Small firms and the digital economy

The rapid expansion of digital technologies has transformed the way that markets and industries operate. According to the 2014 Accenture Digital Consumer Tech Survey, today’s consumers are increasingly online and mobile with the majority owning or planning to own a laptop computer, smartphone, HD TV or a tablet. 

This rise in consumer engagement with digital technologies was also highlighted by the Telstra Sensis e-Business Report for 2014. That study found 95% of all Australian households are online and 77% of Australians own a smartphone. Younger consumers aged in the 20s are the most prolific users of digital technology with 96% owning and using smartphones to access the internet.

For small to medium enterprises (SMEs) the ability to engage in this digital economy is vital not only to their success, but to their very survival. However, while 98% of Australian SMEs have a computer only 66% have websites, only 54% use it to engage in e-commerce (the process of buying and selling online), and only 26% were selling to international customers via e-commerce.

The Sensis e-Business Report also found that only 23% of Australian SMEs had developed a strategic plan for future digital business engagement. Only 39% of SMEs were using social media (mostly Facebook), and only 7% reported having developed an ‘App’ for their business. This would suggest that many Australian SMEs are not actively engaged with the digital economy and may therefore miss the opportunities that it offers.

To gain an understanding of what is happening in the world of SMEs and the digital economy I undertook a review of the academic research literature over the period 2013-2014. This review has been published in the journal Small Enterprise Research and examines 16 papers dealing with e-commerce, e-business (the use of digital and online technologies for operational processes), and e-marketing (the use of digital and online technologies for marketing and promotion). The findings from this review are summarised below.

Digital technology and SME performance

Not surprisingly the review found a positive relationship between the adoption by SMEs of information and communications technologies (ICT) and the successful performance of these firms. However, this may depend on the nature of the industry in which the business is operating. Where the adoption of digital technologies is low a firm that can be an early user of such ICT is likely to secure a competitive edge. However, if the industry is already using this technology the SME should take care not to overinvest beyond what is required to remain at best practice.

In the use of digital online technologies the review also found that SMEs could secure significant productivity enhancements through the adoption of ‘advanced’ broadband applications. These included tools such as virtual private networks (VPN), voice over internet protocols (VoIP), video conferencing and e-learning, as well as file sharing and data security systems. However, the mere adoption of ‘basic’ applications (e.g. email, online banking, or website searches) was unlikely to yield any significant advantages.

The adoption of ICT by SMEs was found to be a boost to their competitiveness and a way of enhancing productivity. This was due to employees being able to perform more efficiently once appropriate technologies were provided to them. However, they required appropriate training and support as might be expected.

Using e-commerce in developing economies

The adoption and use of e-commerce by Australian SMEs may still have some room for improvement, but it is in advance of similar firms in developing economies such as Indonesia and Ghana. A review of research papers undertaken in those two countries found major gaps in age and education levels amongst SME owner-managers. Not surprisingly younger and better educated owner-managers were more likely to adopt e-commerce in Indonesia.

In Ghana, while most small business owners were aware of the potential for ICT and related digital technologies the majority preferred to rely on face-to-face transactions and other ‘non-digital’ methods of exchange. For many SME owners there is the fear of cyber-attacks and other risks to the business (e.g. Malware, Trojan horse, hacking). Such threats can be addressed with a sensible and systematic regime of preventative measures and management protocols. However, for many SME owner-managers this may be viewed as too complex and support services too expensive.

The positives and negatives of e-business for SMEs

For many SMEs the adoption of e-business processes can have significant enhancements to the firm’s management of customers, suppliers, employees and production systems. However, the review found that many SMEs from the United Kingdom that engaged in e-business as part of major supply chains were concerned over the negative impact of this online strategy.

Major concerns related to becoming too dependent on a single large customer, not having direct contact with the customer, losing “transparency” of the information flow, not being paid and “cannibalising” their existing offline business channels. SME owner-managers were also concerned over cyber security issues as they engaged in e-business. Owners who were less experienced were more likely to hold positive views on the benefits of e-business than their more experienced counterparts.

For many owner-mangers the value of adopting e-business strategies is contingent on their being able to see direct benefits from any investment in such technologies. This is particularly the case for very small firms where the expectation is in immediate increases in sales or reductions in costs.

Research undertaken in Malaysia and Singapore found that the key barriers to SMEs adoption of e-business were the knowledge and awareness by the owner-managers of e-business and its benefits. To get owner-managers to adopt such technologies is likely to require not only highly reliable, affordable and easy to use systems, but a process of education of these owners and their employees.

This has lessons for governments, large firms that engage SMEs as suppliers, and the vendors of e-business software and systems. In addition to demonstrating the potential benefits to SMEs of adopting e-business technologies there will need to be education and support programs.

Using e-marketing for business success

The research literature suggests that SMEs that engage actively in e-marketing will benefit from enhanced new business generation and reduced cost of sales. They may also potentially secure better brand awareness, greater market share and more profitability. However, there needs to be active pre and post-sales activity to help support the process of online communications.

Although still a relatively new frontier for many SME owner-managers, the use of social media can also be beneficial. There are many low cost social media tools available to SMEs (e.g. Facebook, Twitter, LinkedIn, YouTube etc.), with the potential to use them as a form of customer relationship management (e-CRM) system.

The use of social or “Web 2.0” technologies can be applied to a range of business channels such as business-to-business (B2B), business-to-consumer (B2C), business-to-employee (B2E) and even business-to-employee-to-consumer (B2E2C). Such technologies can enable SMEs to secure the benefit of positive social media and customer advocacy via sites such as Tripadvisor or HomeAway.com.

However, such initiatives must be managed and supported with a good website and well-considered online marketing strategy. This seems to be an area that requires further work as the Sensis e-Business Report for 2014 found that only 30% of Australian SMEs were actively engaged in e-marketing.

Going digital is essential for SME success and survival

Overall the review of recent research literature in SMEs engagement with ICT and other digital technology suggests that it can deliver significant benefits to these firms if properly applied. However, it also highlights the need to convince many owner-managers of the cost-benefits of investing in this technology, as well as the need to provide them with education and support to assist with implementation.

The proliferation of digital technologies, particularly online and mobile ICT is set to continue. Any SME that does not embrace this technological revolution is unlikely to maintain their competitive edge and may struggle to survive. This may impact some industries more than others, but it is unlikely that any business will be able to ignore digital technologies over the long term.

Further reading

Mazzarol, T. (2015) "SMEs engagement with e-commerce, e-business and e-marketing," Small Enterprise Research: The Journal of SEAANZ 22(1): 1-12.