Page 156 - Introduction to Business

130 PART 1 The Nature of Contemporary Business

EXHIBIT 4.2 many mainframe computer firms out of business. Other examples of businesses
Small Business and Creative that failed to keep up with competitive challenges over the past twenty years are
Destruction Eastern Airlines, Texaco, Continental Airlines, Allied Stores, Federated Depart-
Technologically innovative new ment Stores, Greyhound, R.H. Macy, Pan Am, Maxwell Communication, and
businesses destroy old-technology large Olympia & York. The destruction of large firms can certainly be disrupting. How-
businesses. ever, these failures present opportunities for new firms to prosper and grow in
the future. Also, some large firms that fail are reorganized in bankruptcy and
return to become successful after substantial changes in their operations. Many
Competition
economists believe that competition is healthy because it leads to technological
innovation and change. In turn, competition enables the business sector to
increase the quantity and quality of goods and services. If countries protected
Technological business firms from competition, creative destruction could not take place, and
innovation a vibrant, healthy economy could not flourish.
Large
firm
failure
Invention and Innovation
New small firms
A common argument against small business firms is that they are too small to
produce goods and services as efficiently as large firms. We know that mass pro-
duction reduces the cost per unit output; this is known as economies of scale.
Competition Since smaller firms would be forced to produce the same products and services
at a higher unit cost, some economists argue they cannot compete with larger
firms, which can offer lower sales prices to customers. The wisdom of this logic
Source: Joseph A. Schumpeter, Capitalism,
Socialism, and Democracy (New York: is evident in the preponderance of extremely large firms in many industries,
Harper & Row, 1942). such as automobiles (e.g., DaimlerChrysler), electronics (Sony), fast food
(McDonald’s), beverages (Coca-Cola and Pepsi), computer software (Microsoft),
economies of scale The reduction in
cost per unit output that occurs as a firm and so on. However, each of these industries is constantly experiencing the entry of
mass-produces a product or service new, smaller firms. Small businesses have a substantial share of the gross domestic
product (GDP) in various industries (see Exhibit 4.3).

EXHIBIT 4.3
Small Business Shares of Gross Domestic Product
in Different U.S. Industries, 2001

Total Small Business
Industry Group Share (in percent)

Mining and manufacturing 30
Utilities 22
Construction 90
Trade 64
Transportation and warehousing 40
Information 25
Finance and insurance 29
Real estate, rental, and leasing 74
Professional and technical, administrative, support, etc. 65
Educational services 45
Health and social services 57
Arts, entertainment, and recreation services 76
Accommodation and food services 57
Other services 71
Total private nonfarm industries 50

Source: Joel Popkin & Company, “Small Business Shares in NAICS Industries,” report no. SBAHQ-01-M-1056,
submitted to the U.S. Small Business Administration, Office of Advocacy, Washington, DC, 2002.
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