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E-commerce in Small Medium Enterprises (SMEs)

Analysis of innovation of e-commerce in small and medium-sized enterprises

In the last decade large organisations have realised the increasing impact of new and cutting edge technology. Clark (1989) emphasized on the importance of technology to gain competitive advantage but at the same time he warned that building and maintaining such advantage will always be a challenge.

Information technology in the form of internet has allowed organisations and their management to benefit from better quality information and better decision making. White (1997) adds that the internet is extremely effective in attracting computer literate people. Especially Internet has made a prolific influence on the business world. The internet has become an area where consumers are able to find what they need (Amor, 2002).

This is clearly evident by the growth of internet in the last few years as shown in figure 1. Being involved with the new technologies brought many opportunities and easiness to reach products to consumers anywhere, anytime in the world (McKenna,2002). The new technological innovations have allowed organisations to conduct business in a completely new way by using online electronic transaction mechanisms and the concept of E-Commerce evolved(Gunasegaram & Love, 1999; Westland and Clark, 1999). Today in most of the business and commerce sector IT has taken the form of E-Commerce.

Figure 1 Growth of internet

E-commerce is a major innovation, which has benefited industries across the globe even the Small and Medium Industries. The SME’s in Itself amount to a large part of the economy, at the moment there are12000 SME’s using EDI, electronic data interchange to further their businesses. Although the SME’s are contributors to the national economy of any country, the whole framework used to build them lacks transparency.

There are problems around the financial resources available to keep them going; there is not enough legislative and administrative support from the government. On the business front these enterprises lack the right kind of management vigour, style, knowledge, and experience in handling more developed innovative technologies, which are inundating the markets.

This is something they need to be aware of in order to survive the competitive environment. The SME’sdon’t have a single development system, which can safeguard theirinterests. They need an integrated approach, which encompasses threelevels, strategic, institutional, and enterprise. The government andthe public/private sector need to offer support for the fulfilment ofthis long-term strategy, which will make SME’s into profit centres’-commerce brings in a host of advantages as well as disadvantages tome’s and this project is an attempt to learn more and develop deeper understanding into the effect of technical innovations in e-commerce on Small and medium sized enterprises [Kyiv, 1997].

This study attempts to add to the existing literature by looking at hawse’s are approaching to incorporate e-commerce into their business strategy or how they are trying to improve their existing approach. This study will also evaluate consumer experiences of online shopping and how e-commerce has impacted on their expectations and goes on to suggest how online stores may need to improve if they are to meet these new expectations.

2. Aims and Objectives


The main aim of this project is to explore how the SME’s are important to the national economies and how the use of e-commerce help them gain a better position in terms of growth and profitability. There search context is based on SME’s in England to get an even background to this research question. As one knows technology and innovation always have repercussions, this project would also explore how theses ME’s deal with the disadvantages and convert them into viable benefits.

This project will also find out to what extent do small firms use-commerce in their business processes and what are the barriers to the adoption of e-commerce? Customers as well as organization’s perspective towards e-commerce will be found out. Alongside the study will also try to find out how much electronic transaction have influenced the small-scale industry? Additionally this dissertation will also provide with accurate, up-to-date, research-based information about possible future trends in e-commerce.

And lastly, this research will provide some suggestions and recommendations to be considered for the improvement of-commerce for small firms to develop ideas for further research in this context. This study on SME’s under different situations and circumstances would help present an overall portrayal and even help understand the issues under a magnifying glass when faced in certain sectors like manufacturing.

To summarize some of the questions that will be addressed through this research are as follows:
• What is the status of SME’s in today’s global business environment?
• What is the contribution of the SME’s in the national and global economies?
• How will innovations like the Internet in e-commerce help the businesses in SME’s grow and become more profitable ventures?
• What are the problems/mistakes in the E-business strategy adopted in general by small firms in U.K?
• What are the problems faced by customers and organisations while dealing on internet?
• What are the factors that influence the development of e-commerce?
• Does e-commerce open up new markets for small scale industries in the United Kingdom?


