Important Role Of Small Medium Enterprises Business Essay


Small and Medium Enterprises (SME) are an important part of many national economies. In the developed world, especially in the European Union, they constitute 99% of businesses offering much needed employment, contributing significantly to the GDP of nations (Nachira 2002, pg 3). This paper attempts to gain an understanding of the barriers to the take up of e-business by SMEs, determine the e-business model that would be most appropriate for SMEs, explore the meaning of SME networks and finally determine the importance to national economies the increasing trend towards "Service Ecosystems".

A business model is a story that explains how the different structures within a business relate to achieve its objectives. It answers critical questions of what service or product will be offered to customers, how will it will make money, at what price will these services or products be offered to customers and what way or manner will the service or product be offered to the customers? (Magretta, 2002)

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An SME network is a collection of small and medium sized businesses that leverage on their collective strength (greater economies of scale) for their collective benefit and or collaborate to offer services to third parties or exploit market opportunities. (Nachira, 2002)

Yelmo et al. (2009) defines a service ecosystem as follows:

An open and dynamic service marketplace where a community of third-party service providers work together to provide a wealth of services, which are exposed and consumed using web services technologies in a particular business service delivery environment.

This structure would include all stakeholders in the system such as service providers, infrastructure support services as well as the customers.

As detailed in the definitions above, a business model, SME Network and Service Ecosystem are different stages in the evolution of a business within the market place. A business begins as a separate business model and possibly transits into a network of businesses and finally becomes part of a Service ecosystem.

2.0 What barriers exist to the take-up of e-business by SMEs?

The barriers to the take up of e-business by SMEs can be grouped into two broad categories. The first category involves barriers that are general to all business in all parts of the world ( developed and developing countries) while the second category refers to barriers that manifest in developing or third world countries which have certain peculiarities.

For the first category, barriers include: lack of capital or resources, the absence of skilled labour, absence of easy to use technology from SMEs and lack of information on the benefits of e-business and how it can be used to further their business goals and objectives. Most SMEs cannot afford the cost of implementing e-business in their organisations without recourse to financial institutions such as banks. This is despite the fact that cost of Information and Communication Technology (ICT) infrastructure has greatly reduced over the years. Furthermore, in developing countries, in the event that an SME decides to get financial help from a bank, they are faced with challenges of preparing business plans and viability statements required by the bank which these organisations seldom have the expertise or capacity to provide. There also exists the risk factor of making such a huge investment. Most SMEs can't afford to try and fail due to capital intensive nature of setting up the e-business infrastructure as well as maintenance. The entire process involves planning, costing, procurement, deployment and possibly recruitment of personnel who would administer this new system. Typically, SMEs lack suitable technical and managerial staff that can manage and operate a business in an e-business environment. They can't usually afford to source for these skills from the open market as they are in competition with bigger organisations who possibly have more attractive offers. In Europe, there is an estimated shortage of 1.9million skilled ICT and e-business professionals. It will be safe to assume taking into consideration the many deficiencies of the developing world (such as lower standard of education and availability of infrastructure compared to what is obtainable in Europe) that the absence of skilled personnel in this area in even more dire. Furthermore, the absence of easy to use technologies for SMEs also makes it difficult for SMEs to pursue this line of action. Some SMEs find they are trapped into adopting the technology of major clients thus reducing their flexibility and ability to service a wider range of customers. Finally, some SMEs are not aware of the value of adopting e-business models or technologies. This lack of appreciation of the benefits that can accrue makes it even more difficult for SMEs to make the financial commitment to deploy e-business in their organisations. (Nachira 2002, pg3, 5)

