The digital economy has expanded but small firms have lagged behind.
In an earlier article I discussed the findings of the Sensis e-Business Report for 2012 and the Sensis Business Index for September 2012. One of the key findings was the high level of interest by Australian small to medium enterprises (SMEs) to increase their digital presence. However, 81% of the SMEs surveyed had not developed an online business strategy.
As a result of interest expressed in the article by small business I thought it appropriate to look at what the academic journals are saying about small firms and e-commerce. However, I should point out that this is not a comprehensive review of the literature.
The rise of the digital economy, but not the rise of digital SMEs
At the start of this century the Organisation for Economic Co-operation and Development (OECD) released a report into the potential of electronic commerce for SMEs in the global economy. This report noted the growing opportunity for Internet-based commerce for small firms. It reported that while SMEs were making increased use of the Internet for a range of commercial purposes, in general they had only a limited understanding of the full potential of electronic commerce.
The report identified three ways in which SMEs were using the Internet. First, there were the entrepreneurial start-ups that were using the technology to offer new services and develop new business models. Second, there were established firms that were using the Internet to expand into national and international markets. Finally, there were firms that used online connections to plug into supply chain relationships with larger firms.
Fast forward to 2012 and the latest OECD report on the outlook for the Internet Economy suggests that the growth in the online economy continues without let up and has gone mobile. For example, at the end of 2011 there were an estimated 667 million wireless broadband connections across the OECD group of economically advanced countries. This compares to 315 million fixed broadband connections. Speeds have also increased for DSL by 32% and cable broadband by 31% since 2008. Better still; prices have fallen by 3% to 4% for such services.
As shown in the figure below, the rate of growth of wireless and fixed broadband subscriptions across OECD countries has risen sharply since the 1990s. The trend in wireless broadband is noticeable. Approximately 70% of OECD households now have broadband Internet access. However, although 94% of SMEs across the OECD were connected to the Internet, only 35% were engaged in online purchasing and only 18% of firms were using the Internet to sell goods and services.
So it seems that Australia’s SMEs are not the only ones struggling to get their business online in this increasingly digital economy. What then should the owner-manager of a small firm consider when embarking on the development of an e-commerce strategy?
Internet-based business models
Developing an e-commerce strategy requires a small business owner to consider what their online engagement means in terms of their underlying business model. By its nature e-commerce embraces a wide-range of different online business activities some of which is business to business (B2B) and some is business to consumer (B2C). Its advantages include the ability to reduce transaction costs, increase market reach, build online communities with suppliers and customers, and secure access to valuable information.
Writing in the California Management Review as far back as 2000 B. Mahadevan outlined some general principles for the design of business models for e-commerce. Of importance is for the owner-manager to determine what role they feel they wish to play in the online economy. Also of importance is the type of product or service they offer, and how they may capture revenue streams from e-commerce while simultaneously creating value for their suppliers and customers.
Charles Stienfield, in an article published in 2002 in the Journal of Interactive Advertising, cautioned businesses to avoid “channel conflict”. This is where the opening of an online store by the business as a means of increasing the overall market size results in the loss of traffic to the physical store as customers stay home and shop online. What is important is to use the e-commerce strategy to develop synergies with more traditional business operations.
Stienfield proposes that an e-commerce strategy can create synergies through such measures as having commonalty in online procurement and logistics management infrastructure and operations with its suppliers. Alternatively it can gain synergies by ensuring that its online marketing and sales activities are integrated with its physical ones. This may take the form of a common sales catalogue which is available both on and off line with the company’s website address clearly displayed on the physical documents. The relationship between these synergies, the management strategies and potential benefits accruing from them are illustrated in the following diagram.
Learning to adopt e-commerce as a way of doing business
Research undertaken in the United Kingdom for the Department of Trade and Industry (DTI) identified an “adoption ladder” for SMEs as they developed their online business models. This was reported in a paper by Michael Taylor and Andrew Murphy from the University of Birmingham published in the Journal of Small Business and Enterprise Development in 2004. It is illustrated in the following diagram.
It can be seen that the starting point for many SMEs is the active use of e-mail to assist with efficient communications. Then the first step into the market is to build and publish a website. Once the business is engaged in selling or buying online it is implementing a rudimentary e-commerce strategy. This evolves into an e-business model when the firm has further integrated its online strategy with its offline operations. The active participation in supply chain management activities using online systems is a good example of this. Eventually the business will develop a business model that transforms it into an increasingly virtual and networked organisation.
