BUSINESS LOCATION AND SUCCESS · A list of Internet cafés collected from several sources on the Internet and field observa-tions in three cities supports this number. Figure 1 depicts

171

Indarti—Business Location and Success

Gadjah Mada International Journal of BusinessMay 2004, Vol. 6, No. 2, pp. 171—192

This research aims to examine the relationship between businesslocation decision and business success. The case is Internet café businessin Indonesia. This research is addressed to answer these main questions: (1)what factors do underlie location decision for an Internet café business?;and (2) does location decision determine success of Internet café business?A field research is conducted to answer these questions.

Factor analysis applied to 17 location factors reveals five underlyingdimensions of business location decision. They are centrality, businessenvironment, business venue, cost, and labor. Based on responses from 93Internet cafés in three locations (i.e. Yogyakarta, Surabaya, and Lombok),the author finds that favorable location of business is positively related tobusiness success. More specifically, a regression analysis reveals thatavailability of utilities, proximity to schools/universities and security affectbusiness success in a positive direction, while proximity to highways, beingin commercial center affect in a negative direction. The independent vari-ables explain 23 percent of total variance.

Keywords: business location; business success; location factor; Internet café; Indonesia

Nurul Indarti

* This paper is a part of a larger project on Internet café diffusion in Indonesia, funded by NorwegianMinistry of Foreign Affairs through a collaboration scheme between Agder University College, Norwayand Gadjah Mada University, Indonesia. Author thanks two anonymous reviewers for their insightfulcomments.

BUSINESS LOCATION AND SUCCESS:The Case of Internet Café Business in Indonesia*

172

Gadjah Mada International Journal of Business, May 2004, Vol. 6, No. 2

Introduction

Location selection is one of the busi-ness decisions that have to be made care-fully. Past research has shown that busi-ness location have had relationship withbusiness’ success (e.g. Alli et al. 1991). Inthis context, measurement of business suc-cess can vary, but it is most likely related toboth subjective and objective data onmultiple aspects of performance such assales growth, market share and profitabil-ity (Dawes 1999).

The vast of business location deci-sion studies have focused on the manufac-turing sectors, high technology industries,and large companies (e.g. Greenhut 1956;Wendt 1972; Schmenner 1982; Galbraithand De Noble 1988; Hayter 1997; Karakayaand Canel 1998). Several, but not manystudies on business location decision forservice business have been conducted(e.g. Schmenner 1994). Previous empiricalworks have mainly attempted to investi-gate factors behind business location de-cisions.

The Internet café business in Indone-sia is rapidly growing. Hitherto, there werearound 1500 Internet cafés in whole coun-try (Basuni et al. 2001). Initial interviewswith several users of Internet cafés re-vealed that location was one of their con-siderations in selecting their favoriteInternet café. This preliminary finding at-tracted the author to investigate the rela-tionship between location decision andbusiness’ success. The aim of this study isto participate to the debate, especially aboutlocation decision in service industries. Themain objective is to examine what factorsthat influence location decisions; relationbetween those factors and business suc-cess; and other critical success factors inthe Internet Cafés business.

This study is addressed to answer thefollowing main questions:a. What factors do underlie location deci-

sion for an Internet café business?b. Does location decision determine suc-

cess of Internet café business?

Figure 1. Map of Internét Cafes in Indonesia

Number ofInternet café

100

50

10

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Setting

The development of the Internet cafébusiness (in Indonesian, known as warnetin short for warung Internet) in Indonesiais an interesting phenomenon. There is nofixed statistics on the number of Internetcafés in Indonesia reported. According toBasuni et al., (2001), it was about 1500Internet cafés in the whole country in 2001.In 2002, Purbo (2002) stated that there wereover 2000 Internet cafés in Indonesia. A listof Internet cafés collected from severalsources on the Internet and field observa-tions in three cities supports this number.Figure 1 depicts map of Internet cafés inIndonesia graphically. The vast majority ofInternet cafés is found in the big cities,such as Jakarta, Bandung, Yogyakarta,Surabaya and Semarang.

Theoretical Framework

Past research on location decision ismostly based on three main schools ofthought, neoclassical, behavioral, and in-stitutional (enterprise) theory. The neo-classical framework has largely focused onthe manufacturing sectors and has foundthat location was largely driven by thetransportation cost of their productionfactors (e.g. Schmenner 1982). The be-havioral location theory interprets the lo-cation as a decision making (and learning)process. According to Dicken (1971), thelocation decision can be defined as a partof the objective environment which repre-sents the total sum of information in theeconomy, either globally or regionally,with which the firm receives and sendsinformation flows and signals of one kindand another. The institutional (enterprise)theory interprets location as an exercise inbargaining (Krumme 1969). In more de-tail, location decision can be viewed as apart of investment decisions that have

strategic purposes, i.e. they are made tomeet the basic motivation of corporatestrategy (such as growth, profits and secu-rity) by gaining access to new markets orsources of supply in a way that makessense to individual corporation (Hayter1997: 170)

Recent studies of location decisionhave sought quantitative indicators of thedecision’s success by linking location se-lection decisions to enhanced businesssuccess. Although the business successdoes not depend solely upon the locationof business, but the later influences theformer. Some scholars state that businesslocation had relationship with businesssuccess (Alli et al. 1991; Chan et al. 1995;Ghosh et al. 1995).

