Surviving in the digital world

Eight in 10 small and medium enterprises (SMEs) in Southeast Asia have made technology their top investment priority.

This was shown in a recent Association of Southeast Asian Nations (ASEAN) survey, which isn’t a surprise given the rapid growth in e-commerce even prior to the COVID-19 pandemic.

The number of digital consumers nearly tripled between 2015 and 2018, with double-digit growth expect in the region.

The pandemic, however, has greatly accelerated the shift towards digitalisation and e-commerce. Consumers are becoming more comfortable ordering goods and services online due to lockdowns and social distancing rules, which leaves SMEs with little choice but to go digital.

For many SMEs, if not all, this transition has taken on existential proportions: failure to make the move results in a real threat to survival.

Bank Islam Brunei Darussalam (BIBD) conducted a similar survey last year that showed that over 75 per cent of respondents are engaged in e-commerce while over 60 per cent regularly carry out online banking transactions, signalling a positive development for digital economic growth in the country.

This trend is supported by statistics that show over 75 per cent of households in Brunei have Internet access, with 99 per cent of homes owning at least one smartphone.

The digitisation of economy generates benefits and efficiencies as digital technologies drive innovation and fuel job opportunities and growth, while permeating all aspects of society and influencing the way people interact and live.

As business activities are affected by the unprecedented outbreak, the Brunei Government is urging companies to take up the opportunity to upskill or reskill their human resources thus catapulting the country towards the Industrial Revolution 4.0.

While indispensable, e-commerce will not be a profitable venture for all SMEs, according to economic expert Rashesh Shrestha of the Economic Research Institute for ASEAN and East Asia (ERIA) based in Jakarta, Indonesia.

While it provides access to new consumers, it inevitably brings new competition.

“In a traditional model, SMEs make use of locational advantage, build long-term personal relationships with their suppliers and customers, and have some control over pricing strategies,” he said. “These advantages are less relevant in e-commerce – a world of algorithms and optimisation.”

The biggest consequence of competition is the pricing decision, which is entirely out of the SMEs’ hands.

Shrestha believed that in an online marketplace, SMEs are not free to charge the price that is required to cover their costs since there will be numerous other businesses offering similar products at cheaper rates.

Instead, they will have to sell at a prevailing “market price” if they are to capture any market share. Unfortunately, such market price may not be enough to cover the costs for all SMEs. Consequently, he said, those whose costs of production are lower than the market price will be profitable, while those who fail to lower production costs may be forced to operate at a loss.

“Such competition will affect SMEs whether or not they choose to embrace e-commerce as their customers will eventually move online,” the economist said. “So it is best for SMEs to embrace e-commerce.”

But moving online comes with new types of costs, on top of the regular costs of running a business.

These costs include online advertising and customer acquisition, maintaining high ratings, managing higher volume of trade and inventory, handling returns and exchanges and dealing with logistics companies.

In order to succeed, Shrestha said, SMEs will need to find ways to implement new strategies while keeping their operational costs low.

He believes larger enterprises have an edge over SMEs as they can afford to hire workers who are skilled at meeting these challenges.

“By lowering their costs through optimising back-end business processes, larger businesses can make a profit even when offering products at very low prices,” he said.

The question then becomes: Can small enterprises compete and thrive online in the presence of giant platforms?

There is an argument to be made for SMEs to focus on niche markets where they can cultivate a group of loyal customers with high quality products, which allows them to charge above-market prices. However, competition still limits such a possibility.

Due to the relative ease of entering the online business arena, competitors will seek to enter profitable market segments, thus driving down prices. Cost competitiveness will thus be the ultimate arbiter of success.

In the short term, the skills of the entrepreneurs will be one of the key determining factors of success.

“Entrepreneurs who have the skills to operate in the digital world will face a lower cost of entering into e-commerce than someone who has to learn these skills anew,” Shrestha said.

The competency that is required does not only include technical skills, such as digital literacy for creating an online store and processing orders.

“They will need to have the necessary interpersonal skills to deal with customers coming from a much wider geographic location, handle special requests, and address any problems with the orders,” he said. “The high volume of transactions needed to make a profit creates a greater demand on cognitive skills necessary to do business optimisation, data-drive decision making and management at a larger scale.”

The best hope for SMEs, he added, is to reduce the skills gap as much as possible.

For existing businesses that want to go digital, the government could provide a “digital extension” service to support the transition to the online marketplace. Such a service could be provided privately with governmental support or entirely run by the government, similar to the agricultural extension services for the agricultural sector.

Such services, Shrestha believed, can help to enhance the skills of the entrepreneurs and improve their competitiveness.

He added that specific technical skills “such as digital marketing can be provided to existing workers through upskilling and reskilling programmes, which will then support SMEs’ transition to e-commerce by increasing access to skilled workforce”.

In the longer term, creating a skills development system will be necessary to ensure that increased digitalisation does not widen the digital divide.

Thus, “public education systems need to be reformed to provide high quality cognitive, socio-economical and technical skills that will enable SMEs to navigate the digital marketplace”, he said.

The competitiveness of SMEs in the virtual world also depends on policy and provision of government services, which need to be improved rapidly with these SMEs’ interests in mind.

Therefore, it is imperative that the infrastructure is efficient as any bottlenecks in border procedures may interfere with a just-in-time inventory business model designed to lower costs.

“Overall, the principle behind any strategy to enhance SME participation in e-commerce should be aimed at ensuring that they do not face avoidable disadvantage in their cost structure compared to larger firms,” Shrestha said.