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In addition, some authors argue that other factors such as the validity of customer data, data privacy challenges, absence of a legal dispute resolution system, difficulties in virtual identity management, fears of intellectual property rights(IPF) violations, the absence of independent assessment of e-business enterprises to ensure standards are met, differences in IT standards and the absence of policies and laws to cover non-traditional business structures such as networked organisations also prevent the adoption of e-business by SMEs, especially those interested in cross border transactions and business opportunities. In the event that an SME's business is dependent on customer data such as a micro credit business, some authors argue that to ensure valid customer details is a significant challenge, especially in developing countries where the verification of this data is more difficult due to the absence of regulatory structures such as a credit bureau. Also, data privacy concerns, such as being able to guarantee that using e-business channels will not lead to data theft resulting in fraud. Users who would interact with the e-business system need to be assured of the safety of their private data. The absence or irregularity of regulations with respect to resolution of disputes, unclear definition of the validity of different electronic documents and signatures, the issue of Intellectual Property Rights also increase the reluctance of SMEs to deploy e-business. Some of these SMEs fear that the absence of clearly defined regulations would create situations where business disputes or perceived irregularities are not handled properly especially in situations where cross border transactions are involved. The national laws of the different parties to the transaction could result in conflicts that end up being protracted and unnecessarily expensive for SMEs to manage in terms of man hours and other resources. There also exists an absence of laws or governance structures to oversee non-traditional businesses such as networked organisations or the sort of relationship that might exist in a service ecosystem. These laws and governance structures would ensure that SMEs conform to standards expected of them thus creating a mutually beneficial environment for all SMEs. A further constraint for SMEs is the difference in IT standards across various national boundaries. This constraint makes it more difficult for SMEs that want to establish cross border relationships to provide certain services, thus discouraging the establishment of networked organisations. (Ren and Hassan 2007, pg 247,248,250,252-253)

The second category of barriers consists of challenges that are more specific to the developing world and the peculiarities of that environment. Barriers such as infrastructure challenges like the absence of credit cards, electricity, slow internet diffusion, low tele-density, absence of purchasing power, logistics challenges and bandwidth availability. These challenges make deploying e-business a very difficult task. Research has shown that in countries such as Russia, India and Latin America 35-40% of transactions are cash based, thus emphasising the level of penetration of e-payment systems. In other countries such as Tanzania, the absence electricity, low earning capacity of the people as well as low teledensity has resulted in minimal use of rural internet facilities where available. This is significant because in Sub Saharan Africa a large percentage of the populace reside in rural communities. In addition, some authors argue that internet use for traditional business activities such as agriculture is less attractive. For instance studies have shown that cost savings from e-commerce resulting from traditional business activities such as agriculture is 2% compared to 40% for sectors such as electronic components. Traditional business activities however, make up a significant proportion of economic activities in developing economies. In addition, developing economies do not have easy access to logistics capabilities as is available in the developed countries. In the Caribbean, for instance, it is difficult to attract reputable companies such as FedEx and UPS who have a proven track record of success in logistics which can also help to boost trust (a key ingredient in the successful deployment of e-business channels). Limitations in bandwidth also have an impact on the ability of customers to respond to e-business activities. (Kshetri 2007, pg 444-445)

In addition to infrastructural challenges, there exists a cognitive barrier to the adoption of e-business by SMEs in developing economies: English language literacy. It has been said that the low level of English literacy is a major hindrance to the adoption of e-business in non-English speaking countries.

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As Nir Kshetri (2007, p445) observed:

In Slovenia, 75% of the population fluent in English used the internet compared to 1% of the non-English Speakers. The number of sites in languages such as Quechua (10 million speakers in Bolivia, Ecuador and Peru) or Ibo (15 million speakers in Nigeria) can be counted on the fingers of one hand and non offer interactive services.

Based on the observation above, it's clear that non-English language sites are not only less preponderant in cyberspace, non-English language speakers are not encouraged visit the internet because web content in their indigenous languages are not readily available.

