What’s it? Business size refers to the size of a company’s operations. It can be measured by several indicators, including assets, revenue, production, market capitalization, number of employees, and capital invested.
Business size matters. It can affect a company’s competitive capacity. For example, large companies have large resources to support competitiveness. In addition, they benefit from higher economies of scale, which are not present in small companies. As a result, they enjoy lower costs while increasing their output.
Why business size matters
Large businesses have large capital and resources to grow. As a result, they have better economies of scale, allowing them to be more efficient. Large resources also support a strong market position and greater bargaining power with customers and suppliers.
Large businesses provide more output and jobs for the economy. Their influence on the economy is even greater if they operate in the financial industry.
Take banks, for example. As they get bigger, they become more strategic for the economy. They play a major role in driving the economy through their role as loan providers. As a result, if one big bank fails, it can shake up the economy. For this reason, governments usually issue bailouts only to prevent major bank failures.
Furthermore, stakeholders often consider the business size when making economic decisions about a company. Here are some examples:
Customers often view large companies positively. They see large companies tend to have high quality to maintain their reputation and positive image. On the other hand, companies care about maintaining quality because they don’t want their reputation ruined. With greater economies of scale, they are also more likely to offer lower prices.
Investors consider the business size when allocating investment to a company’s stock or corporate debts. They may perceive large companies as safer because they have large resources, which allows them to have a competitive capacity and ability to make large money.
Workers are also more comfortable working in large companies because they offer better opportunities, including salary or professional career paths. In addition, they are also considered to offer more job security than small companies because they are more competitive.
Governments may charge different tax rates depending on business size. Size may also be a consideration when providing subsidies or grants.
Creditors consider business size to determine a company’s borrowing capacity. Large businesses have a higher borrowing capacity, making it easier to seek funding from banks or the capital market.
Suppliers prefer large companies because they are more likely to get large orders, enabling them to achieve higher economies of scale.
How to determine company size
Several indicators to determine company size, including:
Number of employees: This is a straightforward indicator – the total number of people employed by the company. Generally, larger companies require a bigger workforce to manage complex operations.
Revenue: This refers to the total income generated by the company from its sales activities. Revenue is a key metric for gauging a company’s business size and overall financial health. It provides a snapshot of the company’s ability to generate sales and translate them into income.
Production: While not applicable to service-based companies, production volume is a relevant metric for manufacturing businesses. It reflects the quantity of goods produced within a specific timeframe.
Amount of invested capital: This refers to the total financial resources available to a company. It can encompass equity capital (funds invested by owners), debt capital (borrowed funds), and physical capital (property, equipment, etc.). A higher amount of capital employed often signifies greater operational capacity.
Market capitalization: This metric applies only to publicly traded companies. It represents the total market value of all outstanding shares, calculated by multiplying the current share price by the total number of shares issued.
- Market capitalization = Company’s share price x Number of shares outstanding
The most relevant metric for determining company size can vary depending on the industry and context. For instance, employee headcount might be more insightful for a labor-intensive service industry, whereas revenue might be a better indicator for a capital-intensive manufacturing company.
Classifying business size
The four common categories of businesses based on their size are:
- Micro-sized business
- Small-sized business
- Medium-sized business
- Large-sized business
The classification may differ between institutions and between countries. Each institution has different categories and definitions. Some may use the number of employees as a basis for categorizing. While others may use turnover or revenue. In Indonesia, for example, the Central Statistics Agency categorizes businesses into:
- Micro-sized business: 1-4 workers
- Small-sized business: 5 – 19 workers
- Medium-sized business: 20 – 99 workers
- Large-sized business: 100 or more workers
Meanwhile, the OECD uses the following categories:
- Micro-sized business: less than 10 employees
- Small-sized business: 10-49 employees
- Medium business: 50-249 employees
- Large-sized business: more than 250 employees
Furthermore, the European Commission combines the number of employees and turnover to categorize businesses:
- Micro-sized businesses: less than 10 people and have an annual turnover of not more than €2 million.
- Small-sized business; less than 50 people and have an annual turnover of not more than €10 million.
- Medium-sized businesses: less than 250 people and have an annual turnover of not more than €50 million.
- Large-sized businesses: 250 people or more and have an annual turnover of over €50 million.
In the United States, the Small Business Administration (SBA) classifies businesses into three categories:
- Small-sized business: annual revenue of less than $38.5 million and no more than 1,500 employees.
- Medium-sized businesses: annual revenues between $38.5 million and $1 billion and 1,500 to 2,000 employees.
- Large-sized business: over $1 billion in revenue and over 2,000 employees.
How business size impacts competitiveness
Here’s how the size of a business can influence its ability to compete:
Economies of scale: Larger companies often benefit from economies of scale. This means they can produce goods or services at a lower cost per unit due to bulk purchasing power.
Imagine a company that buys raw materials in massive quantities. They can negotiate a significantly lower price per unit compared to a smaller company buying smaller batches.
Additionally, large companies can invest in efficient production processes, like automated assembly lines, which further reduce costs per unit. This cost advantage allows them to undercut smaller competitors on price.