Although this model is useful in providing a simple evolutionary perspective on how SMEs might develop online strategies, it assumes a linear process and implies that all firms must follow the same path. Taylor and Murphy acknowledge these limitations and point to other models, such as that of Paul Foley and Monder Ram from De Montfort University who’s 2002 study suggested that SMEs approach e-commerce via a three step process. This commences with publishing information on their website, it then moves to interaction with suppliers and customers via buying and selling. Finally, they engage in a process of business transformation that includes more complex systems to allow customers to have more control over the relationship through specifying order times, tracking deliveries and customising orders.
This is consistent with research undertaken by Necmi Karagozoglu and Martin Lindell that was also published in the Journal of Small Business and Enterprise Development in 2004. Their paper found that e-commerce strategies by SMEs largely built on their existing “bricks and mortar” business models. While small firms that engaged in e-commerce experienced enhanced sales growth and profitability, procurement via online systems was less successful. The cause here was the high cost of e-commerce platforms and the related technologies that were required.
A further model of how SMEs might develop an e-commerce strategy was developed by Heikki Karjalutoto from the University of Jyvaskyla and Maija Huhtamaki from the University of Oulu in Finland. Published in the Journal of Small Business and Entrepreneurship in 2010. Developed for micro-businesses engaged in retailing, their model is illustrated in the diagram below.
It can be seen from this model that the business develops through four stages linked primarily to the use of the Internet for information, then communication, then transactions and finally as an integrated strategic part of the business. Driving this development cycle is the three forces of environmental factors, firm resources and the characteristics of the owner-manager and their firm. These three factors can either facilitate or impede the level of adoption of e-commerce within the business.
So is e-commerce worth the effort for SMEs?
In a study of 75 Australian SMEs published in the journal Technovation in 2004, Shameen Mustaffa and Nick Beaumont from Monash University. This found significant relationships between short and long term new revenue generation for these firms, as well as the securing of short and long term competitive advantages. Some of the most important effects were the use of websites to reduce advertising costs, using online media to find and retain contact with customers, and expanding products and services. However, it should come as no surprise that most firms found the Internet to be a two-edge sword as it significantly increased the ability of overseas competitors to enter the Australian market.
Another Australian-based study of SMEs engagement with e-commerce is that of Rob MacGregor from the University of Wollongong and Lejla Vrazalic from the University of Middlesex. Their paper on the non-adoption of e-commerce by SMEs in the regional areas was published in Small Enterprise Research: The Journal of SEAANZ in 2008. They examined 247 SMEs who had not adopted e-commerce strategies. They found firms not adopting e-commerce strategies either due to the perception that it was too difficult or that it was not suitable for their business. The majority of these firms were micro-businesses and those that had direct, personal relationships with their customers saw little value in going online. They also found significant effects caused by the education of the owner-managers of these firms. Those with lower levels of formal education were more likely to resist engaging in online business activities than their counterparts who had university or other higher education qualifications.
These findings are similar to those identified by Prashanth N. Bharadwaj and Ramesh G. Soni from the Indiana University of Pennsylvania in a paper published in the Journal of Small Business Management in 2007. They surveyed 280 SMEs in the United States and found that urban based businesses were more likely to be active in e-commerce than their rural counterparts. The firms that engaged in e-commerce strategies reported significantly better flows of information to and from their markets, better corporate image, higher profits, and faster response times to customers, enhanced market access and greater productivity. They also reported lower costs of marketing, sales, purchasing and less wastage. Although these firms did not necessarily see significant changes to their overall sales volumes they did report protecting their existing market share.
A further study of 55 small online retailers in the United States was undertaken by Patrick Tan, Ravi Sharma and Ying-Leng Theng from Nanyang Technological University in Singapore. Their paper was published in the International Journal of Electronic Business in 2009. The firms examined in this study were actively engaged in e-commerce and they developed a model of e-commerce management that highlights the importance of the owner-manager making a commitment to growth via online strategy. An important focus for those seeking such growth was the need to differentiate their product offerings and build “a vibrant online community to increase sales and profitability”. This contrasted with those firms that were seeking to compete primarily on price.
According to the OECD the past decade has not seen much progress by SMEs in terms of their engagement with e-commerce. Australia performs better than many other OECD countries in this regard, but not as well as Switzerland, New Zealand and Canada. As the digital economy has expanded SMEs have lagged behind. This is due in part to the cost and complexity of setting up online commerce and business activities. However, costs are coming down for such systems and are increasingly within reach of most small firms. The key to getting more SMEs online and engaged with e-commerce is to help owner-managers learn how to do this.
Tim Mazzarol does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations.