Small and Medium-Sized Firms

1.  Economies of scale are characterized by decreases in the average cost of production with increases in the levels of production.  These are especially enjoyed by firms that are expanding their operations in terms of managerial activities, purchases, financial borrowing and marketing operations (Economies 2007).  Small firms usually can play a crucial role in equitable development and economic growth, especially in the developing countries, and mainly through poverty reduction, employment creation, and broad distribution of opportunities and wealth (Elliethy, A 1992).  Just the same these firms’ great potential is not usually realized because of the problems of isolation and size.  In most cases, small firms do not achieve economies of scale in purchasing the inputs, and are therefore unable to avail the market advantages in terms of regular supply, high levels of production and those of homogeneous products.  Isolation is a big limit for these firms since it affects factors such as training, logistics, market intelligence, as well as innovations.  Small firms normally maintain a small profit margin since they cannot afford to invent new processes and products most of the time as the larger firms with their special Research & Development units.  Rather, small firms may only gain a competitive position in the markets through networking.  Evidence from both developed in addition to developing countries shows that networking is only possible if small firms have common interests such as similar products and challenges (Landström, H 2005).

There are two kinds of economies of scale: internal economies of scale and external economies of scale.  Internal economies of scale can be enjoyed when the output of a small firm increases, perhaps due to governmental subsidies that lower the unit cost of production.  Because fixed costs are shared by the number of units produced by a firm, a small firm that increases its production capacity will enjoy internal economies of scale.  Furthermore, a small firm that increases its production capacity may enjoy discounts from its suppliers, referred to as bulk-buying or purchasing economies.  This firm may also take loans at lower interest rates from the banks – referred to as financial economies.  Additionally, a small firm that increases its production capacity may enjoy managerial economies as it hires more people and avails the advantages of division of labor.  Another advantage of increasing production capacity – referred to as indivisibility – may be availed when a small firm changes its machinery and/or processes to replace the older ones and thereby accommodate the larger production capacity (Rodda, C 2004).

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While larger firms are understood to be more economical than smaller firms, a small firm may enjoy external economies of scale when the output of the industry is increased.  As the production capacity of the industry increases, the number of trained workers also increases.  In point of fact, the government may provide special training to the labor force in this situation.  A trained labor force is definitely more economical than untrained workers.  Moreover, a small firm may enjoy external economies of scale when the production capacity of the industry increases and there emerge other businesses to support the growing industry.  Such firms may have their own competitors, and they too may enjoy economies of scale.  Most importantly, the industries that these supporting businesses form tend to reduce the unit cost of production for the small firm.  Lastly, small firms may enjoy external economies of scale when they cooperate with each other, for instance, to publish shared advertising material (Rodda, C).

2.  Market fragmentation entails a division of the market in more ways than one.  It commonly occurs that a given product may have the same quality and brand name but different prices in separate locations; this may arise due to the variance in the transportation costs and storage costs among other variable costs.  A product may similarly have the same brand name but varied qualities of it may be produced, thereby leading to a difference in prices.  All of these factors could lead to the market fragmentation.  This economic principle is closely related to market differentiation.  When the markets are fragmented, each supplier of a given product may enjoy limited economies of scale because the suppliers cannot collectively possess a common bargaining force.  This is because each of them is independent, but usually very keen to watch the actions of the other players in the market.  However, the uncertainties existing in this type of market do not increase external economies of scale.  The desire to produce a strong product typically involves making a product different from that of the fellow competitors, and this leads to fragmentation of the markets to boot.  Nevertheless, strong product differentiation is a key factor towards achieving a competitive advantage.  Product differentiation may include offering a product similar to that of the competitors, but of better packaging or quality.  This also enables the market to be fragmented, as the products in the market are similar to each other but differentiated or diverse.  Hence, consumers at different market niches are charged different prices.  Creative content and image is another key factor that may lead to market differentiation.  Creative content is related to innovation as it enables the seller to improve his products to allow them to attain a bigger market share (Sutcliff, M, & Sloman, J 2004).

