Competitive Markets: Small Firms & Large Firms (Edexcel IGCSE Economics)

Revision Note

Written by: Steve Vorster

Reviewed by: Jenna Quinn

Measuring the Size of Firms

When considering the size of firms, several metrics are useful for comparison and analysis

The number of employees: In 2021, Toyota had 366,000 employees whereas Hyundai had 75,000
The percentage of market share in an industry: During the 1st quarter of 2022, Samsung had 23% of the global market share for smart phones
The size of profits: in 2021, Apple made the highest level of profits for any firm, $58.4bn
Market capitalisation: The market value of a company calculated by multiplying the number of shares issued by the share price e.g. if a firm issues 5 million shares which trade at £20 each, market capitalisation is 5 x £20 = £100 m

Evaluating Small and Large Firms

Generally, small firms have fewer than 50 employees, medium firms have between 50 and 500 and large firms have more than 500 employees
Some firms choose to maintain a small-scale, focusing on niche markets, personalised services, and close customer relationships
Other firms aim to increase market share, achieve economies of scale and increase profits

An Evaluation of Small Firms

Advantages	Disadvantages
Small firms often provide highly customised goods and services, e.g. pet grooming in the customer's home They often create personal relationships with customers, which helps generate customer loyalty and word-of-mouth advertising They often provide unique products which are sold in small quantities at high prices; this can be very profitable Smaller firms can respond quickly to changing market conditions	Small firms are more susceptible to changes in the wider economy, especially during recessions Fewer financial resources are available to them, including access to larger bank loans - some smaller firms are unable to access any loans at all It is harder to recruit and retain staff as the wage & non-wage benefits are less competitive than those offered by larger firms Owners may struggle to take a holiday/sick leave as revenue slows/stops when they stop working Small firms struggle to generate economies of scale as the volume of output is significantly lower than that of larger firms, resulting in lower profit margins

Advantages

Disadvantages

Small firms often provide highly customised goods and services, e.g. pet grooming in the customer's home
They often create personal relationships with customers, which helps generate customer loyalty and word-of-mouth advertising
They often provide unique products which are sold in small quantities at high prices; this can be very profitable
Smaller firms can respond quickly to changing market conditions

Small firms are more susceptible to changes in the wider economy, especially during recessions
Fewer financial resources are available to them, including access to larger bank loans - some smaller firms are unable to access any loans at all
It is harder to recruit and retain staff as the wage & non-wage benefits are less competitive than those offered by larger firms
Owners may struggle to take a holiday/sick leave as revenue slows/stops when they stop working
Small firms struggle to generate economies of scale as the volume of output is significantly lower than that of larger firms, resulting in lower profit margins

An Evaluation of Large Firms

Advantages	Disadvantages
Increased economies of scale from increased output reduces cost per unit of output. This increases profit Lower Prices Firms may pass on their cost savings (due to economies of scale) in the form of lower product prices Large firms may earn greater profits and can use this to invest in research & development to innovative or improve the quality goods and services	When a company grows too large, it may experience diseconomies of scale. It may face challenges in coordinating its various departments, managing its workforce, or maintaining quality control Rapid growth may result in miscommunication. This may result in delays, errors, missed opportunities and impact on employee morale A firm can take on more business than it can handle E.g. A company that expands too quickly may struggle to hire and train enough staff to handle increased demand, leading to a backlog of orders and dissatisfied customers

Advantages

Disadvantages

Increased economies of scale from increased output reduces cost per unit of output. This increases profit
Lower Prices Firms may pass on their cost savings (due to economies of scale) in the form of lower product prices
Large firms may earn greater profits and can use this to invest in research & development to innovative or improve the quality goods and services

When a company grows too large, it may experience diseconomies of scale. It may face challenges in coordinating its various departments, managing its workforce, or maintaining quality control
Rapid growth may result in miscommunication. This may result in delays, errors, missed opportunities and impact on employee morale
A firm can take on more business than it can handle
- E.g. A company that expands too quickly may struggle to hire and train enough staff to handle increased demand, leading to a backlog of orders and dissatisfied customers

Reasons Why Firms Grow

Many firms start small and grow into large companies or even multi-national corporations (Amazon started in a garage)
Two firms can combine into a single business entity to form a merger which creates rapid growth

Reasons Why Firms Grow

Reason	Explanation
Access to finance	Larger firms often earn large profits. This improves the reputation of the company amongst its shareholders or banks It can make it easier for the firm to access greater finance
Economies of scale	Larger firms can take advantage of economies of scale to lower their average costs With lower costs, firms can leave price levels the same and enjoy higher profits, or they can lower prices and pass on the cost benefits to their customers Some industries have economies of scale that mean only one firm can operate efficiently - a natural monopoly
Desire to spread risk	Growth provides opportunities for product diversification Firms are able to increase the number of products that it offer and this reduces risk - if one product fails others may well still be successful
Take over competitors	Firms merge or acquire their competitors as they desire stronger market power and fewer competitors The Walt Disney Company and 21st Century Fox merged in 2018 to gain a higher market value and share (the new company achieved a market share greater than 90%)

Reasons Firms Stay Small

While many firms grow, some stay small or intentionally choose to remain small. They do this for the following reasons:

Nature of the market : Small firms are often able to offer a more personalised service and focus on building relationships with their customers
Size of market: They can provide innovative goods or services to a small section of a niche market
- E.g. custom-built bicycles for competitive cyclists is a smaller market but can be very profitable
Aims of the entrepreneur: The owner's goal is not always profit maximisation but rather an acceptable quality of life or satisficing
- Making just enough profit to keep the owner/shareholders happy
Lack of finance: They may be unable to access finance for expansion. They remain small to keep cost low
Less managerial problems: A smaller firm will have fewer workers and easier lines of communication with employees
Avoid rapid growth and diseconomies of scale which cause costs to rise
Avoid investigation by Government
- Legislation and regulation can prevent firms from growing too large if deemed to be anti-competitive behaviour
- Merger activity is monitored to prevent a single firm gaining more than significant market share
  - E.g. in July 2022 the CMA launched an investigation into the merger of two companies which produce foam used in bedding & cleaning products as they believed it would lead to higher prices & less choice

Last updated: 6 June 2024

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