How Industry Leaders Use the LQ Formula for Decision-Making
Image: Fauxels on Pexels.com

Uncertainty is bad for business – unless you find a way to measure it. Clean data and math help discover patterns in otherwise random economies and use them for future analysis. That’s how industry leaders prevail; they consult data for insight and apply math for precision.

One of the most precise formulas in business math is the location quotient.

Location quotient (or LQ formula for short) is crucial for discovering investment opportunities in regional markets. It tells you, with great certainty, the current and future state of regional economies. The LQ formula also points to the industries that make a specific region unique.

Here’s why this is important and how to use it.

Location quotient: definition and example

When business mathematicians are trying to explain location quotients to investors and company heads, they do so by taking regional industries as an example. In reality, the location quotient can also be applied to a demographic group or occupation in a specific region.

The purpose of the LQ formula is to quantify regional concentration.

If we, too, take industries as an example, our location quotient would determine just how concentrated a particular industry is in its region compared to the entire nation.

The point of reference for LQ doesn’t have to be nationwide concentration. You can use the location quotient to measure the ratio of any regional asset and its comparable types in a geographical region. LQ is as precise as any math formula but also flexible and versatile.

How to apply a location quotient formula

Contrary to what online experts say, businesses don’t need a tool for everything. Simple equations can be done without expensive software and still empower you with powerful insight. The LQ formula is an excellent example of this, so let’s see how it works:

Location quotient =    Regional asset amount

                                            Total asset amount

We use “total asset amount” instead of “national asset amount” to highlight the fact that the location quotient doesn’t only measure the concentration of one asset (say, industry) in a certain region compared to the concentration of that asset on the national level.

LQ can also measure the concentration of one regional asset compared to the total amount of comparable types of assets in the same region. One of the frequently used LQ formulas is the quotient for jobs – for example, the ratio of IT jobs and all jobs in a country.

Common applications of the LQ formula

Organizations use the LQ formula for different types of research and market assessment. Even though location quotient could be applied to various calculations, the following applications of the LQ formula are the most common across industries and sectors:

●          LQ for industries

●          LQ for occupations

●          LQ for competencies

●          LQ for demographics

These applications of location quotient can be used together or interchangeably if some of the required data can’t be found. For example, high-LQ occupations are a strong indicator of high-LQ industries, as unique industries typically employ unique occupations.

LQ-based calculations require reliable data

Firmographic data, which is the term used to describe all the important information about a certain company (industry, size, number of employees, etc.), is the type of data required for all LQ-based calculations. The problem is that firmographic data is often difficult to find.

The greatest challenge in obtaining necessary data for this type of regional market assessment is the scope. Getting accurate and freshly updated data on many organizations (remember, you need nationwide data if you want to calculate LQ) is a complex task.

So much so that most companies can’t do this by themselves.

Internally, acquiring data for LQ-based assessments would take too much time and resources. Data collection of this scope is also expensive, as it requires dedicated technology for scraping and personnel equipped for using it. How do companies approach this?

Firmographic data is better obtained through alternative data sources. Some companies specialize in scraping and refining data, thus saving you time and trouble.

How location quotient can help your business

Location quotient can help your company gain actionable insight into regional markets. This kind of business intelligence is crucial for making long-term decisions, developing competitive strategies, and discovering new investment opportunities – all precursors to growth.

The LQ formula is frequently used for:

Regional market research for B2Bs

If you are a B2B company pursuing expansion opportunities and new markets to conquer, the LQ formula can inform your regional market research. More precisely, it can help you discover where your target audience is – by looking at aspiring regions with unique industries.

Labor analysis and talent sourcing

We’ve already mentioned the location quotient for jobs, occupations, and competencies. If you are looking for new hires with specific skills, knowledge, and abilities, LQ can help you locate them. A lot of employers rely on LQ-based sourcing to discover regional talent pools.

Unique investment opportunities

If you’re looking for investment opportunities, you should start using the location quotient formula ASAP. It is a foolproof way of spotting booming regional economies early and before your competition. LQ will tell you everything you need to know about industries on the rise.

Conclusion

The location quotient formula is a fairly simple way of calculating opportunities. However, it requires a lot of specific data that most companies can’t accumulate by themselves. If you plan to add LQ to your decision-making process, reach out to alternative data sources.