Section 1 – Where We Are Now: Signs of Progress

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Net Impact Canada IV: Strategies for Increasing SME Engagement in the e-Economy
Final Report
Canadian e-Business Initiative (CeBI)
September 2004

In this section, we explore the current state of IBS adoption and use by Canadian SMEs. In many ways, the progress made by SMEs in Canada is remarkable. As this section will show, IBS adoption levels among some sectors of the SME population are high. In addition, the Net Impact data clearly show that tangible financial benefits accrue to those SMEs that adopt IBS. Further, those benefits contribute to a competitive advantage that is sustained over successive periods. The Net Impact data echo the conclusions of Fast Forward 5 in suggesting that SMEs have enjoyed substantial gains from the adoption and usage of IBS.

IBS Adoption by Canadian SMEs

Overall adoption of IBS by SMEs in Canada showed no improvement between 2002 and 2004. In Net Impact I, 50% of SMEs (with between 50 and 500 employees, and in 5 broad industry sectors) responded positively to the question, "Does your company currently use Internet Business Solutions?". The most recent survey (which concentrated on the poorer performing sectors of retail, wholesale and manufacturing) showed 42% of those firms sized between 50 and 500, and 38% of smaller firms between 20 and 50 have adopted IBS. The results suggest that there has been significant penetration of IBS in Canadian SMEs. However, there is also an indication that IBS adoption has slowed, or perhaps stalled. That possibility will be further explored in section II.

Adoption by IBS category

Figure 1 shows how adoption breaks down by IBS category using 2004 data. Of the SMEs that adopted some form of IBS, 64% used the technology to support internal operations, like e-mail, and 60% used it to support online marketing, typically a Website. Fewer SMEs utilized IBS to support purchasing or customer service–both more technically complex applications. The least common application of IBS was to support online selling. These data are broadly consistent with the data collected in 2002.

Figure 1: Adoption by IBS Category, 2004

% of adopting firms: Online selling: 42.9%; Online customer service: 48.2%; Online purchasing: 51.3%; Online marketing: 60.9%; Online internal operations: 64.4%.

IBS Adoption by Firm Size

Figure 2 breaks down IBS adoption by SME size. SMEs in all three size categories adopted IBS to support business functions in similar proportions. There were no statistically significant differences in IBS adoption by SME size. Proportionally, a larger number of small SMEs (20-49 employees) engaged in online selling, while a higher proportion of medium SMEs (50-99) and large-sized SMEs (100-500 employees) used IBS to support internal operations. This result supports a staged IBS adoption process from online marketing, to more integrated and complex solutions.

Figure 2: IBS Adoption by Firm Size, 2004

% of adopting firms: 
Online selling: 100-500: 41.6%; 50-99: 38.5%; 20-49: 47.1%.
Online customer service: 100-500: 47.8%; 50-99: 48.6%; 20-49: 48.1%. 
Online purchasing: 100-500: 48.7%; 50-99: 51.4%; 20-49: 52.9%.
Online marketing: 100-500: 53.1%; 50-99: 62.8%; 20-49: 64%. 
Online internal operations: 100-500: 70.8%; 50-99: 68.2%; 20-49: 57.7%

IBS Adoption by Industry Sector

Net Impact II found that the some sectors of the Canadian economy had advanced further along the IBS adoption curve than others. Specifically, the financial services sector, the communications sector, and the public sector showed relatively high adoption levels. By contrast, the manufacturing, wholesale and retail sectors were found to be IBS adoption 'laggards'. As a consequence, the 2004 survey examined only these three sectors. Figure 3 shows IBS adoption by industry sector in 2004.

The data reveal that all three industry sectors showed high levels of adoption for IBS that supported internal operations. Retailers tended to be more frequent adopters of IBS to assist with all business functions, compared to wholesalers and manufacturers. Only 30% of manufacturers who adopted IBS used them to support online selling, and less than 50% used IBS to facilitate online purchasing or supply chain management.

Figure 3: IBS Adoption by Industry, 2004

% of adopting firms: 
Online selling: Retail: 52.4%; Wholesale: 45.9%; Manufacturing: 31.9%.
Online customer service: Retail: 56.5%; Wholesale: 39.2%; Manufacturing: 43.2%.
Online purchasing: Retail: 59.2%; Wholesale: 50%; Manufacturing: 43.8%.
Online marketing: Retail: 65.4%; Wholesale: 59.5%; Manufacturing: 56.8%.
Online internal operations: Retail: 52.4%; Wholesale: 45.9%; Manufacturing: 31.9%.

