Size and Structure of Firms - Essay Example

Size and structure of firms

Firms exist in different sizes and structures regardless of the industry and market of operation. The size and structure of firms are determined by some factors that ensure the firm operates effectively and competitively in the industry and market of operation. The size of a firm that ensures the firm produces at the lowest production cost represents the optimal size of the firm in the industry. The manner in which activities such as coordination, task allocation, and supervision get directed to an organization or a company is the structure of the firm. Firms take on different structures with the aim of achieving its goals and objectives effectively. Organization theory aims at explaining organization structure which defines the “channels of communication flow through which information flows” (Vu et al., 2011).This study seeks to offer an in-depth review of the factors that determine the size and structure of firms and why firm structure and size varies across industries. Understanding the factors that determine the size and structure of firms allow for the determination of the effective size and structures for business to ensure the objectives and goals of the firm are effectively achieved.

Factors determining the size of a firm

Market size

The market size faced by a firm determines the size of the firm to effectively meet its goals (Vargas, 2015). Larger markets require larger firms while smaller markets can be effectively served by a small firm. In a large market, large firms will have a competitive advantage to benefit from lower large-scale production and distribution of products reducing the overall costs to the firm. The effect is a reduction in the prices for the large firm reducing the competitiveness of small firms further increasing the market share and profitability of the large firms. The impact is an increased growth in the size of the large firm, and that could not have been achieved in a smaller market. The success of a large firm in the market requires the presence of a huge market to purchase the many products produced by the firm and provide a significant reduction in cost per unit.

External funding

The availability of external funding is one of the factors determining the size of firms using the financial theory (Kumar et al., 1999). The dependants on external funding for success in the operations of a firm in a given market also play a significant role in the size of a firm. When access to external funding is important for success a company has adequate access to external funding, the firm will grow but when external funding cannot be accessed by firms the size of the firms will remain small. External funding facilitates the growth of small firms to the international, regional, and global levels augmenting the size of the firm in a given industry, Accessing the international and global markets for these firms allows for increased profitability and sales that propel the firm to, even more, growth and increased size. External funding also allows firms to market, advertise, and set offices and subsidiaries in different global locations increasing the total size of the firm. Lack of external funding, on the other hand, affects the ability of a firm to effectively operate even at the local level and results in many small firms in a given industry.

Financial development

Financial development is the other factor that determines the size of firms in a market. The financial development provides a platform for access to funding to a large section of the market and allows empowerment of business especially small businesses (Constantini, n.d.). Financial development affects the size of existing firms in a market and results in the establishment of new businesses in a given industry that has a high reliance on external finance. The development of financial markets in economic results in the growth of new firms resulting in a fall in the average size of firms in the industry but an efficient financial market also facilitates faster growth of firms eventually resulting in the increased average size of firms.

The type of industry

The nature of the industry that a given firm operates determines the firm size. Where the productive machinery in the industry is very large or the product being made by the company is large, the firm has to be large to effectively manage to produce the product. An example a firm operating in the steel-making industry where the productive machinery and the product are large that the firms have to be larger in size compared to firms in small-product industries. Ship-making companies have to be large to allow for adequate financing, human resource availability and skills, and effective management of the ship-making process and even in the provision of support services including maintenance. The complexity of the product also requires firms to be large to have adequate skills and financing to meet the requirements of product development with an example being the manufacture of typewriters. Small firms cannot adequately manage the effective development of complex products affecting the overall performance and success of the product in the market resulting in the dominance of large firms that have skills and enough funding to overcome product development challenges and engage in massive research and development. When the manufacturing process is simple and the products made are small, the firm size will be small in a given industry as exemplified by the manufacturer of cutlery and bread baking. Large firm sizes in these industries do not provide firms with a competitive advantage as in the case of large and complex product making industries such as steel-making.

Capital

Access to capital is another factor that determines the size of a firm regardless of the industry of operation. When a firm’s management can access capital easily and is focused towards an increase in the operations of the business, there will be a high tendency for the firm to be large. Where access to capital is limited, firms have to maintain small operations and remain small owing to inability to finance large operations.

The attitude of management and the promoters

When the management and the promoters of a given firm have a positive attitude, are foresighted, ambitious, and enterprising, they will eventually grow small firm to a large firm by working diligently towards the increased firm operations. The management and promoters also determine the attention and work on accessing funding and increasing firm operations opening platforms for the firm to increase in size.

The regulatory theory also aids in explaining the size of the firm by offering an understanding of the growth of some firms in the service industry regulated by the government (Kumar, 1999). Power supply firms are large and mostly consist of one or two firms in a country owing to the barrier to entry by government regulation. Health providing firms are also favored by government regulation favoring the increased size of some firms.

Factors determining the structure of a firm

Several factors influence the structure taken by a firm to achieve the pre-determined goals within a given time frame.

Size

Size is an important factor in the determination of the structure in a given firm. Small firms have a flat structure owing to the limited management layers to allow for the effective running of the business. There are also very few employees in a small firm resulting in a flat organizational structure. Large firms, on the other hand, have very many employees and the chain of command is large that a hierarchical structure has to be employed to allow for effective achievement of set goals and objectives. A formal structure is a required in a large organization to guide the employees on their roles, offer clear reporting lines, managerial and specialist expertise, delegation and control systems (Rees & Porter, 2015). A small business or home-based business do not have vast structures since the entrepreneur is responsible for all the actions and could employ one of two employees to assist in the business.