3.  It is of vital importance to SME’s to evaluate the external environmental factors in the process of strategic analysis (Dubinas, V, & Stonkuviene, R 2005).  Systematic competitiveness involves viewing industrial competitiveness as an interaction of both macro and micro factors.  In systematic competitiveness, there are the meta and meso factors to be contemplated.  These factors may have a huge impact on the daily operation of the SME.  As a matter of fact, such factors also affect other businesses, and may include political forces, economic environment, and the legal environment.  The internal factors are also included for consideration in the systematic competitiveness model.  These may include the quality, efficiency and flexibility among other things (Sutcliff, M, & Sloman, J).  In short, a small or medium-sized enterprise must be aware of the competitive advantages of firms that produce goods that are similar to its own.

4.  Innovation is one of the tools used against the negative impacts of market fragmentation in the small firms; this is because innovation enables them to come up with better products that are equally competitive at all level in the market.  Innovation entails coming up with better products or with more efficient technology that could enable small firms to produce more efficiently.  Strong cost control is another tool against the negative effects of market fragmentation; this is because once the costs are carefully monitored, all the decisions made would be cost effective and production would always be efficient.  Cost benefit analysis could be of paramount importance to these firms, as it allows them to easily achieve price competitiveness.  Specialization similarly enables these firms to produce better products in a more efficient way.  Moreover, specialization allows small firms to do away with the products that are inefficient.  This enables them to continue on a certain line of production and improve as they become more experienced with time (Sutcliff, M, & Sloman, J).

5.  Heterogeneous oligopolies are market forms dominated by a small number of firms that know the likely activity of one another and usually deal with various types of products.  Heterogeneous oligopolists may produce different products which are similar in function but diverse in terms of quality.  Furthermore, a heterogeneous oligopoly may consist of both larger and smaller firms.  Interactivity is the main characteristic of the oligopolistic markets since there are a few sellers.  The decision likely to be made by one firm is influenced by the likely decisions of other firms.  Heterogeneous oligopolists may also influence the prices of the products of their competitors.  Strategic planning is crucial in heterogeneous oligopolies due to the high risk of collusion among the participants in the industry.

6.  There were 4,423, 500 firms in the United Kingdom in the year 2005.  Forty one percent of the working labor force was employed in micro firms.  In the small firms, 46.8 percent of the working labor force was employed.  In the small and medium-sized enterprises, 58.7 percent of the working labor force was employed (Small Business Analytical 2007).

7.  The following is a line graph showing the share of SME’s in total employment from 1994-2005:


The graph shows a tremendous increase in the employment of the small and medium-sized enterprises between 1994 and 2005.  This may have been due to an increase in the number of small and medium-sized enterprises in the United Kingdom, especially between 1999 and 2000.  The increase may have been due to a more conducive environment created by the UK government especially for SME’s, with the introduction of new regulations that help SME’s to lower their costs of production.  Such support from the government may specifically have included the offering of expert advice, training of the labour force, financial support or subsidies, and regulation of the markets such that small and medium-sized enterprises could easily enter and leave the markets at their own will, therefore resulting in an increase in SME’s, which in turn lead to an increase in the total employment of UK.

It is also possible that the small and medium-sized enterprises in the United Kingdom expanded their operations substantially between 1999 and 2000, and employed more people to accommodate the expanded scales of production because of subsidies introduced by the government especially for SME’s.  Of course, governmental support could have arrived for SME’s in other forms as well, e.g. regulations that made it easy for them to enter the industry and exist.

8.  Business, enterprise regulatory reform is one of the major policies aimed at offering the best support to the SME’s in the United Kingdom.  This offers all the necessary support to SME’s at the local, national and regional level; more so, it ensures that the government would continuously support the SME’s with expertise.  A good business environment is provided so that all entrepreneurs can utilize their opportunities. This ensures that the SME’s will grow with the full support of the regulatory authorities (Small Business 2007).

9.  The SME’s in Venezuela are likely to be revived.  The economic indicators of the country generally show a positive forward move.  The government has introduced measures to revive the SME’s through the offering of necessary information as well as better technology to enhance their production capacities.  Unfortunately, however, political and social tensions in the country are hindering the process.  These crises have also lead to increased inflation in the country, in addition to rising unemployment rates and decrease in the Gross Domestic Product (Mulhern, A, & Stewart, C 1999; Venezuela 2007).

10.  Explanatory variables are also called independent variables or controlled variables.  These variables manipulate the SME situation in Venezuela.  From 1961 to 1990, the following were the explanatory variables that had an influence on small and medium-sized enterprises in the country: the manufacturing share and the error correlation, barriers to entry, modernization of enterprises, the factor mix, GDP and the exogenous proxy variables (Mulhern, A, & Stewart, C).