Different types of business

# 2 Classifying businesses by size

One of the most obvious ways in which businesses differ is their size. Most of us know some businesses that are very small – one-person businesses or micro-businesses of fewer than five people. Examples may include a single person running, for example, a web design company, a hairdresser’s or a small catering business, or a small retailer, such as a craft shop or a florist, employing just one or two other people. Small and medium-sized enterprises actually make up over 90% of the number of businesses in most countries (although they do not employ over 90% of all employees or make over 90% of all business deals). At the other end of the scale are businesses that are very large – multinational corporations employing thousands of people and operating in many different countries. We are familiar with at least the names of some, such as Microsoft, Samsung, Siemens, Renault, and many more both well-known and less well-known large corporations. And then there are many businesses of all sorts of sizes in between.

Figure 1 Examples of small businesses
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It is less obvious how we should measure the size of a business. There are several different measurements available, not all of which are suitable for measuring the size of all types of business. For example, measuring a business’s size on the basis of how much profit it makes assumes that it is a for-profit enterprise. Measuring the stock market value of a business assumes that its shares are traded on the stock market, which is by no means true for all businesses.

Two measures that are applicable to nearly all businesses are number of employees and annual turnover, i.e. the total value of sales made over the period of a year. These two measurements are not always in accord with each other: there are some businesses with very few employees that nonetheless produce quite a large annual turnover. For example, a single person trading shares on the stock market could make a very large turnover in a year if they were very successful. The European Commission uses a combination of number of employees and turnover to define the size of a business (EC, n.d.):

- Large enterprises employ 250 people or more and have an annual turnover of more than €50 million.
- Medium-sized enterprises employ fewer than 250 people and have an annual turnover of no more than €50 million.
- Small enterprises employ fewer than 50 people and have an annual turnover of no more than €10 million.
- Microenterprises employ fewer than 10 people and have an annual turnover of no more than €2 million.

Businesses with fewer than 250 employees are often collectively classified as small and medium-sized enterprises (SMEs).

In some ways the challenges for small and for large businesses are not so different. All businesses need to make sure they offer goods or services that people want to buy, that they have enough income to cover their costs and something left over, and that people working for them are motivated, well qualified and work well together. In other ways, however, small businesses operate very differently from large businesses.

- Small businesses are often owned and managed by the same person. This ‘owner-manager’ may be the founder of the business, or sometimes a relative, perhaps a son or daughter of the founder. Owner-managers are often more emotionally involved in their business than the managers of large enterprises owned by anonymous shareholders.
- Because of the small size, managers are often very closely involved in the day-to-day running of the business. They also tend to know many – often all – employees personally. This is different in a large business, where top managers cannot possibly know all their employees personally. It also often makes for a different, more personal management style.
- Small businesses have flatter hierarchies. In a small organisation there is no need for many layers of management. In a very small business, it may be just the ‘boss’ and a number of employees. Again, this tends to make for more informal management styles. It can also be useful in terms of innovation, as people across the business can find it easier to work with each other and new ideas can be developed and implemented more quickly than in larger organisations, which are often more bureaucratic. This is one reason why many innovations come out of small businesses (often new ones) rather than larger ones, although this is of course not always so.
- Smaller businesses often have more limited financial resources. They need to be very careful how they spend their money and that they have enough money coming in each month to pay staff and all their bills. This also means that they sometimes do not have the money to make further investments, even if these investments would repay themselves in a relatively short period of time by saving costs (e.g. investment in new, energy-efficient machinery) or bringing in more money (e.g. investment in product development to attract more customers).
- Smaller businesses also usually have limited management resources. A single manager, or a very small management team, only has so much time to attend to all the business and the same will be true of a small number of employees. This can be a problem as it can limit a business’s ability to seek out new opportunities – for example developing new product ideas – or address new challenges – for example dealing with new competition or new business legislation – simply because nobody has time to do so.

There is much more that could be said about the differences between large and small businesses and also about the differences between businesses of a similar size. For the moment, it is enough to be aware that size does matter in business and management, not because bigger or smaller is better but because they pose different challenges and different opportunities.

OpenLearn - Different types of business
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