Despite the benefits of being a small business, many large businesses are extremely successful and thrive for several important reasons.
Large firms are usually huge multinational corporations employing hundreds of thousands of people in many different countries around the world such as McDonald’s or Walmart. According to the EU classification of business size, a large business hires over 250 employees, generates over EUR€50,000,000 in sales and owns capital employed over EUR€34,000,000.
Advantages of large businesses
Advantages of being a large company include:
- Easier to raise finance. Large businesses usually have better access to capital as they have access to several different sources of finance such as issuing debentures, sale of shares to the general public on the stock exchange or access to long-term bank loans. It is also easier to raise capital at lower interest as big businesses borrow huge amounts of money at once.
- Better managed. The owners (shareholders) of big firms do not have to carry a large burden of daily responsibilities. It is because large businesses can afford to employ specialist professional managers to run each business function.
- High market powers. Large businesses have higher brand recognition and customers are more familiar with the brand which allows large firms to sell to a wider market. Many firms are large and established enough to have global brand recognition and better brand reputation as they have positive brand image created through advertising to the mass market. Better branding leads to higher customer loyalty as customers are likely to remain loyal to the business and its products due to the perceived trust and value for money.
- Many opportunities for economies of scale. Large businesses can benefit from the cost reductions associated with large-scale production. Larger firms are also able to offer customers lower prices or greater price discounts through their ability to enjoy economies of scale, therefore achieve better profitability. They may also be able to set lower prices than other firms on the market.
- Greater choice for customers. Large businesses can offer more value-added services to their customers as they have ample resources to provide a wider range of services, e.g. longer opening hours or interest-free credit instalments. Big companies such as eBay.com, one of world’s largest online retailers that sells a huge range of consumer products on the Internet, can offer more choices comparing to a small local retail store.
- Less risky. Large businesses are very well-diversified in several markets, countries and products, so that risks are spread. Big firms are more likely to be able to afford Research and Development (R&D) into new products and processes. And thanks to that diversification, there are lower risks of negative impact of unpredictable changes in the external business environment.
Disadvantages of large businesses
Disadvantages of being a small company include:
- Formalized and stiff corporate culture. Corporate culture in large businesses is often formal. Many employees may not be well-motivated by the overload of procedures to follow every day. Also, employees do not perform multiple roles but specialize only in a very small area of expertise. In addition, it is more difficult to get to know each worker and many employees suffer from working for a large firm without ‘human-friendly’ atmosphere. Because there is divorce between ownership and control – meaning that it is directors and managers, but not the owners who make important decisions – there are more opportunities for stakeholder conflict.
- Difficulties with cost control. Large businesses are rather impossible to be managed and controlled only by their owners. Managers, who run large companies, may want to expand since they will face lower unit costs as their organizations grow, hence higher profitability. Large scale operations can mean that a firm encounters diseconomies of scale due to problems of control, coordination and communication. Also, big businesses are more difficult to manage because they are often geographically spread across time zones, cultures and working styles.
- More financial risks. Owners of large businesses cannot easily manage and control business finances since the costs of running a large global business are huge, e.g. the costs of Research and Development (R&D), marketing expenses, or recruitment and training of hundreds of workers. Business growth requires extra borrowing costs and there might be potential cost increases associated with large-scale production, therefore the financial risks are also high.
- Government aid not available. Large businesses may not qualify for financial support in the form of grants and subsidies offered by the local and national governments. Funds for employee training which are often available for small businesses which provide employment opportunities in the local community may not apply to big firms which are already more competitive.
- Difficult to localize. Large businesses may not be willing to locate in remote areas due to a small number of customers, therefore they are not able to benefit from being the only firm in a particular location, e.g. a local fish and chips restaurant or a franchised fast food restaurant located in a small city. Large businesses are not that interested in gaining access to smaller local markets because they do not find it financially worthwhile to compete with these small local firms, and the number of customers is small too.
- Less personalized services. Large businesses usually do not offer personalized services to customers as they are less likely to have the time to do so. For example, sales staff at large department stores are not able to get to know its customers better as workers are pressurized by achieving high sales targets. Another example can be large supermarkets which rely on a high number of customers being served every day with some shops even using self-checkout services to speed up the payment process.
- Poor flexibility. Large businesses tend to be less flexible and adaptive to change. They are often not able to respond quickly to meet changing customer needs and wants. Also, big multinational firms offer standardized products which cannot be easily changed per customer order such as a cup of Latte coffee at Starbucks, the bottle of coke from The Coca-Coca Company or a BigMac hamburger from McDonald’s. Additionally, large businesses have certain contractual commitments which combined with meeting different objectives of various stakeholders can reduce their ability to change.
The official definitions for micro businesses, small businesses and large businesses are easily discoverable from the trade and industry department in your own country. If you would like to find out more about classification of businesses by size of the company, you can check the following story I wrote a while ago called Classification by Size of the Business: Micro Companies, Small Companies and Large Companies.
