations of using batch production:
1. Time lost switching between batches – machinery may need to be
reset, cleaning of machinery has to be done between batches.
2. Need to keep stocks of raw materials. Cash also investment in work-
in-progress
3. Repetitive work will potentially de-motivate staff
4. Smaller mistake will lead to huge loss as whole batch will be
affected.
5. Cost per unit will increase if the batch size is small
6. Huge capital used may result in workers layoff and redundancy.
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Flow production: Flow production is the production of very large

quantities of identical goods using a continuously moving process.
In this process products moves continuously along a production line. At
each stage of production additional features are added until the product
reaches its finished state.
This type of production is used where a large output of identical,
standardized products is required, to meet high consumer demand; This is
why flow production is also known as mass production.
Example of batch production:

 Chocolate bar
 Coca Cola bottling
 Computer / Computer chips
Characteristics of flow production:
1. Large quantities of idntical products are produced.
2. High standardization of products
3. Workers are relatively unskilled
4. High degree of automation
5. Large inventories of raw material and work-in-progress
6. Equipment maintainance is important.
Benefits of flow production:
1. Increased productivity due to automation and specialization
2. Less skilled labours are required which are easily available and
lower the cost of production
3. Manufacturing cost per unit decreases
4. Raw material can be bought in bulk, providing economies of scale to
the business.
5. Labours will be specialized as they do the same work again and
again.

Limitations of using flow production:

1. Huge capital required as most of the process is automated

2. Repetitive work on assembly line will make workers demotivated,
tired and bored
3. Breakdown of any part in assembly line will halt all the work,
stopping production completely
4. Similar / identical products / no variety
5. Supply may exceed demand
6. Large amount of inventories i.e. raw material and work-in-progress
is required.
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Recommend and justify an appropriate production method for

a given situation

Choosing method of production depends on various factors like

1. The amount of goods going to be sold

2. Type of product
3. The cost of production
4. Varieties of goods expected by customers
5. The size of market

4.1.3 How technology has changed production methods, e.g.

using computers in manufacturing and design

Recently, there has been a move towards more modern production

methods. These methods of production combine the advantages of the
traditional methods new' outlined above, while at the same time avoiding
many of their limitations.

Production has been influenced by the developments in technology and,

in particular, the development of

 Computer-aided design (CAD)

 Computer-aided manufacturing (CAM)
 Computer-integrated manufacturing (CIM).

Computer-aided design (CAD): Computer-aided design (CAD) is a

computer technology that designs a product and documents the design's
process.

The use of computers in design has enabled businesses to develop

products much more quickly than in the past. Products can be designed
and displayed in three dimensions (3D) on computer screens. Special
computer software can be used to test different features of the product's
design, for example to check the product's safety. Any changes can be
easily and quickly made. Being able to design and test products using
computer technology saves the business money. They do not have to
build and rebuild expensive prototypes until they have produced on
screen what they think is close to the finished product.

The development of 3D printers is the latest technology to aid the

production process. For some time these printers have been used to
produce prototypes, but they are now being used to produce finished
products in materials such as metals, plastic and rubber.

Computer-aided manufacturing (CAM): It is an application technology

that uses computer software and machinery to facilitate and automate
manufacturing processes.
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Once a product has been designed and tested it can be produced much
more quickly with the aid of computer technologies. In co manufacturing
(CAM), computers control the machinery and equipment used in the
production process. Manufacturing is more capital intensive, which
reduces the need for labour and, therefore, reduces production costs

Computer-integrated manufacturing (CIM): This is the complete

automation of a manufacturing facility such as a factory. All functions are
under computer control.

In some industries, for example car manufacturing, computer-integrated

manufacturing has completely changed the production process. The use
of robots and other technologies has enabled some manufacturers to
have production lines or their entire factory controlled by computers
Computer-controlled robots are able to complete simple or complex task
very quickly and more accurately than workers. Technology has not only
changed the way goods are manufactured, but has also influenced the
provision of services.

 Many large electrical items, such as washing machines,

dishwashers and televisions, have built in technologies that
diagnose faults.
 Banking services such as cash deposits, cash withdrawals and
moving money between different accounts are almost always done
these days with the aid of computers.
 Many retailers use electronic funds transfer at the point to enable
customers to buy goods using debit or credit cards instead of paying
by cash or cheque.
 Larger retailers, specially supermarkets, use an electronic point of
sale (EPOS) system not only to calculate the amount purchased by
consumers, but also to manage their inventory levels of each item

How technology affects?

