E- Business Potential for SMEs

Authored by
K. Srinivasan
Jansons School of Business
Karumathampatti, Coimbatore - 641659
E-mail : k.srinivasan@jsb.ac.in  / scheenu2@yahoo.co.in


SME stands for small and medium enterprises.  This has become a globally accepted acronym for discussion on issues relating to this sector. Small and medium-scale enterprises (SMEs) have come to play a predominant role in the domestic economies of most countries around the world. This is the case in terms of their relative number in the total population of firms, their share in total employment, or their contribution to value added and exports. Many economies with a high share of small-scale units are among the most successful, for example Japan and the Republic of Korea. The SME share in total exports is almost as much as that of large firms in absolute terms. Several developing countries have also experienced spectacular growth in the export of manufactures, having captured ever-increasing shares in both industrialised and developing country markets. This has further increased the significance of SMEs and the need to keep them technologically competitive. In the emerging global information economy, it is the smaller firms that could be the most significant winners. This, however, is to a great extent dependent on the quality and competitiveness of their products in the international market. E-business offers SMEs exceptional possibilities to compete on global markets and to weave strategic and networking alliances with other players around the world. The "death of distance" provides enormous potential for inter-industry trade, cross-border partnerships and strategic alliances. In addition, Internet-based e-business offers SMEs cost-effective possibilities to advertise their products and to contact buyers and suppliers on a global basis.

This article discusses the various issues concerning the e- business in SMEs like opportunities experiences and challenges.

Small and Medium Enterprises (SMEs)

E-business needs to provide an integrated package which allows them to manage employees, customers and suppliers, along with setting up shop on the Web. It needs to give the SMEs the power of a larger business in terms of technology capabilities. The Internet is not necessarily a friend of the smaller companies - it offers rich rewards only for those who can make it a part of their business. So far, only the larger companies have been able to afford to do this. This needs to change.

What are SMEs? Generally the definition of an industry as a small or medium depends upon the size of investment in plant and machinery and fixed assets. Definitions vary, but a reasonable definition is the following: small enterprises are those that employ 2-99 people; medium enterprises are those that employ 100-1000 people. Going by the above, in the US, there are about 8 million SMEs. Extrapolating, we can expect a global market of over 25 million SMEs. In India, we used to define small industries as having capital investment of perhaps not more than Rs.3 crores in plant and machinery. A medium industry is bigger than this but still smaller than what is considered as the large industry.

SMEs fall in the  turnover range of Rs 0-100 Crore (According to Nasscom, upto Rs.50 Crores) .

First, let us understand some of the characteristics of SMEs. (These are generalizations, and not all may hold true for every SME.)

  • SMEs are strongly owner-manager driven. Much of the time of the top person is spent on doing routine tasks. This is where we need to be able to make a difference. We need to put in place processes and automation for the basic tasks, so that can free the top person to look at growth and management by "exception-handling".
  • SMEs do not have much of a process or structure. They are run by one individual or a small team who make the decisions. In many cases, they are family/owner-driven. They will invest if they see value in making investments in the "short-term". So, one has to work on providing immediate and tangible benefits.
  • Since there is little process or structure in SMEs, this also provides a mechanism to put in place "best practice business" processes. SMEs are generally more flexible, and can rejig the way they do their work around a better solution. SMEs do not favour complex, formal methods of project management, preferring simplicity and familiarity. ]
  • Entrepreneurs at SMEs are generally "all-rounders" with basic knowledge of many areas. They are good at multi-tasking, and since there are many holes in the organization, end up doing many tasks themselves, perhaps not in the most efficient manner. This is where systems can be deployed and SMEs moulded.
  • SMEs are more people-dependent than process-dependent. There are specific people who do certain tasks, with experience and knowledge driving them. This people-dependency needs to change - the knowledge needs to be captured in business rules and processes built around these rules.
  • SMEs are less sophisticated with their IT infrastructure, since it is much harder for them to recruit and retain technology professionals. They lack the sophistication and capability to deploy enterprise-scale systems. They also tend to be somewhat cynical on new technology adoption unless the benefits are clearly visible, or a competitor adopts it, or they are pushed by one of their bigger customers.
  • The focus of SMEs is more on medium-term survival than long-term profits.
  • Since SMEs don't have the efficiencies, they end up wasting a lot of time and money on SG&A (selling, general and administrative expenses).
  • SMEs are so time-pressured that they want just one solid relationship they can count on for top-quality service. They reward that with loyalty and repeat business.