Relating to business success, in thiscontext, measurement of business successcan vary, but it is most likely related to bothsubjective and objective data on multipleaspects of performance such as salesgrowth, market share and profitability(Dawes 1999). Laitinen (2002) proposestwo ways of measuring business perfor-mance: financial and non-financial perfor-mance. Financial measurement is tradition-ally used in measuring the performance ofa company, which relates to the profitabil-ity of the company (return on investment)(Laitinen 2002). Non-financial measure-ments can focus on quality, inventory lev-els, productivity, flexibility, deliverabilityand employees. Beside those, Dawes (1999)uses other terms for explaining financialand non-financial measurement called sub-jective and objective measurement. Sub-jective measurement can be defined asperceived success of the owner’s firm whileobjective one will be an actual percentagefigure of sales growth or profitability.

In this study, Internet café businesscan be considered as services business –simply because it offers services to its

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consumer —as well as retail business—because it sell directly its service to itsconsumer. A service business is not onlyretail business, and a retail business is notnecessarily a service business.

Location Decision in ServiceBusiness

It is generally argued that the charac-teristic of service business and manufac-turing obviously differs. The main differ-ences are regarding to time of productionand consumption considerations. Servicebusinesses traditionally have been thoughtto be locationally connected to markets,while the manufacturing firms (primary and/or secondary sectors) —such as agricul-ture and other direct uses of natural re-sources or manufacturing— are confinedby supply considerations. Since one of thecharacteristics of services is that servicescould not be stored, at least in the conven-tional sense, so they must be providedwhere they are consumed (Hanink 1997).

The service sectors can be dividedinto two major sectors: tertiary and quater-nary (Hanink 1997). The tertiary sectorconsists of those activities such as trans-port, government, wholesale and retail tradeand the general business and personalservices, while the quaternary sectors,which are sometimes called the informationsector because providing and managinginformation, consists of those activitiessuch as banking, insurance, and manage-ment service. Another important distinc-tion between services is defined not bywhat they provide, but by their market.They are consumer services and producerservices. Whether the service issued fromthe tertiary or the quaternary sector, ser-vices sold to households are called con-sumer services. Those services sold or

provided to business are called producerservices.

As mentioned in the previous sec-tion, the service business establishmentsin the tertiary sector are almost alwaysfound in proximity to their market, due tothe fact that most service cannot be stored.Likewise, market accessibility is importantfor the service business establishment inthe quaternary sector that is characterizedby frequency of purchases. Because theirproduction and consumption take placesimultaneously, the best location for ser-vice business (i.e. retail business) or otherconsumer service providers are in placeswith a high market density (Hanink 1997).Other factors such as traffic flows, popula-tion densities and local quality of life arealso important in selecting location for anew firm.

Schmenner (1994) introduces an ap-proach to study the service business loca-tion. His study approaches the locationdecision as an intuitively appealing two-step procedure, which first chooses a gen-eral area for the service operation, and thena particular site. For each step in the deci-sion, influences can be described as being“musts” or “wants.” The decision maker isassumed to look first to “musts” and tosatisfying them, and then to move on toconsider desirable features, termed “wants”for the location.

His study shows that labor issues,infrastructure and quality of life tended tobe more important for those firms located atmore distance from the city center. Proxim-ity to customers is valued by firms withseveral distinct characteristics: high em-ployment, more open hours per week, highcapital/labor ratios, sites in this vicinity,strong local business ties, high value placedon particular sites. Many of these charac-

175


teristics apply also to the proximity to com-petitors influence. Low costs or rents ap-peal most to large service firms and to thosethat draw on a wide market area for theirsales. In addition, they find that hospitals,education and social services, personaland business services (e.g. direct mail,cleaning, graphic arts, and temporary em-ployment agencies) and utilities are rela-tively immune to many of the general areainfluences.

On the location of particular sites,their findings show that the importance ofadequate parking is relatively greater forthose service operations whose sales arelargely local in origin, open hours is longerthan other services, and reloation is distantfrom downtown. Also, the attractivenessof the building and high customer trafficarea sites is most important for those ser-vices that have greater interaction with thecustomer. Those industries that are mostaffected by high customer traffic, adequateparking area, and similar influences are themore retail-oriented services: retailing, res-taurants, banking and auto sales-services.

Location Decision in RetailBusiness

From distribution channels point ofview, the author considers an Internet caféas a retailer, as stated earlier. Levy andWeitz (1998: 7) define “retailer as a busi-ness that sells products and services toconsumers for their personal or family use.”A retailer is the final business, after whole-saler, in a distribution channel that linksmanufacturers with consumers. In this view,Internet Service Providers (ISP) can beconsidered as wholesalers that sell Internetbandwidth to the Internet cafés and some-times directly to consumers.

Furthermore, Levy and Weitz (1998)state that selecting retail location is one of

the retailing strategies, because of somereasons. First, location is typically the im-portant consideration in customer’s storechoice. Second, location decision can beused to develop a sustainable competitiveadvantage. In fact, retail location is notrestricted to only new retailers. Mazze (1972)mentions that population shifts, new modesof transportation, changing consumer lifestyles and competitive conditions are of-ten considered as factors that make retail-ers to re-evaluate their locations. He alsostates that location is one of the factorsthat determine the success of a retail store.