1. Critically evaluate the relevant literature on small firms and the importance/usage of the internet.
2. Understand small firms’ problems and barriers to the use of e-commerce through articles, newspapers, interviews and surveys.
3. Gain specific knowledge of internet usage for small firms in business through interviews, publications and company information.
4. Provide recommendations to improve the usage of internet as a competitive tool.
5. The advent of the e-commerce, its advantages and disadvantages.

3. Literature Review


E-commerce may be defined as “The sharing of business information, maintaining business relationships, and conducting business transactions by means of Internet-based technology” (Riggins &Rhee, 1998, p. 90). Alternately it may also be defined as “Anything that enhances your relationships with an existing customer and increases the revenue you get from the customer.” (Sullivan, 1998, p.24).

The Internet and Electronic Commerce have made the world market smaller place to trade in. The Internet has opened up many possibilities of organising and running an online business. It has created a universal platform for buying and selling of goods which has resulted in faster transaction times and reduced transaction costs. Colin Turner (2000), in his book on the information of e-economy, talks about the e-commerce business accomplishment and strategies.

E-commerce has its benefits and shortcomings, along with this belief; the companies are also battling with the pressures of information technology revolution coming to an end. “Despite all the hype surrounding electronic commerce, and the recent failure of many of that com companies, it does present real opportunities to small entrepreneurs in many countries.” (Fatal and Janet, 2004)

Classification of E-commerce

According to the applications or the nature of transaction of E-commerce, it can be categorized as follows:
Turban et al (2000) divided E-commerce into three categories in terms of its applications:

a) Electronic markets:
It refers to buying and selling goods and services at an electronic marketplace, where the business centre is not a physical building but rather a network-based location. The market handles all the necessary transaction, including response to information request, purchase acknowledgement, shipping notice, purchase/service delivery, payment acknowledgement, and the transfer of money between banks and so on. In electronic market, the principal participants – transaction handlers, buyers, brokers, and sellers, are not only at different locations but seldom even know one another. The means of interconnection varies among parties and can change from event to event, even between the same parties.

b) Inter-organisational systems:
They are facilitating inter and intra-organization flow of information, communication and collaboration. An IOS (inter-organisational information systems) involves information flow among two or more organisations. Its major objective is efficient information and transaction processing. All relationships are predetermined and there is no negotiation, just execution. A typical IOS includes a company and its suppliers and/or customers. Through it, buyers and sellers arrange routine business transactions and information is exchanged over communications networks using prearranged formats. Its main types aired (Electronic data interchange), extranets, electronic funds transfer, electronic forms, integrated messaging, shared databases and supply chain management.

c) Customer service:
It is a series of activities designed to enhance the level of customer satisfaction, helping customers to resolve problems they encountered in any phase of the purchasing process. E-commerce plays a dual role in customer service. First, it provides customer service to a process that is done completely offline. Second, it provides help to online transactions. Types of customer service include answering customer inquiries, providing search and comparison capabilities, providing technical information to customers, allowing customers to track order status, and allowing customers to place an online order and so on.