3.0 Which e-business models would be most appropriate for SMEs to adopt and why?

Timmers (1998) states that there are eleven basic classifications of business models, they are: E-shop, E-procurement, E-auction, E-mall, Third Party Marketplace, Virtual communities, Value Chain service Provider, Value Chain Integrators, Collaboration Platforms and Information Brokerage, Trust and Other Services. Timmers (1998) further classifies these e-business models into two categories as follows: the first category refers to traditional ways of doing business which have become IT enabled or in other words, are now implemented using ICT such as E-shops, E-mall and Third Party Marketplace. For the above listed business models, traditional options to these models are ubiquitous in the market place, for instance examples of the E-shop are independent businesses that sell items to customers in our communities. Customers go to these shops to request items they need and they are sold over the counter or delivered to them at specified addresses. Examples of the E-mall are the various Community malls or Community Centres where various businesses situate their outlets with the hope that the "neighbour effect" of being situated next to other businesses will increase patronage to their shops. Examples of Third Party Marketplaces are the numerous fairs organised by local councils and their Chambers of Commerce to encourage business activities as well as raise revenue. These fairs are set up as one-off events which businesses in the community take advantage of to advertise and enhance the penetration of their various products by offering generous discounts to attract customers.

The second category on the other hand refers to innovative ways of doing business. These business models cannot be operated in the absence of ICT. Their entire value preposition is based on the strength of ICT. For instance, a virtual community is based on the principle that members of this community contribute valuable content to the community which in turn attracts other members to this community thus making the community, a viable forum for advertisement. This concept cannot be implemented without ICT. In addition, a concept such as "Value Chain Service Provider" is based on the premise that ICT infrastructure exist. This refers to a situation where an external organisation offers to execute an aspect of an organisations value chain for a fee. Examples are logistics or electronic payment.ICT ensures the transparency and accountability of transactions. Without the advent of ICT it would be foolhardy for one company to offer a service and for some other company to collect payment on behalf of the service provider. Similarly, Value Chain Integrators offer to consolidate the value chain of third parties offering information based on transactions performed examples of which exist in the Gaming industry where Value Chain Integrators offer information on the performance of newly developed Games. Furthermore, models such as Collaboration Platforms, Information Brokerage and Trust Services are all premised on the use of IT infrastructure. For Collaboration Platforms, a forum is offered to third parties to serve as a basis for collaboration on various projects. This is usually in an online real time environment, providing opportunities for document sharing, teleconferencing and so on. This offers advantages such as reduced costs of travel, better use of human resources and expertise in various locations e.t.c. Information Brokerage and Trust services offer information as a value added service to third parties on areas of interest such as consumer patterns and behaviour which is usually based on another service offered to the public by the company. This value added information is deduced based on consumer activity involving a service offered by the company. Popular examples are search engines and companies that secure websites and transactions. This information becomes valuable to companies who want insight into consumer behaviours and trends to aid planning and product development. (Timmers 1998, pg5-6)

From the information above, it is clear that various e-business models exist depending on the company's business objectives and how it aims to achieve them. Tang et al (2003) states that for a company today to increase competitiveness it should transform its relationship with the stakeholders that make up the business such as suppliers, business partners and employees by leveraging on the advantages of ICT. However, the business model to adopt will have to be determined by the business idea and the options for achieving or implementing this idea in a cost effective manner. The concept of a business model is basically determining a better way to provide value to customers in a manner that they perceive as value adding and are ready to pay for. Margretta (2002) argues that the success of a business model is based on the ability of its initiators to tell a compelling story of how a business idea is to be implemented as well as proof of its profitability. Thus, in as much as the various e-business models can be classified as detailed above, it is by no means an exhaustive list of the possible e-business options that will exist in the nearest future. Furthermore, the appropriate e-business model for an SME can be seen as the product of an in-depth analysis of the SME's strengths, weaknesses, opportunities and threats (SWOT) as well as an analysis of the elements that make up the SMEs value chain. Tang et al (2003) argue that a SWOT analysis of a business combined with a detailed value chain analysis and a subsequent alignment of the resulting keys areas with possible e-business packages would reveal a business model which is possibly unique but most importantly aligns with the company's overarching strategy for competing in the marketplace. In addition, it has been argued that a business model alone does not translate into profitability as what a business model does on a basic level is to explain how the different constituent elements of the business would relate. The business strategy however, would define how the company hopes to differentiate itself in the market place thus attracting patronage in a sustainable manner. Therefore, it can be said that the most appropriate e-business model for an SME is one that best implements its strategy while incorporating the complete value chain of the SME in a manner (use of e-business technologies) that delivers optimal value to the customer.

