What Advantages Do Small Businesses Have?
Small businesses do have advantages.
Ability to meet special needs. Small businesses often are freer to introduce new products or try new methods. This is because bigger firms, with large factories, need to be sure they have markets for new products. Small firms, on the other hand, can operate profitably by meeting the needs of limited markets. A study of 121 companies in a single industry found that small businesses or individual inventors accounted for 40 percent of the industry’s new products. The plain-paper copier, intermittent windshield wiper, and overnight delivery services are examples of new products and services developed by small businesses.
Ability to adapt to change. Small businesses frequently are owned by one or two people. This gives a business the freedom to change operations at will. In most instances owners can add to or discontinue merchandise lines, change hours of operation, and change pricing strategies when needed.
The imagination and flexibility of entrepreneurs in small businesses enables them react quickly and successfully to changing times. In recent years, 60 percent of new jobs have been created in businesses with 100 fewer employees. Small businesses produce twice as many innovations per employee as larger firms.
Interestingly, many of the largest and most successful U.S. corporations are reorganizing design and production departments to operate more like small businesses. These new production strategies will be discussed in more detail in Chapter 7.
What Are the Challenges Facing Small Businesses? Despite these advantages, operating a small business can be a challenge.
Risk of failure. About two out of three small businesses fail within four years of starting. Small businesses have a higher failure rate than large firms for two reasons: poor management and inadequate financing.
Poor Management. Since it is fairly easy to start a small business, many entrepreneurs hope to learn the ins and outs of business management “on the job.” For that reason, most experts advise these people to learn as much as they can about business management before getting started. Peter Drucker, a famous author and expert on business management, says that new businesses don’t fail because business is risky; they fail because the owner don’t know what they are doing.
Inadequate financing. Even the smallest businesses have expenses that need to be met to continue operating. In August 1993 the National Federation of Independent Business reported that the three top problems facing small business were related to financing – insufficient capital, slow sales, and heavy debt. All too often small business owners find themselves unable to meet expenses when business slows. And because of the high failure rates of small businesses, banks often are reluctant to lend them the money when they need it the most.
Bad economic times affect small businesses more then they do big businesses. Small businesses profits tend to fall faster, and small businesses are more likely to fail. According to a 1982 report, “The larger the firm, the better the chance it has of surviving.” The report also said, “A firm with 21 to 50 employees has a 54-percent chance of surviving four years. A firm under 20 employees has a 37-percent chance of surviving four years.