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Economy

Why do SMEs hesitate to digitalize?

TIRACHARDZ-FREEPIK

Digitalization is applying digital technologies to improve business processes, and to provide new ways of producing value for customers. It must not be confused with digitization, which is the conversion of analog data into digital form (e.g., scanning documents to transform them into electronic files). Digitalization is using digital data to make better decisions and to enable new business models.

Business owners and managers can utilize digital technologies in various aspects of the business. In the area of marketing and sales, a business can set up a company website to provide the public with information about its products and services. The website can also incorporate features that will allow customers to order and/or pay online. Without having to set up a physical store, a business effectively expands its potential market. A business can also interact with its customers by utilizing social media platforms such as Facebook, Instagram, Twitter, and YouTube.

Snug Home & Lifestyle, an entrepreneurial business that offers affordable and stylish furniture, home decor and accessories, operates primarily online. It seeks to help small-time furniture and home decor makers and independent carpenters from Rizal and Albay reach wider markets. Snug Home’s website contains its product catalogue and provides delivery and payment options for customers. The company also has Facebook and Instagram accounts, through which it promotes its products and responds to inquiries of potential buyers.

Entrepreneurial businesses can also utilize digital technologies to enhance their various internal activities including accounting, human resource management, inventory management, logistics, and product development.

Ninja Van “is a tech-enabled express logistics company providing hassle-free delivery services for business of all sizes across Southeast Asia.” Launched in 2014, Ninja Van is a fast-growing last-mile logistics company with a network covering six countries in the region — Indonesia, Malaysia, Philippines, Singapore, Thailand, and Vietnam.

Ninja Van provides a variety of delivery options — same day, next day, express, and standard — to social media sellers, small businesses, and large enterprises. It also provides different pickup options, whether customers want to have their parcels picked up, or to drop them off themselves at any of Ninja Van’s network of drop-off points. Customers can easily track the status of their parcels by entering their parcel-tracking ID in the Ninja Van website. The company also offers free redelivery attempts, one-click delivery rescheduling, and self-collection services, which are enabled by a complete logistics management system.

Despite the supposed benefits of digital technologies, many small- and medium-sized enterprises (SMEs) hesitate to adopt these technologies. This can be partly explained by what is known as the digital divide, which is the gap between the level of sophistication in information technology and e-business usage of SMEs compared with that of large companies, and of businesses in rural areas compared with those of urban areas.

According to the Organization for Economic Co-operation and Development (OECD), structural barriers to digital adoption include: internal skills gap, which prevents business managers and workers from identifying the digital solutions they need and from adapting business models and processes; financing gap, which prevents business owners from accessing finance for intangible digital investments that cannot be easily used as collateral; and infrastructure gap, or the lack of access to high-speed broadband, which is needed to maximize the benefits of digital technology.

Also coming into play is how SME owners and managers perceive risks and benefits associated with investing in digital technology. For businesses that have limited resources, the expected costs of investing in technology (including the cost of training workers in its use) must not exceed the expected benefits that they can derive from it.

While digitalization offers many opportunities for businesses, the adoption of digital technology depends on a variety of factors including the nature of the business, the ability of the entrepreneur to pinpoint the digital solutions his or her business needs, and the fit of digital technology into the overall strategy of the business.

Given their limited resources, small businesses can adopt digitalization in various phases, focusing on areas that are most relevant to their business models and that have more tangible returns. It is not a matter of digitalizing for the sake of digitalization. Neither is it about doing what others are doing, but about being judicious in one’s use of scarce resources and being clear about how digitalization contributes to business goals.

Raymund B. Habaradas is a full professor at the Department of Management and Organization of the Ramon V. Del Rosario College of Business of De La Salle University. He wrote the Philippines’ Country Report for a multi-country study entitled  Digital Entrepreneurship in Asia for Economic Resilience and Post-Pandemic Recovery,” which was supported by the Asian Development Bank.

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