Introduction
The small firm theory suggests that small firms or firms that have a small market capitalization are more productive compared to big firms. Depending on what one is analyzing to gauge the level of output to justify this assertion, it can be true or forces. Small firms are easy to manage, and they are well organized. This reduces the risk of making loses due challenges in supervising large organizations. This paper seeks to analyze the productivity of a small firm to see how its performance outdoes bigger firms.
Case study
Totemic Limited is ranked number 45 out of 100 best companies in the United Kingdom according to 2014 the United Kingdom Sunday Times survey. The company has one of the most amazing stories in the history of financial services. Interestingly, the company began as a small office in a small garage to the current great global financial service provider. The walk to its current position has, however, not been an easy one as it is with many other companies. It started as an independent financial advisor and later ventured into advising the civil servants. The company mostly focused on individuals serving as nurses, police officers, union members and the armed forces. Some of the current services provided by Totemic include debt management, mortgage and protection advice as well as insurance.
Aims and Objectives
- To identify the advantages that come along operating a small firm and the implications they have on the organization’s output proficiency.
- To prove that small firms have a greater output in production compared to the big firms.
- To explore the ethical issues that affect the small firms’ environment and their implications on productivity.
- To explore the effects of government regulations on small firms.
Ethical Issues
Ethics is guidelines or rules of conduct that the society is expected to uphold in order to develop a harmonious existence (Stam, Arzlanian, & Elfring, 2014). These guidelines only suggest what humans can or cannot do, and mostly they are based on societal values and cultures. Laws, on the other hand, are legal frameworks that have punitive consequences when they are violated. When laws are broken, there may be fines charged or other associated penalties.
This is not the case with ethics. While laws are rules and regulations that have defined penalties and consequences, ethics are simply social guidelines founded on moral ideologies and standards (Stam, Arzlanian, & Elfring, 2014). Legislation, in some cases, may permit some actions that are not ethically justified. For instance, the law demands justice, while ethics promote forgiveness and reconciliation.
Ethical considerations in the small firm environment
Innovation and technological advancement in small firms have offered solutions to many problems. However, the adoption of some technical applications has led to the infringement of other peoples’ rights. Issues of privacy and information security are some of the common ethical concerns arising from the developments in IT in the small firms’ environment (Gillers, 2012). Through the internet, small firms can track the buying habits of their customers, collect personal information about them, and also monitor their movements. This takes away the right to privacy.
Under the guise of enhancing security, small firms can obtain more information from their customers and employees than it is ethically acceptable. The use of security cameras and surveillance of workers’ activities infringes on their right to privacy. Security cameras also capture images and activities of non-employees such as suppliers and visitors, among others. This creates an ethical challenge and infringement on the right to privacy.
Legal and ethical guidelines for using internet information
Access to internet information is a crucial moral issue. Globally, efforts to limit the use of internet information and reliance on online data in legal matters are being pursued. For instance, the use of ‘cloud computing’ in legal practice has been a controversial endeavour. There are several ethical issues arising from the adoption of Virtual Law Office practice, VLO. If an attorney decides to set up a VLO, he or she may be required to take additional steps to prove his or her adherence to ethical obligations. Storage of confidential information in the ‘cloud’ poses a significant risk to consumer privacy.
How legal and ethical principles apply to organizations
In the current IT environment, legal and moral principles are necessary to consider. The development in IT has created a myriad of legal and ethical issues. For instance, it is hard to measure and determine the extent that the right to privacy can be infringed. As a security protocol, employees are required to surrender too much information (Stam, Arzlanian, & Elfring, 2014)1.
Their movements and activities are continuously monitored, therefore, compromising their right to privacy. It is illegal to use or access personal information without the owner’s consent. Nonetheless, organizations use the data collected from their customers to monitor their response to the market trends (Stam, Arzlanian, & Elfring, 2014)1. This raises the ethical issue of the right to private information.
Managing the small firm effect
The government can control inflation by increasing taxes such as the income tax and the value-added tax (Stam, Arzlanian, & Elfring, 2014)1. This will ultimately reduce spending due to the high prices of commodities and reduce purchasing power. A reduction in the total spending will definitely cause a low supply of currency in the market. This will, in return, reduce the level of inflation. Just like in the monetary policy, the fiscal policy reduces inflation by reducing the growth of demand. The two policies cause demand-pull inflation (Stam, Arzlanian, & Elfring, 2014)1.
Monetarism is a small firm environment
Monetarism is a process of reducing inflation through controlling money supply in the economy (Stam, Arzlanian, & Elfring, 2014)1. Inflation is greatly influenced by the money supply. The demand and supply still exist in the money market, when there is plenty of money in circulation, the demand for it decreases. On the other hand, when the money in circulation is limited, the inflation rate reduces. Rising costs of goods and service is another cause of inflation.
This is mainly dues to lack of competence, and the supply-side policy can control such a situation. This policy is mainly aimed at increasing the long-term competitiveness of the economy and also enhances productivity (Stam, Arzlanian, & Elfring, 2014)1. For instance, dormant govern corporations can be privatized to increase their productiveness.
Major world economies utilize the monetary policy in combating inflation. Such counties include the United Kingdom and the United States of America (Stam, Arzlanian, & Elfring, 2014)1. The monetary policy seeks to reduce the overall rate of consumer spending in an effort to reduce the supply of money in the market. Through escalating the interest rates, the central bank can control the rate of borrowing and savings (Stam, Arzlanian, & Elfring, 2014).1
When the interest rates are high, many people will avoid borrowing. This is due to the high repayment price. Consequently, the low rate of borrowing ultimately leads to low levels of spending hence encouraging saving. This type of inflation control is known as demand-pull inflation. Higher interest rates can also increase the exchanges rate (Stam, Arzlanian, & Elfring, 2014)1. This will have the following effect on the economy, it makes imports cheaper, it will cause a decline in the demand for exports, and it will also reduce the cost of exports.
