How SMEs Differ From Their Larger Counterparts - Essay Example

HOW SMEs DIFFER FROM THEIR LARGER COUNTERPARTS? goes here] [Your goes here] [Due the paper] How SMEs Differ From Their Larger Counterparts? 1. Introduction SMEs refer to small or medium sized businesses. Such businesses usually have 10 to 200 employees and a limited working capital. There are different types of organizations in the world which operate their businesses either locally or both locally and internationally. SMEs are such businesses which operate locally and have less capital to invest in international business activities. On the other hand, large companies have plenty of money to invest in a wide range of local and international projects. Apart from the difference in available capital, there are also many other factors that build differences between SMEs and larger companies. Let us discuss some of those key factors that make SMEs different from their larger counterparts. 2. Differences between SMEs and Larger Companies Some of the main factors that distinguish SMEs from their larger counterparts include layers of management, individual responsibility, communication, speed of decision-making, attitude towards risk, allocation of resources, formal practices, organizational structure, flexibility, marketing and advertising, environment, and politics. Let us discuss each of them in some detail in order to know how these factors create differences between SMEs and large corporations. 2.1 Layers of Management One of the main differences between SMEs and large companies is the layers of management. SMEs generally have very few layers of management as compared to large companies. They have less number of managers and employees because of simple and short organizational structure. The organizational chart of SMEs also looks flat because of fewer layers of management. “Small business organizational charts are often flat; they look like two or three stacked rows of bricks with one or two bricks on top” (Ingram n.d., p.1). If we talk about large companies, we can say that the organizational structure of such companies is usually very tall because of several layers of management. Such a complex and tall organizational structure makes decision-making slow because of the involvement of many layers of management in taking important business decisions. SMEs do not face such delays because they do not have a complex and multilayered organizational structure. Tall organizational structures also increase business costs and expenses because of compensation, salaries, and other administrative costs associated with different layers of management. 2.2 Individual Responsibility Larger businesses usually have a broad and well-organized organizational structure in which every employee and manager has a specific role to perform. In such organizations, every person has a well-defined role to perform which he/she performs individually. On the other hand, in SMEs, the range of activities takes that each employee performs is usually wider. For example, an employee can perform the tasks outside of his/her area of responsibilities. The reason is that in such enterprises, there are not many people to perform different roles individually. Therefore, all tasks related to the business are performed by the same employees. For example, an accountant of a small or medium sized enterprise can be held responsible for dealing with the customers when the receptionist is not on job due to any particular reason. This shows that in SMEs, employees are not hired for any particular skill rather the aim is to hire such employees who can do multiple tasks efficiently. 2.3 Lines of Communication A good flow of operational information is an important part of a company’s organizational structure whether it is a SME or a large organization. “In small businesses, communication between employees is handled in-person much of the time, especially when the business only operates in a single location” (Ingram n.d., p. 1). One of the benefits for employees of small companies is that they get a chance to interact with their executives directly and more openly because of informal lines of communication. The offices of executives of small and medium sized companies are not very far away from the working area of employees. However, when a company starts growing, the distance between employees and managers also starts increasing as the result of which the lines of communication between them become formal and organized. This is the reason why in large companies most of the communication between employees and executives takes place through phone calls, mails, memos, and other forms of electronic communication. 2.4 Organizational Structure SMEs and large companies also differ in organizational structure. In large companies, organizational structure builds up a solid base on which the whole business grows and operates by following the lines of managerial authority. There is a proper set of operational standards which both employees and managers need to follow while carrying out assigned job responsibilities. However, in case of SMEs, business activities usually take place in an informal manner. “Organizational structures can look very different between small and large businesses, with small business structures generally including fewer layers of management and less employees in the organizational chart” (Ingram n.d., p. 1). 2.5 Financial Issues Another difference between SMEs and large companies is the way these companies deal with their financial issues. The main aim of larger companies is to maximize the wealth of the shareholders by reducing the business risks or to increase the net income from the business by reducing the negativity of risks. The companies prepare proper financial statements to know where they stand at any particular point of time. For example, managers prepare profit and loss statements, income statements, and balance sheets to put the financial performance of their businesses on record. On the other hand, the main aim of SMEs is to generate regular income for the business owners by increasing the level of sales. The managers of SMEs, who are usually the owners of the business, handle every financial matter on their own and rarely consult financial matters with their employees. Integration of strategic management and skills of an entrepreneur in running a firm results in financial success of the firm (Ireland et al. 2001, p. 50). In SMEs, the owner or the financial manager of the firm designs all financial strategies all of which are focused towards sustainable growth of the business (Sadler-Smith 2004). 2. People in the Organization In SMEs, employees are usually from the same family from which the owner of the business belongs. For example, a father and his sons may join to start a family business or two or more cousins may join to form a new company. SMEs are usually family owned businesses (Brockhaus 2004). The selections in such companies are also based on family relationships. For example, if an accounts professional is needed in a firm, the owner of the firm usually looks for a skilled accounts professional in his/her own family. If he/she finds the person with required skills and knowledge, the selection is made on the spot without publishing the advertisement in newspapers. However, if there is no such person in the friends or relatives of the owner, the ad is given in the newspapers to hire the required professional. However, in case of large companies, the case is totally different. For example, in large companies, it is the responsibility of the human resource department to recruit skilled professionals based on qualification, experience, and skills. In such companies, proper recruitment standards are followed to fill in the vacant positions. 