10 Advantages Enjoyed By Small Firms – Explained!

Some of the advantages enjoyed by small firms are as follows:

Despite the benefits of growth, a large proportion of the firms in any country are small. There are a number of reasons for this.

i. The small size of the market:

This is probably the key influence. If demand for the product is small, a firm producing it cannot be large. Demand for very expensive items, such as luxury yachts, may be small as it may be for individually designed items, such as designer dresses and suits and for repair work.

ii. Preference of consumers:

For some personal services, such as hairdressing, consumers prefer small firms. Such firms can cater to their individual requirements and can provide a friendlier and more personal service.

iii. Owner’s preference:

The owner (or owners) of a firm may not want it to grow. People who own and run firms have various motives. Some may want to avoid the stress of running a large firm and may be worried that expansion the firm may lead to loss of control.

iv. Flexibility:

Despite the advantages of large firms, small firms may survive because they may be able to adjust to changes in market conditions more quickly. A sole trader, in particular, is likely to be in regular touch with his or her customers and should be able to pick up on changes in their demand. He or she can also take decisions more quickly as there is no need to consult with other owners.

v. Technical factors:

In some industries, little or no capital is needed. This makes it easy for new firms to set up. It also means that technical economies of scale are not important and small firms do not suffer a cost disadvantage. The lower the barriers to entry, the more small firms there are likely to be, in the industry.

vi. Lack of financial capital:

Some firms may want to expand but they may lack the finance required to do so. As mentioned in the beginning, it may be difficult for sole traders to raise financial capital.

vii. Location:

If a product is relatively heavy in relation to its value, transport costs can form a high proportion of total costs. This can lead to emergence of local, rather than national markets and such markets can be supplied by small firms.

viii. Cooperation between small firms:

For example, small farmers may join together to buy seeds, foodstuffs and equipment such as combine harvesters.

ix. Specialisation:

Small firms may supply specialist products to, and distribute the products of, larger firms. For instance, a relatively small firm may provide training services for a large accountancy firm.

x. Government support:

Governments in many countries provide financial help and advice to small firms. This is because small firms provide a high number of jobs, develop the skills of entrepreneurs and have the potential to grow into large firms.

Submitted by : Dr. Maverick, Category : Economics, Tag : Firms