Reasons for IBS Adoption

Net Impact I and II showed that Canadian SMEs were experimenting with, and adopting, Internet business solutions. However, very little was known about the motivations behind this adoption. In Net Impact III, and the 2004 survey, the question of why SMEs choose to adopt (or not adopt) IBS was examined. Figure 4 shows that two justifications for IBS adoption predominated. First, SMEs wanted to use IBS to make themselves more competitive. Second, IBS were adopted to increase SME revenues. Cost reduction was also deemed to be an important consideration by just under half of SMEs. Surprisingly, some commonly cited justifications for IBS adoption were not deemed to be important. For example, SMEs did not cite pressure from competitors or suppliers as a reason for adopting IBS.

Figure 4: Reasons for Adopting IBS, 2004

Reasons for Adopting IBS, 2004

The reasons for IBS adoption differed somewhat by firm size and industry sector. Manufacturers were compelled more by export opportunities than retailers. Manufacturers were also more heavily influenced to adopt IBS by their customers than were retailers. Interestingly, retailers felt pressure from suppliers to adopt IBS. These two results align to support the premise that technological changes in supply chains can affect both upstream and downstream SMEs.

Larger SMEs tended to believe more strongly than smaller SMEs that the primary goal of IBS adoption was to reduce costs. It is likely that larger SMEs represent maturing enterprises looking to control costs, while smaller SMEs are more concerned with enhancing competition and increasing revenues.

Multiple IBS Adoption

A key concern raised in Net Impact II was that SMEs were not progressing 'beyond the Website'. That is, SMEs were successful in adopting basic, stand alone applications, like email and Websites, but had not progressed to more complex, integrated solutions. The 2004 survey reexamined this question and found that more than 83% of IBS adopters had adopted Internet technologies to support multiple business functions. That is, they had implemented more than one IBS.

Figure 5 supports the notion that SMEs adopt certain kinds of IBS before others. SMEs most frequently adopt online marketing applications first (typically a static Website), then over time graduate to using IBS to support more integrated and complex business functions. As IBS are integrated into existing business processes, as opposed to standing alone, their potential value and risk to the firm increases. The fact that half of larger SMEs (100-500 employees) reported implementing their IBS as part of Enterprise Resource Planning (ERP) system implementation, suggests that some IBS adoption was a component of a larger IT system acquisition.

Figure 5: Order of IBS Implementation by Business Function, 2004

Total Implementations: 
Online selling: first:40; second: 59; third: 30.
Online purchasing: first: 43; second: 64; third: 42.
Online customer service: first: 36; second: 68; third: 52.
Internal operations: first: 94; second: 60; third: 32.
Online marketing: first: 114; second: 62; third: 41.

Financial Impacts of IBS Adoption

A key finding of Net Impact I, II, and III was that all SMEs, regardless of size or industry sector, experienced substantial gains in financial performance as a consequence of IBS adoption. Data from the 2004 survey reconfirmed this finding, as shown in Figure 6. SMEs across all sectors and size categories reported a substantial increase in revenue as a consequence of IBS adoption, with an average revenue gain of over 8%.

Figure 6: IBS Impact on Firm Revenue, 2004

IBS Impact on Firm Revenue, 2004

In the 2004 survey, we asked SMEs to provide reasons for their increased revenue. By far the most common reason cited was that SMEs were using IBS to attract new customers (see Figure 7). These new customers were, in turn, providing SMEs with increased revenues. Other reasons, such as an increase in the volume or frequency of purchases, were less prominent.

Figure 7: Reasons for Increased Revenue, 2004

Percentage of SMEs who agree with the following causes of increased revenue:
We have raised our prices: 5.6%;
Customers are buying more expensive products: 13%;
Existing customers are buying in greater volumes: 28.2%;
Existing customers are buying more frequently: 29.2%;
We are attracting more new customers: 69.4%;

The 2004 survey also found that SMEs reduced costs as a result of IBS adoption, although the effect was less pronounced than in the case of revenue. As Figure 8 shows, reductions in costs of goods sold (COGS) were more pronounced as SMEs increased in size. For small SME retailers and manufacturers, IBS adoption actually resulted in a net COGS increase. Larger SMEs were able to realize a decrease in COGS. Evidence gathered in Net Impact III suggested that larger SMEs were able to reduce COGS by leveraging their buying power and negotiating position with suppliers to reduce purchasing costs. Furthermore, larger SMEs, particularly in the manufacturing and wholesale sectors, were able to use IBS to reduce communication and coordination costs across multiple locations (i.e., multi plant networks, warehouses).

