9. Strengths and weaknesses of small Enterprise
 

As I indicated in an earlier item in this blog (item 4), small and large firms have opposite strengths and weaknesses. The strength of large business lies more in resources and their efficient use, and the strength of small business is more behavioural.

An obvious weakness of small business lies in (dis)economies of (small) scale. Those arise in all dimensions of enterprise: R&D, patenting, production facilities, purchasing, marketing and distribution, organization, transaction costs, risk diversification, and political influence.

In patenting there are fixed costs of the procedure, which are relatively high at small potential volumes of business. Also, the first time around the entrepreneur has to find his way through procedures.

In marketing and distribution there are economies of scale in the set-up or access of distribution systems, advertising and brand name.

In organization there is a staff lack due to the fact that full time specialized staff (e.g. for technical specialities, support, legal affairs, and marketing) are not sufficiently occupied at low volumes of business, so that those services have to be sourced outside.

In the preceding item in this blog I discussed effects of scale in transaction costs.

To the extent that the level of education of entrepreneur and enterprise is low, their capacity to absorb innovations developed elsewhere is limited. That sets back the diffusion of innovation that is in the interest of the firm, in order to keep up, and in the public interest, to achieve the diffusion of innovations that yields economic growth. 

An advantage of small firms lies in low costs of informal systems of supervision and control, because the entrepreneur often has direct visual control of the shop floor.

A related advantage lies in their potential for flexibility and specialty products. This is partly due also to direct contact between entrepreneur and customers. Flexibility is enhanced by speed of action, in the absence of a long chain of evaluation and decision making that arises in the deep hierarchies of large firms.

The isolated decision making of the entrepreneur also has the disadvantage of not seeing risks, but this may be covered by the use of an advisory board. As discussed in the preceding item, the fact that most knowledge, undocumented, is locked up as tacit knowledge in the mind of the entrepreneur increases transaction costs for outside partners. It also makes the enterprise vulnerable to the entrepreneur dropping out in accident, illness or sale of the venture.

The flexibility of operations and closeness to customers yields a competitive opportunity to focus on novelties or specialty products in niche markets. The small volumes of the latter yield less pressure to achieve economies of scale. However, concentration on few products in small markets limit the diversification of risk, enhancing the risk of default. Some differentiation of products, while maintaining coherence in a focus of specialized competence, may help here.

As noted in the previous item, the mix of the personal and the commercial yields a high commitment and willingness to absorb setbacks, needed especially under the uncertainties and vicissitudes of innovation. However, it may have an opposite, negative effect of discouraging risky ventures. 

The strong and weak points for innovation show up in empirical work. On the one hand small firms are less likely to engage in innovation, but when they do, they do so more effectively, faster and efficiently.