Ch19 - Advantage and disadvantages of large and small firms

• Methods to determine the size of a firm

  • Turnover
  • No of employees
  • Balance sheet total
• Small firm advantages

  • Flexibility: small firms can adapt to change more quickly
  • Personal service: As firms get bigger, it becomes difficult to offer customers an individual personal service. Some people prefer to deal with the owner of a firm directly to get more personal service
  • Lower wage costs: Workers in small firm do not belong to trade union=> negotiation power is weaker and the owners are able to restrict pay to minimum wage
  • Better communication: small firms have fewer employees, the owner will be in close contact with all staff, can exchange information quicker and more efficiently
  • Innovation: small firms face competitive pressure to innovate
• Small firm disadvantages

  • Higher cost: small firms cannot exploit economies of scale because their output is limited=> their average costs will be higher than larger rivals
  • Lack of finance: small firms often struggle to raise finance. Their choice of sources is limited
  • Difficult attracting quality staff: small firms may find it difficult to attract high qualified and experienced staff e.g. they may not be able to afford the wages or training that high quality employees require
  • Vulnerability: When trade conditions become challenging, small firms may find it difficult to survive than large rival. They might be at risk of takeovers
• Large firm advantages

  • Economies of scale: average costs are likely to be lower than those of smaller rivals. They can operate in large-scale plants and exploit economies of scale
  • Market domination: large firm can often dominate a market. They have a higher profile in the public eye than small firms and benefit from such recognition
  • Large scale contracts: only large firms can win the contracts because small firms do not have the resources to carry out the work
• Large firm disadvantages

  • Too bureaucratic: large firms become overwhelmed by their administration systems. Too many resources may be used up in administration. Communication channels may be too long and too many managers may be employed
  • Coordination and control: large business may be difficult to control and coordinate. There may be a need for more supervision that will raise costs
  • Poor motivation: in large organisations, people can become alienated. Personal contact between employees in large organisations may be lacking and this can result in poor worker motivation
• Factors influencing the growth of firms

  • Government regulation
  • Access to finance
  • Economies of scale
  • The desire to spread risk
  • The desire to take over competitors
• Reasons firms stay small

  • Size of the market: some markets are too small to sustain very large companies
  • Nature of the market: in some markets, such as hairdressing, painting and taxi driving, the set up costs are relatively low. There is little to discourage new businesses joining the market. Also, in some markets, business serve a particular market niche
  • Lack of finance: some businesses would like to grow but they are not able to raise the finance need to expand
  • Aims of the entrepreneur: some owners do not want to grow their businesses. They may be happy running a small business. They may be making enough profit to satisfy their needs and do not want the responsibility of taking on more workers
  • Diseconomies of scales: Once a firm reaches a certain size, any further growth results in diseconomies of scale and average costs start to rise
• Flexibility 


  • small firms can adapt to change more quickly
• Personal service 


  • As firms get bigger, it becomes difficult to offer customers an individual personal service. Some people prefer to deal with the owner of a firm directly to get more personal service.
• Lower wage costs (较低的工资成本)


  • Workers in small firm do not belong to trade union=> negotiation power is weaker and the owners are able to restrict pay to minimum wage
• better communication 


  • small firms have fewer employees, the owner will be in close contact with all staff, and can exchange information quicker and more efficiently.
• innovation

  • small firms face competitive pressure to innovate.
• small firm advantages

  • flexibility
  • personal service
  • lower wage costs
  • better communication
  • innovation
• high cost 


  • small firms cannot exploit economies of scale because their output is limited=> their average costs will be higher than larger rivals
• lack of finance 


  small firms often struggle to raise finance. Their choice of sources is limited.
• difficult attracting quality staff

  • small firms may find it difficult to attract high qualified and experienced staff e.g. they may not be able to afford the wages or training that high quality employees require.
• vulnerability 


  • When trade conditions become challenging, small firms may find it difficult to survive than large rival. They might be at risk of takeovers.
• disadvantages of small firms

  • high cost
  • lack of finance
  • difficult in attracting quality staff
  • vulnerability
• large firm advantages: economies of scale

  • average costs are likely to be lower than those of smaller rivals. They can operate in large-scale plants and exploit economies of scale
• large firm advantages: market domination

  • large firm can often dominate a market. They have a higher profile in the public eye than small firms and benefit from such recognition.
• large firm advantages: large scale contracts 


  • only large firms can win the contracts because small firms do not have the resources to carry out the work.
• large firm disadvantages: too bureaucratic

  • large firms become overwhelmed by their administration systems. Too many resources may be used up in administration. Communication channels may be too long and too many managers may be employed.
• large firm disadvantages: coordination and control

  • large businesses may be difficult to control and coordinate. There may be a need for more supervision that will raise costs.
• large firm disadvantages: poor motivation

  •  in large organisations, people can become alienated. Personal contact between employees in large organisations may be lacking and this can result in poor worker motivation.
• factors influencing the growth of firms: government regulation

  • competition will encourage innovation, improve efficiency. Consequently, the government will monitor business activity and ensure that individual markets are not dominated. The government may sometimes prevent the growth of firms to stop them becoming too big. They can do this by blocking mergers and takeovers which threaten to reduce competition.
• factors influencing the growth of firms: access to finance

  • business need finance to grow, they need money to make acquisition, build new factories
• factors influencing the growth of firms: economies of scale

  
  

  • as a firm grows, average costs will fall because it is possible to enjoy economies of scale. 
• factors influencing the growth of firms: the desire to spread risk

  • risk can be reduced by diversifying selling into new markets and developing new products means if one venture fails, success in others can keep the firm going. 
• factors influencing the growth of firms: the desire to take over competitors

  takes over rivals in the market. This is a quick way of growing and helps to reduce competition
• reasons firms stay small: size of the market 


  • some markets are too small to sustain very large companies. E.g. market for luxury yachts is limited, only a relatively small number of very wealthy people can afford to a buy a luxury yacht.
• reason firms stays small: nature of the market 


  • some markets are too small to sustain very large companies. E.g. market for luxury yachts is limited, only a relatively small number of very wealthy people can afford to a buy a luxury yacht.
• reasons firms stay small: lack of finance


  • some businesses would like to grow but they are not able to raise the finance need to expand.
• reasons firms stays small: aims of the entrepreneur

  • some owners do not want to grow their businesses. They may be happy running a small business. They may be making enough profit to satisfy their needs and do not want the responsibility of taking on more workers.
• reasons firms stays small: diseconomies of scale 


  • Once a firm reaches a certain size, any further growth results in diseconomies of scale and average costs start to rise.
• Small firm advantages

  • flexibility
  • personal service
  • lower wage costs
  • better communication
  • innovation
• small firm disadvantages

  • higher cost
  • lack of finance
  • difficult attracting quality staff
  • vulnerability
• large firm advantages

  • economies of scale
  • market domination
  • large scale contracts
• large firm disadvantages

  • too bureaucratic
  • coordination and control
  • poor motivation
• factors influencing the growth of firms

  • government regulation
  • access to finance
  • economies of scale
  • the desire to spread risk
  • the desire to take over competitors
• reasons firms stay small

  • size of the market
  • nature of the market
  • lack of finance
  • aims of the entrepreneur
  • diseconomies of scale