Main Location Criteria for Retail and Service Businesses - Research Paper Example

Main Location Criteria for Retail and Service Businesses Introduction Entrepreneurship is more than the mere establishment of a business for it focuses on seeking opportunities, taking risks beyond security expectations and having the tenacity to module ideas in to reality (Kuratko, 2008, p. 3) that ultimately helps it become a successful business entity. Exploring and recognizing opportunities are some of the very basic characteristics of successful entrepreneurs who approach opportunities as ‘resources’ to make the business economically attractive. Out of various opportunities of a firm, the location decision has been found to be critical to future success and to have long-term impact and far-reaching effect on the success of a small business almost like choosing a better mode of finance or convenient mode of ownership. Business environment, including all its components like political, economic, social, competitive, technological and legal, is closely related to its location, because, these environmental factors will be entirely or partially different from one location to another location. As Zimmerer, Scarborough and Wilson (2008) noted, the availability of qualified workers, tax rates, traffic pattern, infrastructure, customer advantages and many other factors vary from one location to another (p. 515) and this shows business location is an important determinant of business environment as well. Entrepreneurs who took wise decision of its location based on customer preferences, distribution or supplier convenience, political influence and legal factors, can establish a firm with sustainable competitive advantages over their competitors. This piece of research paper explains how entrepreneurial decision making regarding the business location becomes a significant factor being critical to the success. Based on reviewing literatures, this paper details various location criteria for small and service businesses and explains how these factors influence the success of the firm, especially how technological factors like mobile, internet, wifi and communication advancements critically influence the location decision. Location Criteria for Retail and Service Businesses Significance of Location-decision: While planning for a small or service business, a number of factors in relation to its location are to be considered. Right and convenient region and state, nearness to customers, proximity to the markets and raw-materials, reasonable wage rate and labor supply, business climate, tax rate and total operating costs are thus some of the very important factors that an entrepreneur has to consider regarding its location element (Zimmerer, Scarborough and Wilson, 2008). A careful and wise decision to choose convenient and right location is critical to build competitive advantages too (Zimmerer, Scarborough and Wilson, 2008, p. 515). Retail stores and restaurants have to be located near to customers so that they can reach to the business easily, where as manufactures may find locations remote from the customer base in order to be cost-effective due to the availability of raw-materials, availability of labor, taxes, regulation and overhead costs (Pinson and Jinnett, 2006, p. 39). It shows, different business enterprises will be influenced by location element differently. Nearness to customers is highly important and critical to create competitive advantage for small retails where as being remote from the customers to take cost-effective advantages is a way to achieve competitive advantage to the large manufacturers. A retail business that attracts large number of customers due to its nearness to the people will obviously enjoy more advantages than its competitor who is away from customers and finds less number of customers. As Pakroo and Pakroo (2008) emphasized, the entrepreneurs are required to figure out how a particular location selection will or will not contribute to the success of the business and how it makes economic sense (p. 50). The location will make economic sense when it is really going to pay to the entrepreneur and generate more earnings than in the case if the business is located in some other locations. For a real estate business, the best three things are ‘location, location and location. Katz and Green (2009) hold an opinion that the same is true with a small and service business too (p. 357). Location is meaningful when it is good location for business so as to attract more number of visitors. Katz and Green (2009) emphasized that a good location is in fact highly dependent on the budget an entrepreneur can afford, the business philosophy and marketing niche he is seeking (p. 357). Location represents ‘P’ element of the basic four marketing Ps. Out of the four Marketing Ps namely Place, Price, Promotion and Product, Place plays a very significant role because, all the other three elements can be meaningful or can help the business reach its target only if the location is good fit for it. Mariotti (2007) found that location is the key to attracting customers and thus to create a ‘market’ that the business find will success with (p. 90) Location Criteria and Factors influencing a ‘good location’ As detailed above, in deciding the location of a small and service business, determining the extent of its trading area is also a very significant factor. By determining trade area, the entrepreneur would be able to recognize the strengths of the customers, potential number of customers who are likely to visit the shop, their social and economic background, behavioral factors related to their purchasing and their demand for various products and services. Zimmerer, Scarborough and Wilson (2008) described that a trading area is the region that a business can expect to draw customers from that region over a reasonable time period (p. 527). Though service businesses that need to go to customers do not always need to be concerned about their location, generally, a service and small retail businesses need to evaluate their trading area (Lambing and Kuehl, 2007, p. 127). According to them, a trading area is a geographically defined area in which that specific target market is located. The trading area will be affected by a number of factors like type of business, the number of competitors, type of facility etc (p. 127). Various factors that influence