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Module 10 (5.2 (Why firms may want to remain small (Concentrate on niche…

- - - - Size of capital
        
        The capital invested by the owner determines the size of business. It is mainly used to compare
        two firms or more that are producing similar or differentiated products. It is an important factor
        because it determines how little of how much you will be able to do in your business.
        If a business has limited capital, it is limited in terms of the volume of sales, services to be
        rendered, number of employees to be appointed and the level of technology to be employed in
        its operations
      - Number of
        employees
        
        The number of employees employed by any business determines its size. In the case of a small
        sole trader the owner will do all the work him/herself and possibly appoint a receptionist who
        will do the administrative duties. In a large sole trader with different sections the owner will
        need more personnel to be responsible for different tasks. One of the aspects one can look at
        when comparing businesses is the wages paid to employees.
      - Volume of
        sales
        
        High volume of sales = business have many clients and selling large amount of goods/rendering
        a lot of services.
        Business with high volume of sales are usually regarded as big. It is also assumed that the capital
        contribution will be high, buildings are bigger and more staff will be employed than in a small
        business.
      - Level of
        technology
        
        The technology used can also give an indication of the size of a business. Is production done
        manually or by means of machinery? Does the business have a sophisticated computerised cash
        register system or just an ordinary cash register or a money box? If we have a small business
        with only a few customers and little capital, it is not necessary to have state-of-the-art
        equipment.
      - Raw materials
        used
        
        The annual consumption of raw materials of any firm determines its size. The raw materials is
        used to determine the size of the business where firms are producing similar products.
      - Legal form of
        ownership
        
        This is the form in which the business is registered. A sole trader business most probably will be
        the smallest business, unless the owner has lots of capital and employ many people, while a
        partnership with a maximum of twenty partners or a Close Corporation will be much bigger.
  - - - Small niche markets may have less competition and therefore be more profitable. Moving into a mass market may make competition more intense. Niche markets such as handmade products can have a more price inelastic demand; therefore firms can charge a bigger markup on the marginal cost of production. This enables the firm to be more profitable, despite lower volume.
    - - In some goods like clothes, there could be an advantage to 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.
    - - Related to the previous point, small local firms can take advantage of their local knowledge and local profile. Consumers gain utility from supporting ‘local small businesses’
    - - In the car industry, there are a small number of relatively big firms as economies of scale are very significant. But, in some industries like coffee shops, economies of scale are relatively insignificant. There may be dis-economies of scale in expanding production. Therefore, it is not a competitive disadvantage to retain low output.
    - - Not all firms aim at profit maximisation and increasing market share. Some owners may prefer a business that is manageable and easy to retain control. Expansion may involve listing on the stock exchange which makes you liable to shareholders. If people work in small firms, they may get more joy because they feel in control and have a close connection with customers. Owners may create a business that is also a hobby. Therefore, they would prefer to keep the firm small and avoid spending their time on management and paperwork.
    - - In the UK there is a VAT threshold of £83,000. Once firms increase turnover above this, they are liable to paying VAT and filing in VAT returns. This can be a disincentive for a firm to grow. Also, as firms grow and employ more workers, it leads to national insurance contributions. For some small business owners, the cost and time of filing tax returns can be as cumbersome as the tax.
- - - - Flow production is capital intensive. This means it uses a high proportion of machinery in relation to workers, as is the case on an assembly line. The advantage of this is that a high number of products can roll off assembly lines at very low cost. This is because production can continue at night and over weekends and also firms can benefit from economies of scale, which should lower the cost per unit of production.
    - - The main disadvantage is that with so much machinery it is very difficult to alter the production process.
        This makes production inflexible and means that all products have to be very similar or standardised and cannot be tailored to individual tastes.
        Another disadvantage of using flow production is that the work can be pretty boring for employees involved. Keeping staff motivated is therefore an important issue for management.
  - - - Batch production where groups of items are made together. Each batch is finished before starting the next block of goods. For example, a baker first produces a batch of 50 white loaves. Only after they are completed will he or she start baking 50 loaves of brown bread.
      - Flow production where identical, standardised items are produced on an assembly line. Most cars are mass-produced in large factories using conveyor belts and expensive machinery such as robot arms. Workers have specialised jobs, for instance, fitting wheels.
      - Job production where items are made individually and each item is finished before the next one is started. Designer dresses are made using the job production method.
- - - - Once a business has set standards for quality, it can then measure whether or not these have been achieved.
        
        A hospital might set targets for the length of time patients are kept waiting before being seen, how long it takes to treat patients, and how many operations are successful.
        
        An airline might set targets relating to the percentage of planes taking off on time or landing on time, the percentage of people who have had their bags lost and customer satisfaction ratings of the quality of service on the plane.
    - - Make sure its suppliers are reliable and that the products they use are of good quality and meet their needs.
      - Train staff so they know how to do their jobs properly and what the desired standards are.
      - Invest in equipment so that staff have the equipment they need to do their job well.
      - Inspect the products at each stage of the production process to make sure there are no defects. This is cheaper than finding them at the end of the process.
      - Involve staff in improving the production process (for example, through kaizen groups) to find ways of doing things better and removing errors.
  - - - The cost of recalling faulty products- customers must be told of any mistakes and the business must pay to get the products handed back in.
      - The cost of replacing goods- new items may have to be produced to replace the faulty ones.
      - The cost of waste- faulty products will need to be thrown away.
      - The cost of goods that are produced that nobody wants so they do not get sold.
      - The cost of legal action if the business is sued for poor quality.
    - - The costs of inspection and checking.
      - The costs of training staff to check their own quality.