Benefits of Small Firms

Readers Question: Why does a firm prefer to remain small??

In recent times, the tendency is for product markets to be dominated by large multinational corporations who can benefit from various economies of scale. However, despite this general trend, there are still advantages to being a small firm.

Concentrate on niche Markets. Small niche markets may have less competition and therefore be more profitable. Moving into a mass market may make competition more intense.

Small Can Be A Selling Points. In some goods like clothers, there could be an advantage from small firms selling top end clothes ranges. A big firm like Primark and M&S may be able to sell clothes cheaper, but, small firms can target the customer who wants an exclusive deal – somebody who wants to stand out from the crowd. Some people prefer a local small coffee shop, rather than visiting a ‘bland’ multinational like Starbucks.

Economies of scale limited in some industries. In the car industry there are a small number of relatively big firms as economies of scale are large. But, in some industries like coffee shops, economies of scale is less. There may be diseconomies of scale in expanding production.

Not all Firms Aim at profit maximisation and sales maximisation. Some owners may want a business that is manageable and easy to retain control. Expansion may involve listing on stock exchange which makes you liable to shareholders.

See also: Decline of the Corner shop and small firms