Large and Small
Firms
Advantages & Disadvantages
Objectives
Understand the advantages and disadvantages of large and small firms
Understand the factors that influence the growth of firms
Understand the reasons why some firms stay small
How much do SMEs really contribute to the economy?
Think about different countries: USA? China? Botswana? Nigeria?
What about different industries?
● Tech
● Agriculture
● Mining
● Energy
● Meat
Why are some industries dominated by large firms?
Country Contribution of SMEs to GDP Contribution of large corporations to GDP Dominant Industries
Botswana 15-20% 80% Diamond mining (33%)
Saudi 45% 23.3% Oil - Member of OPEC
Arabia Petroleum (45%)
Malaysia 38.3% 61.7% Mining and quarrying sector
Transportation & storage
(22.6%)
Zambia 70% 30% Emerald Mining (12%)
Mining Exports (36%)
Sri Lanka 52% 48% Tourism (12%)
Germany 35% Around 70% Automobile manufacturing
(23%)
Nigeria 48% - Agriculture, high-value,
low-sulfur crude oil
United 23% 72% Real estate, rental and
States leasing(12.2%)
Why are some industries dominated by large firms?
E.g. Mining Industry
● Economies of scale,
● Large investment in the business
● Complex process of entry to the market (licenses, land permits)
How is the size of a firm measured?
● Turnover
○ I.e. total revenue
● Number of employees
● Balance sheet total
○ Based on the amount of money invested in the business by the owners
○ More money would be invested in larger firms
Small Firms
Advantages of small firms
● Flexibility
○ Can adapt to change more quickly
○ E.g. A small baker can produce a personalized birthday cake for individual customers, while a large
national cake manufacturer may not be able to
● Personal service
○ Owners of a firm are more accessible in a small firm compared to larger firms.
● Lower wage cost
○ Workers in small firms may not belong to trade unions - weaker negotiating power
● Better communication
● Innovation
○ Small firms face competitive pressures, and must innovate as a result, despite the lack of resources for
R&D
Disadvantages of small firms
● Higher costs
○ Cannot exploit economies of scale
● Lack of finance
○ E.g. sole traders cannot sell shares to raise finance
● Difficult to attract quality staff
○ May lack resources to afford high wages / training costs
● Vulnerability
○ E.g. during recession / vulnerable to takeovers
Large Firms
Advantages of large firms
● Economies of scale
○ Lower average costs (e.g. through bulk buying of raw materials)
● Market domination
○ Brand recognition
● Large-scale contracts
Disadvantages of large firms
● Too bureaucratic
○ Slow decision making due to extensive administrative systems
● Coordination and control
○ Difficult to control thousands of employees, factories, machinery etc
● Poor motivation
Factors influencing the growth of firms
● Government regulation
○ E.g. investigating mergers/takeovers to ensure that industries are not dominated by a small number of
firms
○ Competition encourages innovation, improves efficiency, prevents consumer exploitation
● Access to finance
● Economies of scale
○ Average costs can easily be lowered by increasing output in some industries (car manufacturing, air
transport, water distribution)
○ Can be difficult to exploit economies of scale in some markets (taxi firms, hair salons)
● Desire to spread risk
○ Diversification - if one venture fails, success in others can keep the firm going.
● Desire to take over competitors (M&A)
Reasons firms stay small
● Size of market
○ E.g. luxury yachts - too small
● Nature of market
○ Some markets have very low set up costs, results in new business joining - fierce competition
○ Niche markets (small customer group requiring very particular goods/services)
● Lack of finance
● Aims of the entrepreneur
● Diseconomies of scale
○ If a firm expands beyond the minimum efficient scale, average costs start to rise
Groups of 3-4
● Use a real world example which
you have found in the news
Task
(recent article)
● Apply the key words / theory from
this topic to your firm
● You will present your “firms” with
other people in the class.
Intro
● What does the company do?
● Do they want to grow/stay small?
Presentation Application
Structure ● Advantages
● Disadvantages
Recommendation
● Do you think this is a good idea?
● JUSTIFY your idea with theory from
this topic