According to Levy and Weitz (1998),there are three general factors affecting theattractiveness of market in retail business:demographics, business climate and com-petition. Demographic factors relate tosome conditions, such as population den-sity, education, income and family size(Mazze 1972; Levy and Weitz 1998). Demo-graphic factors considered in retail busi-ness location are dependent on the targetmarket of a particular retailer. For example,an Internet café with student as its targetmarket often choose its location near touniversity, school or student dormitory.Business climate is mainly considered toensure strong retail environment in thefuture. This factor may include market’semployment trends to guarantee availabil-ity of labor and availability of necessaryutilities. For instance, an Internet café relieson service from an ISP to provide access tothe Internet, hence, the availability of suchservice in the future should also be guaran-teed. The level of competition in an areaalso affects demand for a retailer’s prod-ucts or services. For example, if two conve-nient Internet cafés are too close in theirlocation, their market will shrink since theyoffer the same services.

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In more detail, Mazze (1972) and Levyand Weitz (1998) mention several factorsthat should be taken into account in select-ing retail location: term of occupancy, retailgrouping or being in a center, accessibility,and legal consideration. The term of occu-pancy relates to the cost of renting/build-ing and utilities, since most retailers preferto lease a building for their store rather thanto be the owner of the building. Hence,once a particular location is chosen, retail-ers still face a multitude of decision, eitherwill lease or buy. In fact, most of the bestlocations such as in shopping malls areonly available by leasing (Levy and Weitz1998).

Retail grouping refers to a group ofretailers that have the same target market(Mazze 1972). It is important for a storelocated in retail grouping or a center ofbusiness activities. The theory of cumula-tive attraction as formulated by Nelson(1958) suggested that retailers indeed ben-efit from agglomeration. It means that acluster of similar and complementary retail-ing activities will generally have greaterdrawing power than isolated stores thatengage in the same retailing activities (Levyand Weitz 1998). For instance, shoe stores,clothing stores, cosmetic and perfumeshops seem to do better if they are close toone another. Likewise, stationary shops,photocopying, computer rental andInternet café seems to get more benefit ifthey are close to another.

Referring to Levy and Weitz (1998),the accessibility of a retail location is de-fined as the ease with which a customermay get into and out of the store, and it canbe analyzed into a macro analysis and amicroanalysis. The macro analysis con-centrates on the road pattern or the posi-

tion of retailers relatively to highway (Mazze1972) or freeway so that customers cantravel easily to the store. The microanaly-sis focuses on issues in the immediatevicinity of the store such as visibility, ve-hicular traffic, availability of parking area,congestion, transportation facilities, andingress/regress (Levy and Weitz 1998).

Legal consideration is also importantfactors in considering location of a store.Legal issues that affect the location deci-sion of a store include environmental is-sues, zoning, building codes and signs andlicensing requirement (Levy and Weitz1998). For example, retailers must considerlaws regarding how land is used whenchoosing a certain location for their stores.

Methodology

Operational Measurement

In fact some specific hypotheses canbe drawn, however, the author choose totreat this research as exploratory in nature.The reason is due to the lack of theoreticalbackground that specifically relates toInternet café business. Location factors inthis business sector are not well-under-stood. Research questions are stated ear-lier in this paper. It is believed that businesslocation decision has effect on businesssuccess. The more favorable the locationof a business, the higher possibility of thebusiness to succeed.

Despite that there are many locationfactors, 17 location factors that are relevantto be taken into account in making locationdecision of Internet café business are se-lected (see Table 1). The research model isdepicted in Figure 2.

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Figure 2. Research Model

Table 1. Factors Considered in Location Decisions

Factors Studies

Availability of labor Fulton (1971); Blair and Premus (1987); Gailbraithand De Noble (1988); Schmenner (1994); Mudambi(1995); Laulajainen and Stafford (1995); Hayter (1997)

Proximity to customers Schmenner (1994); Laulajainen and Stafford (1995);Alberto (2000)

Proximity to schools/universities Haines (1970); Gailbraith and De Noble (1988);Karakaya and Canel (1998); O’Mara (1999)

Proximity to business services Mazze (1972); Gailbraith and De Noble (1988);Schmenner (1994)

Proximity to residential housing Gailbraith and De Noble (1988); Schmenner (1994)

Proximity to hotels/recreation places Gailbraith and De Noble (1988)

Proximity to highway Schmenner (1994); Hanink (1997)

Being in commercial center Schiller (2001)

Proximity to competitors security Schmenner (1994)Laulajainen and Stafford (1995); Mudambi (1995)

Availability of utilities Fulton (1971); Schmenner (1982)

Availability of adequate parking area Schmenner (1994); Hanink (1997)

Owner/personal preference Haines (1970); Gailbraith and De Noble (1988)

Availability of business venue Haines (1970); Karakaya and Canel (1998)

Location Factors

- Availability of labor- Availability of utilities- Availability of adequate parking area- Availability of business venue- Availability of high quality ISP- Proximity to customer- Proximity to schools/universities- Proximity to hotels/recreational places- Proximity to residential housing- Proximity to business services- Proximity to competitiors- Proximity to highways- Being in commercial center- Rental cost business venue- Price of high quality ISP- Owner/personal preference- Local security stability

Perceived success

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The dependent variable of this studyis perceived success measured by fiveitems. The items are perception on utiliza-tion of computer, growth of net income,payback period, and two items on generalassessment on success.

