Large Firms and Small Firms - Term Paper Example

?Large Firms and Small Firms Introduction The firms are ified into small, medium, and large firms according to the nature and size of the business conducted by them. Each level of the firms is defined differently in different countries taking the rules and regulations into account. Polly Roberts writes on differentiating the firms noting that larger and smaller firms differ in their internal factor prices. He says, “Larger firms pay less for capital and more for labor; smaller firms pay more for capital and less for labor” ( Roberts, n.d.). However, there are numerous definitions for the firms among various economists; and researchers are still on their efforts to study more on the competitive factors between large firms and small firms. Small firms Small scale firms are privately owned and operated business undertakings, classified on their characteristics like small number of employees and lower turnover. They usually occupy only a tiny segment of the market place where they are operating. For the purpose of simplifying the accounting requirements, section 382 and 465 of the Companies Act 2006 defined the Small and Medium sized firms on the basis of the amount of business carried out by the company. They define, “a small company is one that has a turnover of not more than ?6.5 million, a balance sheet total of not more than ?3.26 million and not more than 50 employees” (Small and medium sized enterprises, 2011). Large firms Large firm is often considered as an economic cluster of large profit-making corporations who have the ability to directly influence the social and political policy. Large firms are usually identified on the basis of national ranking rather than their actual size. They have many advantages in the market which the small firms do not possess, such as the flexible pricing policies. They are capable of changing the price at frequent intervals. Rebecca Hellerstein and Pinelopi Goberg (cited by Derby, 2011) write that large firms are changing their products’ prices more frequently than the small firms do, and by smaller amounts. Competitiveness Competitiveness is a word having numerous definitions. Here we will take the business aspect of competitiveness into account. Chikan (2006, p.46) gives one of the most acceptable definitions and it says, “business competitiveness is a competence of the company that allows the company to provide products and services for customers within the standards of social responsibilities, that (i) are preferred to the products and services of other competitors and (ii) provide profit for the company” (ed. Reine, 2009, p. 179). Competitiveness is considered to be a multi-dimensional perception. This term has a three diverse but interconnected stages; firm, industry, and country level. And we are concentrating on the firm level competitiveness. As both firms are taken into consideration, growth is an important point and is a performance measure that gives and additional vision of the strength and competitiveness of the firms. Firms can benefit in many ways from the competitiveness, if exploited efficiently, which includes higher efficiency in the market, improved power, capacity to withstand the changes of environment, higher profits, and enlarged prestige for the firm. The competitiveness exists not only depending on the associationalism of firms but also determined by the alliance between the local businesses and governments. Not many other economic factors have gained attention as ‘competitiveness’ has done. Competitiveness is used often to deal with any aspect regarding the market performance. The most important factors affecting the competitiveness are, product quality, capability towards innovation, being able to adjust easily according to customers’ need. Price competitiveness As we talk about the price competitiveness between the small and large firms, the most disputed issue that comes to the surface is predatory pricing, a practice implemented by the large business firms, which offers massive discounts to the consumers. This policy creates a situation where the independent small firms are not able to survive with the low prices. When the small firms are thrown out form the market, the large firms slowly increase the prices, and even higher than the price at what the small firms had been selling. And thus the larger firms obtain the monopoly power over the market. The same pricing policies occur between the large firms too so as to balance the profitability of their own overpriced products. Innovation within the firms Small firms as well as the large firms experience both pros and cons of making innovations in their business. When considering the small firms, they are more reactive to environmental changes and consumer wants and the internal communication and alterations can be made swiftly according to the external changes. The small firms usually adopt the flatter management structure that enables a free flow of dialogues between the management and the staff. However, larger firms are equipped with greater financial and human resources. They also have the benefits of developed infrastructure in various fields like selling and marketing, research, and development. These firms procure a greater capability in manufacturing and distributing their products. Many factors can influence the innovation abilities of small business firms as well as large business firms. However, factors like age of the firm and employment growth are only undependable predictors of innovation. Large firms changes the business environment and the small firms adapts the changes Large firms have better management accessibility to the business management. Usually, they are the ones which manage and control the business environment. And the smaller firms are forced to adapt to these changes to survive in the market. When we make a closer analysis on each aspect of the business environment such as, economy, governments, customers, suppliers, and competitors, we find that large firms are more privileged to make the utmost utilization of each resources of the situation. They get the advantage of better accessibility to these factors while the small firms are drawn back from these privileges and are lagging back in the market. Regarding the economy, the large firms are more favored by market force of economies of scale as well as they are not much affected by the entry costs. When a new product is to be introduced into the market, the small firms find it too hard to accommodate the high entry costs where as the large firms are not at all bothered about it. Besides, political influence also helps the large firms in many ways. The report of Zhou (n.d.) analyses that entrepreneurs of large firms have greater political influences than that of the small entrepreneurs. This political influence can create an impact on the formulation of laws and rules. The governmental rules and regulations may be made in favor of such entrepreneurs. However, the large firms are more exposed to corruption as they earn higher profits in contrary to the small firms whose management is more clear and visible. In total, the management of business obstacles becomes much difficult for small firms as they face with large fixed costs, which large firms can absorb easily. While bigger firms are usually seen as controlling and even changing the business environment, the small firms are adapting to these changes as they do not procure the capacity to make changes. To survive the changes in the business environment created by the influence of large firms, they should execute strategies to survive the challenges facing today and formulate policies to face that of tomorrow. They are faced with the challenge of finding new customers. For forming a continual flow of the business, the small firms must concentrate on efficient marketing every moment. The competitiveness forces firms to adapt changes in their strategies and policies. Small firms are more flexible and can quickly adapt to the changes in the business environment. Changes in economic conditions and changes in governmental legislations normally do not affect the large firms, but small firms are faced with the risk of altering their strategies quickly to these changes. And if the firms are not willing to respond to such business environmental changes, they are slowly descending into oblivion. Throughout the history, both in developing countries and in the developed countries, the large firms had been having the lion’s share of innovation in the markets. It is to lessen the dissimilarities between the small and large firms, and to promote the small and medium business enterprises, the World Bank introduced the strategy of “level the playing field”, which means to create a business environment where entrepreneurs of all sizes get equal opportunities (Schiffer, 2001, p.1). Conclusion This hyper-competitive era has put forward the need for an explicit management of competitiveness for various issues at different levels. Competitiveness at the firm level has gained the utmost attention of the researchers of the various levels of competitiveness. Time and again studies and analysis are done on the importance of firm level competitiveness. Nevertheless, price competitiveness is not all that matters but also the firm’s ability for ongoing adjustments. References Derby, MS July 2011, ‘Large firms are most active price changes, fed researchers say’, The Wall Street Journal, Viewed 03 Aug 2011 Roberts, P, ‘Differences between large and small firms’, Application to Oil Leasing Policy, pp. 1-41, Viewed 03 Aug 2011 Reiner, G 2000, Rapid Modeling for Increasing Competitiveness: Tools and Mindset, Springer, London. Schiffer, M & Weder, B 2001, Firm Size and the Business Environment: Worldwide Survey Results, International Finance Corporation, USA. ‘Small and medium sized enterprises: Definitions’, June 2011, University of Strathclyde Glasgow, Viewed 03 Aug 2011 Zhou, W (n.d), ‘Political connections and entrepreneurial finance in an emerging market: the China case’, Nanyang Technological University, pp.1105-1119, Viewed 03 Aug 2011 Read More