Main Difference between SMEs and Large Businesses Introduction SMEs play an integral role in the economy of most countries (Loviscek, 1982, p. 36; Beck, Demirguc – Kunt and Levine, 2004, p. 1). With this realised importance, it is critical to support these SMEs to grow and develop. However, as compared to established large business organisations, SMEs face myriad challenges as a result of being vulnerable to external and internal shock (Smit and Watkins, 2012, p. 6324 citing Berry, 2002; Laforet and Tann, 2006). One way of conceptualizing SMEs is to examine the key differences between them and large firms.
The aim of this paper is to examine the principal differences between small and medium business enterprises and large ones. To attain the latter, the paper will explore areas of distinction in factors like risk of failure, market focus and bulk sour of their customer base, strategy implementation, management and ownership structure, source of finance, human resources innovation, and knowledge management. Risk of Failure The reality is that all businesses be it a large corporate or an SME, phase the same macro-environment factors with the difference being internal factors.
These external macro factors include cut-throat competition, globalization, trade barriers, and technology. The risk of failure of SMEs is determined by how they are able to manage risks from a wide array of sources. While the macro-environment is the same for all businesses, small and medium businesses have no that opportunity to enjoy in excess benefits like adequate capital and extended human resources as compared to large enterprises. In a nutshell, SMEs/ SMMEs are more vulnerable to major external shocks (Smit and Watkins, 2012, p. 6324 citing Berry, 2002; Laforet and Tann, 2006). One area that distinguishes SMEs and larger corporations are the risks of failure.
Basing his study in Tokyo in the period 1986 to 1994, Honjo (2000, p557) found out that new firms with the low capital formation or a sufficient size has a higher risk of business failure. European Federation of Accountants (2004) notes that the first three years of establishing a business is a critical period since it determines the success or failure of SME. The high risk of failure during this time is tied to the fact that a new SME has to prove its capability to customers and suppliers, providers of finance, employees, and outside investors (p. 7).
Sheng, Rani, and Shaikh (2010, p. 229) summarise the risk of failure of SMEs that ‘ from a bank’ s perspective, financing to SMEs is often regarded to be of higher risk due to the relative opaqueness of these firms as compared to larger firms’ . For instance, from a credit risk perspective, SMEs are riskier as compared to large corporate (Altaman and Sabato, 222, p. 2 citing Dietsch and Petey, 2004). In conceptualizing the likelihood of failure, Altman, Sabato, and Wilson (2008) observe that it is critical to distinguish between failure and closure (p. 8).
Watson and Everett (1996 cited in Altman, Sabato and Wilson, 2008, p. 8) developed five points for defining failure. These include ceasing to exist/ discontinuance as a result of various factors, closing to limit losses, closing or a change in ownership, filing for bankruptcy, inability to reach financial goals and closing, or a change in ownership. On the other hand, closure occurs when the owner (s) decide to close down for other reasons, but, not for financial reasons.
This implies that closure might occur even when the firm is financially successful, as opposed to failure that is associated with financial underperformance.
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