Basic Location Strategies

The bottom line of an economic activity is the relationships between the costs of its inputs and the revenue from the sale of its outputs; profit. A location can have an impact on the price of both inputs and outputs, so the choice of a location can be important to insure the profitability of an activity. Two major location strategies can be considered:

Costs minimization mainly considers location problems where income (sales) is generally constant and costs vary. This is particularly the case for manufacturing and resources that tend to service large markets. Thus, a computer manufacturer is likely to have similar sales, wherever its location, but its production costs are likely to vary depending on its location. The goal is consequently to find an optimal location (O1) that minimizes costs and maximizes profits. Such a location can be "bounded", implying that a certain geographical area, due to its lower costs, would incur profits for an activity wherever its location within this area. There is a potential positive feedback effect as a low cost location enables to increase profits, which can be passed down the supply chain and likely improve the market share, demand and income.
Revenue maximization on the other hand deals with constant costs, but varying income. This is particularly the case for retail activities whose inputs tend to be constant (such as labor), but whose income (sales) can increase at locations that are more accessible to potential customers. There is an optimal location (O2) insuring the highest access to customers which can be bounded.

Both strategies can be reconciled in a profit maximization perspective where both costs and income varies according to location. Under such a perspective, the optimal location could be different (03).