Kalakos & Whinstone (1997) contended that there are three distinct general classes of electronic commerce applications:
a) Inter-organizational Electronic Commerce:
Like Turban et al above, Kalakos & Whinstone consider that-commerce can be applied in following inter-organizational business:
Supplier management: Electronic applications help companies reduce the number of suppliers and facilitate business partnerships by reducing purchase order (PO) processing costs and cycle times, and by increasing the number of Pops processed with fewer people.
Inventory management: It shortens the order-ship-bill cycle and time of transmitting information. Businesses can also track their documents to ensure that they were received, thereby improving auditing capabilities. This also helps reduce inventory levels, improve inventory turns and eliminate out-of-stock occurrences.
Distribution management: Electronic application facilitate the transmission of shipping documents such as bills of lading, purchase orders, advanced ship notices, and manifest claims, and enable better resource management by ensuring that the documents themselves contain more accurate data.
Channel management: Electronic application quickly disseminates information about changing operational conditions to trading partners. By electronically linking production-related information with international distributor and reseller networks, companies can eliminate thousands of labour hours and ensure accurate information sharing.
Payment management: Linking companies with suppliers and distributors enables payment to be sent and received electronically. Electronic payment reduces clerical error, increases the speed at which companies compute invoices, and lowers transaction fees and costs.
b) Intra-organizational commerce
The purpose of intra-organizational applications is to help a company maintain the relationships that are critical to delivering superior customer value. Its applications are as follows:
Workgroup communications: It enables managers to communicate with employees using electronic mail, videoconferencing, and bulletin board, hence increase the dissemination of information, resulting in better-informed employees.
Electronic publishing: It enables companies to organize, publish and disseminate human resources manuals, product specifications and meeting minutes using tools such as the World Wide Web. Meanwhile, it reduces costs for printing and distributing documentation, faster delivery of information and reduction of outdate information.
Sales force productivity: These applications improve the flow of information between the production and sales forces, and between the firms and customers. The goal is to allow firms to collect market intelligence quickly and to analyse if more thoroughly.
c) Consumer-to-Business Electronic Commerce
Social interaction: Consumers can communicate with each other through e-mail, videoconferencing, and news group etc.
Personal finance management: Electronic applications enable consumers to manage investments and personal finances using online banking tools.
Purchasing products and information: Consumers can find online information about existing and new products/services.
Turban et al (2000) further goes on to describe E-Commerce based on the types of transactions and are more popularly known as:
B2B (Business-to-Business): Most of E-commerce today is of this type. It includes the IOS transactions and electronic market transactions between organisations.
B2C (Business-to-Consumer): These are retailing transactions with individual shoppers.
C2C (Consumer-to-Consumer): In this category, consumers sell directly to consumers.
C2B (Consumer-to-Business): In this category, consumers sell directly to organisations.

Challenges to E-Commerce

Although the Internet offers great deals of advantages to electronic commerce and businesses, it also provides a number of challenges. Some of these challenges as mentioned by Turban et al (2000) are discussed below:
1. Unsuccessful Business Models
Not all companies that implement electronic commerce make benefits. Technologies changes so rapidly that keeping pace with change ultimately becomes too expensive or results in a failure.
2. Channel Conflicts
Sometimes a company uses more than one distribution channel (Online as well as traditional channels) to sell its products and services. This can cause conflict between the dealers as it becomes important in such case to maintain a balance between the different channels. For might be possible that a particular company tries to sell its product online at a lesser cost with some discount and maintains the original cost while selling it offline. This disparity can cause its dealers to create a problem.
3. Legal Issues
Internet Laws are confusing and mostly non-existent. Also the Internet’s global and is used by individuals from different countries and thus it becomes difficult to decide which law to apply if a conflict arises.
4. Security & Privacy
This is the most important issue concerned with online transactions and businesses. Important information and valuable data like credit/debit card details, personal information, business plans and other company data can be easily leaked and tracked by hackers. Security risk in electronic payments has been one of the major reasons in making online businesses not to grow rapidly over the Internet.

Small and Medium Enterprise (SME)

Different countries define small medium enterprises in different ways. Teethe and Burn (2001) define small medium enterprises (SME) as “firms with less than 500 employees”. This is further broken down into micro companies, those with less than 5 employees; small companies, those with 5 to 20 employees and medium companies, those with between20 and 500 employees”. On the other hand, the UK Department of Trade and Industry (DTI, 1999) define SME’s as firms with 250 employees or fewer.

The European Commission (2003) defines SME’s as follows: “microenterprises are enterprises with a maximum number of 10 employees, maximum turnover of 2 million euros and a maximum balance sheet of total of 2 million euros. While small enterprises are enterprises with maximum number of 50 employees, a maximum turnover of 10 million euros and a maximum balance sheet of a total of 10 million euros. Finally medium enterprises are enterprises with a maximum number of 250employees, a maximum turnover of 50 million euros and a maximum balance sheet of a total of 43 million euros”.

