Locational Interdependence Theory

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Locational interdependence refers to the impact of a business’s geographic location on its ability to operate and make a profit. For small-business owners, understanding the connection between place and success can help guide you in researching and choosing the right place to start your business.

Adequate Customer Base

  • One of the main theories of locational interdependence relates to the proximity of a business to its customers. If you have a restaurant, you need to be in an area with enough target customers to support you. If you want to start a tennis pro shop, you will need to locate in an area with a thriving tennis community. If you make a product and sell it nationally, you can’t be near all of your customers, so you can set up your manufacturing facility or corporate offices based on low operating costs.

Access to Vendors and Suppliers

  • Another factor in determining locational interdependence is access to vendors and suppliers. Foreign automakers would not have begun building assembly plans in South Carolina, Georgia, Alabama and Tennessee if they had to work with parts suppliers in the Detroit area. They made sure they had quick access to local suppliers before they built their plants in these states. The parts companies that located down south became dependent on the auto manufacturers. A small-business owner might think working out of her home in the suburbs might be cost effective, but if she might have to drive all over the metro area to meet with her accountant, graphic designer, IT provider, banker, materials supplier and manufacturer, it could prevent her from making enough sales calls, getting projects finished in a timely fashion and making and shipping product quickly and efficiently. When choosing a location, look for industry clusters that might give you access to a large network of support.

Distribution and Logistics

  • If you sell regionally or nationally, warehousing and distribution can play a key role in your success. While it might be tempting to think about locating your business in the mountains or near the beach, you need to think about your cost to receive materials and ship finished goods. The economic development offices of many cities and counties across the U.S. sell themselves, in part, based on their road, rail and air access. Access to affordable distribution can make or break a business.

Other Attractions

  • Some entrepreneurs rely on other businesses or attractions to generate sales. Restaurateurs often locate near sports stadiums and arenas, relying on the large crowds looking for post-game dining and drinking. Clothing and snack shops locate near beaches to cater to vacationers. Savvy businesses owners take advantage of parks, lakes, ski mountains, racetracks and convention centers, becoming dependent on being located near those businesses. Business owners bid to get contracts to become vendors inside these types of locations, as well, getting a captive audience that can only buy from approved vendors.

References

  • Photo Credit alice-photo/iStock/Getty Images
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