There are various economic as well as non-economic factors that influence the size of a business unit. The relative importance of the factors varies with the products manufactured, industry in which the firm operates etc. Size is primarily determined by the goals and objectives of the organization and influences the efficiency of operations. The following factors determine the size of the firm.
Factors determining size of firm
The extent of resources that are available and that can be arranged by the entrepreneur determines the size of the firm. In case the entrepreneur is able to raise more resources, he can opt for a larger sized firm. Conversely if the resources that are available and arranged are less, the organizations has to settle for a smaller sized firm.
For e.g. though both CavinKare and HUL are both in the FMCG industry, HUL’s size is larger when compared to CavinKare. One reason being that HUL has more resources available when compared to CavinKare
Requirement of capital
Certain businesses require huge investments and therefore have to be set up as large scale units. For e.g. Iron and Steel mills require huge investments in machinery, similar is the case with cement plants, power generation etc. Therefore in such cases, firms have to be set up as large scale units.
Nature of industry
In case the final product produced is complex, or machinery required for manufacturing is of a large size e.g. aircraft manufacturing, iron and steel mills, boiler manufacturing, power generation plants, manufacture of ships, rail engines etc, only large size firms are suitable.
Nature of product
If the product manufactured is large, the size of the firm will be of a higher size e.g. heavy machinery. Smaller size is preferred in case of less durable, less standardized and fashionable products (e.g. handicrafts).
Nature of demand
If the demand for the product is high and expected to grow further in the future, the size of the firm would increase. For e.g. to meet the increased demand for its cars, Hyundai has set up a second car manufacturing plant, Nokia is planning to increase the number of cell phones manufactured in India to meet the high demand for handsets. In case demand for a product is showing a declining trend, the size of the firm would not be increased e.g. scooters, floppies, typewriters etc.
In case the size of the market is large, then a large sized firm would be preferred. Firms which are marketing their products not only in their home country but also internationally would prefer large size e.g. Pepsi, Coke, Nike, Intel, RayBan, Hewlett Packard etc. Those firms which market their products only in the local market have limited market size and therefore would prefer to operate with a smaller size.
Ability of entrepreneur
If the entrepreneur is intelligent, motivated and innovative he would tap emerging opportunities and the firm would grow. For e.g. Azim Premji inherited a company which was producing vegetable oil. But today Wipro is in the vegetable oil business, consumer care products, lighting, hardware, software (among the top 3 companies), BPO etc. The reason for the phenomenal growth is the vision, ability and enterprising spirit of Azim Premji.
Economic environment plays a significant role in influencing the value of the firm. In case the economy is in a boom condition, and purchasing power is increasing, the entrepreneurs would be induced to increase the scale of operations. Whereas in case the economy is passing through a recession or depression, the size of operations would remain small. In India, the FMCD companies (LG, Samsung, Onida, Videocon etc.), are planning to increase their sales. They are confident of increased sales because of growing middle class and better purchasing power.
Availability of inputs of production
In case of productive factors such as raw materials, labour, power, land are available in abundance, entrepreneurs can choose large scale operations. In case inputs are not available in required quantities then the size of the operation would be small. For e.g. because of the abundant availability of English speaking skilled manpower, IT, BPO and KPO businesses are expanding in India. Due to abundant availability of iron ore mines in Orissa, many companies such as POSCO, Tata Iron and Steel Co., etc are planning to set up their plants in that state.
The government has reserved certain items for manufacture by the small scale industry (SSI). Therefore the size of such firms would be small in order to enjoy protection and government privileges.
Estimates of future
If an industry is expected to perform well in the future, then entrepreneurs would be ready to set up large sized businesses to meet future demand. For e.g. with the increase in employment and purchasing power the demand for automobiles, housing, consumer durable are expected to increase. Therefore business units engaged in these businesses are encouraged to increase their size.
If the market for the product is restricted to a particular locality or State, the size of the firm would be small. But if the market is national or international, a large size firm would be set up.
If increase in production is expected to yield only low returns, the firm size would remain small. In case increase in firm size, is expected to yield higher profits, the firm size would be increased to a large sized firm.