Figure 2 SME Thresholds (European Commission, 2003)
Buncombe (1999) points out that a number of studies have attempted to collect information on the make-up of Botswana’s SME sector, by gaining access to official statistics and by conducting field surveys in connection with various research projects. According to the report, he defines enterprises according to the number of employees, annual turnover, and level of formality.

There is no real universally standard definition for Small firms. In a study carried by the ILO, more than 50definitions were identified in 75 different countries, with considerable ambiguity in the terminology used. For the purpose of this study the author will go with the definition of Small firms which defines Small firms as firms with 49 or fewer employees. From the foregoing definition of small medium enterprises (SME’s) by different researchers, it can be seen that the number of employees and turnover are the determinant factors in the definition of SME, but, the criteria is different from country to country.

SME’s and E-Commerce

Internet became a main way for effective marketing in business. It is one of the most effective media all over the world and this makes it compulsory channel to use for market entries. Specifically, small firms have major problems with strong companies and existing small firms about market entries in the market. They have to prove their identity in the market as an enterprise despite all these rivalry and difficulties such as web design, domain name, site security responsibilities to customers, etc.

They have to let customers know that they are in the market and internet is an efficient way to do so. Furthermore, cost advantages which come with e-commerce are reasonable for market entry. Small firms have a lot of to do as they are new tithe market or they need to grow in the market. They try to cut costs and increase investments in their business.

Internet provides great opportunity to small firms for their activities in the market. Even as they serve a local or regional market rather than a national or an international market, it might be difficult to enter market or to reach customers. E-commerce appears as the most efficient way to gain successor small firms in existing fierce rivalry.

The small firms generally provide the majority of the jobs and are significant contributor towards the national economy (Baldwin, 2001).Small and medium scale enterprises are considered to be the core out’s economy. According to Smith et al (2000) 99% of UK business firms can be categorized as small businesses and they employ up to 58% out’s total workforce. Hence small firms are extremely important in UK’s economy and the government expends considerable resources to support this sector. The UK government admits that small firms are neglected and left behind while the larger companies getting advantage over small businesses in the e-commerce world (Simpson; Docherty, 2004)

Thus it’s very important to study the problems and barriers encountered in adopting a new economy cycle by the sector which represents the majority of the countries businesses. Sadowski et al (2002) notes that even after the widespread use of internet technologies in the corporate world, the amount of Internet use varies to a great extent in the small-scale sector. The adoption of any new technology in this sector is influenced by the several variables as stated by Martens et al (2001).

These factors may include the characteristic of the firm, its competitiveness, the influence it has on third parties in the decision process, the management strategy and the characteristic of the new technology itself. All these factors lead company to strategic advantage if they used as they should be. It is important that the company sustains strategic advantage from e-commerce. Competitive business environment makes this matter more important (Hiding, 1999).As long as the company provides well designed web-site that suits with business and its requirements, then strategic advantage can be sustained.

Thomas H. Davenport (1993), in his book, ‘Process Innovation –Reengineering work through information technology talks about, how revolutionary approach to information technology and its integration in our business processes can change the scenario. This can dramatically change the way business is conducted in small and medium enterprises also improve the performance keeping in view the competitive environment. New technologies and process innovation brings a new commitment and strategic evolution to these enterprises.

Resources like information technology and e-commerce are largely untapped by the SME’s but once that scenario changes, there will be a lot of improvisations and growth avenues. Mandel (2001) says that every technological innovation and discovery finally has it downturn. When these new opportunities like e-commerce come into play, all businesses want ashore of this market. In their rush to get more profits, the investments are so heavy and lacking direction that invariably it leads to a loss since the economy infrastructure cannot support it.

This has been proven with the dotcom burst and doom. According to some authors, these SME’s can actually use the innovation of e-commerce to march forward and become integral contributors to the economies. Due to their sizes they lack the initiative and financial power to go all out and compete in different markets, e-commerce could be the solution to some of the marketing gaps, which hold them back from becoming more successful.

