Introduction to SMEs
Over the last thirty years Small and Medium Enterprises (SME’s) have significantly contributed to economic growth, job creation, innovation and promotion of enterprise. Although SME’s are important to the UK economy they face many different issues in comparison to a large organisation. The report looks at a current issue which affects SME’s and how it is important as it can affect the business from start-up to growth. The issue investigated in this report is e-commerce, there is no single specific definition of e-commerce, but leading authors of e-commerce (Timmers, 1999 and Tassabehji 2003) agree that e-commerce ‘includes the electronic trading of physical goods and intangibles such as information.’
Small firms employ a total of 12 million people and provide half of the total gross domestic product in the UK (FSB, 2005). The FSB add that this money is then used for public services. Furthermore, Poon and Swatman (1999) claim that the success of small business has a direct impact on the national economy. This strongly implies that the government is actually dependent on SMEs. Perhaps this is the reason why the government are, encouraging small business activity and e-commerce activity amongst SMEs. The Business Link (www.businesslink.gov.uk), Small Business Research Initiative (http://www.sbri.org.uk/) and ITSafe (www.itsafe.gov.uk) initiatives are examples of such encouragement.
What are the benefits of e-commerce?
Many SMEs are adopting e-commerce as well as traditional commerce. The reason for this is that this provides the company an opportunity to improve its performance. As e-commerce becomes more widespread, the consumer has the option of buying from or comparing products from various firms. In order to be one of these firms, many SMEs consider adopting e-commerce. This notion is reinforced by Kalakota and Robinson (2001) who claims that e-commerce is adopted to satisfy the modern customer’s needs (i.e. providing the customer with what they want, when and how they want it and at the lowest cost).
E-commerce is not only more efficient for the consumer, but also the business, 16% of small firms (those with up to nine employees) spend no money at all on setting up a website and 23% spend up to $999 (US SBA, 2002). This strongly implies that the costs to initiate an e-commerce strategy are very low, which could be one of the reasons for the continued growth of e-commerce amongst SMEs.
Although all small businesses do not use e-commerce, an article, released by the Office of Advocacy of the US SBA (2002), claims that 83% of small businesses use the Internet in some way (e-mail), in order to make their business processes more effective. Despite the high use of Internet technology amongst SMEs, the e-commerce adoption rate is much lower – Goode (2002) said the reason for this was the lack of understanding of the benefits that e-commerce offers.
Factors affecting e-commerce adoption
Dholakia et al (1993) suggest that the size of a given firm is a determining factor in whether or not they adopt Information Technology. Larger organisations tend to have the resources to implement new technologies. Limited resources restrict the ability of an SME to compete.
Also, self-belief is one of the main reasons as to why an organisation or even an individual would carry out a behaviour. Hill, Smith and Mann (1987) found that self-efficacy influences the adoption of a technology. This is an example of standard human behaviour according to Skinner (1953) who suggested that when a past event causes a negative outcome, it is likely to be avoided in the future. This therefore implies that any organisation, which had implemented a strategy that had previously failed, was likely to avoid implementing another one (e.g. e-commerce) in the future.
Disadvantages/barriers of e-commerce implementation
Despite the perceived benefits of e-commerce, many SMEs do not adopt e-commerce. In order to understand why there is reluctance amongst SMEs to adopt e-commerce, empirical evidence must be exhausted. A study by Kambil and van Heck (2002) found that in order to be successful, an online market must be as rich, complex and complete as a traditional market but simultaneously offer extra value (incentive) for its users. This suggests that SMEs may be reluctant to adopt such a strategy, because they feel unable to offer extra value to customers.
However, Cragg and King (1993) say that one of the major barriers to adoption is a lack of resources (including finances) and knowledge. Walczuch et al (2000) adds weight to Cragg and Kings (1993) argument by outlining that SMEs often lack the finances necessary to adopt e-commerce. These costs include, but are not limited to, staff training and purchasing of hardware.