Research Instrument

A questionnaire was developed asthe main research instrument. The ques-tionnaire was based on theories on loca-tion decision and several preliminary un-structured interviews with owners ofInternet café and users. The preliminaryinterviews were conducted in the begin-ning of August 2002.

In addition to demographical ques-tions, the questionnaire consisted of ques-tions on location decision, market struc-ture, business development, key successfactors and obstacles. The questionnairewas in Indonesian language. Normally ittook around 20 minutes to fill in the ques-tionnaire.

Background questions incorporatedindividual characteristics such as gender,education and work experience and busi-ness-related items such as year of estab-lishment, number of computer, operatinghours, initial investment, and total invest-ment.

Items on perceived success weremeasured by 5-point Likert scales anchoredby “strongly disagree” and “strongly agree.While those on location decision were

measured by 5-point Likert scales anchoredby “very unimportant” and “very impor-tant.” Questions on location decision con-sisted of 17 items which each of themrepresented one dimension of locationbelieved to be relevant on deciding busi-ness location in the Internet café businesscontext. Dimensions of location, for in-stance, were availability of labor, availabil-ity of utilities (e.g. water, electricity, andphone), availability of high quality InternetService Provider (ISP), proximity to cus-tomers, and proximity to schools/universi-ties.

To test the questionnaire, a pilot in-vestigation was done in the middle of De-cember 2002. Based on feedbacks fromsome respondents, the questionnaire wasrefined. Some questions were elicited sincethe respondents considered that they weredifficult to answer or they did not want torelease such information asked.

Data Collection Procedure

Respondents of this study were theowners of Internet café. The study tookplace in three regions: Yogyakarta,Surabaya, and Lombok. Yogyakarta wasselected because it is a typical universitycity, where large proportions of the popu-lation are active students at the 100 institu-tions of higher education within the smallprovince. Surabaya (in East Java) was in-cluded because of its dominant role as anindustrial city in Indonesia with a high

Continued from Table 1

Factors Studies

Rental price of business venue Haines (1970); Galbraith and De Noble (1988);Schmenner (1994)

Availability of high quality Developed in this studyISP and price of ISP

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number of modern manufacturing and ser-vice industries. The island of Lombok in theprovince of Nusa Tenggara Barat (NTB)was selected mostly because of the domi-nating tourist industry in the area. Theauthor use the term Lombok to refer toMataram, Senggigi, and Gili TerawanganIsland. The three study areas are economi-cally relatively well developed and cen-trally located within the wider Indonesiancontext. The Lombok site, however, differsfrom the urban Javanese study areas insome ways, as we shall see. First and fore-most, Lombok is characterized by a morerural society and less advanced infrastruc-ture development. There are around 120Internet cafés in Yogyakarta, 100 inSurabaya, and 30 in Lombok.

A clustered-proportional samplingwas used to select respondents. The areaof Yogyakarta city was divided into fivegeographical clusters based on main linesof demarcation. A north-south distinctionwas made using the railway as divider. Thenorthern area was divided into three clus-ters, and the southern into two based onthe main road partitions. The author dis-tributed 66 questionnaires randomly toaround 50 percent of the total population ineach cluster. The author got 44 responsesand 43 were usable. A similar procedurewas employed in Surabaya, dividing thetown into four geographical clusters parti-tioned by main highways. The authordistributed 50 questionnaires and got 41responses, 39 are valid. The island ofLombok was divided differently: one edu-cational cluster that is in the vicinity ofeducational institutions in the capital town,one shopping-mall cluster, and lastly atourism area cluster. The number of Internetcafé in these three clusters is around 30.The author distributed the questionnairesto 50 percent of total population in each

cluster, got 11 responses, all of them arevalid. On the average, the response ratewas 73 percent.

Data from the questionnaires havebeen complemented by five in-depth inter-views with Internet café owners and twentyusers in Yogyakarta and in Lombok. Thequalitative information has helped inter-preting some of the quantitative data.

Data Analysis Methods

Score of each independent variable iscalculated by averaging from score fromeach item in respective variables. Reversescoring is employed for unfavorable item.Because all questions in the questionnaireare closed-ended ones, a statistical soft-ware package, SPSS, is appropriate to beused in data analysis.

To examine reliability (internal con-sistency), Cronbach’s alpha is used. Con-firmatory factor analysis is used to examinevalidity of the instrument. In addition todescriptive analysis (i.e. central tendency),correlation and regression analyses areemployed to check interdependency amongtwo variables and the effect of severalindependent variables on dependent vari-able respectively.

Research Results

Reliability and Validity of theInstrument

Reliability and validity test is appliedto items to measure subjective success.Cronbach’s alpha value is used to examinethe reliability (internal consistency) of theinstrument (Frankfort-Nachmias andNachmias 2000). The value of Cronbach’salpha is 0.89. Nunally (1978) suggestedthat the values up to 0.60 and even 0.50 canbe considered acceptable.