Importance of SME’s to countries’ economies

Baraka (2001) reports that growing evidence indicates that Small Medium Enterprises play an important role in promoting the national economic development of any country. They create a lot of new jobs and produce much of the creativity and innovation that fuels economic progress. Ninety present of the total number of companies in most countries is comprised of small medium enterprises, which provide on average 70% of job opportunities (OECD, 1997). 26% of OECD exports and35% of Asia’s export are directly produced by small medium firms as suggested by Tendon (2002).

The existing literature from research in different studies points out that Small medium enterprises (SME) world-wide have found that Internet use has become a critically important aspect of their business. Porter(2001) supports this view and suggests that companies of all sizes should have a strategy of reacting to competitors and increased adoption of the Internet technology, which will lead to increase in competition within markets.

He further points out that “e-commerce reduces the difference among competitors’ offerings and frequently migrate competition to price rather than products features or brand perceptions”. He also suggests that smaller businesses could improve their business competitiveness with either other small businesses or larger companies by adopting e-commerce. Porter (2001) is backed up by an earlier study (Jacobs and Rowland 2000).

They suggest that “smaller businesses have, in particular, been encouraged to adopt e-commerce as a means of improving their competitiveness, either with other small medium enterprises or with larger companies, where they have been promised that e-commerce can level the playing”.

According to Daniel and Wilson (2002), small and medium-sized enterprises are now increasingly making use of e-commerce. Daniel further suggests that “responding to competitive pressure was the main reason leading to companies to adopt e-commerce. Information sharing and communication between employees within the firm were found to bethe e-commerce activities where firms are realizing the greatest benefits”. Hence, though the future of e-commerce is still unpredictable, it is important that developing countries, their governments and businesses should prepare for these new developments.

Benefits of e-commerce to SME’s

A growing number of organisations have implemented e-commerce in the hope of improving decision making, lowering costs and improving customer satisfaction levels. A major benefit of e-commerce is cost reduction as Tagliavini et al (2001) pointed out “a correct adoption of-commerce could lead to a reduction of transaction costs and coordination costs”. Also, Davies and Garcia (1999) argue that benefits for SME’s are faster communication, effective dissemination and collection of information and closer relationships throughout the supply chain.

Meanwhile, Liu and Arnett (2000) suggested theatre-commerce can help business organisations cut costs, interact directly with customers, run more smoothly and in a timelier manner, and even better, it can help an organization outperform its competition”.

Further driving factors of e-commerce for SME’s are also identified by Auger and Gallagher (1997) as follows: access to an Affluent Customer Base, lower Information Dissemination Costs, lower Transaction Costs, broader Market Reach, increased Service, additional Channels for Customer Feedback and Consumer and Market Research.

Reducing costs, better communication with customers, access to larger customer base, and extended market are the major benefits of using-commerce agreed by a number of authors. At the same time, the more detailed benefits of e-commerce to SME’s are summarized as follows:
• Innovative products, better services and exploring new market opportunities;
• Shift in value added and content components of what is made and sold;
• Changes to economies of scale and the traditional barriers and advantages of large enterprises;
• Untying work functions from specific locations and time constraints;
• Flattening and disaggregating of organisational structures;
• Scope for customization at low cost; and
• Commercialization of in-house content and know-how.

However, a study conducted by Poon (1999) found that the benefits of Internet commerce could be classified into long-term and short-term benefits, direct and indirect benefits. He suggested that the short-term benefits should be achieved within a few months, while the long-term benefits may take longer and unable to be predicted. The use of e-commerce can benefit SME’s in terms of reducing costs and access to larger customer base in the short term, and business transformation in the future.

The use of e-commerce will also have a great deal of effect on the SME’s’ business activities as Tagliavini et al. (2001)indicated that “E-Commerce has an important influence on SME’s; range of activity, providing increased competition on a global scale and allowing them to access wider markets”. From the above literature it could be rightly said that E-Commerce adoption is an essential business strategy for SME’s to obtain competitive advantage.