For example, a large clothing manufacturer might be able to offer lower prices due to economies of scale, making it harder for smaller, independent clothing brands to compete solely on price.
However, smaller companies can find other ways to compete, such as focusing on niche markets or offering unique, handcrafted products. Alternatively, large companies can reinvest the savings from economies of scale in further growth initiatives, like expanding their product line or entering new markets.
Resource advantage: Bigger companies typically have access to more significant resources, which fuels their competitive strategy in several ways. This can include financial resources for research and development, marketing budgets to reach a wider audience, and a larger talent pool to recruit skilled employees.
Take, an example, a large tech company with a significant budget for research and development. They can invest in creating innovative new products and technologies, giving them a competitive edge over smaller companies with limited R&D resources.
Additionally, larger companies often have larger marketing budgets, allowing them to launch extensive advertising campaigns and build brand awareness on a national or even global scale. This can make it difficult for smaller companies to get their message heard by potential customers.
Finally, large companies can attract top talent by offering competitive salaries, benefits packages, and career development opportunities. This access to a wider pool of skilled employees allows them to build stronger teams and develop innovative solutions.
Business size and legal structure: Choosing the right fit
The legal structure chosen by a business significantly impacts its operations and growth potential. However, the optimal structure often depends on the company’s size. Let’s explore the common scenarios:
Sole proprietorships and partnerships
These structures are typically suited for smaller businesses with limited resources. Their simplicity makes it easier to manage all essential business functions, particularly for businesses with just a handful of employees. This allows the owner(s) to wear multiple hats and oversee various aspects of the business, such as marketing, sales, and even some production tasks.
For instance, a local bakery run by a family might operate as a sole proprietorship, where the owner has complete control over decision-making. However, this structure has limitations:
- Restricted access to capital: Sole proprietorships and partnerships cannot raise capital by selling shares to a wider pool of investors. This can hinder growth potential if significant funding is needed for expansion.
- Limited liability protection: The owner’s personal assets are not separate from the business, meaning they could be at risk if the business incurs debt.
Corporations:
Corporations are a better fit for larger businesses seeking growth and expansion. They offer several advantages:
- Easier access to capital: Corporations can raise capital by selling shares on the stock market, attracting a wider pool of investors. This provides the financial resources needed to fuel growth initiatives.
- Greater liability protection: The corporate structure separates the owner’s personal assets from the business. This means that shareholders’ liability is limited to the amount they invested in the company.
- Facilitates growth: A corporate structure facilitates mergers and acquisitions. By combining resources with another company, corporations can expand their market reach, product portfolio, or production capabilities.
Growth strategies tailored to business size
The size of a business is a major factor influencing the growth strategies it can effectively implement. Here’s a breakdown of how different business scales can approach growth:
Large businesses: Leveraging scale and resources for growth
Large businesses possess a significant advantage when it comes to growth. Their economies of scale enable them to produce goods or services at a lower cost per unit. This translates into investable capital that can be directed toward various growth initiatives:
- Product line expansion: By leveraging economies of scale, large businesses can invest in research and development to create new product lines, potentially entering entirely new markets or expanding their offerings within existing markets. This allows them to capture a wider customer base and diversify their revenue streams.
- Technological innovation: Large businesses’ financial resources allow them to make significant investments in research and development. This fosters innovation, allowing them to develop cutting-edge technologies that enhance existing products or create entirely new ones. These advancements can lead to a competitive edge and attract new customer segments seeking the latest innovations.
- Global marketing campaigns: Large companies have the financial muscle to launch extensive marketing campaigns across various media platforms. This allows them to build brand awareness on a national or even global scale, significantly increasing their customer reach.
- Strategic acquisitions and mergers: Large corporations can pursue inorganic growth strategies by acquiring smaller companies or merging with competitors. This allows them to consolidate market share, acquire valuable resources and expertise, and potentially eliminate competition.
Small businesses: Resourceful growth strategies for limited means
While large businesses enjoy economies of scale and vast resources, starting a small business requires a different approach. For the entrepreneur, limitations can breed innovation. Small businesses can excel by focusing on specific areas:
- Customer acquisition through targeted marketing: Small businesses can leverage digital marketing tools and social media platforms to launch targeted marketing campaigns that reach their ideal customer segments. This allows them to compete effectively with larger companies by focusing on a specific niche market and tailoring their message to resonate with those customers.
- Product development for niche markets: Small businesses can develop products that cater directly to niche market needs by intimately understanding their specific customer base. This focus on specialization can create a loyal customer base that values the unique offerings a small business provides.
- Geographic expansion within a region: Small businesses can achieve growth by strategically expanding their operations within a specific geographic region. This might involve opening new brick-and-mortar locations or expanding their online presence to reach a wider local customer base.
- Strategic partnerships with other small businesses: By collaborating with other small businesses in complementary industries, they can combine resources and expertise. This can lead to benefits like expanding product offerings, entering new markets, or leveraging each other’s customer base for cross-promotion.