4.0 What is meant by an SME network?

An SME network is a collection of small and medium enterprises that form alliances and partnerships in other to take advantage of opportunities in the market place. Authors argue that this business structure is an attempt by SMEs to respond to the new digital markets. In order to remain competitive in the new digital market place SMEs will require to update their infrastructure in terms of ICT and Human Resources. To achieve this at minimal cost whilst retaining their individual characteristics and strategies, the concept of SME networks was born. This structure enables SMEs leverage on their collective economies of scale to invest in collective infrastructure whilst being able to retain market separation on a different level. (Nachira, 2002)

Furthermore, Authors such as O'Callaghan (2007) argue that SME networks can be classified along two lines: distance and type of relationship as follows: Local, Extended, Static and Dynamic networks. This classification is depicted in the diagram below:

Figure 1.0 Clustering Topology [Source: O'Callaghan 2007, pg 4]

For SME networks classified as static, they are characterised by a well defined relationship usually embodied in the form of some agreement or SLA which defines the nature of the relationship and how the network will operate. Details such as how profit will be shared and costs allocated amongst members will also be included. The difference between local or extended SME network is determined by the location of its members. It is argued that static networks can straddle localities, municipalities, states, provinces or nations.

Dynamic SME networks on the other hand, are characterised by a fluid relationship between SMEs which can be constantly re-defined to meet market needs and opportunities. In this network, SMEs belong to a community of service providers who constantly re-align their competences and services to meet new market opportunities. This group it is argued is a veritable vehicle for development of young industries and forays into new areas of technology where the SME network did not previously have experience. This is possible because, for an SME network that does not have competence in a specific industry to offer its services there, it seeks the integration of similar sized organisations that currently operates in that industry, offering it better economies of scale due to the increased size of resources that will accrue to it when it joins the network while the organisation offers its experience in the industry and possibly exposure to new technologies. (O'Callaghan 2007, pg 4)

In addition, IT has been highlighted as having a key role to play in this business structure. As O'Callaghan (2007,pg6) explains, IT has the potential to support the SME networks in activities such as: the capture, analysis and interpretation of market intelligence data to aid the understanding of market trends, help to acquire knowledge required to understand new phenomena in the market place, perform dynamic allocation of resources and aid the coordination of tasks amongst various teams within the SMEs and ensure that all individual efforts contribute effectively to the collective goals of the group by supporting knowledge sharing with relevant parties and serve as a repository of all activities carried out by the group for effective audit and quality assurance.

Dini et al (2005) explains that a possible result of an SME network is a business structure as depicted in the diagram below where cooperation at the bottom of the pyramid supports competition/market separation/individual SME strategy at the top of the pyramid. The author previously reiterates that openness is a key attribute of this structure for success to be achieved. The structure must be such that SMEs can tap in to the collective knowledge, expertise and infrastructure without restrictions. Hence at the bottom of the pyramid is the Open-Source infrastructure which is the foundation of the entire structure. On top of this open source infrastructure will evolve the distinct models for industries, enterprises and finally individual SME business models. This approach bestows certain advantages. First, the fact that basic, industry and enterprise models exist ensure that SMEs developed at anytime within the lifecycle of the SME network would have very high levels of interoperability with other SMEs. This is because the basic, industry and enterprise models will serve as guidelines for SMEs to be deployed within the network. In addition to interoperability, the existence of these models will reduce the cost associated with the deployment of SMEs within the network, since the new SMEs will leverage most of their concepts from the models that currently exist in the pyramid.

