Small and Medium Enterprises and ICT/SME Adoption of ICT

Why Should SMEs Adopt ICT?

SMEs are often the main driver for a country’s economic growth. However, as the number of SMEs increases, competition increases, which then results in a decrease in prices, customer base, or both. This in turn will erode existing profits, creating less incentive for people to start SMEs. This dynamic is captured by balancing feedback loops where the greater the number of SMEs, the greater the competition, resulting in a slower rate of growth for SMEs (see Figure 6, left). To counter the increasing competition, firms can lower prices, increase promotion of their product, improve their product, add new distribution channels, and/or improve their internal processes (see Figure 6, right). The challenge is to counter competition when the firm still has the financial resources to do so. Otherwise, once the pressure of competition sufficiently erodes the SME’s profits, it will no longer have resources to counter the competition and will have to exit the market.

Figure 6: A Systems Dynamics View of Firm Response to Competitive Pressures

Foreign firms in both the import and export markets further add to competitive pressures, especially if they react faster to improve their product, process, promotion, or distribution channels.This is the problem of the Digital Divide.When firms in developed countries adopt ICT, firms in developing countries will lose out on the competition.This in turn can slow the growth rate of SMEs and hurt the economy as a whole. ICT can thus play a very important role because it can help SMEs both create business opportunities and combat pressures from competition.Appropriate ICT can help SMEs cut costs by improving their internal processes, improving their product through faster communication with their customers, and better promoting and distributing their products through online presence. In fact, ICT has the potential to improve the core business of SMEs in every step of the business process. Figure 7 uses Porter’s value chain to summarize various ways that ICT can benefit a firm.

Figure 7: Benefits of ICT Tools Categorized under Porter's Value Chain

In countries where SMEs are only starting to adopt basic ICT, obtaining a fixed or mobile phone line can help their business. It can replace the time and costs necessary for face-to-face communication. In countries where SMEs already have basic ICT, adopting more advanced ICT still brings enormous benefits. Advanced communication technologies such as email can help firms communicate faster and cheaper with both its suppliers and clients. In 2000, an organization that uses paper took on average 7.4 days to move a purchase from request to approval, but if done electronically, only took 1.5 days.12 Advanced ITs such as ERP software can capture cost savings (see Figure 8). Beyond cost savings, SCM software can also help increase productivity, efficiency of inventory controls, and increase sales through closer relationships and faster delivery times (see Figure 9).

Figure 8: Cost Reductions from Enterprise Resource Planning13

Figure 9: Cost Reductions from e-Procurement and Supply Chain Management

Why Have So Few SMEs Adopted ICT?

Given the benefits that ICT can bring to SMEs, SMEs in most developing countries in the Asia-Pacific region still have been slow to adopt it. For example, 90 percent of Thai SMEs still use basic communication technology such as fixed phone line and fax, and only 1 percent use CRM software.Meanwhile, their counterparts in developed countries are using advanced ITs. One cause of limited adoption is the lack of dynamism between ICT firms and SMEs outside of the ICT sector. ICT firms have not provided goods and services tailored to SMEs in the past because demand from SMEs has been low. However, their demand is low in part because ICT products available in the market are too complex and expensive.The result is a vicious cycle of limited supply and limited demand that ultimately excludes SMEs from the benefits of ICT. Other factors also contribute to the limited supply and demand of ICT for SMEs:

Supply Side

1. Poor communications infrastructure results in limited access and higher costs.
Many developing countries still have poor communications infrastructure.Outdated equipment and state-owned monopolies often result in expensive charges and limited coverage, especially in rural areas. This discourages SMEs from adopting even the basic ICT of fixed lines or mobile phones.

2.Most advanced ICT products are designed for larger firms and not SMEs.
ICT firms used to target large enterprises because they had a larger budget and were willing to pay for more complex ICT services.Their products are often too expensive and too complex for SME users. However, competition in this market is making firms – both large and small – turn their attention towards the untapped SME market. Rosetta, for example, is pushing to capture SME customers by lowering prices by 50 percent and increasing awareness.16

Box 4: Examples of ICT Firms Entering the SME Market

In India, SAP launched pre-packaged, cost effective, and ready-to-plug-in ‘mySAP all-inone solutions’ for SMEs in mid-2003.Two months later, Oracle launched a special edition of its e-business suite for the segment in India.This pre-configured package of business applications is designed specifically for Indian companies that have a turnover in the range of USD 5 million to USD 80 million. The new Oracle solutions can be implemented rapidly within 10 to 40 days and save 60 to 70 percent on the cost when compared to traditional implementations.The special edition was priced at USD 32,000 for a financial solution complete with installation,hardware,maintenance, and software licences for 10 users.An enhanced bundle of products including financial, distributing, manufacturing, and purchasing solutions was priced at USD 52,000. The lower total cost of ownership was achieved through reduced complexity in the solution implementation, eliminating the need for extra administration resources, and lower entry pricing so that investments can scale-up with business growth. In terms of smaller firms, TBelmah Strategies, a Malaysian firm, created an ICT-aided manufacturing solution that integrates quality, productivity, and cost improvements. The software is cost effective, has 70 applications, and can be used by the electrical and electronics, moulding, rubber, and metal fabrication sectors.The firm is going into other countries such as Indonesia.17 HK Comp Technology developed NIIX, a software that saves SMEs time by sorting through thousands of pages to gain ISO status.18 It improves recordkeeping to meet new disclosure requirements and auditing practices, and harmonizes national financial reporting methods with international standards. In Thailand, TRUE launched an ‘all-in-one solution’ that offers services for SMEs in communications, marketing, business processes, and office management.

