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Study notes

Small businesses

  • Levels: AS, A Level, IB, BTEC Level 3
  • Exam boards: AQA, Edexcel, OCR, IB, Eduqas, WJEC

This study note considers smaller businesses and how they survive and thrive in markets dominated by large, scaled competitors.

Over time there is a trend towards larger scale businesses because of the pressures of competition; the need to achieve economies of scale and the lasting effects of mergers and takeovers which leads to a consolidation of market power.

However there are plenty of examples where businesses are de-merging and divesting themselves of some of their existing assets. And even in industries where giant businesses dominate the market place, there is frequently room for smaller firms to compete and survive profitably.

How can smaller businesses remain commercially viable?

  1. Many smaller businesses act as a supplier / sub-contractor to larger enterprises especially in the construction industry and in sectors such as software coding / web design.
  2. They might take advantage of a low-price elasticity of demand (PED) and high income-elasticity (YED) for specialist ‘niche’ or ‘bespoke’ products that can then be sold at a higher price with a larger profit margin.
  3. Smaller businesses can avoid internal diseconomies of scale (which lead to rising long run average cost).
  4. Many smaller businesses run as lifestyle enterprises where owners are looking to satisfice not maximize profits.
  5. Small businesses are often innovative, flexible and nimble in responding to changes in market demand
  6. Small businesses have benefitted from consumers willing to buy online – the barriers to entry into the market have come down because of low-cost digital technologies.
  7. Small businesses keep over-head costs low by having a smaller full-time staff or relying on leasing equipment
  8. All firms – regardless of size – can benefit from external economies of scale especially if located in cities. These external economies of scale can help to lower the costs of running a smaller business.

Background on smaller businesses in the UK

According to data published by the House of Commons Library (December 2018):

  • In 2018, there were 5.7 million businesses in the UK
  • Over 99% of businesses are Small or Medium Sized businesses – employing 0-249 people
  • 5 million (96%) businesses were micro-businesses – these are businesses employing 0-9 people. Micro-businesses accounted for 33% of employment and 22% of turnover.
  • Large businesses (defined as those employing in excess of 250 people) accounted for 40% of employment and 48% of turnover.
Number of people in employment in businesses in the United Kingdom (UK) in 2018, by employment size (in 1,000s)

5 key reasons why firms may choose to remain small

  1. Lifestyle choice of the owner(s) - maintaining a sense of control over work-life balance
  2. Desire to keep overhead (fixed) costs to a minimum
  3. Avoiding the costs involved in meeting regulatory burdens associated with bigger businesses
  4. Maintaining quality control over the good or service provided
  5. Keep a high level of flexibility an adaptability to respond to changing market conditions

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