Figure 1.1 Balancing Cooperation and Competition [Source: Dini et al. 2005, pg 22]

An example of how this can be implemented can be seen in the telecoms sector, where a telecoms operator in collaboration with third-party service providers form a service ecosystem offering value added services to customers in a manner that is beneficial to all parties. Yelmo et al. (2009, pg174-175) explains:

"...the opening up of telecom networks, creating attractive service platforms that link the different stakeholders in the provision process: service providers, consumers and the operator itself. By playing such a role, the operator becomes the central entity in the service provision process and not just a bit pipe, generating a service ecosystem around its core business - the network...In this context, we use the term service ecosystem in the sense of an open and dynamic service marketplace where a community of third party service providers work together to provide a wealth of services, which are exposed and consumed using Web services technologies in a particular business service delivery environment"

Relating this to SME networks, "the network" would refer to shared infrastructure which all SMEs using their combined economies of scale would invest in - the open source infrastructure which would include elements such as Customer Relationship Management Infrastructure, Supply Chain Management System, Payment mechanisms, Accounting systems, Service Level Agreements as well as technology. The third party service providers would refer to the SMEs in the network. Each with its own service and strategy for optimal performance. Thus each SME would be able to tap into this shared infrastructure for information on their collective customers, consumer behaviour and trends while maintaining a Chinese wall necessary for areas of data where privacy is required. The availability of SLAs would define standards to which new SMEs would conform and also serve as a basis for settling disputes that may arise. As described by Dini et al (2005) in the pyramid, the enterprise model for all SMEs would have been defined by such a structure, thus saving cost in time and resources for new SMEs.

5.0 The importance to national economies of the increasing trend towards 'service ecosystems?

Service Ecosystems can involve organisations of all sizes, irrespective of industry and services offered in the marketplace. However, SMEs are a significant percentage of enterprises in most national economies. In Europe (2003), for instance there are 17 million SMEs which make up 99.8% of all enterprises in the Union (Leon 2007, pg84). As a result, this segment of this paper will place some emphasis on the effect of service ecosystems on SMEs.

Service ecosystems provide a platform for SMEs to make optimal use of the knowledge available in the knowledge space. Enterprises will be more efficient as they are able to learn from and leverage on the experiences of other businesses within their ecosystem. For instance, in the event that an SME wants to carry out a survey to assess its service delivery to customers, it can leverage on the results of similar surveys carried out by other businesses in the same industry or collaborate with other businesses in the industry within the same ecosystem to reduce the cost of the survey for their collective benefit. This ability to share knowledge within the same ecosystem has the potential to reduce the knowledge gap between large companies and SMEs.

Furthermore, it is argued that the connectivity that exists between businesses in an ecosystem can result in global value chains constituting different enterprises such that these companies can upgrade their services thus creating a positive impact within their various areas of influence. Some of this impact could be in the form of enhanced competition resulting from a renewed ability to offer better services to customers. This competition will further drive enterprises to look for innovative ways or strategies of differentiating themselves in the market place.

The increased economies of scale that result from the establishment of an ecosystem also encourages increased investments in technology. For instance statistics shows that only 11% of SMEs use e-procurement software (Leon 2007, pg85). A possible cause of this is the cost associated with procuring, installing and training personnel that will use this new technology. A service ecosystem offers the opportunity to leverage on the collective strength of the group to improve negotiations with technology suppliers and reduce per unit cost of deploying new ICT infrastructure. Also, countries that have large numbers of SMEs have seen a reduction in their numbers, service ecosystems, however, help to increase the resilience of SMEs to collapse thus reducing the mortality of SMEs and loss of valuable jobs from the economy. (Leon, 2007)

It can also be argued that the importance of service ecosystems to national economies can be seem in the resilience it impacts on SMEs, reducing the possibility of collapse and availing the economy longer access to some of the special benefits inherent in the nature of SMEs and the way they operate. Some of these advantages include: increased sales, increased profitability, reduced costs and human capital development/training. Increased sales results in the need for SMEs to increase their inherent capacity to cope with the increase in demand. This results directly in job creation thus creating additional opportunities for the unemployed to secure jobs. Increased profitability and reduced costs provides the opportunity for SMEs to consider expansions and investment in technology to improve their service to customers. These results in additional demand for the services of enterprises engaged in other service industries such as Construction, Information Technology, Logistics and so on. One of the ancillary activities that results from investment in new technologies, expansions and or restructuring is the development of human capital. People have to be trained or retrained on the use of new technologies and to man new service outlets. This results in communities that are better trained to respond to the human capital needs of businesses in their domain and beyond.

