The cost of doing business drives business location, writes Timi Olubiyi
Businesses in emerging economies, large, small, and micro, continue to bear the brunt of inflation, high energy costs (diesel and electricity), and, more broadly, global economic turbulence, which has snowballed into a slew of challenges that increasingly threaten the survival of many enterprises across all sectors. Attention to businesses, particularly small businesses, continues to heighten because of the increasingly difficult times and widespread uncertainty in many countries due to post pandemic consequences. Therefore, more and more businesses are looking for ways to fight back against the harsh economy and hostile environments. One of the ways widely considered, based on the author’s observation, is the change of business location to reduce the cost of doing business, in particular for rent reduction.
Lately, it has been observed that more businesses with headquarters and main base of operations or offices in choice location, where they have established connections and network with customers, continue to relocate to neighbouring states and remote areas. This trend has been increasing in all sectors and industries post-pandemic. The probing question is why? According to a survey conducted in Lagos State, Nigeria’s economic capital, the most common reason given by many business operators for relocation of businesses is receiving high consideration, was that it is a way to minimise the rising cost of doing business, and remaining in business seems to be a top business priority for many of them. The view is that location or relocation factor in a business should be more on overall business gains, that is to, maximise income, access to competent workforce, be closer to customers and business resources, amongst others. Many of them are not aware that these key variables adequately and effectively give competitive advantage to business. Location or relocation should not just be determined-based cost of doing business. It can be concluded that location decisions at this time are typically driven by financial factors.
However, such linear decisions can have serious consequences on the non-financial factors such as customer retention, sales or market share growth, proximity to resources, or more broadly, long sustainability of the businesses. Let the truth be told, the choice of a business location is an economic decision and should only be considered strategically with thorough evaluation rather than just for financial reasons, that is reducing operating costs or on mere sentiments. Because such sharp decision can influence the conditions in which the business activity is subsequently conducted. If a business selects a wrong location, it may have an adverse effect on access to customers, competent workers, good transportation, access to resources, and so on. Consequently, it should be done with caution and strategically because location plays a significant role in overall business success,
The criteria dictating the location of businesses in the past were, for example, access to raw materials, low costs of labour force and production means, costs of transport or benefits from government amongst others. But presently, in Lagos State, what drives business location is the cost of doing business. Whereas globalization and technology have been the most important factors in industrialised countries, where remote work and digital adoption has been on the rise.
A location strategy is especially critical now in post-COVID economy and it is especially crucial for these small businesses since location can determine the going concern and earnings to support the business. Where a business is set up can have a significant impact on its success; a poor choice can jeopardise potential income, dissuade existing customers, increase delivery costs, and compromise future business growth and related supporting industries. When examining the role of location, it suffices to mention that some start-ups and small businesses may just require a website and a presence on the internet. That can offer better proximity to customers than a physical location where the cost of running the business is high. For businesses in retail, traditional stores may be complemented with technology and an online presence, reducing the number of outlets or branches.
The new normal has clearly demonstrated that technology and digital adoption can provide a competitive advantage while also lowering the cost of doing business, particularly the cost of running a business activity (rent, electricity, renumeration, local taxes and fees). The COVID-19 crisis has brought rapid change in the way businesses in all sectors and regions conduct their operations. Largely, the COVID-19 crisis has removed the technology barrier in business and the introduction of many applications to improve operations and globalisation are now available. Adopting digitization and the use of technology to improve customer and supply-chain interactions is increasing globally. Some businesses have even re-strategized and moved part of their business operations online, implementing more than 60% of their business operations on the internet. This is also a location for a business to stay competitive and reduce the cost of doing business in a hostile environment, not just physical change or relocation. Many businesses are currently struggling as a result of their adherence to the old-fashioned brick-and-mortar business model, despite the fact that the new normal has been established through the effective use of technology and digital channels.
The important thing to note is that new strategies, business models, and practises are required for businesses to stay profitable and stem the tide of high inflation, harsh environmental conditions, and weak consumer spending. Technology’s strategic importance has to be recognised in business dealings going forward and as a critical component of the business. It can provide a source of business cost efficiencies and also global accessibility. Research has shown that the location of a business is one of its most important factors for success, and online is also a location. Perhaps, across sectors, businesses may need to refocus their offerings, fill the technology gaps by adopting digital channels, increase their online presence and develop digital products more. This may just be the strategic location businesses need to consider at this time.
Dr. Olubiyi is an Entrepreneurship and Business Management expert