Exchange rate policy seeks to keep the local currency’s value high to reduce inflation. The UK used this policy in the 80s. This policy, however, will have some other repercussions, including exposing the country to an economic recession. On the other, an increase in the wage bill causes a rise in the level of inflation. This is because high wages will increase spending and consequently an increase in the price s of goods and service.
Controlling the wage growth factor can significantly reduce the level of inflation by reducing the purchasing of the consumers. Macro-economic policies are largely dependent on the Philips curve. This curve represents the relationship between unemployment and inflation. According to Philips curve, unemployment can be directly linked to inflation in a number of ways. One of them is wage growth. According to Philips, government spending will generate growth in the economy (Stam, Arzlanian, & Elfring, 2014)1.
Mixed economic system
A mixed economic system is an economic system that features characteristics of both capitalism and socialism. A mixed economic system allows a level of private economic freedom in the use of capital, but also allows for governments to interfere in economic activities in order to achieve social aims (Stam, Arzlanian, & Elfring, 2014)1. Inflation is generally defined as the increase or decrease in the prices of goods and services in an economy.
The rate of inflation has varied impacts on the small firms, but one of the most dominant effects is that it reduces or increases consumers’ purchasing power. Inflation is basically the value of a currency. It is the monetary value of a currency that allows the exchange of goods and services. Several economic policies have been used over the years to control or solve the inflation problem. These policies include monetary policy, fiscal policy, monetarism, supply-side policies, exchange rate policy, and wage control, among others.
The small firm effect and the Free enterprise economic system
When the economy falls, the Federal Reserve’s respond with interest rates cut to encourage more borrowing. This means that interest charged on loans becomes relatively low; hence more people are able to borrow. This consequently follows an increased rate of investments which highly benefits the small firms. Generally, it suffices to say that the interest rate is the value or cost of money. Just like any other product in the market, the law of demand and supply in the money market applies as well. The cost of money, therefore rises with the decrease in its supply and fall with the increase in the same. The supply of money in the market is influenced by trading government securities. This includes government debt or treasuries that the public has invested in.
Money market and capital market are closely related though they have notable differences putting into consideration the period by which they both mature. Money markets are financial securities that have a short term maturity period normally a year or less (Czarnitzki, 2014)2. This is measured to be the most secure method of investing. The securities invested according to include treasury bills, purchase agreements, bankers’ acceptance, federal funds and many other financial transactions.
Due to the low risks and high liquidity attached to these securities, the returns on the same are relatively very low. The money market is a way through which investors store money for future need or use. Capital markets are, on the other hand, the opposite of money markets in that they are markets for financial assets which can take quite a long time to reach maturity (Vandaie & Zaheer, 2014)3. The financial instruments that drive the capital markets take at least a period of more than a year to mature as pointed by Vandaie & Zaheer (2014)3.
Market hypothesis in regard to the small firms’ theory
Historically, studies have shown that the higher the risks, the higher the amounts of returns associated with an investment. Safe investments are exposed to low risk as well as lower returns on investment. Therefore, different amounts of risks are applicable to common small firms and corporate big firms. Diversification is thus an important aspect if investors want to reduce the amount of risk (Czarnitzki, 2014)2.
For instance, among the three types of investment, corporate big firms essentially have the least type of risk. Nevertheless, irrespective of the dividend payments that are done regularly, the amount of returns offered is still low. On the other hand, the highest investment risks are exposed to common small firms, but the potential returns are generally high.
The chart below indicates the potential growth of $1 invested in small firms that has been listed in the S&P 500 Index (small firms) in relation to $1 dollar invested in the big firms market and listed in the Barclay Capital U.S Aggregate Bond Index (Czarnitzki, 2014)2. While it is not possible to guarantee future performance using historical performance, the table indicates that investment in small firms outperforms significantly investment in bond during this period. Returns on small firms versus big firms (Czarnitzki, 2014)2
Small firms seem to have major advantages if an investor has substantial amount of time before he retires. This is because there will be enough time for the market make adjustments and correct any negative factors that tend to reduce the small firms’ value. On the other hand, an investor who wants a short-term strategy, the best option to consider is big firms (Czarnitzki, 2014)2. This is because although big firms cannot outperform small firms, they are protected against market fluctuations associated to the ups-and-downs that are experienced in a conventional market.
One of the major disadvantages of operating a big firm is that the company risks losing its organizational culture due to cross culture effects from the many employees. Small firms have an existing preconceived culture and ideas on how to manage the business. Changing the structure and introducing new organizational SOPs will require training and also it may take more time (Czarnitzki, 2014)2.
Footnote
- From Social capital of entrepreneurs and small firm performance: A meta-analysis of contextual and methodological moderators, by Stam, W., Arzlanian, S., & Elfring, T. (2014), Journal of Business Venturing, 29(1), 152-173.
- From Small firm innovation performance and employee involvement, by Andries, P., & Czarnitzki, D. (2014), Small Business Economics, 43(1), 21-38.
- From Surviving bear hugs: Firm capability, large partner alliances, and growth, by Vandaie, R., & Zaheer, A. (2014), Strategic Management Journal, 35(4), 566-577.