E- business basically involves an internet platform to link vendors, suppliers and distributors, banks and customers wherein information exchange, price negotiation, order placement, delivery confirmation, billing and payments take place online. It is essentially an evolving set of IT tools and implementation techniques as well as the business strategies and practices necessary to do business electronically. The concept that companies succeed by creating value is not new. As well as, e- commerce is not new as a concept, it existed earlier too. But the way it was carried out was a little different. Hitherto, it was conducted in a more traditional manner- by telephone, mail, facsimile, Electronic Data Interchange(EDI) systems.

E-business uses technology and e-commerce processes to build better customer relationship and create new value propositions. It encompasses the entire business processes and the strategies of the corporate world. E- business strategies help organisations to distinguish themselves. It is changing not only the shape of competition , the speed of action, the nature of leadership but also the style of management and business models of such companies.

Large computer hardware corporations like Intel, IBM, CISCO, Nortel, Dell etc. are the pioneers as well as leaders in E-business. Though e- business remains to be a strategic tool of corporate giants, it throws many opportunities for small and medium enterprises also.

E- Business opportunities in SMEs

As we examine the issue of e-business for the SMEs, the following points become obvious:

1. As India adopts liberal economic policies and becomes more closely linked with the global economy, we should use the globally accepted definitions for small and medium enterprises for classifying this sector and evolving appropriate strategies.

2. The electronics business particularly Internet based business, which can be further classified into B to B, B to C, B to G mostly involves small and medium enterprises. The knowledge economy seems to be a perfect match and fit for SMEs.

3. In this context the issue of e-business application support for small and medium enterprises becomes an exercise in optimising the synergy between SMEs and e-business by using imagination and lateral thinking to the maximum extent. We explore not only e-businesses based on internet which belong to the new economy but how they can support and interface with what is called as the brick and mortar old economy. One of the important facts we have to notice today in the area of e-business is that the new business model for dotcom companies which focussed on venture capital funds and angel funds helping anyone with the bright idea and then making millions of dollars through the IPO is no longer very popular. There seems to be a massive correction process taking place in the new economy and many dotcom companies have lost. Even the model for the companies on the Internet, which involved the venture capital funds and the angel funds supporting anyone with the bright idea and then making their profits through IPO, is under severe review. In short, the entire e-business seems to be under-growing a market correction at this stage.

4. Now is therefore the right time to find out what is the real value addition which internet companies can make in the B to B, B to C, B to G areas and help the small and  medium enterprises. The first useful role e-business can play is to provide an extended  shop window and expand the market reach for SMEs. The late Dewang Mehta used to  highlight the remarkable story of a normal woman in Kutch whose mirror work embroidery  attracted the attention of the US company, Tierack thanks to the Internet. As a result, the  lady got massive orders running into lakhs of rupees for making ties based on her embroidery work. She made profits, which would just have been impossible in the absence of the Internet. Extension of the market reach and the networking appear to be one of the  important contributions which e-business companies can make to SME. The very fact that  access also is cheaper and physical presence which is a sin qua non in the brick and mortar  world is not required is a great attraction especially for SMEs which may be short of capital.

5. The next important aspect of e-business impact on SMEs is in-company application of IT, which make operations more economical. This covers individual operations like the  materials management or personnel management or more importantly optimising productivity through enterprise resource planning. Information technology can help in small and medium enterprises optimising their productivity and profitability.

6. One of the attractions of e-business is the chance for changing the distribution channels or even avoiding them and reaching the customers directly. In fact, one of the issues that is debated in the context of e-business is the role of Internet in dis-intermediation. However, except DELL, the computer company, others have not been able to use direct marketing model very effectively. The reason was that the computer, the PC particularly, was ideally suited for the type of the DELL model because the bulk of the components were common and customisation was possible within a small range. Perhaps such a customisation may not be  possible in the case of other industries. If the DELL model can be studied and used as a  means of optimising market access and success, perhaps this may help SMEs to improve their competitiveness and profitability.

