Enterprise and Small Business Principles
Cost disadvantages
Looking first at why business ownership rates declined prior to the 1980s, one reason may have been that smaller enterprises were at a cost disadvantage. In an era of mass production, larger enterprises were able to produce goods much more cheaply (economies of scale). Mass production also meant that the optimal size of plants (minimum efficient scale (MES)) needed to be larger. Smaller enterprises, therefore, found it more difficult to compete against rising volumes, falling costs and cheaper prices. The rising optimal plant size had two other effects: it tended to deter new entrants and it promoted concentration of ownership in an industry. Another impact of consolidating ownership is that it reduces uncertainty in the market place. As Coase (1937) had shown, enterprises who wish to sell their products or services in the market place face two principal transactional costs. First, both sellers (enterprises) and buyers (consumers) have costs: sellers have to market/advertise their goods/services whilst buyers have to search for these goods/services. Second, there is no guarantee that enterprises will gain payment for their goods/services. Hence, they need contractual terms that ensure that buyers of goods/services will not default on their payment.
Such uncertainties have led Galbraith (1967) to argue that it made sense for enterprises to limit such transaction costs. He argued that this was best done by larger enterprises working together to manipulate the behaviour of buyers through advertising and marketing. Bigger enterprises were also able to reduce uncertainty by vertically integrating their business with others in the supply chain. In essence, therefore, larger enterprises sought to economise on the market: ‘the visible hand of managerial direction has replaced the invisible hand of market mechanisms, however, in coordinating flows and allocating resources in major modern industries’ (Chandler, 1990: 95). Prior to the 1980s then, business ownership rates seemed to have declined as MES rose and economies of scale became more important. Little wonder, therefore, that Boswell (1973) lamented ‘because many small firms appear to be inefficient, traditionalist and family-ridden, the small firm-sector as a whole is seen as inimical to progress and professionalism’ (p. 19).