Opportunities and Threats faced by SME’s

“There are major opportunities for new entrepreneurs and small- to medium-sized businesses to flourish in the maturing of e-commerce”(Drew, 2003). The use of e-commerce has provided a variety of benefits for SME’s as well as a number of potential opportunities. “The Internet’s usually presented as an opportunity for smaller firms because it helps reduce transaction costs and level the playing field” (Evans and Wurster, 1997). The opportunities for SME’s include expanding scope of marketing, wider and richer communication, reaching new market and reducing cost of operations and partnering with suppliers (Drew, 2003).

According to a report conducted by Prevost (1998), there are variety of opportunities added to SME’s, including efficiency and productivity for business process, the development of new market opportunity (B2C andB2B) as well as access to global market. Also, the e-commerce give SME’s opportunity to exploit competitive and know how benefits as suggested by Tagliavini et al. (2001). Nevertheless, how to use e-commerce as an opportunity to SME’s will depend on the industry and firm factor implied by Drew (2003).

These influenced factors include: The smaller firm’s technical and Internet knowledge; The rate at which the market is growing; The pace of innovation and change in the industry; The technical and Internet strengths of the larger competitors; The sources of competitive advantage for the smaller business; The strategic intent of the larger competitors; and The structure of the industry in which the firm competes.

Generally, the market, industry structure, and macro-environment will be the major influenced factors that decide e-commerce as an opportunity or threat for SME’s. Therefore, although it is not doubt that e-commerce has provided a huge opportunity for SME’s in the range of business activities, the external and internal factors must be considered strategically while adopting e-commerce. However, Tagliaviniet al (2001) argued, “the real opportunity of E-Commerce adoption force’s is still unclear”(p.211).

Global Trading

The significant opportunity for SME’s is to extend existing market to international market addressed by a number of authors (OECD, 1998;Webb and Sawyer, 1998; Walczuch et al., 2000 and Giessen et al., 2001).Giessen (2001) remarks “the twin phenomena of globalization and-commerce pose new challenges and provide competitive opportunities for large and small firms alike”. It is an imperative opportunity force’s to access the global market, as the one of the important feature of e-commerce is global reach as stated by Loudon (2001).

Therefore, ME’s are expecting the opportunity to extend existing market into globalization by using e-commerce. Undoubtedly, Internet has provided chance for SME’s to diminish the entry barrier and costs into global trading market as “electronic commerce offers companies the possibility to sell internationally, effectively removing constraints of time and location and substantially enhancing their competitiveness”, and it is the most imperative opportunity for SME’s to increase productivity andthe capability to entry markets and discover business partners globally(OECD, 1998).

Indeed, the reach of global market is an exciting opportunity for SME’s to grow in terms of the size of company and competitive advantage. However, Jutland et al. (2002) proclaims that “globalization pressures arising from e-commerce operations often mean that SME’s have to acquire international trade knowledge”. Publishing company’s website in the Internet is simple but trading in the global market is not so simple task for any of the SME’s. As Teethe and Burn (2001) points out that “the challenge for SME’s are complicated byte general lack of clearly defined frameworks for analysis of the entire processes of strategy building, implementation and management with aspect to the emergent global information economy”.

However-commerce truly provides the great opportunity for SME’s to increase competence with lager firms in variety of business opportunities as well as an opportunity to extend trading geography. The various opportunities offered by e-commerce are the significant riving factors that encourage a firm to adopt e-commerce as its business operation.


Although the use of e-commerce has provided a huge opportunity force’s in range of business activities, e-commerce might become a threat for SME’s while trying to explore a variety of opportunity by using-commerce. As Drew (2003) indicates there are a number of threats of-commerce for SME’s.

These threats include increasing competition from larger firms as “the new medium allows larger firms to mimic the traditional strengths of SME’s in serving niche markets, developing customer intimacy

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