Small and Large Businesses - Term Paper Example

Organisation Table of Contents Introduction 3 Comparison of Characteristics between the Small and Large Businesses 3 Conclusion 8 References 9 Bibliography 10 Introduction The project begins with making a distinction between large and small businesses. It describes their characteristics individually. It tries to discuss the ways in which large enterprises attain more stability as compared to small ones. In this regard it tries to analyse the internal and external environments in which the two types of firms operate. Then it presents the ways in which both firms contribute towards economic development. The individual ways have been explored separately in the project. Finally the project concludes by presenting the interdependencies between the two and the requirement of both kinds in every nation. Comparison of Characteristics between the Small and Large Businesses Small businesses are owned privately. These are relatively smaller firms as compared to larger firms in the industry. Usually the manager of the firm is the owner of the firm as well. These firms do not generally dominate the industry. They are generally owned by a single individual or a few individuals. Small businesses have regional or local operations. Large businesses, on the other hand are those in which there are separate management and ownership. These businesses are also seen to have dominance over the industry. These firms may even operate nationally and internationally. These firms can also access the capital markets (University of Texas, n.d., p.1). In the large organisations, decision making is done in a highly systematic manner. Decisions are taken within an ordered and structured framework which is characterised by a clear hierarchy. Moreover, decisions are also based on clear theoretical foundation using proper analysis and evaluation criteria. In small firms the decision making process remains significantly different. The process is originated from the owner and communicated to the employees. The owner’s style and personality plays a significant role in shaping the decision (Oxford University Press, n.d., p.2). One important characteristic associated with large organisations is that they remain extremely conscious about the impact on the developing nations resulting from their actions. They also behave in responsible ways and do not always function to maximise profit (Madeley, 1999, p.177). Large organisations are influential in the global context. They can exert more social and political impact on society as compared to small organisations even without the application of direct measures. The marketing decision making is considered to be formal, structured, sequential and disciplined. The decisions are also oriented according to the system which considers both the short and long term implications. The small businesses are run in the centralised management style and there is not much delegation of authority and responsibilities. The day-to-day operations are run solely by the owner. Succession plans are generally present in small firms. “Key man insurance can pay death benefits but no one has been trained to assume the duties and responsibilities of the owner-manager to ensure long-term survival of the company” (University of Texas, n.d., p.2). Since small firms have a small market, it is difficult to sell any small firm. In such cases, the owner is required to provide ‘seller financing’. Initially the traditional approach towards the process of economic development used to be greatly dependent on the recruitment of large enterprises with financial incentives, tax breaks, and various other inducements. Instead today the focus has shifted towards the development of enterprises from the ground level and providing assistance to the existing enterprises to grow. The main objective is to support the infrastructural development of small businesses and develop a workforce which is educated and highly skilled. The reason behind the shift in strategy is that success in large enterprises can only be achieved at large costs while small business would attain rapid growth even at low costs (Edmiston, 2007, p.1). However it is seen that small businesses are characterised by immense labour turnover. Due to this their failure rate is also greater than the large enterprises. Business failures usually lead to immense job losses. Job losses arising out of business failures have been shown in the figure below. Figure 1: Job Losses arising out of Business Failures, 2002 & 2003 (Source: Edmiston, 2007, p.15) Despite the existence of economies of scale, majority of the firms in the international market are small firms. One of the important means of economic development in the Atlantic is the development of small firms. Development of small firms has been a major economic policy in the Atlantic. Certain theories have evolved indicating that small firms are likely to avoid competition with large firms. This project tries to find the extent to which the small firms enter into competition with the large ones. This is done by making a comparison between the determinants of profitability between the large and small firms. It is seen a significant amount of profit of small firms are dependent on the profits generated by large firms. There are many evidences indicating that ‘price cost’ margins remain higher for the smaller firms as compared to their larger counterparts. Small firms also “constitute a strategic group in an industry that is distinct from the larger enterprises” (Audretsch, Prince & Thurik, 1998, p.3). Thus it can be concluded that smaller firms do not generally compete with the large firms. Studies show that small firms prefer to run independently and their profits are no way dependent on that of the large firms. Results even suggest that small and large firms operate in different and distinct segments in the market. It also shows that small firms have their