2.7 Government Support for SMEs “Family-run enterprises are noted contributors to the small business population, particularly in terms of job creation and wealth generation” (Ram 2001, p. 395). Governments of almost all countries assist and encourage entrepreneurs to start their own businesses because it not only improves the economy of a country but also increases the number of job opportunities for local people. Government support is imperative for the early success and growth of small businesses (Carter & Jones-Evans 2012, p. 63). If we talk about the government of the United Kingdom, we can say that the government has started paying attention to the needs of recognizing the efforts of entrepreneurs. As Curran (2000, p. 36) states, “small and medium-sized businesses now account for well over half of business turnover and jobs in the UK”. Even the governments of third world countries, such as, Pakistan and India, provide loans on easy payback installments to SMEs to help them grow in the competitive markets. “Specific financing tools such as leasing and factoring can be useful in facilitating greater access to finance even in the absence of well-developed institutions” (Beck & Demirguc 2006, p. 2931). Along with the support of the government in terms of funds, external support also serves as an intangible help for entrepreneurs (Ramsden & Bennett 2005, p. 227). 2.8 Speed of Decision-Making The way SMEs and their larger counterparts undergo the process of decision-making also creates a difference between them. In large companies, the process of decision-making is usually long because a number of management layers are involved in taking any critical business decision (Lindegaard 2011). The abundance of bureaucratic levels in large corporations make the decision-making process slow because a thorough analysis of the issue is done at every level in order to ensure that the decision proves productive for the company. If we talk about SMEs, we can say that decision-making process in such companies is usually rapid and simple as compared to large corporations. The reason is that in SMEs, there are less layers of management who analyze the severity of the issue and take a suitable decision. The owner of the firm usually takes all key decisions related to business matters. For example, if the decision is to be taken regarding introducing a product in a new market, the owner of the firm will take that decision solely because there is no complex management structure governing the business matters of the firm. 2.9 Attitude toward Risk There is also a considerable difference between the ways both SMEs and large corporations deal with risks. Small and medium sized organizations tend to be less focused towards taking risks because they do not have enough money to bear the consequences of taking risks if things do not go their way. For example, the managers of a small company may not invest in risky business opportunities in the early stages of the business because they may not have enough capital to normalize things. Small companies have a less amount of capital that managers use for early growth of business without taking any risk. On the other hand, large corporations have enough money to invest in risky projects. Managers of such companies are usually highly experienced and they use their experience and situational analyses to decide whether they should take any particular risk or not. Large companies may experience negative consequences of taking business risks but they have enough capital to offset the negativity of those risks. Therefore, larger companies usually have a more positive attitude towards taking risks as compared to small or medium sized companies. 2.10 Formal Practices There are also some differences between the way SMEs and large corporations carry out their business practices. For example, large companies hold formal meetings and presentations to discuss important business matters. Similarly, in such companies, there is a proper set of guidelines which every employee and manager follows while carrying out any particular business activity. In small companies, there is no such thing like formal practicing and decisions are usually taken independently and quickly. “Small businesses, on the other hand, do not usually have time for either of these practices and find that it is more effective to simply address problems quickly and independently” (Johnson 2011, p. 1). 2.11 Marketing and Advertising Marketing is another key factor that distinguishes SMEs from their larger counterparts. Large companies usually launch comprehensive and all-inclusive marketing campaigns to make people aware of their new products and services. They also launch their campaigns in international markets to attract foreign customers. The key to launching such campaigns is capital. Larger companies have enough capital to invest in local and international marketing of products. The managers of such companies have a good knowledge and understanding of the target market due to which they are able to design effective marketing strategies. On the other hand, small and medium sized companies have less capital to invest in marketing because of which they cannot launch comprehensive marketing campaigns to increase their sales. Such companies usually make use of more personalized messages to make target population aware of their products (Carson 1985, p. 9). Managers of such companies create personalized messages and use local publications to increase the chances of reaching the target audience (Johnson 2011). However, with the passage of time, SMEs start adopting the concept of doing effective marketing to attain business goals (Peterson 1989, p. 40). 3. Conclusion Summing it up, SMEs are small or medium sized businesses that operate locally and have a less amount of capital to invest in big business opportunities. On the other hand, large corporations have enough money to invest in local and international projects. Apart from these financial difference, there are also many other factors, such as, layers of management, lines of communication, individual responsibility, attitude towards risk, speed of decision-making, and marketing and advertising that distinguish SMEs from their larger counterparts. However, the main difference is that of the organizational structure that provides the base for all above-mentioned differences in both types of organizations. References Beck, T & Demirguc-Kunt, A 2006, ‘Small and medium-size enterprises: Access to finance as a growth constraint’, Journal of Banking & Finance, vol. 30, no. 11, pp. 2931-2943. Brockhaus, R 2004, ‘Family Business Succession: Suggestions for Future Research’, Family Business Review, vol. 17, no. 2, pp. 165-177. Carson, D 1985, ‘The Evolution of Marketing in small Firms’, European Journal of Marketing, vol. 19, no. 5, pp. 7-15. Carter, S & Jones-Evans, D 2012, Enterprise and Small Business, 3rd edn, Pearson/Prentice Hall, Upper Saddle River, N.J. Curran, J 2000, ‘What is Small Business Policy in the UK for? Evaluation and Assessing Small Business Policies’, International Small Business Journal, vol. 18, no. 3, pp. 36-50. 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