2 Size of A Business Unit

Size of a Business Unit
In an industry there are firms of varying sizes. The costs of production

in these firms of different sizes vary. Economists are concerned with
the best size of a business unit, that is, a firm in which the average cost
of production per unit is the lowest.
But while taking decision about the size of a business unit or scale of
operations often the various terms such as the plant or the
establishment, the firm and the industry are used in a confused way.
To have clear understanding of the concept of the size of a business
unit it is advisable to keep in mind the differences between these
terms, i.e., the plant, the firm, and the industry.
The Plant:
Plant or establishment means a factory, a mill, a shop or an
establishment. It refers to a place where goods are produced such as a
cement pipe factory. The term plant includes not only the machinery
and equipment installed in the factory building but also the workers
employed therein.
The Firm:
The term ‘firm’ refers to the business unit or undertaking which owns
the plant (the factory, the shop, the warehouse or transport depot),
controls and manages it. Thus this term (firm) is broader in its scope.
It is essentially a unit of control, ownership and management.
The firm owns the land on which the plant or establishment is

situated, the building along with the machines and equipment
installed in it and the raw materials, the semi-finished and finished
goods of the plant.
It controls the workers employed in the plant, finances the needs of

the plant, arranges for the marketing of goods produced (or purchased
in case of a selling shop) and bears the risks involved. It may be noted
that a firm may own only one plant or more than one plants.
Again, the various plants owned by a firm may be engaged in the
production of the same product such as a number of cotton textile
mills or different plants may be engaged in the production of different
goods.
The Industry:
The term ‘industry’ is wider in coverage than the term firm. It includes
all the firms owning, controlling and managing plants engaged in the
production of similar products. For example, by sugar industry is
meant all the firms which are engaged in the production of sugar;
cotton textile industry is the aggregation of all the firms which own the
plants producing cotton yarn and cloth.
Measures of Size:
In spite of the lack of preciseness the following standards

are used to measure the size of a firm:
1. Capital Invested:
The Amount of capital invested is one measure of size that can be used
to compare the size of like and unlike firms. But as Kimbal and
Kimball point out “the main difficulty of this measure is that accurate
data concerning capitalisation are difficult to obtain. Due to the
variation in the capital requirements of different units and their
methods of financing this measure is not much reliable.”
2. Value of the Product:

The second measure is the value of the products in terms of rupees
turned out by a firm. This measure has the advantage of making all
comparisons in terms of rupees, which is convenient.
But difficulty arises in case of the fluctuating value of the product or if

the comparison is over two periods of time, one of the rising prices
(boom) and the other of the falling prices (depression), because inspite
of large volume of output during depression the value may be small
whereas during the boom period even with relatively small output
value may be big.
3. The Number of people employed:
The third measure is the number of wage-earners employed by each
firm. This measure is much used and is advantageous in the
comparison of the firms of similar nature. However, in case of its
application to unlike firms results may be misleading.
Also, it can be used only for the firms at the same stage of
development because as firms grow in size all of them may not employ
increasing number of workers, some may actually install more
machines for increased production rather than increasing their labour
force.
4. Power Used:
The amount of power used per unit is also “an index of the size and
growth” of firms engaged in manufacturing. However, the amount of
power consumed may be more or less even due to the factors other
than the scale of operations of a firm. Therefore, it may not always
prove to be a reliable measure.
5. Amount of Raw Materials Consumed:

In case of the firms whose output are of similar nature the annual
consumption of raw materials by a firm may be a good measure.
6. Volume of Output:
This is a good measure of size in case of firms producing products
which are uniform or homogeneous in nature or characteristics. But it
will not give perfect picture in case of the firms which produce variety
of goods such as is the case with the cotton textile industry.
7. Productive Capacity of the Plant:

This is a good measure of size especially for the industries producing a
variety of products. For example, number of plants in case of iron and
steel industry with their productive capacity may provide a good
standard of measure.
The Concept of Optimum Firm:
The concept of optimum firm has been developed by E.A.G. Robinson.

