SMEs going digital the way to transform the business

Small and medium-sized enterprises (SMEs) represent 99% of all businesses in the EU (and Malta). SMEs are defined (or rather described) in the EU recommendation 2003/361, with the description of what constitutes to fall under the definition of an SME being mainly quantitative in terms of headcount and, turnover size and/or balance sheet total.

The uniform SME description across the EU serves multiple purposes. From the perspective of an SME owner, the most tangible purpose of an EU wide definition, will surely relate for which national and/or EU ‘incentive’ schemes or funds they may qualify for. However, the uniform definition of an SME plays critical importance for EU and national policy making and strategies, one of which being the promotion of EU’s Digital Single Market and EU’s Information Society.

It is indeed striking, that the Junker Commission published that only 7% of SMEs are actively involved in cross border selling, thus giving a strong indication that SME’s remained ‘local’ as opposed to ‘global’ notwithstanding having the freedom to access 31 markets across the European Economic Area, and notwithstanding EU’s efforts in promoting an EU Digital Single Market.

The use of information technology by SMEs has taken up considerably over the past 5 years, however statistics clearly indicate that SMEs (particularly the micro and small) are still in the ‘infancy’ stage of ICT usage in their business, with no real alignment to their business objectives, and limited applicability to their business processes. Yes, it is true that even the corner grocery shop may have a facebook page, or that the cleaning services company employing 8 people may have a website and an email address where to contact them, however such examples are a far cry from truly exploiting information technology to allow the business (of the micro to small enterprises) to survive and grow.

On the other hand, the medium sized enterprises seem to have better understood why going digital is important for their existence and growth. EU surveys indicate that the majority of medium size enterprises have embraced with more ease the digital era, whereby they have unleashed themselves from merely having an internet presence and/or having locally installed accounting and HR solutions, but are moving towards digital processes, eSales, ePurchasing and digital invoicing. For instance, for the period 2011-2016, medium sized enterprises almost doubled the share of eSales from their overall turnover from 8% to 13%, thus registering a similar growth rate compared to the large operators which on average registered a share of eSales compared to their overall sales of 26% in 2016 (19%: 2011).

Balance sheet

It may be argued that large enterprises have more means than SMEs to embrace technology and be more digital. In a way, this assumption is valid, as large enterprises may have more resources and larger budgets to invest in digital technology, particularly as they may have easier access to finance. However, a counter argument, which is equally valid, relates to the fact that larger enterprises should on paper be less swift than SMEs to change their modus operandi and become more digital, due to the size and complexity of their operation and processes, and thus SMEs should have a higher propensity to be digital. The truth may be mid-way between these two schools of thought, both of which may be rather simplistic arguments. Comparing the 1% of European enterprises versus the 99%, which involve SMEs is in reality comparing apples with oranges, as the nature of micro and small enterprises within the SME cohort skews the comparative assessment due to the intrinsic business nature of most micro enterprises and the majority of small enterprises. The latter include enterprises based on single practitioners, (such as notaries, family doctors, lawyers, hair dressers, etc), which business model is a traditional, personalised and very localised, together with micro enterprises based on traditional trades which the very reason of their existence is not based on volumes, but on personalised products/services.

The European Union has since 2003, embarked on a journey to provide SMEs with more possibilities to exploit digital technology. In 2003 it founded the European e-Business Support Network for SMEs, with the scope to create awareness amongst SMEs on the benefits of going digital, together with spear-heading policies that gave life to various co-financing programmes to allow SMEs join the digital era, by promoting internet connectivity, the use of ICT and supporting SME have a web presence. In 2006, European e-Business Support Network shifted its attention towards promoting the use of digital supply chain technologies (DSC) for SMEs as it identified that DSC would be the digital technology that would provide a high return to SMEs terms of shifting them to radically change the way SMEs conducted their business and thus being in a position to keep up with the pace of the large enterprises.

Addressing the supply chain is key for the survival of small enterprises in order to avoid the large enterprises squeezing them out of the market with their aggressive marketing actions. For instance, the bedroom furniture manufacturer employing 25 people can compete with the likes of IKEA by using digital technology in allowing their customers build their own design, rather than choose from a preset digital catalogue. In the case of medium sized firms addressing the supply chain is critical for their growth strategies, where for instance the concept of distributed warehousing has taken off, whereby medium sized retail enterprises with cross border sales use networked ordering systems in order to ship orders from warehouses which are geographically closer to their customer in order to reduce distribution costs and time.

However, the application of DSC may also apply for micro enterprises. The cases of UBER and Airbnb show how even micro enterprises such as self-employed chauffeur driven car services and owners of small tourist rental apartments can exploit DCS technologies (albeit using the digital platform of a third party) in order to maximise their orders books.

Although the take up of digital technologies for SMEs may not yet be what may be expected, however SMEs with the ambition of EU cross border sales can exploit the opportunities presented by Digital Technology to re-engineer their processes, and thus be more efficient, whilst for those who are more bold and innovative potentially become market disruptors.

Tips: Going Digital

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