In addition, some authors argue that SMEs are a significant source of entrepreneurship, instigating change and providing a vehicle for innovation in my economies. SMEs have been found to be less risk averse than bigger companies and so are prepared to start enterprises in young, untested industries which result in fresh ideas and concepts on how to either carry out traditional activities or new value prepositions. This zest by SMEs for exploring uncharted territory has been attributed to the difference in approach SMEs have towards intellectual property rights. In large organisations, individuals are not given credit for innovations. The company takes the credit and innovative ideas often have to go through several layers of bureaucracy to be considered viable. In SMEs however, people are better able to give expression to their ideas because the originator of the ideas gets credit for it, the idea goes through a much shorter approval process and the cost of failure is borne by a much less number of people. SMEs are also an importance source of Foreign Direct Investment (FDI) to national economies which is a key economic indicator of growth areas in an economy. Examples of this can be seen in companies like Oracle who purchase holding in companies that are already established in areas where Oracle is interested in offering services to customers. SMEs being leading participants in innovations and technology are often subjects of these investments by larger companies who want to benefit from their expertise in the new technology and innovation. As a result, SMEs have also become a major conduit for the spread of technology and the export of expertise to other countries. (Acs and Preston 1997, pg 2-6)

6.0 Conclusion/Summary

In this paper, various barriers to the adoption of e-business by SMEs have been explored. These barriers were considered from two perspectives. The first perspective detailed barriers that deter all SMEs in developed and developing countries. Barriers such as the absence of capital, skilled labour, easy to use technologies for SMEs, information on the benefits of e-business, challenges with the validation of customer data, data privacy, absence of a dispute resolution mechanism that adequately caters for e-business type transactions, fear of intellectual privacy violations, difference in IT standards across territories and finally difficulties with virtual identity management. The second perspective covers barriers peculiar to SME in developing countries such as slow internet diffusion, bandwidth restrictions, low teledesity, low purchasing power of the populace and finally English language illiteracy.

To answer the question of what business model is most appropriate for SMEs, several arguments were analysed looking at the research of several authors describing the various business models that exit and their dependence on ICT. The business models were also classified based on those that re-defined old ways of doing things and those that introduced new value prepositions into the market place based on increased capabilities from ICT. However, it's been concluded that the ideal business model for an SME is one that best implements its strategy while incorporating the complete value chain of the SME in a manner (use of e-business technologies) that delivers optimal value to the customer. The ideal model will depend on the SME and what it strives to achieve. However, whatever the model, an SME should imbibe ICT so as to enable it benefit from emerging business phenomena such as SME networks and service ecosystem to further its ideals and objectives.

SME networks are partnerships or alliances involving small and medium enterprises to enable them take advantage of market opportunities. These networks are classified based on distance and the nature of the relationship between enterprises in the network. Some networks are local while others are extended across boundaries. Other networks have static relationships amongst members usual captured in an agreement while some others have dynamic relationships which are fluid and can be reconfigured based on market demands. Some of these networks can display characteristic of more than one type of network such that we can have dynamic local or extended networks as well as static local and extended networks. ICT is key to the implementation of these relationships because it reduces the distance factor between members and makes it possible to move large amounts of data across large distances for the benefit of members. The implementation of an SME network is likened to a pyramid where the bottom of the pyramid is made up of open source infrastructure which all members contribute to and enjoy (such as technology, payment systems and so on) while the top of the pyramid would reflect the individual models/strategies of each member to provide optimal services to customers.

The trend towards service ecosystems is important because of its benefits to the enterprises that constitute it as well as the multiplier effect of these benefits to the economy. The benefits that accrue to enterprises include: the optimal use of knowledge that exists in the knowledge space and the resultant reduced gap in information available between large and small businesses. In addition, service ecosystems reduce the mortality rate of SMEs, the multiplier effect of which is increased sales, profitability, human capital development and reduced cost. In addition service ecosystems increasing the economy's exposure to certain advantages inherent in SMEs and the way they operate. For instance, SMEs contribute significantly to entrepreneurship, innovation and investments in young industries. This often results in the creation of new technologies or business value which attracts foreign direct Investment.