7. Perhaps the most important aspect of competition apart from imagination would be the time-based competition. To what extent IT applications can help in saving time and also optimise the work that can be out sourced? This will help to make the just in time operations become more profitable.

8. There have been many intiatives to help SMEs in this regard.

Computer associates and Satyam have formed an ASP joint venture to eEnable SMEs in India. The JV  offers cost-effective access to technology helping SMEs to harness the tremendous potential of eBusiness In India.

The Joint Venture Company has plans to provide access to advanced eBusiness and back office applications plus implementation expertise and support. The joint venture's initial offerings will include CA's interBiz products, providing intelligent solutions for supply chain, financial and manufacturing applications. It will also leverage the Internet to deliver selected applications and services tailored to the requirements of SMEs.

Companies that are smaller and gearing to make their business grow faster are looking at ASPs as a great opportunity. However the high potential SME market would make the presence of Application Service Providers in India a necessity.

Thus, effective application of ICTs in the SME environment can help:
*  lower the SME's costs;
*  improve timeliness of SME product development and delivery to the market place;
*  enhance SME product quality; and
*  improve SME innovation of products and processes.

Software for SMEs

Larger companies have many options for software to manage and automate parts of their business. Small and Medium enterprises (SMEs) have fewer options, since they are also harder to reach. Yet, their need for such e-business software is no less - they too would like to be cost efficient and grow revenue. This sub-G2K (sub-Global 2000 companies) market is therefore an interesting, diverse and possibly rich target market.

In fact, one of  predictions  states that Small Business will emerge as a hot business segment.

One of the fundamental axioms of b-to-b is that the highest levels of value-added services come in highly fragmented industries. If there were ever a sector that is highly fragmented, it's the small business sector. Small business ranges from the mom-and-pop grocer to the local dentist, to the flower shop, to construction companies and a whole host of services. Perhaps the most compelling reason for all the interest in small business is that the small-business customer has always been difficult to identify and reach. Because the market is so geographically and functionally diverse, the cost of customer acquisition has been high. Small business owners seldom have either the resources or time to invest heavily in building in-house capabilities.

Suddenly, the Internet provides a cost-effective channel for reaching small businesses. Tim Minahan, analyst with Aberdeen Group, sums up the situation: "The SME (small/midsize enterprise) is definitely a hot area. The initial thrust in e-commerce was focused on larger companies. The challenge now is how to productize cost-justified solutions and deliver the benefits of enterprise productivity-type solutions to small businesses."

But for all the interest in small business, one is well advised to keep in mind one important fact: Although there are notable exceptions, small business owners tend to be risk-averse and wedded to old ways of doing business.

The challenge therefore is to provide an SME with the building blocks which are needed to run the business - the same blocks which a larger organization would have access to, but at a fraction of the price. These building blocks comprise CRM, SCM, ERP and eCommerce. An SME cannot hire expensive consultants to customize these building blocks. The challenge therefore is to create a solution which addresses the need of this hard-to-reach market, and then actually sell it to this audience.

SME e-business solution

Let us consider the needs of an SME.

First, Communications. An SME needs connectivity to the Internet - reliable, cost-effective, and reasonably high-speed. Most SMEs still use dial-up to connect to the Net. In addition, SMEs need email at their own domain name. There are two options: there can be a locally installed mail server (which would download the emails and make it available on the LAN) or POP/IMAP accounts on the Internet, which make email accessible from anywhere but need appropriate bandwidth. In the future, it is also possible that there will be IP phones plugging into the local Ethernet, perhaps a wireless LAN.

Second, Software. SMEs need software to handle internal functions (finance, taxation, HR, admin, project management, timesheets), collaboration tools (calendar, instant messaging, shared telephone directory, bulletin board), customer functions (database, relationship management, marketing, trouble ticketing, one-click history of all interactions) and the website (with shopping cart, content management and hosting). This needs to be made available to SMEs in "Lego-like" building block modules, and should be customisable by the SME based on its processes.

