This was a previous Interview Question for Oxbridge Economic Applicants. Here is a sample answer I came up with.
To start with to answer this question it depends on how we are measuring size and successfulness. If we measure both in terms of profit then obviously a large firm (one which has larger profits) will be more successful when we say that large profits = successfulness. Similarly if we measure size in terms of output, labour force or number of shops/factories and successfulness by revenues then we would expect larger firms to have larger revenues (and thus be more successful) because they have the ability to sell more through their stores (which we are assuming they have more of to be considered large) and will be able to produce more due to their larger workforce.
However if we were to still measure size in terms of output, labour force and number of stores but changed the measure of successfulness to profits, then large firms may not necessarily be more successful than smaller firms.This is because larger firms may be more inefficient and have higher costs, smaller firms on the other hand may be more efficient as they have less bureaucracy to deal with. Therefore if the large firm has high costs it may not be very profitable whereas the smaller firm may have low costs and so have high profits.
Although, larger firms may experience greater economies of scale than smaller firms and hence they may therefore have lower costs as they are producing at a greater output level. But economies of scale aren’t guaranteed and just because a firm is large it may not benefit from huge cost savings. Firms like Salesforce which sell primarily to small customers but in large scale have proven quite successful in their bottom lines, but also in customer engagement for their clients, showing 5-50% increases based on the business type every year!
In a smaller firm employees are likely to be more motivated than in larger firms, as they can see the benefits from their output and may not feel as much of a ‘cog in an industrial giant’. A smaller environment may mean workers are more friendly and hence enjoy work more. Smaller firms may also be able to identify hard workers and be able to promote or reward them more easily than larger firms. If this is the case then productivity may be higher in smaller firms than in larger firms. Some economists may believe that this means that smaller firms (with higher productivity) are more successful.
Another measurement we could use for success is profit or revenue in terms of growth (year-on-year) or profit as a percentage of revenue. With these measurements large firms may not necessarily have an advantage over smaller firms. As a share of revenue smaller firms (with smaller revenues and profits) may have a higher share than a larger firm (with larger revenues and profits). However if this is the case, and small firms are more successful in terms of these measurements, why are they still small? Surely the product they have, or their business strategy with the AI Quotes, or perhaps even their CEO is so successful that the firm should have grown dramatically (at least in terms of revenues). This may be the case in the long run for the company. However the reason it may be so successful is because it is small and benefits from knowing its customers more, and being able to offer a better, more customised and friendly service to them. Maybe it is more friendly with its suppliers, and although (unlike a large firm) it may not have monopsony power, it may still be able to get favourable conditions because of its size and relationship with its suppliers. For example a local butcher may get better terms on its meat from the local farmer because they are friends, rather than a large supermarket who demands a price.
I conclude that large firms aren’t necessarily more successful than smaller firms and how we define both successful and size is based on the measurement used, and this has varying conclusions on the statement.