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Principal factor analysis is used todetermine the validity of data. Principalcomponent analysis (Frankfort-Nachmiasand Nachmias 2000) discloses that onlyone factor is being extracted with factorloadings vary from 0.73 to 0.88. Withoutexception, component loading of all itemsare greater than the minimum acceptablevalue, 0.3. Hence, the instrument is said tobe valid.

Demographic Characteristics

The vast majority (89.2%) of Internetcafé’s owners are male. Most owners ofInternet café have university education(87.2%), while only 1.1 percent of them whohave either elementary or junior high schooleducation.

The age of the owners varies from 22to 59 years old, with an average 32 years.Most of them fall into the age group 26-30years. Two third (66.3%) of the ownershave previous work experience. Out ofthose with work experience, 40.7 percenthave IT-related experience and only 11.1percent have worked in the public sector.More than half of the owners are Javanese(57%) and 14 percent are Chinese.

Location Factors and BusinessSuccess

Using mean rating, the five most im-portant location factors considered by therespondent at starting up are (a) availabil-ity of high quality ISP, (b) proximity tocustomers, (c) security, (d) availability ofutilities, and (e) availability of businessvenue. At present day, the five most impor-tant location factors are somewhat differ-ent from those at start up. These factors are(a) security, (b) proximity to customers, (c)availability of high quality ISP, (d) avail-ability of utilities, and (e) price of highquality ISP. The following quotations from

in-depth interviews support the findings

“I prefer to open it here or at Seturan [alocation in the proximity of a university].But first, Jogja Media Net [an ISP thatoffers a high quality Internet connec-tion] should be available in that loca-tion.”

“[The location] is very favorable. [It is]close to campuses. There are manyboarding houses in the surrounding ofcampuses. Students are our target mar-ket.”

“Access speed is very important. Andthen [it is followed by] comfort andquality services. Access speed meansquality of infrastructure, in this regardISP.”

A regression model is used to deter-mine which location factors that have di-rect effect on business success. Values ofindependent variables are based on thevalues of the location factors at start up,while the dependent variable is subjectivemeasurement of success.

Prior to regression analysis, a correla-tion analysis is conducted to ensure thatindependent variables do not correlateamong other (i.e. no multicollinearity prob-lem). Result of the correlation analysis isdepicted in Table 2. Multicollinearity issaid to exist if there is strong correlationbetween independent variables or if coef-ficient of correlation is greater than 0.7(Gujarati 1995). As can be seen, no coeffi-cients of correlation that is greater than 0.7,and hence the author can conclude thatthere is no multicollinearity problem.

The author finds that the indepen-dent variables altogether significantly (F

17,

73 =2.60, p<0.01) explain the perceived suc-

cess as summarized in Table 3. As can beseen, availability of utilities, proximity toschools/universities, and local security

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affect success in a positive direction, whileproximity to highways, and being in com-mercial center affect in negative directions.

In this regard, availability of utilities(e.g. electricity, water) is considered to besignificant by the Internet café’s owners indetermining their business success. It isobvious, no Internet café without thesenecessary requirements. Moreover, a com-fortable place as mentioned before needsmore utilities to provide. Quite often, thecomfortable place is a necessary conditionto attract more customers and keep theexisting customers. This demand makesthe Internet cafés consider availability of

utilities to be more important at present daycompared to that at start up.

Likewise, position of the Internet caféclose to schools/universities has directand significant positive effect on businesssuccess. The possible explanation is thatlocation in the neighborhood of schools/universities will enable the Internet cafésto get more potential customers since thelargest percentage (58.9%) of their marketis student.

Security is also found to be linked tobusiness success significantly. As rate ofcriminality increases, this factor becomesmore important to attract customers. The

Table 3. Regression Coefficients

Variable Beta t

Availability of labour -0.04 -0.35

Availability of utilities 0.24 1.83 *

Availability of adequate parking area 0.12 0.97

Availability of business venue 0.05 0.37

Availability of high quality ISP 0.12 0.93

Proximity to customers -0.20 -1.53

Proximity to schools/universities 0.31 2.50 **

Proximity to hotels/recreational places 0.22 1.65

Proximity to residential housing 0.02 0.14

Proximity to business services -0.22 -1.56

Proximity to competitors 0.09 0.79

Proximity to highways -0.37 -2.96 ***Being in commercial centre -0.18 -1.72 *

Rental price of business venue -0.12 -1.09

Price of high quality ISP -0.09 -0.70

Owner/personal preference 0.19 1.64

Security 0.29 1.99 *

Model summary:

F17, 73

= 2.60 p < 0.01 R2 = 0.38 Adj-R2 = 0.23

Notes: * p<0.10, ** p <0.05, *** p<0.01

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higher the number of potential customersthat can be attracted by the Internet cafés,the higher their possibility to get success.

On the contrary, the author finds thatproximity to highways has a direct andnegative effect on business success. Prox-imity to highways in one hand is related tovisibility and attractiveness; but on theother hand it has its inherent disadvantagebecause of noise. Since the author findsthat each Internet café has already had itsregular customers, then the visibility be-comes less important and hence have nopositive influence on business success.

