Why some businesses want to grow and other businesses remain small?
Growth is a long-term objective of most businesses. However, some firms never grow and remain as small businesses forever. Here are a few factors that explain why some businesses do not have growth as the main objective.
1. The owner’s personal choices
Businesses start off small trying to survive in the first year of operations. Then, as they become more established on the market having their first customers, their owners usually want growth and profit maximization. But, this is not always the case.
A. The owner does not want the responsibility and workload of managing a large business. This is often very common among owners of small businesses who want to live comfortably and enjoy time with their families. It is a lifestyle choice. Some business owners do not want to work too much in order to earn more money. They focus on profit satisficing instead. Profit satisficing means aiming to achieve enough profit in order to live a comfortable life to keep the owners happy. Being comfortable with a certain amount of profit, although it does not have to be maximized at all cost. Once a satisfactory level of profit has been reached, the owners consider other things as a priority.
B. The owner wants to keep total control of the business. He or she fears that business growth will reduce the level of control over important decision-making and daily management. When expanding output to the point where profits are maximized, more workers need to be hired, as well as managers who will be making crucial decisions.
C. The owner wants to maintain a close relationship with customers. Small businesses usually provide very personal services, and the owners are happy to do so. Larger businesses usually sell standardized products to hundreds or thousands unknown customers.
D. The owner does not want to take risk. To grow the business, often additional capital must be borrowed to pay for expansion plans. If profits do not increase, the business may not be able to finance its borrowing. Then, the business will not survive. Also, the owners of unincorporated businesses, such as sole traders and partnerships, have unlimited liability for the debts of the business. So, the owners do not want to gamble to see whether the business will be successful at the maximum use of resources. Otherwise, they will have to use their own wealth to pay business debts.
2. Small market size
Some businesses have increasing market share for market dominance as a main business objective. However, many businesses that serve customers in a local market, or sell goods that are highly advanced and expensive, will operate in markets that are small in size. Examples of markets with small size include hairdressers or dentists. These are highly-specialized professionals who only serve customers in the local area. They may not want to offer their services beyond the local neighborhood as they may not want to travel, if they also have their business in another place.
Also, businesses operating in small markets are likely to struggle to compete financially against companies from larger markets. Firms from larger markets are more competitive as they outbid the competition for top talents.
Example 1: A specialist wedding cake maker who sell hand-made wedding cake may want to stay small because the demand for this kind of good is relatively small, limited to mainly a few couples per month who are getting married. Therefore, the cake maker will only sell a few expensive wedding cakes per year.
3. Limited access to and availability of capital
Another important factor influencing growth is the access to and availability of capital to finance business growth plans. This is probably the most important factor that prevents businesses of this type from expanding. One of the disadvantages of small businesses is the difficulty they have in obtaining loans from banks and other lenders. Many small firms are struggling to raise the money they need to expand. The Federation of Small Businesses (FSB) in the UK found that 42% of those who applied for a loan said they were turned down.
Raising capital is never an easy task and often requires a lot of determination and patience. One of the reasons why so many small companies have difficulties in raising finance is security. Banks often require entrepreneurs to have security for a loan. A small company often does not have that kind of assets such as land or buildings on which to secure a loan.
4. Market dominated by large players
Many industries are dominated by a few very large companies such as food and beverages, oil and energy or banking industries. It makes it very difficult for smaller businesses to compete with the industry giants which often enjoy the benefit of internal economies of scale.
Market domination often means that consumers have a brand loyalty to the larger business that can offer lower prices than smaller firms. The oligopolistic, or even monopolistic, nature of many markets dominated by a handful of heavyweights which have established relationships with major customers makes it extremely hard for start-up firms to compete.
Example 2: Top four companies in the search engine industry own together as much as 98.5% market share. Major companies include Google owning 64.1% of the market, Yahoo owning 18.0% and Microsoft owning 13.6% of the market.
Example 3: Although there are 26 currently licensed universal banks in Ghana and others hoping to join the sector, the market is dominated by six lenders. Between them they have a 51.2% overall share when ranked by assets, although the fact that this has slid from 62% in 2007 indicates the extent to which the market is becoming more competitive.
You can check more about Top 10 Highly Concentrated Industries in the United States.
Remember, most of the businesses choose to expand, but there are still some that prefer to, or have to, remain small.