To the business:

Advantages Disadvantages
Reduce the cost and time taken to Business needs to change with
design new product technology to remain competitive
Increase productivity Can be very expensive
Reduces cost of production May need to spend money training
Improves quality and reduces waste workers which increase cost
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To the workers:

Advantages Disadvantages
Development of new technology will Technology often reduces need of
create employment opportunities labour and result in redundancy
The work is easier with the aid of Technology could make the work
technology less interesting
Small workforce reduces
opportunity for promotions
Business using latest technology is
likely to be more successful and
Technology completes simple and
thus provides job security
repetitive task which workers find
boring

To the customers:

Advantages Disadvantages
Better quality products Product may become outdated soon
Lower prices Faulty products may be expensive
or difficult to repair
More features

4.2 Costs, scale of production and break-even analysis

4.2.1 Identify and classify costs: (Classifying costs – fixed, variable,

average, total; use examples to illustrate these)
Businesses have to make many decisions. To make decisions businesses
must know accurate data of costs involved.
Classification of costs
The main classification of costs are
 Fixed costs
 Variable costs
 Total costs
 Average costs

Fixed costs: Fixed costs do not change with output (finished product).
Fixed costs will be same when output will be zero or when the firm is
producing its maximum capacity of output.

Examples of fixed costs are

 Factory rent
 Managers salary
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Fixed cost = Total cost – Variable cost

Variable costs: Variable costs changes with output (finished product).

Variable costs increase if output increases.
Examples of variable costs are

 Raw material
 Fuel

Variable cost = Total cost – Fixed cost

Total costs: Total costs are the cost of making certain level of output.
Total cost is the addition of fixed cost and variable cost
Total cost = Fixed cost + Variable cost
Average costs: Average costs are the cost of producing a single unit of
output
Average cost = Total cost / output

Use cost data to help make simple cost-based decisions, e.g. to stop
production or continue

 A business can use cost data for a variety of different uses, for
example setting prices, break-even analysis and decisions about
whether to continue or stop producing a product.
 Cost data can be used in making decisions about whether a
business should continue or stop producing a loss-making product.

4.2.2 Economies and diseconomies of scale: (The concepts of

economies and diseconomies of scale; examples of both)

Economies of scale

The reduction in average costs as a result of increasing the scale of

operations.

Types of Economies of scale

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Financial economies
Lenders, such as banks, often prefer to lend to large businesses because
they consider them less of a risk than smaller businesses. As a result,
large businesses find it easier to borrow money and often do so at a lower
rate of interest than smaller businesses.
Managerial economies
As a business grows, it often employs specialist managers for the different
functional areas of the business such as marketing, finance, operations
and human resources. Specialist managers improve the quality of
business decisions and make fewer mistakes than non-specialist
managers.
Marketing economies
While total marketing costs rise as a business gets larger, they do not rise
at the same rate as sales output. So, if a business doubles its output and
sales, it will not need to double its marketing costs. This means that the
average cost of marketing falls as output and sales increase.
Purchasing economies
Large businesses usually buy greater quantities of raw materials and
goods than smaller businesses. Suppliers often offer discounts on large,
or bulk, purchases. Small businesses do not benefit from discounts.
Purchasing economies are sometimes called "bulk-buying economies
Technical economies
Large businesses usually use flow production to produce their output. This
method of production often uses the latest technology, such as computer-
aided manufacturing (CAM). Such technology may be very expensive and
only very large businesses can afford the level of investment required.
The technology enables businesses to produce very high levels of output
at lower unit costs than smaller businesses
Diseconomies of scale
Factors that cause average costs to rise as the scale of operations
increases.
Sometimes, a business grows so large that it loses the benefits of
economies of scale. Instead, it experiences the opposite diseconomies of
scale. Diseconomies of scale are all due to the problems faced by
management in trying to control a business that has become too large.
The main causes of these problems are:
 poor communication
 demotivation of workers
 poor control
Poor communication: a business becomes too large, managers may no
longer be able to communicate directly with workers. This can slow and
poor decision-making and an increase in mistakes.
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Demotivation of workers: In very large businesses, managers may no

longer have day-to-day contact with workers. This can lead to
demotivation as workers feel that they are no longer a valued part of the
business. Demotivation can lead to high labour turnover, poor quality and
a fall in productivity.

Poor control: As a business grows, so too will the number of

departments, products and production units. The control and coordination
of these can present with many problems, especially where production
units are located in other countries. The business's average costs may
rise as a result of in different departments or different production units
working managers towards different objectives. Also, there is a greater
risk that work will be duplicated and of course, is a waste of resources and
increases costs this, unnecessarily.