Another interesting finding is thatbeing in commercial center is negativelyassociated with business success. Thefact that most people visit the shopping

center for other activities than Internetbrowsing may explain this. In case they willuse the Internet, they will go to the Internetcafé on purpose. This finding suggeststhat the Internet café located in commercialcenter tends to be less successful thanthose not located in commercial center.Total variance explained by all indepen-dent variables is only 23 percent (adjusted-R2).

Underlying Dimensions ofBusiness Location Decision

Factor analysis with principal compo-nent analysis and varimax-rotation is usedto determine underlying dimensions of lo-cation decision. That factor analysis is

Table 4. Varimax-Rotated Principal Component Loadings

Factor 1 Factor 2 Factor 3 Factor 4 Factor 5

Centrality Business Business Cost Laborenvironment venue

Availability of high quality ISP 0.82 0.02 0.12 0.17 0.07

Price of high quality ISP 0.72 0.06 0.02 0.44 0.17

Availability of utilities 0.66 0.12 0.39 -0.01 0.28

Proximity to customers 0.59 0.14 0.49 0.03 -0.17

Security 0.54 0.06 0.52 0.21 0.21

Proximity to highways 0.47 0.25 0.12 0.33 -0.09

Proximity to business services 0.31 0.85 -0.08 0.04 -0.05

Proximity to residential housing 0.06 0.83 0.13 0.14 -0.26

Proximity to hotels/recreation places 0.29 0.75 -0.08 -0.07 0.07

Being in commercial centre -0.10 0.69 0.26 0.15 0.11

Proximity to competitors -0.25 0.44 0.10 0.15 0.24

Availability of business venue 0.18 0.08 0.83 0.08 0.02

Availability of adequate parking area 0.07 -0.07 0.79 0.38 -0.01

Owner/personal preference 0.17 0.16 0.55 0.04 0.31

Rental price of business venue 0.22 0.07 0.12 0.80 0.20

Proximity to schools/universities 0.24 0.22 0.33 0.76 -0.16

Availability of labour 0.16 -0.03 0.12 0.05 0.87

Percentage of variance explained 32.00 14.05 8.28 6.89 5.96

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applied to values of importance of locationfactors at present day provided by respon-dents and reveals five factors (dimensions)as shown in Table 4.

The first factor consists of six factors;availability of high quality ISP, price ofhigh quality ISP, availability of utilities,proximity to customers, security, and prox-imity to highways. The author names thisas “centrality” factor. This factor accounts32 percent of the variance. Being in thecenter of activities is an important factor inselecting business location. Location inthe proximity to customers and the proxim-ity highway means that it is close to highcustomer traffic. In addition, generally, in aplace where there are many activities, itneeds a high security. Not surprisingly,this factor falls into this dimension. Givingthe customer as well as the owner freedomfrom fear about criminality is very impor-tant. The attractiveness of the Internet cafeis difficult to maintain without the exist-ence of security. In addition, availabilityand price of high quality ISP play a central

role in the Internet café business. In Sum-mary, all these six factors play a central rolein succeeding the Internet café business.

The second factor that is termed as“business environment” factor has fivecomponents; proximity to business ser-vices, proximity to residential housing,proximity to hotels/ recreation places, be-ing in commercial center, and proximity tocompetitors. This factor accounts 14.05percent of the variance. A good businesswithin inappropriate business environmentis not guaranteed to survive. In this re-gards, the existence of a good businessenvironment is important. Location in theproximity to business services, proximityto residential housing, proximity to hotels/recreation places, being in commercial cen-ter, and proximity to competitors are ben-eficial to present a good and healthy busi-ness climate. The first four componentsagain are related to the possibility to in-crease potential customers because of theattractiveness of the location. The lastfactor is very important to stimulate the

4

5

3

2

1

0

Centrality Businessenvironment

Businessvenue

Cost Labor

Mea

n o

f va

lues

of

impr

tan

ce

Figure 3. Importance of Five Location Decision Factors Compared

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Internet café to always be innovative inorder to win the market. This, then, willproduce a tough entrepreneur.

The third factor is named as “busi-ness venue” factor and incorporates threecomponents, namely availability of busi-ness venue, availability of adequate park-ing area and owner/ personal preference.This factor explains 8.28 percent of thevariance. The first two components aredirectly related to a necessary building inwhich the Internet cafés operate and attrac-tiveness of the venue. The last componentmay be related to locality. These compo-nents, then, altogether ease to get a repre-sentative and attractive business venue.

Next, the fourth factor is labeled as“cost” factor and has two components (i.e.rental price of business venue and proxim-ity to schools/universities). This factorexplains 6.89 percent of the variance. Thesefactors cannot solely be corresponded to

operating cost, but also to profitability.Quite often, rental price of business venuein a certain location, such as in the prox-imity to schools/universities, is somewhathigh, but this will be compensated by rev-enue the Internet cafés will get. The lastfactor is availability of labor that is namedas “labor” factor and accounts 5.96 percentof the variance.

In order to examine which factor thatis most important, five factors are com-pared based on their importance as shownin Figure 3. The centrality factor appears asthe most important one with mean rating of4.56, and is followed by the business venuefactor (4.34), the cost factor (4.25), the laborfactor (3.96), and the business environ-ment factor (3.4) respectively.