own independent policies of operating and do not follow those of the large firms. In order to pursue the strategies if their product niches, small firms may develop strategies that are distinctly different from their larger counterparts. These niche strategies may help the smaller firms to increase their price cost margins to a greater extent than the large counterparts. Such strategies require innovation and customisation. Such strategies and policies also involve implications and economic welfare. Research shows that the presence of small firms performing below their optimal performance is likely to bring about economic inefficiency and represents loss. “Weiss advocated any public policy which “…creates social gains in the form of less sub-optimal capacity” (Audretsch, Prince & Thurik, 1998, p.10). This statement relies on the fact that small firms are the smaller counterparts of the larger firms. They are exactly like the large firms excepting the size. Instead of incurring loss on the society, it is important to create a strategic niche in society enabling the firm to act like a change agent through the implementation of innovative activities (Audretsch, Prince & Thurik, 1998, p.10). Small businesses are considered to be less attractive because they tend to get bankrupt and remain under capitalised. They are also considered to be the major creator of jobs in the economy. This is the reason why the United States legal system have not made many changes for ensuring the attractiveness of the small firms for making investments. In fact many of the laws are framed in favour of the small scale businesses so that they can resume their businesses in case of bankruptcy (White, 2001, p.1). The question which arises frequently is the reason behind the existence of small firms and the way in which they are able to exist. Research has tried to find a link between size of firms and their survival rates but has not come to a definite solution. It has found that small firms create an economic function different from the large firms. Therefore they do not enter into competition directly with the larger firms. Porter (1979) and Caves (1977) developed a theory stating that creating a niche in the market would allow the small firms avoid competition with their competitors. Firms are said to be sub-optimal. This implies firm’s profitability is directly related to the size. Some have shown a positive relationship between market share of the firm and its profitability. Caves and Porter have raised question on the same issue. They have said that the performance of firms (big or small) in an industry do not remain homogeneous. Certain barriers exists in the industry which do not allow mobility within them industry. This prohibits small firms from creating strategic niches. “According to the theory of strategic niches, small firms will actually exhibit higher levels of profitability by occupying product niches in strategic groups that are inaccessible to their larger counterparts” (Audretsch, Prince & Thurik, 1998, p.3). There is also the existence of inter-dependencies between the large and small firms. The biotechnology industry witnesses great complementary between small and large firms in areas of networks of research and development. Innovation plays an important role in this industry, in case of both the large and small industries (Hagedoorn & Roijakkers, 2000, p.3). Conclusion It is seen that certain basic differences exists between the large firms and their smaller counterparts. Differences exist with regard to the firm ownership, size of the firm, employee strength of the firm, etc. It needs to be noted that firm size is not the only factor accounting for the difference between the small and large firms. Firms differ in their characteristics on account for their economic power also. Large firms are the modified and enhanced versions of the small firms. But it is also true that each organisation is unique having its own set of characteristics and features. Large businesses tend to be more stable and competitive as compared to their smaller counterparts. They are also more capable of struggling with the odds and overcoming them. But the smaller counterparts require more support and assistance while doing the same. References Audretsch. B., Prince, Y. M. & Thurik, A. R. January, 1998. Do Small Firms Compete with Large Firms? [Pdf]. Available at: http://publishing.eur.nl/ir/repub/asset/7778/1998-0133.pdf. [Accessed on October 18, 2010]. Edmiston, K., 2007. The Role of Small and Large Businesses in Economic Development. [Pdf]. Available at: http://www.kansascityfed.org/publicat/econrev/pdf/2q07edmi.pdf. [Accessed on October 29, 2010]. Hagedoorn, J. & Roijakkers, N. December, 2000. Small Entrepreneurial firms and Large Companies in Inter-firm R&D networks – the International Biotechnology Industry. [Pdf]. Available at: http://www.hec.edu/var/fre/storage/original/application/a6fb32175e8689dd0b0a2a70a2794b15.pdf. [Accessed on October 18, 2010]. Madeley, J. 1999. Big business, poor peoples: the impact of transnational corporations on the worlds poor. Palgrave Macmillan. Oxford University Press. No Date. Marketing in Small Firms. [Pdf]. Available at: http://www.oup.com/uk/orc/bin/9780198775768/freelecturer/manual/imchap25.pdf. [Accessed on October 18, 2010]. University of Texas. No Date. Comparison of the Characteristics of Small Businesses with Large Businesses. [Doc]. Available at: http://faculty.business.utsa.edu/kfairchild/classes/5853/Handouts/Characteristics.doc. [Accessed on October 18, 2010]. White, M. J. 2001. Bankruptcy and Small Business. [Pdf]. Available at: http://www.cato.org/pubs/regulation/regv24n2/white.pdf. [Accessed on October 18, 2010]. Bibliography Chesney, T. 2003. Competitive information in small businesses: by Thomas Chesney. Springer. Jackson, P. M. 2006. Sarbanes-Oxley for small businesses: leveraging compliance for maximum advantage. John Wiley and Sons. Read More