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    Classification of Firm11

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    warrenalcides77
    Firms can be classified by their operations into primary, secondary, and tertiary sectors, as well as by ownership into public and private categories. Small firms are independently owned businesses that face advantages such as independence and flexibility, but also challenges like higher costs and limited access to finance. Despite their limitations, small firms play a crucial role in the economy by serving niche markets and contributing to employment and innovation.

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    Classification of Firm11

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    warrenalcides77
    2 views3 pages
    Firms can be classified by their operations into primary, secondary, and tertiary sectors, as well as by ownership into public and private categories. Small firms are independently owned businesses that face advantages such as independence and flexibility, but also challenges like higher costs and limited access to finance. Despite their limitations, small firms play a crucial role in the economy by serving niche markets and contributing to employment and innovation.

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    Firms can be classified by their operations into primary, secondary, and tertiary sectors, as well as by ownership into public and private categories. Small firms are independently owned businesses that face advantages such as independence and flexibility, but also challenges like higher costs and limited access to finance. Despite their limitations, small firms play a crucial role in the economy by serving niche markets and contributing to employment and innovation.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    2 views3 pages

    Classification of Firm11

    Uploaded by

    warrenalcides77
    Firms can be classified by their operations into primary, secondary, and tertiary sectors, as well as by ownership into public and private categories. Small firms are independently owned businesses that face advantages such as independence and flexibility, but also challenges like higher costs and limited access to finance. Despite their limitations, small firms play a crucial role in the economy by serving niche markets and contributing to employment and innovation.

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    Classification of Firms

    Firms can be classified in terms of the sectors they operate in and their relative sizes.

    Firms are classified into the following three categories based on the type of operations
    undertaken by them:

    • Primary: all economic activity involving extraction of raw natural materials. This includes
    agriculture, mining, fishing etc. In pre-modern times, most economic activity and employment
    was in this sector, mostly in the form of subsistence farming (farming for self-consumption).
    • Secondary: all economic activity dealing with producing finished goods. This includes
    construction, manufacturing, utilities etc. This sector gained importance during the industrial
    revolution of the 19th and 20th centuries and still makes up a huge part of the modern
    economy.
    • Tertiary: all economic activity offering intangible goods and services to consumers. This includes
    retail, leisure, transport, IT services, banking, communications etc. This sector is now the fastest-
    growing sector as consumer demand for services have increased in developed and developing
    nations.

    Firms can also be classified on the basis of whether they are publicly owned or privately owned:

    • Public: this includes all firms owned and run by the government. Usually, the defence, arms and
    nuclear industries of an economy are completely public. Public firms don’t have a profit motive,
    but aim to provide essential services to the economy it governs. Governments do also run their
    own schools, hospitals, postal services, electricity firms etc.
    • Private: this includes all firms owned and run by private individuals and they are aimed at
    making profits and so their products are those that are highly demanded in the economy.

    Firms can also be classified on their relative size as small, medium or large depending on the
    output, market share, organisation (no. of departments and subsidiaries etc.).

    Small Firms

    A small firm is an independently owned and operated enterprise that is limited in size and in
    revenue depending on the industry. They require relatively less capital, less workforce and less
    or no machinery. These businesses are ideally suited to operate on a small scale to serve a local
    community and to provide profits to the owners.
    Advantages of small businesses:

    • Independence: owner(s) are free to run the business as he/she pleases.


    • Control: the owner(s) has full control over the business, unlike in a large business where
    multiple managers, departments and branches will exist.
    • Flexibility: small businesses can adapt to quick changes as the owner is more involved in the
    decision-making.
    • Better communication: since there are fewer employees, information can be intimated easily
    and quickly.
    • Innovation: small businesses can tend to be innovative because they have less to lose and are
    willing to take risks. However, it is important to note that they are usually imited by lack of
    finance.

    Disadvantages of small businesses:

    • Higher costs: small firms cannot exploit economies of scale – their average costs will be higher
    than larger rivals.
    Lack of finance: struggles to raise finance as choice of sources of acquiring finance is limited.
    • Difficult to attract experienced employees: a small business may be unable to afford the wage
    and training required for skilled workers.
    • Vulnerability: when economic conditions change, it is harder for small businesses to survive as
    they lack resources.

    Small firms still exist in the economy for several reasons:

     Size of the market: when there is only a small market for a product, a firm will see no point in
    growing to a larger size. The market maybe small because:
    • The market is local – for example, the local hairdresser.
    • the final product maybe an expensive luxury item which only require small-scale production
    (e.g. custom-made paintings)
    • the services being offered are personalised or custom made e.g. wedding cake makers.
     Access to capital is limited, so owners can’t grow the firm.
     Owner(s) prefer to stay small: a lot of entrepreneurs don’t want to take risks by growing the
    firm and they are quite satisfied with running a small business.
     Small firms can co-operate: co-operation between small firms can lead them to set up jointly
    owned enterprises which allow them to enjoy many of the benefits that large firms have.
     Governments help small firms: governments usually provide help to small scale firms because
    small firms are an important provider of employment and generate innovation in the production
    process. In most countries, it is the medium and small industries that contribute much of the
    employment.

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