Discussion of the Results

Two main research questions wereposed at the beginning of this study (1)what factors do underlie location decisionfor an Internet café business?; and (2) doeslocation decision determine success ofInternet café business? These questionsare addressed below in light of the result ofthe data analyses.

Underlying factors of LocationDecision for an Internet CaféBusiness

The recent study finds that there aresome underlying dimensions examined inthe Internet cafés location decision. Thefive underlying factors identified (i.e. cen-trality, business venue, cost, labor, andbusiness environment) through factoranalysis are clearly the important dimen-sion considered by the Internet cafés’ ownerwhen evaluating the location for business.From a regional-planning perspective, itmeans that regions (cities or town) attempt-ing to attract new Internet cafés into theirarea need to consider the factors that areimportant to Internet cafés planning torelocate or open up new Internet cafés. It isequally important to prevent the existingInternet cafés from leaving their presentlocations to more attractive ones.

These five factors seem also to affectthe agglomeration of the Internet café busi-ness. Attractiveness of a certain locationmakes business with similar target marketto cluster. Spread of Internet cafés inYogyakarta and Surabaya (not only thosein the research sample) as depicted byFigure 4 supports this claim. In this analy-sis, the author excludes Internet cafes inLombok because as mentioned above, the

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term Lombok refers to Mataram, Seginggi,and Gili Tawangan Island and this make itincomparable to those on Yogyakarta andSurabaya.

As can be seen in Figure 4 (a), mostInternet cafés are concentrated in clusters2 and 3. This spatial pattern of locationseems to be like this because in thoseclusters several big universities, such asGadjah Mada University (with more than40.000 students), Islamic University of In-donesia (with more than 20.000 students),Yogyakarta State University, SanataDharma University, and National Develop-ment University are located. Among these93 Internet cafés in the sample, 80 of them(86%) target students as their customer.Though several universities are also foundin the rest of the three clusters, they are notthe big ones. This seems also to be the casein Surabaya. Most Internet cafés are lo-cated in clusters 2 and 3 (see Figure 4(b))where several big universities (e.g. ITS,Petra University, Surabaya University,Untag, and Unitomo) exist. This findingsubstantiates previous theories on geo-graphical concentration or agglomeration

and theory of accumulative attractiveness(e.g. Nelson 1958; Porter 1998a; 1998b).According to Porter (1998a, p. 88), this willgive “a social glue that binds clusters to-gether and facilitates access to importantresources and information.”

Impact of Business Location onSuccess

Location of the Internet cafés is foundto be having a direct and significant effecton business success. This finding sup-ports previous finding stating that busi-ness location had relationship with busi-ness’ success (Alli et al. 1991; Chan et al.1995; Ghosh et al. 1995). The specific loca-tion factors that are important differ frombusiness sector to business sector. In thecontext of Internet café business, the au-thor finds that availability of utilities, prox-imity to schools/universities and securityare positively and significantly linked tobusiness success, while proximity to high-ways and being in commercial center havea negative influence on business success.Internet cafés entrepreneur who want toensure the success of the business should

Cluster 1 Cluster 2 Cluster 3 Cluster 1

Cluster 2

Cluster 5 Cluster 4 Cluster 3

(a)(a) (b)

Figure 4. Spread of Internet Cafés in (a) Yogyakarta, and (b) Surabaya

Cluster 4

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pay more attention to availability of utili-ties, proximity to schools/universities andsecurity when selecting business location.On the contrary, they should avoid fromestablishing Internet cafés in commercialcenter and near to highways.

The independent variables altogetherexplain 23 percent of total variance. Thisfinding tells us that there are other factorsthat explain business success in additionto location factors. Including other rel-evant factors such as individual back-ground (e.g. education and entrepreneur-ial readiness) and business related factor(e.g. type of Internet connection, market,and number of computers) into the modelmight increase the explained variance.

Furthermore, examining critical suc-cess factors on business success may givea better understanding of factors behindthe success. In addition to geographicallocation, access speed, comfort of place,quality of services, and rental price arebelieved to have determining influenceson the Internet café business success. It isequally important to consider possiblebarriers that hinder the Internet cafés tosucceed. In addition to unfavorable loca-tion, these factors include high fixed ex-penses, unfavorable ISP, high competi-tion, and limited market. Fostering the criti-cal success factors and dampening thepossible barriers down will ensure the suc-cess of the Internet café business. Some of

the factors/barriers are the owner’s respon-sibility and some are other business’s andgovernment’s tasks.

Limitations and FurtherResearch

This research is not without its limita-tions. First, limited number of sample ononly three locations (e.g. Yogyakarta,Surabaya, and Lombok) may lead us to asomewhat biased conclusion, since theauthor finds that the importance of loca-tion factors varies from one location toothers. However, the findings may be ex-trapolated to other locations. But, includ-ing Internet cafés in other locations intosamples perhaps will give us a cleanerpicture of the relationship between loca-tion factors and Internet café businesssuccess.

Second, this study only includes 17location factors based on findings of sev-eral previous researches. However, includ-ing other factors especially those related tospecific market area and business context,may give different results.

Third, the author wants to re-empha-size here that as an exploratory research,this research addressed the research ques-tions broadly. A more specific researchmay be carried out to examine many specu-lative explanations throughout the study.