The importance of economies and diseconomies of scale Economies of

scale reduce average costs and diseconomies of scale increase average
costs. The relationship between average costs and scale of operation is
shown in Figure given below

You can see that as output increases, unit costs fall and continue to do so
until diseconomies of scale occur and the unit costs begin to rise. The
"best' scale of operation is where unit costs are at their lowest the bottom
of the curve at the point

The fact that most businesses will eventually experience diseconomies of

scale, as the scale of operation grows, explains why most industries are
not dominated by just one or a few firms.

4.2.3 Explain, interpret and use a simple break-even chart:

Simple break-even charts

Break-even the level of output where revenue equals total costs, the
business is making neither profit nor loss.
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Break-even describes a situation where a business is not making a profit

or a loss from the production and sale of its products. In other words, the
revenue a business earns from selling its output exactly equals the total
costs of producing the output. If the revenue a business earns from selling
its output is greater than the total costs of producing it, then the business
earns profit. However, if the revenue earned is less than the total costs
then the business will make a loss. These three situations are shown in
Figure given below

The concept of break-even

Break even analysis is a business technique that shows the relationship

between revenue, costs and volume of output/sales. A business might use
break-even analysis to:

 calculate how many units it needs to sell before it starts to make a

profit
 calculate the effect on profit of increasing or decreasing the price of
a product
 calculate the effect on profits of an increase or decrease in business
costs.
 Construct, complete or amend a simple break-even chart
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Simple break-even charts

The purpose of a break-even chart is to show the relationship between a

business's revenue and costs at different levels of output. The chart can
be used to work out the level of output that must be produced and sold to
earn revenue which exactly equals the total costs of producing that level
of output. This is known as the break-even output.

To produce a break-even chart, a business needs to know its:

 Revenue at zero output and at its maximum output (capacity)

 Total costs at zero output and at capacity output
 Fixed costs at zero output and at capacity output.

The revenue and cost information at these two output levels is then used
to produce a break-even chart similar to that shown in Figure below

 Interpret a given chart and use it to analyse a situation

 Use a chart to help make simple decisions, e.g. impact of
higher price
 Understand the limitations of break-even charts

Margin of safety

The margin of safety is the amount by which actual sales exceed the
break-even level of output.

Margin of safety = actual sales = break-even output

This is a measure of the amount by which sales can fall before losses are
made. The higher the margin of safety, the lower the risk of a loss being
made.

Benefits of Break-even analysis

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 Easy to construct and interpret.

 Provide businesses with useful information about the output that
must be sold to cover all costs and how different sales volumes
affect the margin of safety and profitability.
 Can show the effect of a decision to change costs or revenues
 Can help with other important business decisions such as the
location and relocation of a business.

Limitations of Break-even analysis

 Assume that all costs and revenues can be represented by straight
lines.
 It is not easy to separate costs into fixed and variable
 Assume that all output is sold do not allow for inventories and the
costs of holding these.

4.3 Achieving quality production

4.3.1 Why quality is important and how quality production might
be achieved:
Achieving Quality Production
Introduction
How do businesses keep the customers they have and also attract new
customers?
The answer lies mainly in the quality of the products they produce and
sell. Businesses that provide poor quality products or poor customer
service may quickly lose customers and eventually close down.
In this chapter you will learn the meaning and importance of quality and
understand how businesses can achieve quality production. You will look
at quality control and quality assurance.
Why quality is important?
What quality means?
When we talk about a quality product' we do not mean that it is the best
possible product, which has been made by the most advanced production
methods using the highest quality raw materials. It also does not mean
that the most expensive product is always the best
Instead, we need to think of "quality' as free from defects. When you buy a
product you want it to work in the way that you expect. For example, if you
buy a calculator you expect it to work out calculations correctly. In other
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words, a quality product is one that meets the needs and requirements of
the consumer.
Businesses usually find out about the needs and requirements of
consumers through market research. Once they know what these needs
are the business can set the quality standards that are expected by
consumers.

Quality standards can be divided into design standards and process

standards.

 Design standards help a business create the best possible product,

which consumers find more valuable than other products in the
market
 Process quality standards help a business to produce its goods and
services at the lowest cost. Combining design standards and
process standards helps a business gain a competitive advantage
and gain market share.

KEY TERMS
Quality: ensuring a good or service that meets the needs and
requirements of its consumer
Quality standards: the minimum acceptable standard of production or
service acceptable to consumers.
The importance of quality to all businesses
Quality is important to businesses because it helps them to:
 Develop a strong brand image-building strong brand image based
on quality makes it easier for a business to introduce new products
to the market.
 Keep customers and attract new customers-this is known as
customer loyalty. When a business has a reputation for producing
quality products it is easier for them to keep their existing customers
(repeat purchase) and attract new ones.
 Reduce costs, customer complaints and returns products that do not
meet the needs and expectations of customers will be returned.
 Charge a premium price many consumers are prepared to pay a
higher price for a product that is seen as being of better quality than
similar products on the market.

