Reasons for Businesses to Remain Small (Cambridge (CIE) O Level Business Studies)

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Danielle Maguire

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Why Some Businesses Remain Small

Some entrepreneurs choose for their business to remain small
- In 2021, 98.9% of businesses in the European Union (EU) were classified as small firms with less than 49 employees
- Small businesses dominate some industries, such as hair and beauty, home improvement and childcare services

Reasons why Small Firms Exist

They offer a personalised service and focus on building relationships with customers (excellent customer service)	They are unable to access external finance for expansion	They provide a product that is in a niche market - small market size but potential for high profits
By remaining small they are able to respond quickly to changing customer needs/preferences	Rapid growth can cause diseconomies of scale which can be avoided by remaining small	Small business owner's goal is (satisficing) rather than profit maximisation

While developments in technology often benefit large businesses, some can work to the advantage of small firms
The Internet offers low cost access to market for many firms
- Social media allows even the smallest business to achieve an online presence and target specific groups of customers
- Online storefronts such as Amazon Marketplace, Etsy and Ebay provide low-cost distribution options

Evaluation of Remaining Small

Advantages	Disadvantages
Small firms often provide highly customised or unique goods/services which are sold profitably in small quantities at high prices e.g. pet grooming in the customer's home Personal relationships can be developed with loyal customers which helps to generate word-of-mouth advertising Smaller firms can respond quickly to changing market conditions such as changes in fashions/trends	Small firms are unlikely to benefit from economies of scale as the level of output is lower than that of larger firms Access to finance such as bank loans or trade credit is likely to be limited Recruiting/retaining high quality staff can be challenging as wage & non-wage benefits are less competitive than those offered by bigger firms Small business owners may struggle to take holidays/sick leave as the business relies on their presence to function

Advantages

Disadvantages

Small firms often provide highly customised or unique goods/services which are sold profitably in small quantities at high prices e.g. pet grooming in the customer's home
Personal relationships can be developed with loyal customers which helps to generate word-of-mouth advertising
Smaller firms can respond quickly to changing market conditions such as changes in fashions/trends

Small firms are unlikely to benefit from economies of scale as the level of output is lower than that of larger firms
Access to finance such as bank loans or trade credit is likely to be limited
Recruiting/retaining high quality staff can be challenging as wage & non-wage benefits are less competitive than those offered by bigger firms
Small business owners may struggle to take holidays/sick leave as the business relies on their presence to function

Exam Tip

Do not focus too much on making a judgement about whether businesses are better big or small. Businesses of all sizes can - and do - succeed

It is more important consider whether the size of the business allows it to achieve its overall aim and whether other factors such as its culture and organisational structure contribute to its success

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