The Optimal Business Location Model

By: Mitchel Gorecki

Purpose

To create a comprehensive model that will predict the optimal location for a business.

Method

• Identify and weight the key characteristics of an area that contribute to a business’ success

• Combine these characteristics into a formula or model that will indicate the optimal place of establishment

• Evaluate effectiveness by applying model to predict current outcomes

Example of Evaluating Factors

Kuo and Kao (2005)

Example of Parameter Weights

Kuo and Kao (2005)

Specific Example – Road Configuration

Kuo and Kao (2005)

Problem• Most models produce an output given various

inputs• In our case the output needs to be an area or

location

• Employ matrices to create a 3-dimensional model that can be represented graphically

Solution

A Mini-Matrix of Parking Availability

• The cell (3,2) has the maximum parking availability, with a value of 8/10

• The scaling factor in this case is .1648

Durham in 1925

Example of Matrix

Major areas of business will occur where the cost to the consumer is at a minimum.

Results3 Indicators of Success

1. The given area must have a peak when looking at the meshplot of the sum of evaluative matrixes.

2. Given a highly competitive situation, a firm must understand that primary places of commerce will form where the cost to the consumer is at a minimum.

3. The first partial derivatives in the x and y direction must be between 0 and -1.

In every model there is a but…

• No two firms are identical. As it is, this model only predicts the relativistic probability of success for a business given a particular location.

• Each business must identify which aspects of the model are most relevant.– For instance, a gas station would give greater

weight to consumer cost minimization and would care less as to whether or not the area has reached its business capacity.

Any Questions?