 Encourage wholesalers and retailers to stock the product. If a

product is of good quality then both wholesalers and retailers will
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want to stock the item because they know that consumers will want
to buy it. This will increase their revenue and profits.

 Lengthen product life cycles products that are good quality will
continue to meet the needs of customers. These products will have
a longer life cycle than poor quality products, which consumers will
not continue to buy. If a product has a long life cycle then it will stay
in the most profitable maturity stage much longer

Concept of quality control and how businesses implement

quality control

How businesses achieve quality production?

Quality control: Checking the quality of goods through inspection

Quality control is the traditional method businesses use to check the

quality of products. It aims to ensure that only quality products reach the
consumer.

Businesses employ trained quality inspectors to check products, usually at

the end of the production process. Sometimes products are checked at
different stages of the process.

Problems of quality control by inspection

Apart from the cost of inspecting for quality, there are other problems with
this method of quality control.
 The work can be repetitive and boring and this may demotivate the
inspectors, resulting in them not performing their tasks efficiently.
 It is rarely possible to check every item produced as it is time-
consuming and therefore may be too costly for a business to do this.
 This means that not every product is checked for quality and there is
always a chance of a poor quality product finding its way to the final
customer.
 It would be too expensive to test every product in this way Quality
control, by inspection, usually uses sampling.
 If inspection only takes place at the end of the process, then
problems with quality that occur at the beginning are not found soon
enough. Resources are wasted completing a product that should
have been rejected much earlier in the production process.
 The use of quality inspectors takes any responsibility for quality
away from the workers. Workers do not see quality as their
responsibility and may not try to ensure quality is maintained
throughout the production process.
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The concept of quality assurance

Quality assurance: a system of setting agreed standards for every stage
of production
Problems with quality control have led many businesses to move away
from quality control to quality assurance. This method focuses on
preventing poor quality. It makes sure that:
 raw materials, components and other resources are of the required
standard before they enter the production process
 quality standards are agreed for every stage of the production
process
 products are designed to minimise quality issues -many businesses
use computer-aided design (CAD), which is more accurate than
hand-drawn designs.

Benefits of quality assurance

 Businesses benefit from quality assurance. It encourages teamwork

and this can act as a motivator for workers.
 It reduces the cost of wastage and faulty products.
 Quality issues are found when they occur and not at the end of the
production process. This means that resources are not wasted
completing a product that will later fail quality checks.
 Although a business may inspect goods at the end of the production
process, the time spent by inspectors will be less and the business's
inspection costs will be reduced
 Businesses that have a quality assurance system of quality control
find it easier to obtain industry quality awards such as ISO9000.
These awards can bring marketing benefits to a business.
Customers have greater trust in products with quality awards and
this helps to increase revenue and profits.
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4.4 Location decisions

The decision about where to locate a new business, or relocate an

existing business, is one of the most important decisions most businesses
make. The decision can be the difference between business success or
business failure.

4.4.1 The main factors influencing the location and relocation

decisions of a business:

(Factors relevant to the location decision of

manufacturing businesses and service businesses)

Some factors which may be relevant to location decisions are

 Availability of site.
 Customer flow
 Labour mobility
 Transportation
 Competitions
 Infrastructure availability
 Telecommunication

Location decisions of manufacturing and service businesses

Businesses need to consider a variety of factors when choosing a location

for a new business or relocating an existing business. These factors can
be divided into quantitative factors and qualitative factors.

Qualitative factors
• Size of site: site should be sufficient enough and also provide
the scope for expansion

• Infrastructure: Transport links such as road, rail, sea and air.

Communication, water, power etc.

• Legal control: in some countries it is not easy to start a

business on any location available as there may be planning
restrictions or other restrictions. For example business may
not be allowed to work near residential areas.

• Ethical: business wanting to locate or relocate may have to

look out for ethical issues like unemployment and
redundancies. If business follows such actions it may leave a
negative impact on customer’s mind-sets and lead to fall in
demand for product.
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Quantitative Factors
• Cost of Site: how expensive the land or building are to rent or
buy

• Market potential: revenue from sales might depend heavily on

the location. For example restaurant and most tertiary sectors
need to be close to their customers whereas it is less
necessary for secondary sector to be near customers.

