Main reasons for the different sizes of firms

If we look at business organisations, we can see that there are firms of different sizes. We have already looked at types of business organisations. We can see that each one of the types of business organisations have their own advantages and disadvantages.
Firms try to grown in size due to many reasons. A sole trader may grow to become a partnership because it needs more capital. A partnership may grow and become a private limited company to enjoy the benefit of limited liability. A private limited company may be converted to a public limited company to enjoy the benefit of selling shares at the stock exchange.

Let us look at the advantages of being big in size.

Advantages of large scale production

Economies of Scale

When a firm expands scale of production, it has a chance to become more efficient and lower its average cost. Such kinds of economies of scale are known as internal economies of scale as internal operation and production gives the advantages. Let us look at internal economies of scale in detail.
1. Financial economies
A large firm has several financial advantages because it is large, and well known and becomes a more credit-worthy borrower than a small firm.
2. Marketing economies
The way large firms buy materials, transport and sell their products can give them advantages. A large firm is able to buy in bulk quantities at discounted prices. Although large firms spend huge amounts of money on advertising to create a want for them, their advertising costs are spread over a very large output.
3. Technical economies
Large firms can afford to use different methods of production. They can afford to use specialist workers and machines. Division of labour and specialisation is possible in large firms. They can also afford to do research and develop new products and new and more efficient methods of production.
4. Risk-bearing economies
Large firms can reduce risk and are able to bear the risk by using various methods. For example, they can diversify their products so that bad business in one product will be covered by other products which are doing well.

External economies of scale
External economies of scale are those advantages in the form of lower average costs which a firm gets from the growth of the whole industry. Specialised services maybe available if there is a demand for such services within the industry. For example, a firm maybe set up to give specialised transport services to many firms located in an industrial zone.

Survival of small firms

Even though bigger firms enjoy the advantages mentioned above, we can see that many small firms still survive in the market. Let us look at the reasons.
1. Size of the market
When there is only a small number of consumers willing to buy a product, there is no point in a firm growing to a large size. The market determines the size of the firm. The market maybe small because:
– The market is local, where the community is not big.
– Wide variety of goods and services are wanted. Small firms are flexible enough to address changes in taste and fashion, while large firms which tend to do mass production are not that flexible.
– The end product maybe highly priced luxury items which only requires small scale production.
– Personalised services could be given by small firms, unlike large firms which mostly gives standardised services.
– There are large firms which require components which is can be more efficiently produced by small firms.
2. Small firms can co-operate
Co-operation between small firms can lead them to set up jointly owned enterprises which allow them to enjoy many of the economies of scale that large firm have.
3. Governments help small firms
Governments usually provide help to small scale firms because small firms are an important provider of employment and innovations in the production process.

Next topic: Advantages and disadvantages of monopoly

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