Chap 19

• Micro firm


  Turnover (revenue) < €2 million, No of employees < 10, Capital employed < €2 million
• Small firm


  Turnover (revenue) < €10 million, No of employees < 50, Capital employed < €10 million
• Medium firm


  Turnover (revenue) < €50 million, No of employees < 250, Capital employed < €43 million
• Large firm


  Turnover (revenue) > €50 million, No of employees > 250, Capital employed > €43 million
• BP in 2015 had turnover of $226 billion, employed 80,000 people and had a balance sheet total of $98 billion -> large company (leading gas and oil company)
• Governments encourage the development of small businesses

  • In developed countries - tertiary sector - provision of services more efficient on a small scale
  • During periods of financial crisis/recession and high unemployment people turn to self-employment (start their own business) as a way to support themselves by using money from being made redundant
• Small firms


  • Flexibility: adapt quicker to changes - owners (the main decision makers actively involved in the business) can better react to a change i.e. small baker to produce personalised cakes
  • Personal service: customers may prefer to deal directly with the owner and be prepared to pay higher prices for this benefit – owners more accessible
  • Lower wage costs: negotiating power of workers is weak (no trade unions, few employees, owners pay minimum wage)
  • Better communication: fewer employees- informal /rapid communication, owner in close contact with staff – quicker and more efficient exchange of information -> faster decision making and workers are more motivated – higher efficiency
  • Innovation: although since small might mean lack of resources for research and development - may be surprisingly innovative due to competitive pressure to come up with new ideas for products or will lose market share. More prepared to take a risk since not much to lose compared to large firms
• Small firms


  • Higher costs: cannot exploit economies of scale i.e. buying in bulk as limited output -> higher average costs – lack competitive edge
  • Lack of finance: limited sources i.e. sole traders cannot sell shares and banks do not easy give loans as considered to be too risky
  • Difficult to attract qualified and experienced staff: cannot afford the wages or training high-quality employees require
  • Vulnerability: challenging trading conditions make it more difficult to survive due to limited resources and risk of takeovers (may be forced to accept unattractive takeover terms/hostile takeovers)
• Large firms


  • Economies of scale: lower average costs – operate in large scales and get cheaper supplies – buy in bulk
  • Market domination: higher profile/reputation and benefit from such recognition – more people prefer to go to well-known companies and are prepared to pay higher prices -> more profit for the firm
  • Large-scale contracts : a small firm will not be able to compete with a large firm for a large scale contract i.e. construction of a new motorway as they do not have the available resources
• Large firms


  • Bureaucracy: decision making can be too slow as too many people involved, too many resources are wasted in administration (filing, forms, reports), communication gets harder
  • Control and coordination: difficult to control and coordinate -too many employees around the world – need for supervision will raise costs - too many managers employed
  • Poor motivation: lack of personal contact -> poor motivation, an effort made by a single employee seems insignificant
• Government regulation


  Desirable in an economy as encourages innovation, improves efficiency and prevents consumer exploitation thus government needs to monitor business activity and ensure individual markets are not dominated by one or a small number of firms – this could prevent growth by stopping them to get too big (investigation of every merger and takeover and blocking those that threaten to reduce competition)
• In 2016 EU prevented Three's takeover of O2
• Access to finance


  Firms that can persuade money lenders and investors to provide finance are in a better position to grow
• Economies of scale


  Firms that can exploit economies of scale and produce in large quantities can reduce average cost and can grow further i.e. car manufacturers, air transport, power generation BUT there are markets where it is difficult by nature to exploit economies of scale and growth is limited i.e. hairdressers, window cleaning companies, taxi firms
• Diversification


  Reduces risk (new markets, develop new products) – if one venture fails you still have the other that keep the firm going. Events like Brexit are likely to result in such behaviour
• Desire to take over competitors
• Some markets are too small to sustain very large companies i.e. market for luxury yachts as only a relatively small amount of wealthy people can afford to buy a luxury yacht – businesses in this market will struggle to grow into very large organisations
• Microsoft co-founder Paul Allen owns Octopus. It has 41 suites, pool, two helicopters, movie theater, basketball court and recording studio. It cost $200 million
• History Supreme yacht -$4.5 billion owned by an anonymous Malaysian businessman - It boasts a wall feature made from meteorite rock and a statue made from genuine Tyrannosaurus Rex bones!
• Niche market


  Small market usually within a large market where customers have very specific needs which are sometimes neglected by larger firms i.e. organic food, organic and natural cosmetic products i.e. natural face masks attract the health-conscious consumer, maternity clothes, toothpaste for sensitive teeth, customised cars, very large sizes for cycling outfit, wedding dresses
• Lack of finance


  Growth requires investment in new resources such as new machinery, property, labour and not all firms can convince money lenders that if they grow they will be more successful and able to repay the loan as they are considered too risky
• Aims of entrepreneur


  Owners might not want to grow for personal reasons (happy with a small firm, satisfied with their profit, do not want more responsibilities, want time for personal life)
• Diseconomies of scale


  After a specific size if a firm grows further its average costs starts to increase which means they will have to charge higher for their products and their demand could fall