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Explain why it is that “small firms are not simply scaled down versions of large firms”.
- Differences in economic characteristics,
- including small firms are invariably price takers, generally more vulnerable
- due to limited customer base and product range, operate under greater financial
- pressures, greater competitive pressures, typically smaller profits, different type of innovation (usually incremental). (Large firms greater at achieving economies of scale)
- Difference in social characteristics, in small businesses owners generally work long/unusual hours, work in poorer
- conditions, have objectives other than maximising profit. Also characteristics
- that can relate to being your own boss, working from home, family
- involvement/atmosphere, less bureaucratic procedures and more flexibility.
- Different management challenges also vary
- with small businesses usually facing greater difficulties obtaining finance, other resources and establishing credibility. They also have greater difficulty maintaining the viability and competitiveness of the business and are generally challenged to be multi-skilled (eg accountant, maintenance, server, cook, and
Identify and explain why is it that small firms typically operate under greater financial
pressure than large firms.
- Smaller firms generally have smaller profit margins as a result of a limited range of products and services. Smaller firms are also
- less capable of achieving economies of scale, therefor they may not be able to significantly compete with larger firms. They would also be less likely to receive the same advantages in terms of crediting from financiers or suppliers as they would be considered to be higher risk that larger firms.
Identify and explain why it is that small firms often face greater competitive pressures than large firms.
- Due to the financial pressures placed on smaller firms it is more difficult for these firms to achieve large scale innovations as they are generally costly. Therefor these businesses can only achieve incremental
- innovations. With a large amount of changes being implemented by large businesses it is likely that small businesses would not be able to keep up and would no longer be competitive.
What is meant when it is said that “some small businesses have objectives other
than maximising profits”? What might these other objectives be? How does this differ from the objectives of large businesses?
- Small businesses may be focused on achieving goals other than maximising profit, they may seek to achieve being their own
- boss, work from home, creative a family business (involvement and atmosphere),
- have more flexibility with their time. Large businesses generally seek to maximise profits at the cost of most other factors.
What are the possible advantages for an individual in running their own business
(ie relative to being an employee in some
other business)? At the same time, what are the possible disadvantages in an individual running their own business (as opposed to being an employee in some other business)?
Advantages: satisfy the desire to be independent, be a vehicle to fulfill personal goals, vehicle for greater financial rewards, lifestyle and family benefits.
- Disadvantages: increased uncertainty and risk, greater possibility for financial loss, increased responsibility, higher levels of personal stress and negative lifestyle