Strategy

The business strategy employed in a given business also determines the structure of the business. Smaller organization structures are evident in firms that have a strong desire to grow and expand allowing the business to respond fast and effectively to changing market conditions than the competitors. The development of organization structures in small businesses is also hampered by the unwillingness of business owners to relinquish business control resulting in a delay in the formation of organization structures. The other reason for the delay in the development of organization structures in small businesses is the preference on the setting of business strategies to guide the business to the achievement of organization goals. The strategy of a firm determining the positioning of the firm in the market also determines the structure that fits this strategy. Where a firm decides on a differentiation strategy, providing the most innovative products in the market and being first to roll out better products, an organic organization strategy is implemented (Cunningham & Harney, 2012). The organic organization structure for a firm with differentiation strategy offers a platform for fast response to changes in consumer preferences and tastes and make and implement decisions faster and more effectively (Saha, 2006). On the other hand, a firm that chooses a cost leadership strategy by producing products already in the market in the most cost-effective and efficient manner could employ a mechanistic organization design. The organization design, therefore, has to be in line with the market strategy decided upon by a given firm in the achievement of its set goals and objectives.

The organization lifecycle

The other determinant of the structure in a firm is the organization lifecycle. The organization lifecycle progresses from birth, youth, midlife, and maturity with differing implications on the structure taken by the organization. The birth stage in the organization cycle makes organizations take a less formal structure owing to the lack of structures to guide the performance of roles at the company. There is a delegation of duties and authorities in an organization in the birth stage with the owner make most if not all the decisions. The youth stage in the organization cycle entails the growth of the organization with an emphasis on increasing the organization size. The focus is on customer satisfaction resulting in the delegation of authority, and a formal structure is put in place. The midlife stage of organization cycle is reached when a high level of success has been achieved, and an increased complex and formal structure have been instituted. More levels are included in the organization structure and favor a mechanistic structure. The maturity stage in the organization cycle entails an organization taking steps to maintain its market position in a secure and stable environment with emphasis on profitability and efficiency. The organizations, in this case, take a mechanistic structure and responsibility cannot be adequately handled by only executives but also supervisors and others in the organization.

Data Sensitivity

Data sensitivity is the other determinant of organization structure. Where sensitive client information is used in undertaking the operations in a firm, the storage and use of data in these organizations become an important consideration for effective service delivery and success of the organization. An example is financial institutions that utilize a lot of personal and sensitive information in the operations of businesses. The organization structure that effectively fits these organizations provides autonomy for front-line employees who have direct contact with customers and access the sensitive information. The impact is that a decentralized organization structure is instituted when organizations deals with highly sensitive personal information and consumer data ensuring the data is only accessed by those who need it, and client information is not distributed freely among agents of the company. Companies that deal with non-sensitive customer information effectively perform in a centralized organization structure that free flow of information is achieved without any fear of compromised access to sensitive customer information.

Environment

The environment is the other determinant of the structure in a given firm owing to the impact on the success and performance of the employees. The environment that the employees work in determines the manner in which the organization will be structured. An unpredictable and fast-changing environment that requires a high degree of flexibility, cooperation between departments, and adaptability requires a structure that allows for decentralized decision-making and a flattened organization management (Gitman & McDaniel, 2007). Centralized organization structure is applicable for a stable economic environment with well-defined tasks and controls that ensure the mechanistic structures and increasing power be applied effectively. The environment also impacts the manner in which delegation and responsibility id provided augmenting the chances of stable environments taking on centralized structures as opposed to horizontal structures.

Reasons for varying firm structure and size across industries

There are several reasons that could explain the differences in the sizes and structure of firms in different industries.

The industry level determines the size and structure of firms since the type of industry determines the level of capital and control required to perform well. An example is the largeness of firms operating in the utility industry such as power producing companies that achieve the huge size from either being a natural monopoly or that the monopoly nature of these utility firms is officially sanctioned by the state. A small firm in the utility sector cannot also perform effectively. The entry of other small firms in the sector is also affected by the monopoly nature of utility firms and barriers to entry are so huge that a firm grows so big compared to other industries and sectors in the economy. The other factors that result in differences in the size of firms in industries are capital intensity, wages, financing, and research and development. Industries that are very capital intensive results in the success of large firms with the capital intensity forming a large barrier to entry by small firms and favors the expansion and growth of a firm. High-wage industries are preventing the establishment and success of new firms to effective competes with established firms in the industry resulting in a few large firms operating in the industry. The other factor that results in large firms in a given industry is research and development where an industry that requires huge spending on research and development favoring the success of only large firms. Huge research and development requirement also prevents small firms with limited funding to enter and effectively compete with established firms in the industry. Large firms in an industry mainly out in place mechanical structures to allow for the achievement of set goals and objectives.

The size and structure of firms also vary across industries because of the differences in products in different industries and the complexity of products. The service industry, for example, consists of many small firms owing to the limited complexity and limited requirement to effectively provide service as evident by many restaurants operating in the hospitality industry. Firm operating in industries that require a lot of skill and complexity, for example, the airline industry have to be large to allow for effective operation, purchase of planes that require a lot of funding and having an adequate workforce to provide effective service delivery to customers. Complex product delivery also ensures the size of the firms in an industry is large for example building and construction companies have to be large to afford large machinery and huge funding for the building of large construction units and funding for large tenders including construction of roads and bridges. The heavy machinery and financial requirement are huge for the success of small firms to effectively compete with established players in the building and construction industry favoring the large sizes of firms.

Size and structure of firms in the market depend on several factors and the industry of operation also affects the size and structure of firms. The factors determining the size of a firm include market size, external funding, financial development, the type of industry, capital, and the attitude of management and the promoters resulting in different sizes of firms in the market. The factors determining the structure of a firm include the size of the firm, strategy, the organization lifecycle, data sensitivity, and the environment. The differences in the size and structure of firms in different industries are mainly as a result of different operating conditions in the industries that serve to meet consumer needs through different product offerings and strategies. The size and structure of a firm are pegged on its effectiveness in achieving set goals depending on the industry of operation.