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APPENDIX

Questionnaire

Impacts of Business Location Decision on Business SuccessThe Case of Internet Café Business in Indonesia

Part I. The Owner/Entrepreneur

1. Gender: 1. Female 2. Male

2. Your ethnic group _________________

3. Year of birth _________________

4. Educational level1. Elementary school 2. Junior high school 3. Senior high school4. Diploma III 5. Bachelor 6. Master

5. When did you use the Internet at the first time? ________ (year)

6. Have you been working before starting this venture?1. Never 2. Yes

7. If ‘yes’, in what sector (select all applicable)?1. Public 2. Private 3. Self-employed

8. If ‘yes’, in what position (select all applicable)?1. Non IT-related position 2. IT-related position

Part II. The Internet Café

1. Year of establishment ___________

2. Number of computers ______ units

3. Standard rental price/hour IDR ___________

4. Who is your intended market segment at starting this business? (select all applicable)1. Students 2. Professionals 3. Tourists4. Young, non-student users (<25 years) 5. Other, please specify _______

5. Give the percentage of each group of your actual customers1. Students ______ % 2. Professionals _____ %3. Tourists _______ % 4. Young, non-student users (<25 years) _____ %5. Other, please specify _________ %

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Part III. EntrepreneurshipUnder you will find several statements about your own skills and access to external resources. Youshould state if you agree or disagree with these statements. Choose one value on 5-scale measure (from1=strongly disagree to 5=strongly agree) for every statement mentioned below.

Strongly Stronglydisagree agree

1 I have the leadership skills needed to succeed as an entrepreneur 1 2 3 4 5

2 I have mental maturity to succeed as an entrepreneur 1 2 3 4 5

3 I have enough experience in business operation to succeed 1 2 3 4 5

4 I have social networks that can be utilized to start and improvemy business 1 2 3 4 5

5 I have access to supporting useful information to start and toimprove my business 1 2 3 4 5

6 I have access to capital needed to start and improve my business 1 2 3 4 5

Part IV. Location DecisionWhen you started this Internet café how did you at that time perceive the following factors whenchoosing location? Please choose one value on 5-scale measure (from 1=absolutely not important to5=very important) for every factor mentioned below.

Very Veryunimportant important

1 Availability of labour 1 2 3 4 5

2 Availability of utilities (e.g. water, electricity, phone) 1 2 3 4 5

3 Availability of adequate parking area 1 2 3 4 5

4 Availability of business venue (to rent or your own) 1 2 3 4 5

5 Availability of high quality ISP 1 2 3 4 5

6 Proximity to customers 1 2 3 4 5

7 Proximity to schools/universities 1 2 3 4 5

8 Proximity to hotels/recreational places 1 2 3 4 5

9 Proximity to residential housing 1 2 3 4 5

10 Proximity to business services 1 2 3 4 5

11 Proximity to competitors 1 2 3 4 5

12 Proximity to highway 1 2 3 4 5

13 Being in commercial centre (e.g. mall/industrial park/office park) 1 2 3 4 5

14 Rental cost of business venue 1 2 3 4 5

15 Price of high quality ISP 1 2 3 4 5

16 Owner/personal preference 1 2 3 4 5

17 Security 1 2 3 4 5

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If this Internet café has been in this location for more than 6 months how would you rate the importanceof the same factors based on the experience so far. Please choose one value on a 5-scale measure (from1=very unimportant to 5= very important) for every factor mentioned below.

Very Veryunimportant important

1 Availability of labour 1 2 3 4 5

2 Availability of utilities (e.g. water, electricity, phone) 1 2 3 4 5

3 Availability of adequate parking area 1 2 3 4 5

4 Availability of business venue (to rent or your own) 1 2 3 4 5

5 Availability of high quality ISP 1 2 3 4 5

6 Proximity to customers 1 2 3 4 5

7 Proximity to schools/universities 1 2 3 4 5

8 Proximity to hotels/recreational places 1 2 3 4 5

9 Proximity to residential housing 1 2 3 4 5

10 Proximity to business services 1 2 3 4 5

11 Proximity to competitors 1 2 3 4 5

12 Proximity to highways 1 2 3 4 5

13 Being in commercial centre (e.g. mall/industrial park/office park) 1 2 3 4 5

14 Rental cost of business venue 1 2 3 4 5

15 Price of high quality ISP 1 2 3 4 5

16 Owner/personal preference 1 2 3 4 5

17 Security 1 2 3 4 5

Part V. Development of your businessUnder you will find several statements about the development of your business. You should stateif you agree or disagree with these statements. Choose one value on a 5-scale measure for everystatement mentioned below (1 = strongly disagree, 5 = strongly agree) for every statement mentionedbelow.

Strongly Stronglydisagree agree

1 I am satisfied with utilization rate of computers 1 2 3 4 5

2 I am satisfied with the growth of net-income 1 2 3 4 5

3 I am satisfied with the time needed to reach break-event point 1 2 3 4 5

4 I consider my Internet café business as the successful one 1 2 3 4 5

5 My internet café business is growing 1 2 3 4 5

Documents

BUSINESS LOCATION AND SUCCESS · A list of Internet cafés collected from several sources on the Internet and field observa-tions in three cities supports this number. Figure 1 depicts