There
are hundreds of thousands of successful small firms operating in all kinds of
industries, surviving among large firms.
There
are many reasons for this successful survival of small firms. They are 1) Market
limitation on mass production, 2) Demand for variety, 3) Geographical
limitations, 4) Need for personal attention, 5) Market limitation for luxury
items, 6) Possibility of disintegration and 7) Facility for joint ventures.
Market limitation on mass production: - Mass produced goods are
standardized. The size of the market is large only for standardized products,
and it is not possible for a business to make profit from large scale operation
when the market is small.
Demand for variety: - Consumers demand for wide variety of styles,
patterns and designs. Market for a particular style or variety or design
is very small, therefore, it is not profitable to set up a mass production for
those products. (Ornaments and Fashion dress)
Geographical limitations: - When the goods are bulk in size
in relation to its value, then the transport cost will be higher than
production costs. In such cases, market for the product is likely to be
local rather than national. (Brick, Bread, etc.)
Need for personal attention: - Personal attention is required
in many areas of business. Personal attention is a very important part of
service sector, so standardized mass production is not suitable for business
such as law, accounting, and small retail delivery and so on.
Market limitation for luxury items:- Markets are limited for
luxury items because of the limitation of number of people with high purchasing
power (people with high income and wealth) Those luxurious products (expensive
sports car, fur coats etc.) are produced for a very small prestigious market.
Possibility of disintegration :- It is possible for mass
production industries to disintegrate (split up) their production into many
number of small specialist firms, each producing and supplying some
standardized parts (of vehicle, electronic machine etc.) to the assembly
line of the mass production unit.
Facility for joint ventures :- Co-operation between smaller
firms may lead to the setting up of jointly owned enterprise which enable
then to enjoy many of the economies of scale which normally obtained by
larger firms (like common research and development activities, using of
combined harvesters etc.)
Financial constraints: - When the size increases, the firm find difficulties to
raise finance for expansion. This is either because of the increase in the cost
of loans or fear of losing the control of the management.
Management problem: - It is difficult to adjust the output with the change in
demand in the market. The managerial problem related to this will be more
as size increases.
Reasons for the growth of firms
The reasons for the growth of firms are as
follows
1)
To reduce the average cost.
This is the most sensitive reason behind the growth of
firm. Firms try to grow because it can enjoy the economies of
scale which reduce the cost.
2)
To obtain larger share in the market.
An increase in the share of the market helps the firm to become larger in
size. Larger the market share greater the market power and lesser
threat from competitors.
3)
To achieve greater security.
A larger firm with diversified production need not fear a fall in total
demand. A fall in demand for one of its product may be compensated by the
rise in demand for another
Factors influencing the size of a firm are : 1) Size of the market: Larger market require large quantity of
goods and then only larger firm can provide large quantity of goods If
demand is low, the size of the firm is likely to be small. 2) Availability of capital: In order to
set up a large firm huge capital is required. So availability of capital is
another factor influencing the size of the firm. A small firm may want to
expand but may not be able to obtain a loan 3) Type of business organization: Smaller types of business
organization [sole trader, partnership etc.] find it difficult to meet the
requirements of a large firm. A public limited company is likely to be larger
than a sole trader as it has more sources
of finance. 4) Therefore the type of business organization plays an
important role in deciding the size of the firm. Last but not the least factor
is the preference of entrepreneur
to decide the size of business. An entrepreneur may choose to keep the firm
small in order to keep control/reduce stress.
Possible advantages of growth of firms: 1) it would be able to benefit
from expanded production, such as through benefiting from economies of
scale. 2) Lowering the cost of production as a result firm would be able
to increase profits.
Possible disadvantages of growth of firms: 1) when the firm is newly established
or an improper stage, the expansion may be unwise/premature. 2) it might
be better for a firm to get itself established in domestic market before
expansion. 3) the availability of limited resources are to be
considered [based on opportunity cost]
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