Third, Services. SMEs need external assistance in various areas, starting with IT support. It is especially hard for SMEs to attract and retain technical talent. Hence, the ability to simplify internal technology needs and have outsourced its management becomes important. Then, there are back-office services like accounting, taxation, escrow, legal and strategy. These are areas where India is well-positioned to leverage - the area of IT-enabled services.

Fourth, Marketplace. SMEs need to buy and sell. A market place which can help them reach wider markets can be very useful. SMEs also buy various non-core items like travel services, stationery, etc. Being able to offer a portal which can combine offerings of various SMEs on the sell-side and offer an aggregate of sellers to SMEs can help create a marketplace which can help SMEs some of the benefits which bigger businesses have managed to get. What needs to be leveraged is the combined buyer power of the SMEs.

What needs to be done is that all of the above services need to be aggregated and presented as a solution to SMEs. E-Business is as much for the small businesses as it is for the large ones. Small does not mean simple. If anything, the challenges for creating an SME e-Business solution are even greater.

Case studies:

Applications of ICTs in Small Enterprises - Successful Experiences

While the application of ICTs in large and medium enterprises is well documented, not much has been publicised about ICT applications to enhance productivity and competitiveness in small enterprises. The following examples from rural India throw light on a few success stories in this sector. One successful application of ICT has been the use of a microprocessor-based Automatic Milk Collection System (AMCS) to enhance milk collection in milk co-operatives in Gujarat, India. Electronic technology is used to measure and transmit the quality and quantity of milk that farmers are delivering. This system makes the collection and evaluation process faster and more efficient and reduces cheating of farmers by intermediaries. The Baroda Dairy in Gujarat, India, has installed extensive IT infrastructure for the computerisation of its function. This includes a Local Area Network with 4 servers and 65 client systems. The servers are used for e-mail and applications/data services. The computerisation of most of the functions at the Baroda Diary has not only improved the overall level of efficiency of the organisation but also resulted in a much better utilisation of its manpower. Regular MIS reports have helped senior management in the organisation to take informed decisions in time.

The Warana Co-operative Complex in India is one of the finest examples of successful integrated rural development programmes in India resulting from a co-operative movement through people's participation. It comprises 25 co-operative societies in the areas of sugar, milk, poultry and house construction with an annual turnover of US$ 130 million. The Wired Village Project at Warana Nagar in Maharashtra State in India has been set up to utilise IT to increase the efficiency/productivity of co-operative societies in order to provide greater transparency in the working of co-operative societies; provide agricultural, medical and educational information to villagers by establishing networked facilitation booths in 70 villages, bring the world to Warana through the Internet; provide tele-education at both primary and higher level educational institutions. It will also develop user-friendly map- based information systems for better administration and governance.

The Gyandoot Project seeks to take the benefits of ICT directly to the people in rural areas, helping them in their day-to-day economic and other activities. The project specifications were prepared based on a detailed study of the needs of the people in villages of the Dhar district. The condition of telecom facilities in the district was also checked so that village- level connectivity to the network could be established under the project. Nineteen Gram Panchayats (village-level administrative units) were identified as serving the needs of the people in the district. One local person in each of these nineteen Panchayats was identified to act as a resource person, called a Suchak (information provider). These people were given an adequate level of computer training to run computer booths called Suchanalkayas (Information Kiosks). The range of services provided include commodity prices at agriculture produce auction centres; rural e-mail facilities; village level auction sites; government sponsored loan project preparation; on-line employment exchange; transparency in government working and 'ask the expert'.

KalaNation.com is an artist portal from India. Its goal is to train Indian artist of all kind by providing with traditional know-how, which has formerly been passed down by oral tradition. An additional goal is to market the artists' products (or services).

Kumbhan is a project stemming from a village in India where traditional pottery used to be produced. By influence of cheaper production at industrial sites, almost all craftsmen had lost their skills over time. The Kumbhan project has been the first attempt to revive those abilities. Today, the potters are manufacturing traditional-style as well as contemporary pottery for daily use, and are marketing their products via their home-page. Here, one can find pictures of the products and addresses where to turn to if one wants to buy them.

