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1.6 The Merits of Small versus Large Organisations AO3 only

AO3 You need to be able to: Demonstrate synthesis and evaluation. Command terms these terms require you to rearrange component ideas into a new whole and make judgments based on evidence or a set of criteria. Compare,  Compare and contrast, Contrast, Discuss, Evaluate, Examine, Justify, Recommend, To what extent

It can be difficult to define the term 'small organisation' and the classification will be different from country to country. It is likely that the measure will include:
  • Sales turnover
  • Number of employees
  • Market share
  • Privately owned

A small organisation, therefore, is a business that is privately owned and operated, with a small number of employees and relatively low volume of sales. It is likely to have fewer than 500 employees.

There are many reasons why small organizations survive and prosper. A small organisation:

  • can be started at a very low cost,
  • can have low overheads (eg operate from home)
  • can be entrepreneurial and the owner is usually highly motivated 
  • can manage their assets and liabilities and cash transactions relatively easily and the owner can setup an accounting system on a home PC using off the shelf software.
  • knows each individual customer better
  • is suited to internet marketing because it can easily serve specialized niches, something that would have been more difficult prior to the internet revolution.
  • not being tied to any bureaucratic inertia, it is typically more flexible in its response to change in the marketplace.

Small businesses, however, often face a variety of problems related to their size. Drawbacks for small organisations include:

  • working on a low budget and therefore requiring very competent marketing and the planning to achieve strategic objectives.
  • the improper handling of loans and poor liquidity ratios.
  • frequent underfunding, which is a common cause of bankruptcy.
  • higher unit costs than large firms such as higher interest rates, insurance costs and tax rates.
  • concern about excessive government bureaucracy and regulation.
  • lack of trust from customers who have not heard of them and would prefer to rely on well know corporations and brands.
  • the 'Entrepreneurial Myth' based on an assumption that an expert in a given technical field will also be expert at running a business. Additional business management skills are needed to keep a business running smoothly.
  • the capacity of much larger businesses to influence or sometimes determine their chances for success.

It is true that large businesses provide the society with employment and wealth, but in return they may remove the entrepreneur mind set. They forces people to become employees, rather than business owners who can start something of their own. This is because small business is often the life blood of an economy and the source of future job creation.

The appropriate scale of operation

We have seen that the optimum size for a business, is the point where average costs are at their lowest. This is, however, a theoretical concept and it may be impossible for the owners of a business to know when this point has been achieved. It is more likely that other factors are more influential, such as:

  • the aims, objectives and goals of the owners
  • the potential size of the market
  • access to funding and investment
  • competition in the market

There are examples of large organisations that have remained as private limited companies rather than floating the business, because the owners are determined to keep the business in family hands.

Many industries support both large and small companies, especially if the small companies provide goods and services to a market niche.