the role of small businesses as part of the industrial structure in some industries

1.3 Size of Business – Significance of Small Businesses

Learning Objective

Students will be able to:

• measure the size of a firm using the three standard metrics,
• explain which metric is most appropriate for a particular industry and why,
• evaluate the role of small businesses within the industrial structure of selected sectors, and
• analyse the overall contribution of small firms to the economy, including their impact on stakeholders and business objectives.

Key Definitions

• Small Business: An enterprise that employs fewer than 50 people (UK definition) or has an annual turnover below a country‑specific threshold.
• Medium Business: 50‑249 employees (or the equivalent turnover range).
• Large Business: 250 + employees (or the equivalent turnover range).
• Industrial Structure: The pattern of firm sizes (small, medium, large) that characterises an industry and determines the nature of competition, entry barriers and strategic behaviour.

1.3.1 Measurements of Business Size – Choosing the Most Appropriate Metric

Common Metrics

How to Choose the Most Appropriate Metric

When analysing a specific industry, follow this short decision‑tree:

1. Is the industry primarily labour‑intensive? → Use Number of Employees.
2. Is the industry primarily service‑oriented or high‑value‑added where sales best indicate scale? → Use Annual Turnover.
3. Is the industry capital‑intensive with large fixed assets or where dominance is measured by output? → Use Market Share / Asset Value.
4. If more than one characteristic applies, compare the results and note any discrepancies – this often highlights structural features such as high automation or niche specialisation.

Practice question: Which measurement would best reflect the size of a local bakery and why?

1.3.2 Significance of Small Businesses

Why Small Businesses Matter

• Employment generation: They create a disproportionate share of new jobs, especially in the early stages of economic development.
• Innovation: Flexibility and entrepreneurial drive make them a fertile source of product and process innovation.
• Market diversity: They occupy niche markets that larger firms may deem unprofitable.
• Economic resilience: A broad base of small firms cushions the economy against sector‑specific shocks.
• Stakeholder impact: Small firms often have closer relationships with local communities, suppliers, and customers, influencing CSR, local employment and regional development objectives.

Typical Industrial Structures

Why the distribution matters

• A high proportion of small firms usually indicates low entry barriers and a fragmented market, encouraging competition on service and niche differentiation.
• Industries dominated by large firms often have high economies of scale, substantial capital requirements and stronger barriers to entry, limiting strategic options for small entrants.

Contribution to Employment

Across most economies, small businesses account for roughly 60 % of total employment.

$$\text{Employment Share}_{\text{small}} = \frac{\text{Number of employees in small firms}}{\text{Total employment}} \times 100\%$$

Advantages (Strengths) of Small Businesses

1. Rapid decision‑making and ability to respond quickly to market changes.
2. Close customer relationships, often leading to higher perceived service quality.
3. Lower overheads and capital requirements compared with large firms.
4. Owner‑managers develop a broad skill set by being involved in many functional areas.
5. Can act as specialised suppliers or distributors within larger supply chains, adding flexibility for big firms.

Disadvantages (Challenges) of Small Businesses

1. Limited access to finance, credit facilities and long‑term capital.
2. Greater vulnerability to economic downturns and market fluctuations.
3. Difficulty achieving economies of scale, leading to higher unit costs.
4. Potential skill shortages, especially in high‑technology or specialised sectors.
5. Pressure to meet multiple stakeholder expectations (profit, community, employees) with limited resources.

Strategic Role in the Industrial Structure

• Entry point: Small firms are often the first entrants in a new market, testing demand before larger firms invest.
• Supply‑chain integration: They can act as specialised component makers, contract manufacturers or local distributors, allowing large firms to focus on core activities.
• Innovation pipeline: Many breakthrough ideas originate in small firms; larger firms may acquire them or adopt their innovations.
• Competitive pressure: A dense base of small firms forces larger rivals to improve service, price or product variety.
• Stakeholder alignment: Small firms frequently pursue objectives beyond profit – e.g., community development, environmental stewardship – influencing industry‑wide CSR standards.

Case Study – UK Food‑Processing Industry

Small, often family‑run firms dominate the supply chain for artisan and regional foods. Their contributions include:

• Supplying supermarkets and local retailers with region‑specific items (e.g., Scottish salmon, Cornish pasties).
• Acting as incubators for new product concepts that larger manufacturers later mass‑produce.
• Providing rural employment, helping to sustain local economies and preserve culinary heritage.
• Operating as specialised contract packers or ingredient suppliers for larger processors, thereby enhancing supply‑chain flexibility.

Assessing the Role of Small Businesses – A Checklist

1. What proportion of total output and employment is generated by small firms?
2. How essential are they for innovation and the introduction of new products/services?
3. Do they provide critical niche services that larger firms cannot profitably offer?
4. What is their impact on key stakeholders (employees, local community, suppliers, customers)?
5. Which policies (finance schemes, training programmes, tax relief, procurement preferences) could enhance their contribution?

Practice Question

“In the UK construction industry, small firms account for about 70 % of all businesses. Explain how this size distribution influences competition, entry barriers and the strategic options available to a new start‑up.”

Suggested Diagram

Summary

Small businesses are a vital component of many industrial structures. Their flexibility, innovation capacity, and employment contribution make them essential for a dynamic economy, even though they face distinct challenges such as limited finance and scale disadvantages. Understanding how to measure size, evaluate strengths and weaknesses, link firm objectives to stakeholder impact, and interpret their position within an industry equips students to answer exam questions confidently and to appreciate the strategic importance of small firms in real‑world business environments.