Small or medium sized companies can have the advantages of being able to act as a big company while maintaining the advantages of being small.
A hosted solution has many advantages.
You no longer need the staff, or have to spend money on installing and upgrading software on your clients' machines. Your customers and clients can use your application anywhere, not just on their office computers. If you provide services as well as an application, third parties can easily use your solution as part of their offering. Sometimes these services can be used in your own applications such as portals, or future applications. Perhaps your customers can extend your application making it more valuable to them. Having your application in the cloud means that your intellectual property (your secret sauce) is better protected because it is not in the hands of your users.
All these arguments also apply to small business units within a large enterprise.
Nonetheless, small businesses very often do not have the financial ability to economically run, or even rent a significant hosted application solution beyond a small scale web application.
Cloud computing offers a way out of the dilemma.
Cloud computing offers businesses a utility model for computation. Host your application on a cloud platform and you pay only for what you use. With minimal initial investment, you can scale up or down as your customers use more or less of your application or services.
With many cloud vendors (Amazon being a major exception) you do not even know on what infrastructure your machine runs on. Scaling and failover happen in those environments with minimal work on the client's part.
Clearly the cost and reliability of the cloud provider is crucial. Google's most recent outage shows that this is not a unreasonable fear. Private IT centers also have had their outages, but they are not made public.
Microsoft, Amazon, Google and others are spending huge amounts of money to build cloud data centers. Clearly they see the opportunity.
Right now many large companies already have data centers that can offer cheaper compute power than the current generation of cloud providers. This will eventually change.
But right now, small companies, start-ups, and other similar organizations should think about cloud computing for their hardware infrastructure.