When it comes to choosing a business location, big companies put a lot of thought and effort into it. This is because when you select a business location, it will establish the foundation for your business. The location you choose essentially sets the tone for your business. What’s more important is that your business location plays a crucial role in determining the success or failure of a company. Thus, you cannot merely choose the trendiest spot or the cheapest one; thus, a significant amount of time and thought needs to be given to the selection process.
Now, coming to the tricky part – How to select a business location?
While choosing a business location, there are plenty of factors to consider. Here are some of the most important questions that you must ask when deciding on a business location:
- What is your budget – how much can you afford?
- What kind of business space are you looking for?
- What businesses are thriving in the area?
- What are the zoning rules in the area?
- How is the neighborhood in that area?
- Does the location match your brand’s style?
- Can your business grow in the future in that location?
- Is the location accessible to all (both vendors and customers)?
If you can find the answers to these eight questions, your job of selecting a business location will become easier. However, this isn’t all. If you wish to perform a comprehensive analysis of a particular business location, you must adopt the PESTLE approach.
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What is PESTLE Analysis?
The PESTLE analysis framework studies, monitors, and analyzes the macro-environmental factors that play a pivotal role in an enterprise or organization’s overall performance. The term “PESTLE” is a mnemonic wherein ‘P’ stands for political, ‘E’ for economic, ‘S’ for social, ‘T’ for technological, ‘L’ for legal, and ‘E’ for environmental.
It is not only useful when launching a new business, but it is also excellent for monitoring and analyzing market situations when entering a foreign market. Usually, large enterprises and organizations combine the PESTLE framework with SWOT analysis and Porter’s Five Forces to get a thorough picture of the business and market scenario in a specific location.
Let us now expand on each of the six tenets of the PESTLE framework.
1. Political factors
Political factors refer to the government policies and regulations that influence an economy and its industries. These factors determine how an to what extent government policies will affect your business. Apart from government policies, political determinants will also include things like foreign trade policy, fiscal policy, tax policy, labor law, trade law and restrictions, and political stability/instability.
2. Economic factors
As the name suggests, economic factors refer to the determinants that influence a country or region’s financial performance. Economic factors include economic growth rate, exchange rate, inflation rate, interest rate, disposable income of consumers, and unemployment rate. Since all of these factors impact the demand-supply model and also the purchasing power of consumers, they have a direct or indirect impact on a business and how it functions.
3. Social factors
Social factors include everything that makes the social dimension of a market. It includes determinants like demographic characteristics, cultural norms, population analytics, age distribution, income distribution, career attitudes, health consciousness, and lifestyle of the society in which a business operates. All these factors are crucial for customer segmentation and targeted marketing – two core aspects of most modern businesses.
4. Technological factors
Technological factors refer to the technological innovations that may either have a positive or adverse impact on business operations, the market, and the industry as a whole. The technological determinants include R&D activities, innovation and automation incentives, technological awareness, and technical development within a market. These factors influence businesses whether or not they should enter a particular market.
5. Legal factors
While legal factors are a part of the bigger picture (political environment), it includes more specific laws like employment laws, consumer protection laws, discrimination laws, antitrust laws, copyright and patent laws, labor health and safety laws, and so on. These factors are crucial to the functioning of businesses since business owners must know what is legal/illegal and what is ethical/unethical.
6. Environmental factors
The inclusion of environmental factors in the business scenario is a recent one. The environmental factors pertain to ones that have a significant impact on the environment around us, including the acquisition of raw materials, carbon footprint, and pollution levels. It also takes into account ecological aspects like weather, climate, ecological offsets (floods, hurricanes, earthquakes, landslides, etc).
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Together, all these factors have an essential role to play in the making of a business. When you select a business location by leveraging the elaborate and comprehensive PESTLE analysis, you get the bird’s-eye view of all the determinants that can make or break your business.
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What is PESTLE Analysis?
PESTLE analysis is a framework that is especially popular among global companies. It is very helpful to evaluate the feasibility of a new, foreign location for the purpose of starting a new line of business, or to expand an existing business. This framework involves monitoring and analysing 6 important macroeconomic factors – political, economic, social, technological, legal and environmental. The PESTLE analysis framework, in combination with common tools such as SWOT and Porter’s 5 forces model is generally used to estimate the potential of a new location in terms of business performance, as well as the overall sustainability.
How to choose a business location?
There are several tools available for choosing a business location, depending on the nature and size of the business. For instance, startups have limited options and capital, and hence should choose a location that they are familiar with to start with. But a business location is one of the most key decisions in running a business, and should be taken by considering multiple factors such as maximum exposure to the required target audience, lowest penetration of competitors, stable political environment, ease of doing business, availability of resources, and so on. PESTLE analysis and Porter’s 5 forces are some good tools one can use.
Why is location so important to business strategy?
Location is perhaps one of the most important aspects of business strategy. Choosing the right location would ensure a better control over the business operations. If you choose the wrong location for your business, many things could go disastrously wrong. For instance, if you have chosen a place which is already saturated by competitors, you would find it that much harder to stay competitive in the market. Similarly, choosing a place with insufficient demand for your product/service, lack of access to suppliers, trained resources, or an unstable political environment could cause your overheads to shoot up exponentially, overshadowing any revenues earned.