Agriwatch.com is providing information and analyses on agricultural products, aiming to close the gap that exists with regard to an adequate degree of information of the different parties participating in the production of / trade with agricultural commodities in India. Moreover, it is offering the possibility of online auctions and e-commerce for the suppliers and demanders of the agricultural sector. The enterprise is being financed by membership fees and by selling space for advertisements.

DoctorAnywhere.com is a B2B-e-commerce model, providing countrywide access to medical experts to Indian physicians. By paying a small fee, physicians and other people working in the field of medicine become eligible to get expert advice on medical questions by request. Those seeking advice are able to choose an expert from a pool of specialists. DoctorAnywhere.com is also supporting medical institutions / health centres regarding the purchase and implementation of the hard- and software necessary to use its service.

Tara Projects
Tara is a project that operates guided by the principles of fair trade. It aims to help artists and craftsmen to receive a fair income on a regular basis. By posting their products on its web-site, it has succeeded in increasing sales by 20% in the course of the past twelve months.


To assist SMEs in developing countries and economies in transition with access to ICTs, it is imperative that coherent measures and activities consistent with national development strategies are taken. At the enterprise level, these measures and activities would include effective planning, organisational capabilities and related managerial skills with regard to ICTs. The establishment of electronic networks, common databases and various value-added services that speed up transactions is fundamental at the industry level. Governments have substantial scope to influence the development of the ICT industry and the promotion of ICT diffusion through actions such as standard setting, outsourcing and application of competition policies. An enabling environment for introducing ICTs could be ensured also by the provision of the legal protection for confidential information, security for electronic transactions and standards.

Ministry of IT has planned and taken initiatives to Promote SMEs as E-Commerce Enterprises. 

1. Promoting innovation, supporting entrepreneurs with brilliant & commerciable ideas, providing business support, create incubation centres are some of the areas where government with the participation of industry and other sectors have been playing a catalytic and facilitating role.  This may need to be further intensified.  Some of the recent initiatives taken include:

2  MIT in association with SIDBI, IDBI and software industry has set up a corpus of Rs. 100 crores , named as National Venture Fund for Software and Information Technology Industry (NFSIT).  NFSIT is targeted to provide venture capital to start up software professional and IT units in small scale sector.

3. To provide help to small enterprises, STPI has recently set up business support centre at San Jose, USA.

4. In various software technology parks as well as other parks promoted by State Government, Incubation Centres/plug  & play facilities are being set up.

5. To release the Indian venture creation and incubation engines, procedures & policies are being simplified. We need to have many more initiatives.

SMEs can do copycatting or adopt the principle of follower-ship and try to emulate them. Japan became a model of success through follower-ship in the seventies. While Americans used to focus on breakthroughs and coming up of new products, the Japanese followed the strategy of copying and being very effective followers. One need not be a pioneer but one can be a very imaginative and intelligent follower and improve on the pioneer. This is one type of development that is possible by collection of data regarding application of e-business models for success in SMEs.

SMEs can apply e-business models is by practising the principles of lateral thinking. To what extent can cases of success in the application of e-business in SMEs be useful in creating similar success stories in other sectors and industries? Perhaps there could be dedicated and conscious efforts made in this direction.

Finally, this very issue of e-business application in small and medium enterprise is very timely in India today. Firstly, from 1 st April 2001 the quantitative restrictions have  been removed. The Indian small and medium enterprises, which were brought up in a particular environment of protection and reservation, are today facing greater competition.

Further, the huge imports from China and the competition even in products like fruits is a challenge. It is here, I think, trying to use the e-business technologies, B to B, B to C or even B to G become important because from a broad national point of view, one can even consider whether for the Indian SMEs to survive, they should try to make optimum use of e-business models so that they can face the immediate problem of intense competition from abroad. It all depends on  commitment and imagination.

K. Srinivasan
Jansons School of Business
Karumathampatti, Coimbatore - 641659
E-mail : k.srinivasan@jsb.ac.in  / scheenu2@yahoo.co.in

Source : E-mail June 11, 2004




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