Demand Side

1. Limited ICT literacy of SME owners hinders their ability to choose the appropriate technology and understand the concrete benefits it can bring to their business.

Many SME owners are unfamiliar with operating a computer, are skeptical of the concrete benefits to its core business, and have the stereotype that ICT is only for larger companies. Even if they have the will and financial resources to integrate ICT into their core business, SME owners are often at a loss when needing to choose the most appropriate and cost-efficient product.

2. Limited ICT literacy of employees in SMEs hinders ICT adoption. Even if SME owners have a strategic understanding of why they should adopt ICT, their staff is often untrained.Training costs both time and money – resources that SMEs usually lack.

3. Adopting ICT is an adaptive challenge, not a technical challenge. Adopting ICT is a difficult task for companies of all sizes, whether they are in developed or developing countries. In fact, a lot of management literature focuses on the organizational changes that firms must go through in order to effectively adopt ICT because they change the way firms do business.While the changes may be beneficial in the long run, they often hurt one department and strengthen another. For example, Zhang Hongwei, senior consultant with D'Long International Strategic Investment, comments that “in order to make ERP‘s cost-saving and efficiency-building features work, managers must be willing to take measures that can be anathema in the state-owned sector, such as selling businesses, laying off workers, and changing longstanding vendor relationships.All of this can be tough to do.”19 Thus, SME owners are often reluctant to bring their firm through a learning curve that may be difficult and costly.

4. Lack of financing options limits SME ability to purchase ICT. Lack of financing and appropriate technology is clearly a major handicap to developing country producers and exporters, and it inhibits developing countries from deriving full benefits from their trade rights. Rubens Ricupero, Secretary General of UNCTAD, 18 February 2002, Geneva

SMEs usually have limited ability to make larger investments in their firm due to the lack of financing options. Given the financial squeeze, IT budgets are usually small or nonexistent. In addition, adopting ICT is not a one-time cost because there are ongoing costs of maintenance, upgrading, and human capacity building.

5. Lack of financial and legal infrastructure. SMEs may still be hesitant to engage in e-commerce due to undeveloped legal policy for electronic payment and security issues.Many Asian banks, a key link in the e-commerce chain, have not even adopted online banking in their own systems. In the end, the definite costs of identifying the right goods and/or service, finding staff to manage it, taking the company up the learning curve, and obtaining financial resources are not perceived to justify benefits.

Why Have Past Government Interventions Been Met with Limited Success?

Many governments have not explicitly focused on ICT adoption by SMEs in the non-ICT sector. They have either focused on growing the ICT sector or supporting the growth of SMEs, but they have not focused on integrating the two areas to implement broad-based policies (see Figure 10). Since most SMEs who can benefit from the use of ICT are not in the ICT sector, they have not been able to receive the benefits.

Figure 10: Breakdown of Types of Government Interventions

In addition, workshops and training seminars, the most common way for governments to encourage ICT adoption by SMEs, often did not tailor the content to the type of audience20 and did not focus enough on the concrete benefits. To encourage SMEs to adopt ICT, efforts first need to concentrate on convincing top management that implementing ICT can improve their business, whether through cost savings or enabling expansion to new markets. This is because these managers determine the overall strategy of the firm, and they make the decision whether or not to adopt ICT.Middle management are usually the ones to implement the ICT project and thus need to have a deeper knowledge of how to implement it, so their training should include a mix of strategy and implementation skills. Frontline employees are the ones who will use ICT on a daily basis. It is therefore more important to concentrate their training on the actual skills required than on the strategic benefits of ICT. The difference in training based on the roles of people in the firm is characterized in Figure 11.

Figure 11: ICT Training by Management Level21

This framework is supported by ICT consultants in the field. Zhang Hongwei comments that, “top management and the quality assurance function in its broad sense are best positioned to be directly involved in pushing for ERP implementation, and the number two of a company should be the project leader.”22

Box 5: Malaysia’s Effort Met with Resistance

Malaysia has about 100,000 SMEs.According to the International Data Corporation (IDC), SMEs spent USD 782 million on ICT, and investments will be growing at a compounded growth rate of 11.4 percent between 2002 and 2007.23 While most of the SMEs are aware of the potential benefits of ICT, they are unsure of how to select the right solution.24 Malaysia has tried to increase the ICT capabilities of its SMEs. The Malaysian Industrial Development Finance offers 75 percent financing at a 3 percent interest over five years for SMEs to buy ICT applications. Loan amounts can be anywhere between MYR 20,000 and MYR 250,000. The Small and Medium Industry Association of Malaysia has also signed a memorandum with TM Net (a local Internet Service Provider) to increase broadband usage among SMEs.25 However, the efforts have not been fully translated into results.Of the SMEs in manufacturing, only about 10 percent of SMEs have used ERP, 10.1 percent CRM software, 13 percent computer-aided manufacturing, and 24.8 percent computer-aided design.26 Of SMEs as a whole, only 30 percent have a web presence and use ICT extensively in daily operations.27