Small Firms as Economic Giants

Small Firms as Economic Giants
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Table of Contents3 1.0 Small firms as Economic Giants3 1.1 Introduction3 1.2 Why BIG is always considered BETTER4 1.3 Maximization of Profits as a reason for companies to grow bigger6 1.4 Small Firms6 1.5 Economic role of small firms7 1.6 Use of innovation to keep small firms remain competitive7 1.7 Conclusion9 Reference
1.0 Small Firms as Economic Giants
1.1 IntroductionOne of the most influential economists of the 20th century and a Nobel Prize in Economics laureate Ronald Coase once posed the questions - "Why is not all production carried out by one big firm?" and "Why is there any organisation?" he asked these questions because he puzzled by the existence of both large and small companies at the same time (Coase, 1937). If being large has got huge advantages, then it would be assumed that all the companies in existence around the globe would eventually merge and the existence of one huge company that has got more than three billion employees realised. However, that has never been the case. It implies that organising economic activities in large companies makes no sense at all. This notion too begs another question; if so, why then are people not self-employed? Furthermore, why do we have companies in existence today? The common notion amongst people is that companies are becoming fewer and larger at the same time. The belief is that the business world is slowly experiencing corporate power concentration into a minority of global behemoths (this fact has however not been substantiated). Joseph Stigler opines that if in business size does really matter, then most of the small companies would cease to exist. The smaller firms would loose in the unequal rave against the big companies and therefore disappear. The United States for instance has got one of the most competitive and most dynamic corporate sectors in the world presently. During the past few decades, there have been many acquisitions and mergers and the trillions of dollars in assets changing ownership after industry consolidations. The companies have grown and so has the country`s economy. The big firms have in fact held a lion`s share of the country`s economy since the onset of the 1970s. Coase stated that companies can be of any size. There are no advantages and disadvantages in the size of a business firm. This paper is going to further this idea and show that a firm`s size is not an indicator of its success in the business arena. To achieve this, discussions on why ‘bigger` is always better will be discussed with the core elements on why firms think going ‘big` is the solution to survive the cut throat competition. Additionally the paper will advance the idea that, a small firm is also a better way to achieve greater heights in the business world if the proper areas are focused into correctly.1.2 Why BIG is always considered BETTERBig has always been considered better by business firms. One of the major ways of increasing a firm`s size as has been noticed currently is through mergers. The school of thought behind bigger companies and therefore mergers has been encouraged by the fact that when two companies are combined, less capital is needed. Furthermore, fewer employees are needed to cater for the new entity`s customers. Moreover, it is believed that after merger to form a bigger firm, new services and products will be introduced to the market and therefore serves the customers even more. Additionally innovation is believed to increase after the merger. Another reason for mergers to form bigger companies is the belief that the industry being affected will change its behaviour. The main intention is to create monopolies or near-monopolies. The businesses do hope that by merging they will increase and improve industry dynamics. Another significant driver for targeting of bigger firms is the managerial self-interest. Most of the firms managers want to increase their firm`s size not merely on economic arguments basis, but empire building are their main thirst. These managers push their firms to grow beyond their optimal size. Consequently, the level and amount of resources under the control of these business managers works towards increasing the business mangers powers. Furthermore, it works towards the manager`s advantage as it ensures that the business managers are well compensated. This has been the case especially in countries where there exists inefficiency in their capital markets. This has been the case in some of the European countries. For instance German banks had for a couple of years had quite substantial industrial holdings. To date some of the Bundeslander dominated banks possess the same holdings. 1.3 Maximization of Profits as a Reason for Companies to grow BiggerThe most prominent reason given by firms aspiring to increase in size is capitalization or maximization of profits. In relation to mergers as a way of increasing the size of a firm, the financial motives do underpin the mergers after all. These mergers from their onsets way back in the 1960`s when they become more popular, were created as financial engineering legerdemain products. Not much though was put when acquiring the mergers. The only thing that really mattered was whether their combined financial statements seemed attractive. This created conglomerates which never made sense from an industrial perspective. With such conglomerates gone, most managers and corporate leaders have ceased initiating mergers and growing their companies based on the financial aspect alone. For a business to maximise on the profits, there are a lot of things that have to be considered. For instance it has to make sure that it has got the right number of employees, adequate market value, proper and enough materials and equipment to sustain the level of production. Additionally the firms have to reduce expenditure on the work force they have in their firms. As a business rule, it is mandatory for a firm to take good care of its human resource. This way a linkage is maintained between the clients and the employees of the company and subsequently the business relationship with the client is maintained. This way, the long-time profitability is maintained. The effects of maximising on profits do create a lot of side effects which eventually harm a business in the long run. As an institution grows in size it becomes more complex and issues on how to manage it do arise. It creates what is referred to as welfare bureaucracy. This is basically the expression of organisational rationalisation. The evolvement of the bureaucracies is seen as a very efficient and predictable way of controlling people. Truth be told, it does increase efficiency as it helps in streamlining process. That means it assists in dealing with clients in a more efficient way. Additionally it gets the customers to help in doing some of the work a company would have paid for. For instance if the business is a fast food firm, it could get the customers to perform self-service instead of hiring waiters. Taking the same example of a fast food firm, a menu for instance provides very limited choices and this makes the employees work easier. Furthermore, it ensures that the company pays low wages as it does not need to further train its workers. All this is beneficial, but this benefit is directed towards the company in its highest percentage. What the business forgets is that this kind of arrangement offers little or no advancement opportunities to the workforce. It is associated with low wages, minimum or nil job security and the ability to maintain human capital is almost absent too. The profit oriented firms ask for more work output from its employees. What they fail to understand is that this diminishes the creativity of the employees which is central in the long time profitability of the company. The models (business) that are all about increasing sales (hence profitability) means that the employees are all scripted or jobs being specialized. Therefore as said earlier zero room for creativity...