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    Internet for SMEs: A New Silk Road?

     

     
     
    © International Trade Centre, International Trade Forum - Issue 3/2000

    Are Australian firms ready to use the Internet as a means to join the global economy? And what lessons can be learned for developing countries from the Australian experience, especially for small firms located in rural areas?

    With great enthusiasm, Australian SMEs have been adopting Internet modes of marketing and (to a lesser degree) sales, seeing this as a way of overcoming the natural disadvantages of small size and geographic distance. Yet these same SMEs often do not have a strong base of technological experience or global marketplace management skills.

    In Australia nearly 95% of companies are SMEs - although, of course, they account for a considerably smaller percentage of turnover. This mixture of economic significance, enthusiasm, technical and technological inexperience, and growing global awareness is potentially very dangerous. Small companies traditionally fail to survive in astonishing numbers - the Australian figures suggest that one in two fail to survive their first year. The risks that global marketing pose to comparatively inexperienced and unsophisticated smaller companies have encouraged governments of all types to look at ways of assisting SME import/export activities.

    What follows are experiences from Australian government and academia in examining how SMEs use the Internet to develop international business, and how government could facilitate the process.

    Internet: A new silk road?

    In 1997 the Australian Federal Department of Foreign Affairs and Trade commissioned a series of 12 case studies on small Australian companies that use the Internet for international trade. These case studies, which were undertaken by a group of students and academics, told a story of moderate success in using low-cost technologies (both web and e-mail based) by some small and innovative Australian companies. The cases were subsequently published in the form of a book entitled Putting Australia on the New Silk Road (available in PDF format from http://www.dfat.gov.au/nsr).

    A significantly larger follow-up project in 1998 looked at ways in which the government could effectively support Australian SMEs planning to use the Internet for international trade. A group of 36 case studies, based on a questionnaire and round-table discussions in major cities, resulted in the book, Driving Forces on the New Silk Road. An analysis of similar projects around the world led to Creating a Clearway on the New Silk Road.

    What role should government play?

    What role should government play, the studies asked. The companies were unanimous about what government should not do: they requested that government refrain from further regulating Internet-based trade activities. They were much less certain about just what governments should do to assist them. The most popular suggestion was to create an online "one-stop-shop" for all offshore trading documentation - so that companies need only go to a single site to find information, regulations and forms to undertake export activities. Forms would be downloadable (or even online); links to other sites, when absolutely necessary, would streamline the form-filling, permission-granting process to the maximum.

    This project provided a rich mine of information on a cross-section of Australian exporting companies. They varied from large to small and were located in both capital cities and in remote, rural and regional Australia. Some of the most innovative companies were not, as one might have expected, those based in Sydney or Melbourne and possessing excellent technical support - but were located in remote areas where technology was effectively dependent on the skills of the entrepreneur concerned (see, for example, the exclusively online operation, Mick's Whips, based more than 100 km outside Darwin and selling Australian products most successfully to Europe, Asia and North America.

    Remote communities: Will they benefit?

    The tendency is for governments to encourage remote, rural communities to build web-based infrastructure, on the grounds that this will cut service delivery costs, enhance the lives of the inhabitants and encourage young people to remain in the town because of exciting employment opportunities.

    We are finding, however, that this approach does not always have the expected results. Many service providers use the excuse of the web to remove existing infrastructure (banks and post offices being obvious examples), while much of the money which was formerly spent within the community is now flowing outside to capital city and overseas providers of goods and services.

    The net result, in some cases, is a further degradation of the quality of life in country towns - and, in extreme cases, a further shift in population away from the very area which was to have benefited from the new technology. A number of issues arising from this project have been confirmed by other work undertaken by the CollECTeR inter-university e-commerce research network.

    There are, of course, encouraging exceptions to this picture - country towns in which an innovative entrepreneur can establish enthusiasm for new technology and provide a foundation for further growth of Internet-based businesses. Cowley Online, for example, is a search engine, web site developer and focus for technology development in Newcastle, a former steel town in New South Wales. The company is successfully acting as a fulcrum for high-tech businesses in the area, and has already spawned the extremely successful Petal Network which links over 1,000 florists around Australia in a worldwide online flower and gift delivery system.

