Why do some firms remain small?

Question

in general and with examples(if posible)

Answer 1

In the traditional Marshallian framework (homogeneous product + no substantial legal or institutional barriers to expansion), firms remain small only because there are no economies of scale. A good example are gas stations; owning two (or even twenty-two) gas stations gives you no cost advantage.

Obviously, if the assumptions of the basic Marshallian model are broken, firms may remain small for reasons that are related to those assumptions.

For example, car repair is not a homogeneous product because it often involves trust issues (people tend to take their cars to mechanics they trust). As a result, automotive repair businesses are generally small. A related observation is that consolidation and franchising were successful only in more commoditized segments of the repair market (oil change in particular).

An example of legal barriers would be German pharmacies. In Germany, drugstore chains are illegal, so pharmacies remain independently owned and operated and, as a result, generally small.

One institutional barrier is capital availability. Generally speaking, you need capital to grow. But capital is expensive if raised on a small scale (transaction costs are relatively high)...

Answer 2

There are two main issues for growing a business:
Whether there is a desire to grown and whether there are abilities to grown?

Some business owner do not wish to grow their business. Rather than having business consuming their lives, they only wanted to make, in their mind, enough money or provide the kind of services/goods that a smaller company could. You could also find family businesses (i.e. Mars Brothers maker of Mars bars) do not grow as much because management do not wish to bring outside people to manage the company. So the desire, or rather lack of desire, is the first reason why some firms remain small.

Even if management of a firm have the ambition to grow the business their are many reasons why the growth can't be achieved. Most common reasons are: no sufficient market (or demand) for the product/service at the time and poor management. One could argue that Mars Brothers hasn't grown as quick as M&M or Hershy because of poor management (executives controls all the power rather than including outsiders for fresh ideas).

Answer 3

Bigger is not always better. Bigger means higher payroll, higher taxes, higher overall overhead. It's better to take care of what you have than to try to take on more than you can handle. Look at some of the huge conglomerates and what is happening to them. They get so huge, they have to subsidize in order to maintain, in other words, break down into smaller separate companies to be more efficient and productive.

Answer 4

Lack of economies of scale. In some cases, diseconomies of scale. An example is the trucking industry.

Answer 5

Some individuals starting a business, have limits in mind which exceeding, would make them uncomfortable! They are the reason their businesses will never be anything but small.

Answer 6

All firms don't have to grow. Perhaps they don't have enough resources to do so.