It is unlikely that any type of strategic planning will take place in most SMEs and this is why Bridge and Peel (1999) believe that most small business are somewhat reluctant to utilize ICT for their business needs. This suggests that the mere fact that a company is small in magnitude is a barrier in itself to e-commerce adoption.
Introduction to SME
Bare Essentials is a small business in the wholesale sector. The company recently implemented an e-commerce strategy. Bare Essentials specialise in the wholesale of socks, underwear, nightwear, lingerie, tights and gloves. In addition to being a wholesaler, Bare Essentials also manufacture some products for their own company as well as importing and exporting some products. It is a very small and young organisation.
Bare Essentials were facing a quiet period in their business. The business had always been conducted via a storefront in the traditional bricks and mortar fashion. Bare Essentials are in a highly competitive market providing socks and underwear to mainly small businesses from the retail sector. The management at the company took the decision to create a company website; this would increase awareness of the company and also introduce the company to e-commerce.
Bare Essentials needs to learn from the failure of highly publicised fashion web site Boo.com. Boo.com was one of the biggest e-commerce failures, because they invested too heavily in software and technology (DiSabatino, 2000). Although Boo.com invested a lot more money than would be feasible for Bare Essentials, the notion of successful budgeting is still highly important for Bare Essentials, because being a small business, Bare Essentials can not afford any financial setbacks. For Bare Essentials, the Boo.com case highlights the fact that there are risks in going online.
Bare Essentials has many local competitors, these organisations are located nearby to Bare Essentials and offer a similar service with a similar product range. To gain competitive advantage Bare Essentials needs to have an innovative sales strategy.
Largely due to the size of the organisation, there are not many systems in place at Bare Essentials. There are no set procedures for hiring staff or for responding to the competitive environment. One of the systems used at Bare Essentials however, is the technology to facilitate customer payments. The decision to adopt e-commerce by Bare Essentials shows that the company intends to embrace an IT system whereby ordering for current customers will become easier and potential customers will be able to view company and product information conveniently.
Two members of staff at Bare Essentials were interviewed. Two of the interviews were conducted with manager/owners. (See Appendix 1)
How has e-commerce impacted the SME
For Bare Essentials, it seems that a competitive advantage has not yet been achieved, since the year-on-year sales have not increased. It is clear though, that there has been no growth thus far, after implementing e-commerce, which undermines Oliver (2000), who claimed SMEs would experience growth as a result of e-commerce. This implies that in the case of Bare Essentials, a competitive advantage has not been created. . The implication of this is that, e-commerce does not change the business or its competitive position to the extent outlined by some researchers. It is possible though that the change will not occur immediately, but instead after e-commerce has been in use for several years.
Competitive forces were the primary driving force for Bare Essentials in e-commerce adoption. The company did not want to fall behind their main local competitor, M Holt Ltd. The customers of the company had not expressed an interest in e-commerce and it can therefore be concluded that the customers were not a driving force for Bare Essentials, in e-commerce adoption. This suggests Bare Essentials were pressured into going online, by their local competitor, against whom they probably benchmark their business. E-commerce was implemented in order to keep in touch with their competitors, rather than to fulfil the needs of their customers.
The business’ operating costs were not lowered. Instead, they increased as a direct result of e-commerce implementation. Furthermore, revenues were not increased, neither were profits for the business, although no figures were released by the owners. One possible reason for this is that customers were reluctant to make big orders online.
In addition to the costs not being lowered at Bare Essentials, even the initial investment has not yet been recovered by the company. This provides further ammunition to the theory that e-commerce increases business costs, rather than lowering them. It is not known whether costs will decline in the future at Bare Essentials.
Another conclusion made was that Bare Essentials do not have the money necessary to create a known presence online as the marketing costs and search engine optimisation costs are too high. After investing approximately ₤400 in this area, the owner/managers said they would not invest further unless they were positive that some monetary benefits would be realised. From this it can be concluded that the Internet is not a fair or equal marketplace, as larger organisations have a healthier budget for online marketing and creating online awareness. The research also suggests that e-commerce had a positive impact on some business operations, but a negative one on others. For example, customers reported that communication with Bare Essentials became easier.