the trade area are detailed below: 1- Technology Technology is perhaps one of the most influencing factors in today’s most dynamic and complex business environments. When it comes to retail or service business location decision, communication and other technological factors seem to have significant roles. Communication is critical to business success and therefore choosing a location with adequate communication and other facilities also highly important for a good location. Many researchers have emphasized the influence of information technology on business location decision. Traxler (2002) described that information technology, like mobile and internet based communication and accessibility to network areas like wifi are of greater importance to business location, and especially for those businesses that depends more on communication. Mareno, Castillo and Masere (2007) emphasized that the location decision for a service business is largely influenced by communication facilities like network and other facilities. As noted by Dosi, Teece and Chytry, technology is no doubt an important factor that can determine the competitiveness of a business (p. 3). Where an entrepreneur fails to choose a location with adequate communication facilities like mobile or internet network, he lacks better communication facilities that will eventually result him failure in his business. A business with less communication facility is very vulnerable to lose. 2- Retail Compatibility There are greater differences between a business being single-free standing and a business being one among a cluster of businesses in the same location like shopping mall or shopping centers. It is found that shopping malls and shopping centers attracts large number of customers than a single-sanding shopper does. Retail compatibility is the totality of advantages that a business is likely to enjoy by locating its business near to other businesses that sell complementary products and generate high profits as well (Zimmerer, Scarborough and Wilson, 2008, p. 528). As Akehurst and Alexander (1996) pointed, “two compatible businesses in close proximity will show an increase in business volume directly proportionate to the incidence of customer interchange between them, inversely proportional to the ratio of business volume of the larger store” (p. 109). When it comes to retail business and its location decision, retail compatibility is thus an important factor to be considered, especially for a start-up business with relatively less-budget to spend on advertising (Davidson, 1991, p. 142). Retail compatility factor explain why some drugstores and ice cream parlors are found to be successful due to it is located near to grocery firms. 3- Degree of competition Degree of competition determines the size of the trade area of a business, because, if the area that the business is located has many stores and they do compete with each other, the trading area of each business can be said to be very small because the market is saturated by competitors (Zimmerer, Scarborough and Wilson, 2008, p. 528). If the trade area of a retail or service business lies entirely inside a specific circle, to say 15 kms, then the store could potentially attract all of them. But, when there are many competitors spread out in the same location, may be some of the competitors’ customers are more than 15 kms away from that particular shop and hence these customers cannot be attracted even if those customers prefer the shop (Miron, 2010, p. 211). 4- Index of Retail Saturation Index of retail saturation is a best measurement of recognizing the level of retail saturation in a specific area. Index of retail saturation also is a significant factor in determining the trade area of retail and service businesses. It is the ratio of demand for a particular product or service divided by the available supply of the goods or services (Dunne, 2007, p. 226). According to Zimmerer, Scarborough and Wilson (2008), the finding out the index of retail saturation is highly important for every retailer (p. 528) in order to recognize the profit potential and severity of retail saturation. It can be calculated as follows: (Total numbers of customers in the trading area * average expenditure per person for retail products) ÷ Total square feet of selling area. 5- Reilly’s Law of Retail Gravitation: Zimmerer, Scarborough and Wilson (2008) found that Reilly’s Law of Retail Gravitation is a significant factor influencing the trade area of a retail business. Reilly’s Law of Retail Gravitation is an analogy of gravity to estimate the attractiveness of a particular business to its potential customers (p. 529). According to J.W Reilly’s retail trade analysis, “two cities attract trade from any intermediate city or town in the vicinity of the breaking point approximately in direct proportion to the population of two cities and in inverse proportion to the square of the distance from these two cities to the immediate town” (Samli, 1998, p. 70). This model provides a model to estimate the trade limits between two areas or two cities by finding a breaking point between them, which is the line between these two areas where customers are not different about shopping from the one or from the other. When it comes to the location decision of a retail or service business, the law of gravity thus provides a significant measure of estimating its potential strength of the market and targeted customers. 6- Customer Traffic The potential number of customers who pass by the retail location is an extremely important factor that retail entrepreneurs have to consider while choosing its location. The customer traffic is thus a significant factor that determines the size of the retail trade area and also its potentiality to generate profits from this customer traffic. As O'Malley (2008) pointed, customer traffic is not a stand-alone factor, as it is interrelated with various others factors. In proposing and deciding a location for the new startup retail or service business, customer traffic is the most important factor to the business success, because even if the business he designed is best0shaped, lowest-cost or best located space in the town, but if there are no sufficient numbers of customers coming by that location, it will profit him little (p. 71). Strauss (2003) stressed that when selecting a location, one of the major factors to be thought about is foot and car traffic to the business. It is because; a high profile location may generate higher returns due to impulse buying. As he noted, a gas station requires a great location and lot of traffic where as a dentist or nurse may not need so (p. 83). 7- Transportation Network: Retail’s trading area is largely influenced by the transportation facilities available or planned for. If there are better transportation facilities like public service routes, or high road being linked to the retail shop and customers thus have more convenient access to the shop, it virtually means that the retail shop’s trade area is relatively more. If customers find no easy access to shop, trading area is in contrast reduced (Zimmerer, Scarborough and Wilson, 2008, p. 529). Transportation facility is a very significant factor that a retail or service entrepreneur needs to be concerned of not only because it is a criteria for attracting its customers and facilitating them convenience, but also for reducing costs and facilitate better distribution of the goods. When the retailer buys its supplies or provides home delivery of goods, convenience in transportation is thus critical to reducing the costs. The entrepreneurs planning to start a retail or service business must carefully evaluate all the trucking routes that can support their transportation needs and consider the costs of both transporting supplies from the manufacturing location and delivering the goods to the customers (Longenecker, Moore, Petty and Palich, nd, p. 240). 8- Physical or racial or emotional barriers Barriers like parks, rivers or lakes made by people that seem to be hindrance to the people to reach the shop can largely influence the size of the trading area of retail and service business. For instance, an entrepreneur has chosen a location where large number of crimes are reported or people fear to visit that place due to gang’s troubles or communal violence or even people find difficulty to visits a shop due to a river between the location and their place, it virtually reduces the size of the trade area of that particular shop. 9- Political Barriers Various law and systems have significant impacts on retail markets. Local or national or state government and related laws often influence the trade area and therefore it is important than an entrepreneur planning to start a new retail venture is required to consider political barriers that are creations of laws. 10- Parking Facilities In today’s changing social life, parking and adequate facilities are key factors to the success of a retail shop. Many retails shops attract large number of customers mainly because its facilities and amenities provided to the customers. If customers cannot find adequate space for parking their vehicles, no doubt, customers will find a place that can meet their needs. As discussed earlier, the retail shop is located in a very busy town, providing convenient goods of high quality for low price, may not attract sufficient number of customers unless there is park for vehicles. 11- Reputation Locations may have god or bad reputation among the public. Zimmerer, Scarborough and Wilson (2008) found that some locations may have bad name, which was due to a previous business that was located in the same area (p. 531), and this will directly influence the reputation of the new business as well. When there is a bad reputation, it will adversely affect the trade area of the retail business as well. In taking strategic decisions regarding the location for a new startup retailing or service business, a number of factors are to be considered. Some locations may long have a bad name among the people, or some businesses have repeatedly failed in the same location and created a bad impression among the public or some wrong incidents might have occurred in the same location. All these can influence the reputation of the location and can affect the size of trade area of retail location. 12- Business expansion opportunities Today’s business environment itself is highly dynamic. Due to a number of factors like social, economic, technological and competitive, business environments and contexts will be every now and then changing. When it comes to retail or service businesses, it often requires expansion and many changes. The location selected for the business must be flexible so that changes and expansions can be done easily, whenever so is necessary. The area to be chosen for the retail and service business thus requires wide and with no legal or otherwise restrictions on expounding the business. There may be some legal or governmental regulations regarding business expansion. While choosing the location, it would be better if the location is flexible and there are no restrictions or barriers to expand the business. A location chosen between few other businesses, especially when they are competitors, may not eb flexible because there won’t be enough space to expand buildings and business. 13- Visibility Visibility is very important factor that influences the size of the trade area of a retail and service business, especially in case of a restaurant business. If people cannot find the business easily, it means that the location can draw relatively less number of customers and therefore the trade area is reduced. Conclusion Business location is an extremely important factor in determining whether the business will be successful or not. Choosing the right location is therefore the first and foremost strategic step that an entrepreneur planning to start retail or service business requires to take. The entrepreneur must evaluate the size of the trade area by considering a number of its environmental factors influencing the size and strength of the trade area. These factors include retail compatibility, degree of competition, customer traffic, transportation, parking facility, index of retail saturation. This piece of research work has highlighted the significance of location decision for an entrepreneur and explained various factors that influence the trade area of a retail or service business. This paper suggests that further study is required to analyze how trade area and its influencing factors relate to an online business or an e-commerce shop that attracts worldwide market and to find whether index of retail saturation will be applicable to this type of business or not. 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