• Transport cost: The cost of production matters and so does

transportation cost. If the cost of transportation from supplier
or to the customers is costly than the cost of production will
rise.

• Availability of labour: Labour should be available for smooth

functioning of business.

• Government incentives. Usually finance such as interest free

loan, or grants provided to a business to help when locating in
a country or area of a country.

Factors influencing location and relocation decisions. (Why

businesses locate their operations to another country?)
As well as local location factors, some businesses may decide to locate
their operations in another country. This decision is usually for one of the
following reasons:
 To achieve growth:
Location overseas might be the best way of achieving growth for
companies whose sales have reached their maximum level in the
home market; the product in the maturity stage of its life cycle.

 To reduce production costs:

For example, labour costs in countries such as India, China and
Eastern Europe are much lower than in Western Europe, Japan and
the USA.

 To locate production closer to the market:

This reduces delivery time to customers and reduces transport
costs.
The benefits of international location decisions include:
 Government incentives:
Governments around the world can see the benefits of attracting
overseas businesses to locate in their country. Such benefits include
providing employment, improving workforce skills (including
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management skills), introduction of new technologies, improved

product quality and increasing consumer choice. These benefits
lead to economic growth and the long-term improvements this
brings to a country's citizens

 Access to global markets:

The development of the economies of many countries around the
world has opened up markets to businesses whose sales in their
home market have no further opportunity to grow because the
product has reached the maturity stage of its life cycle. Although
businesses could simply export their goods into these countries, it is
often much easier and more successful to locate operations in other
country. For example Coca-Cola has manufacturing operations in
many countries throughout the world including, Pakistan, Argentina,
Costa Rica, Nigeria and Jordan.

 To avoid legal barriers and import tariffs:

Although many countries have removed or reduced their barriers to
free trade, they still exist. One way around this is, to locate in the
country. The business does not then have to pay import tariffs and
will not be affected by legal restrictions on foreign companies.

 Lower labour costs:

Businesses may decide to relocate from a high labour cost country
to one where labour costs are much lower.

The limitations of international location decisions include:

 Cultural differences:
These may affect the workplace and/or the market place. Products
that are popular in one country may be less popular in some
international markets due to different consumer tastes or religious
beliefs. The workplace culture in one country may not be right for
another.

 Communication problems:
Language differences may be a barrier to communication between
workers, managers and suppliers. Communication problems may
also arise as a result of the distance between Head Office and the
operation unit based in another country.

 Ethical concerns:
A decision to relocate to another country may affect the workforce in
the home country. Although some managers may be prepared to
relocate to another country, other employees may not be given the
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opportunity or wish to do so, resulting in high levels of redundancy.

There have been several reported concerns about the exploitation of
workers in low cost economies, including issues of child labour.
These issues could damage the reputation of a business and affect
revenue and profits in all of their markets.

 Quality issues:
It may be more difficult to control the quality of supplies and the
quality of finished products in international markets.

The role of legal controls on location decisions (The role of legal

controls)

When considering its location, a business may also need to think

about possible legal controls. For example, building new premises
such as a factory or supermarket may require planning permission
from local government or other government agencies. Local and
national government will want to attract businesses to locate in their
country, or in particular areas of the country, as they provide
employment for the population. However, they may also want to
protect the environment so do not want businesses to locate in
areas which may cause damage to wildlife, rivers, woodland or other
open spaces that are enjoyed by the local community.

In many countries there are areas that have been set up for
businesses to use. These areas are usually located away from local
housing so that residents are not affected by any noise, air or traffic
pollution from manufacturing activities.

Governments are now much more aware of the problems caused by

pollution, especially from manufacturing. In some countries there are
laws which require businesses to control the amount of pollution
their activities cause. Any business found breaking these laws might
be fined or closed down.

There are often legal controls concerning the employment of

workers such as discrimination laws and minimum wage laws.

The legal controls placed on businesses will not be the same for
every country. A business that is thinking of relocating to another
country will have to investigate the laws of that country and make
sure that these are considered along with other location factors.

Recommend and justify an appropriate location for a business

in given circumstance
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Choosing a location
The task of owners or managers is to select the best location. This
is never easy because every location will have factors which are a
benefit and others which are a limitation. For example:

 The land on which to build a factory might be very cheap

because it is located some distance from the nearest town.
 The business might find it difficult to recruit a workforce
because of the distance workers would have to travel to get to
work.
 A business looking to relocate to a low labour cost country
might need to balance the benefit of lower production costs
with increased transportation costs for raw materials and
finished goods

Those faced with making the decision must balance location factors
and choose the location where the benefits outweigh the limitations
so that future profits are maximised.