In his words by the optimum firm we must mean that firm which in
existing conditions of technique and organizing ability has the lowest
average cost of production per unit, when all those costs which
must be concerned in the long run are included.
The concept of optimum size signifies the conditions under which a

firm can conduct its affairs with minimum costs and maximum
results. The term optimum literally means the conditions that produce
the best result.
Implications of the Optimum Firm:
The main implications of the optimum firm are as given

below:
(1) Production of the required output at the level of minimum average

cost per unit.
(2) Costs should include all the elements that need to be met not only
in the short run but also in the long run. The total costs consist of not
only direct costs like those on materials and labour but also indirect
costs like depreciation, selling expenses etc also
(3) Fullest possible utilization of technological potentials available

under the existing conditions.
(4) Operating to the maximum scale of the installed capacity through

tapping of productive techniques and organizing talents.
FACTORS INFLUENCING OPTIMUM SIZE OF BUSINESS UNIT
The following are the factors that influence the optimum size of a firm:
a. Technical forces
b. Managerial forces
c. Financial forces
d. Marketing forces
e. Forces of risk and fluctuations
1. Technical forces influence size of a firm

Technical forces which influence the optimum size of firm are degree of
specialization (division of labour), mechanization and integration of work
processes.
In the case of division of labor, a job is split into small functions and each
function is assigned to a specific workman. When a workman performs a
specific operation over a long period of time, the skill of the workman, speed
of performance, quality of work etc improve.
2. Managerial forces influence size of business units

Managing an organization today is a complex task. The services of qualified,
experienced professionals are required to run the organization in an
efficient manner. Therefore businesses which desire to maximize their sales
and profitability need to appoint a competent management team.
To appoint such personnel, high amounts of remuneration and benefits have

to be paid. Only large organizations would be able to offer such high
remuneration levels.
3. Financial forces influence size of a business unit

Investors have more confidence in large and established firms. They prefer to
invest their money in large firms because of the possibility of
earning high returns. Investors generally do not prefer to invest in new or
small firms because they feel that such investment is risky and the possibility
of earning high returns is also less. Therefore large firms are able to raise
required financial resources easily. Banks also come forward to lend
loans at cheaper rates of interest and therefore cost of funds is also less for
large firms.
The Board of directors is answerable to shareholders, and financial institution
such as IFCI, ICICI or IDBI which advance loans might require that their
representative should be in the Board of directors. This sort of interference
will result in management losing its independence, delayed decisions,
disharmony and loss of efficiency.
4. Marketing forces influence size of business

A large firm can enjoy economies of buying and selling. Since it buys raw
materials in bulk quantities it can enjoy the benefits of quantity
discounts. It can employ experts for purchase. They would be able to source
quality raw materials at cheaper prices. Similarly experts can be employed for
marketing their products. In case a large firm has multiple products, the sales
force can market the entire range of products.
Advertisement time in media can be bought in bulk at cheaper

rates. The organization can employ reputed market research agencies to
know the changing needs and preference of consumers and produce products
accordingly.
5. Forces of risks and fluctuations influence size of business

Business enterprises face risks from different sources. Risks may arise due to
the following reasons:
 Changes in customers preferences (textiles to ready-made,

typewriters to computers etc.)
 Changes in fashion (jeans to cotton casuals etc.)
 Increased competition (in all industries)
 Changes in government policies (reservation to De-reservation in
SSI’s, ban on lottery sales in Tamil Nadu, from protection to local
industry to liberalization, globalization and privatization etc.)
 Fluctuations in currency rates (1$ = Rs.30 in 1980’s to 1$ = 68 in
2016)
 Loss of key employees.
 Development in technology (pagers to mobile phones, floppies to
CD’s)
 Natural calamities (earthquakes, tsunami, floods, etc)
In case of risks, a small firm would be able to adjust its operations and
business much faster when compared to a large firm. A large firm would find it
difficult to change its business and way of working in a quick manner.

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2 Size of A Business Unit

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Size of a Business Unit

In an industry there are firms of varying sizes. The costs of production

The firm owns the land on which the plant or establishment is

It controls the workers employed in the plant, finances the needs of

In spite of the lack of preciseness the following standards

2. Value of the Product:

But difficulty arises in case of the fluctuating value of the product or if

5. Amount of Raw Materials Consumed:

7. Productive Capacity of the Plant:

The concept of optimum firm has been developed by E.A.G. Robinson.

The concept of optimum size signifies the conditions under which a

Implications of the Optimum Firm:

The main implications of the optimum firm are as given

(1) Production of the required output at the level of minimum average

(3) Fullest possible utilization of technological potentials available

(4) Operating to the maximum scale of the installed capacity through

1. Technical forces influence size of a firm

2. Managerial forces influence size of business units

To appoint such personnel, high amounts of remuneration and benefits have

3. Financial forces influence size of a business unit

4. Marketing forces influence size of business

Advertisement time in media can be bought in bulk at cheaper

5. Forces of risks and fluctuations influence size of business

 Changes in customers preferences (textiles to ready-made,

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