Small versus Large Organisations
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.
In the United States the Small Business Administration classifies a small business as having fewer than 500 employees for manufacturing businesses and less than $7 million in annual receipts for most non-manufacturing businesses. In the European Union, a small business has fewer than 50 employees. However, in Australia, a small firm is defined as having fewer than 15 employees. A business of less than 10 employees can be defined as a 'microbusiness'.
Often small businesses get subsumed into the category of small and medium sized enterprises (SMEs).
There are many reasons why small organizations survive and prosper. A small organisation:
- can be started at a very low cost, carried out with minimum investment and potentially run on a part-time basis. Small business grants, financial aid and economic support is readily available as governments like to promote small business developments.
- can be from the home with low overheads, meaning they can be competitive on price despite their lack of scale.
- can be entrepreneurial and the owner is usually highly motivated by the independence provided .
- 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.
- tends to be intimate with its customers and clients, which results in greater accountability and maturity. The business can provide exclusivity in their products and services and meet niche market needs which are uneconomic for big companies as they need to standardise their products and services to gain economies of scale.
- 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 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.
Mars had total revenue of $30 billion in 2008 and employed over 70,000 people. Despite their size and multinational status, the Mars family still owns the business as a private limited company with the Mars family as Chairman and directors.
We look more closely at these types of growth in the following sections.