    Challenges for small firms

    Understanding today's global marketplace

    Small companies (and particularly micro-sized companies) are very susceptible to the unintended side effects of technology. The concept of globalization and the potential prices available to companies able to reach customers around the world are very attractive prizes to many SMEs. But, without a thorough understanding of the market, customers, the order fulfilment requirements of overseas trade and possible pitfalls, many small firms that attempt to move from a local marketplace to a global one will fail at the endeavour and possibly fail completely.

    Telecommunications infrastructure

    One of the major problems faced by high-tech companies in rural locations is that of inadequate technical infrastructure. Even in countries as technologically advanced as Australia or the United States, small-town, high-tech companies complain about the quality of their telephone lines and data access. A company that must pay a special charge to connect to the Internet has no chance of competing effectively with capital city or regional centre-based alternatives.

    Understanding the role of the Internet

    The Internet is an "additive" marketing channel, rather than a "substitutive" one. Companies, unless they are entirely web-based, are generally unable to move away from other marketing channels, such as television, radio or print media, simply because they are now also marketing on the web. The additional costs of having a web site must thus be balanced by additional income from new customers (or, at the very least, from existing customers being prepared to purchase substantially more than they previously did).

    Opportunities

    • Information-based products are at an advantage. Companies with information-based products have a real advantage in the networked world. Not only can web sites display product information and take orders, but they can deliver the end-product immediately and at a low cost. These benefits obviously accrue to music, video and software companies, but also to lawyers, accountants, stockbrokers and consultants, among others.

    These companies are in an excellent position to form more-or-less informal global networks, so that they can provide support around the world at very low cost - and obtain expertise on local issues and problems. In many cases, consumers prefer to deal with smaller firms. This means that there are benefits in terms of image to position a small firm as part of a network of local experts.

    • Niche marketers can be winners. In Australia, examples of small firms that have successfully used the Internet to exploit niche markets include Mick's Whips (cited earlier in this article), Tobwabba Art Online which sells Aboriginal art and craft products, or Boots Online which sells Australian bushman's boots around the world. In a niche market, competition is significantly less, customers are far less likely to engage in price comparisons (and far more willing to tolerate delays and product imperfections), and relatively high freight charges are not so noticeable.

    Risks

    • Companies with physical products may be at a disadvantage. They must deal with the complexities and expenses of international order fulfilment. The issues of distribution, warehousing, timely delivery, order tracking and (above all) return of unsatisfactory goods are such as to make most small companies pause before they decide to go into business on a global scale.

    • Small companies competing in standardized product areas face serious challenges. Products such as CDs or DVDs - which are effectively identical, and for which only service and price can differentiate sellers - face enormous competition and frequently do not last long. Customers of online stores are notoriously fickle and disloyal. One example of poor service can be enough to send an online shopper to a rival store, while order fulfilment and product returns are difficult, expensive and logistically complex. It is already becoming apparent that successful online purveyors of CDs, books, DVDs and videos are comparatively large companies which can absorb freight costs and can offer a speedy and efficient returns service for imperfect products. The cost of keeping a web site up-to-date, alone, can be prohibitive - and yet this is an absolute essential in a field where customers expect to see changes every time they log onto the site.

    E-trade for small firms: Lessons for success

    For smaller companies hoping to trade internationally, the glittering prizes of a global marketplace may well prove a chimera. Those companies whose ventures into cyberspace have proven successful have tended to:

    • be niche-focused or information-product focused, so that customers do not expect too much for too little;
    • work in virtual networks with other "local" companies with whom they can exchange expertise and specialized local knowledge or support skills, where they need to support customers located in many countries;
    • be based in regions where they have access to high-quality technological infrastructure at reasonable prices; and
    • not be overwhelmed by complex and unreasonable government regulations which add to costs without adding advantages.


    Companies without these advantages are more likely to fail under the multiple and complex pressures of competing with large firms having deep pockets.

    Paula Swatman is a professor at RMIT University, Melbourne, Australia. This article is based on a paper she provided to the ITC Brainstorming Session (July 2000) in preparation for the ITC Executive Forum on the Digital Economy (September 2000).