It is easy to equate organizational success with being big – getting the vesture capital investments, listing on the stock market, and becoming the next ‘unicorn’ success. However, while this may meet some people’s desires for success, it is not for everyone. It is a high-risk approach, and many firms that pursue high growth strategies do not gain success.
The growth of the side-hustle and solo entrepreneurs who start businesses alone illustrates the possibility of launching a company on a small scale. This article explores the question of whether you need to be ‘big’ – considering both your own desires for your company, as well as the economic forces that can act against (or in favor) of small firms.
Recognizing your priorities: What is important to you?
Something critical that you need to ask yourself when considering your startup is what are your ambitions. Don’t fall into the trap of thinking that your goals need to align perfectly with others’ expectations. What is right for someone else is not necessarily right for you.
A key thing to remember is that you do not need a company to be huge to achieve substantial returns. Indeed, your goals may be simply to make as much as you would be able to achieve in a traditional job, while potentially being able to pursue opportunities that you are passionate about while enjoying some benefits of greater freedom associated with being your own boss.
Having an awareness of your own ambitions will help in making critical decisions for your business. Your understanding of what is important to you will allow you to decide whether you want to, for example, take on external finance, which while allowing your firm to quickly grow, carries its own pressures.
Is it possible to operate on a small scale?
While it is important to recognize your own interests, it is also important that you are aware of the economies that may influence the success that you are able to achieve as a small firm. There are some benefits that come with size, and it is important to be aware of the impact that being a small company may bring. Ultimately, if the economics are strongly against you, it may be hard to achieve success
Economies of scale
A factor that will inevitably work against you if you are attempting to operate at a small scale is economy of scale disadvantages. Companies that are able to operate at a larger scale may gain benefits including:
- Better bargaining power
- Spreading fixed costs spread over a larger number of products
- Labor costs per unit may decline
- Reduced changeover times
If you are operating at a significant scale disadvantage, you will have to accept some scale disadvantages, and it is important to take these into account when developing your business strategy. Having a much smaller scale may for example make it difficult to pursue a low-cost position (where scale economies are often particularly important). Instead, you may want to position your firm as a more differentiated company.
Another disadvantage that you may have at operating on a small scale is difficulty attracting customers to your operations. It is possible that customers may be reluctant to choose a company that is small – perceiving that there to be lower risks associated with a larger company. As a small firm, there may be concerns about your future stability or your ability to meet their demands.
Another limitation that you may have as a small firm is financial pressures. It can be difficult for very small firms to gain finances, and this may be something that you specifically decide that you do not want to deal with. Although opting not to take on external finances can have many advantages, it may also make certain approaches to acquire customers infeasible.
For example, the razor razorblade business model operates by offering an initial product relatively cheaply (potentially at a loss) and then making money from the ongoing consumable sales. Unless you have the capital to offer the initial item relatively cheaply, you may not be able to establish the userbase to drive sales in the consumables.
What are the benefits of being small?
While large firms may have many benefits relative to small startups, depending on your setting, there may be some advantages associated with being a small company.
More individual relationships
Bing a small company may allow you to develop more individual relationships with your clients. While large companies often are very impersonal in nature – you may not have a constant sales representative for example – as a small company, you can be the face of your organization, able to build a more individual relationship with your clients.
Possibility to more easily customize products to meet individual demands
Beyond having an individual relationship with clients, you may also be able to more easily customize the products that you are providing to meet the specific needs of the small number of clients that you are working with. This again may give you an advantage relative to larger competitors, who may not be as set up to customize their offerings.
Ability to move quicker to act on new opportunities
Another benefit of being small is that it may allow you to act on opportunities more quickly than your larger competitors are able to do so. If you are a solo entrepreneur, for example, you may not need to consult with anyone to make changes to your company. In larger firms, there may be many layers of hierarchy, that can slow the decision-making process (or make it too difficult for large firms to act on small opportunities).
Final thoughts: Not everyone's expectations are the same
When starting your company, a key thing to keep in mind is that ultimately it is you who decides what your ambitions are. There is nothing wrong with a small company. Indeed, you may be able to create a valuable business, that supports your lifestyle, while also giving benefits of traditional employment, such as the ability to set your own schedules. Just because you are not expecting to be the next Apple, Google, or Amazon, does not mean that your business cannot be a success.
This article unpacks how economies of scale can act as a barrier to new firms entering a market, with examples of disadvantages new firms face.
This article explores two related, concepts – economies of scale and diseconomies of scale – with examples of the differences.
This article explores some key approaches for reducing diseconomies of scale that arise as production volumes increase.
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This article explores some of the difficulties of starting a business alone – the downsides of not having a startup team
Economies of scale and economies of scope are two related – but distinct – concepts. This article explores the differences.
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Taking on outside funding is not a decision to be taken lightly. It does not necessarily match the ambitions of all entrepreneurs, nor is it always the best decision for the organization. This article explores some of the reasons to be cautious before seeking and taking on outside investors.
The solo entrepreneur – or solopreneur – offers can many advantages of large teams when starting a business – this article explores some reasons to consider going it alone.