Figure 8: IBS Impact on Costs of Goods Sold, 2004

IBS Impact on Costs of Goods Sold, 2004

The 2004 data showed a decline in sales, general and administrative (SGA) costs as a result of IBS adoption. While some categories of SGA costs increased, such as IT expenses, a net decline across SME size categories was found (see Figure 9).

Figure 9: IBS Impact on Sales, General, and Administrative Costs, 2004

IBS Impact on Sales, General, and Administrative Costs, 2004

Net Impact III found that SMEs were able to quantify revenue increases much more easily than they were able to specify reductions in costs. In many cases, cost savings were intangible, hard to measure, or difficult to attribute to specific investments. Smaller SMEs, in particular, had difficulty quantifying specific financial benefits associated with IBS adoption. However, SMEs of all size categories, and within all sectors, expressed high levels of satisfaction with their IBS investments.

The Financial Impact of IBS Adoption on the Average Firm

As in Net Impact I and II, a simple hypothetical firm is employed to illustrate how bottom line financial results can be affected by the adoption of IBS by SMEs in Canada. The results presented in Table 1 draw on the 2004 survey data.

An Illustrative Firm

For purposes of illustrating the potential financial impact of implementing IBS, a hypothetical firm will be used. This firm has annual Revenues of $10M, from which it deducts $8M in Cost of Good Sold (80%) for a gross profit of $2M (a 20% gross margin). It then deducts a further $1M in Sales, General and Administrative expenses, for a net profit of $1M (a 10% net margin).

The following are average increases in Revenues and decreases in COGS and SGA. Both overall averages, and those broken down by the size of firm are shown.

Table 1: Average Financial Impact of IBS Adoption by SME Size

Table 1: Average Financial Impact of IBS Adoption by SME Size
  Overall Size in Canada
    20-49 50-99 100-500
% Revenue Increase 8.5 9.2 8.4 7.9
% COGS Decrease 1.8 0.4 1.6 3.3
% SGA Decrease 2.6 1.4 1.8 4.5

Applying these average benefits, a hypothetical firm would achieve the following increases in Net Profit (see Table 2):

Table 2: Average Impact on Net Profit of IBS Adoption by SME Size

Table 1: Average Financial Impact of IBS Adoption by SME Size
  Base Case Overall Size in Canada
      20-49 50-99 100-500
Revenue $10.00 $10.85 $10.92 $10.84 $10.79
COGS 8.00 7.86 7.96 7.87 7.73
Gross Profit 2.00 2.99 2.95 2.97 3.06
SGA 1.00 0.97 0.99 0.98 0.95
Net Profit 1.00 2.02 1.96 1.98 2.10

Each column represents a comparable average firm. The base case is a hypothetical SME that has not adopted an IBS. The second column provides the average overall improvements for SMEs that adopt IBS, while the next three columns show these improvements broken down by SME size. It is clear that the financial benefits are dramatic–increases in Net Profit of around 100%. These results are particularly remarkable given that the three sectors studied in 2004 (retail, wholesale, and manufacturing) were found to be the poorest performers in previous Net Impact Canada studies. Further, the benefits extended to small SMEs (20-49 employees) to a greater extent than in earlier studies. This begs the question; "If the financial rewards are so positive, why has the adoption rate overall for SME stalled at 50%?"

The effects of firm size are clearly evident in these results. Although revenue improvements shrink slightly as firm size increases (although they are still large and substantial), they are more than offset by improved reductions in cost, i.e. COGS and SGA. In particular, there are substantial cost improvements seen in large SMEs (>100 employees). Data from Net Impact III suggested that larger SMEs have additional capabilities to implement the more complex, back-office IBS that reduce costs, whereas small SMEs focus solely on the simpler, customer-facing and market-increasing Websites that increase revenues.

Sustainable Competitive Advantage

In 2004, SMEs were asked if the use of IBS led their company to a position of competitive advantage. 56.7% of 450 respondents answered yes, compared to 39.3% who answered no. Since most Internet technologies are widely available and able to be imitated, competitive advantages typically only last for a short period. However, when firms were asked whether they we able to sustain the IBS-enabled competitive advantage for at least one year, 67.8% answered yes, versus only 6.4% who answered no (the remainder were not sure). This finding suggests that many firms are able to improve their competitive position both in the short and longer term using IBS.

SMEs were asked to identify the source of this competitive advantage. The most common response was that IBS-enabled SMEs were able to provide better customer service than their competitors (see Figure 10). Close behind were two other reasons that suggested improvements in internal factors. Around half of the firms who achieved a competitive advantage attributed that success to being able to operate more efficiently, or more quickly than their competitors.

Surprisingly, some common sources of success did not contribute to competitive advantage. Relatively few firms felt that IBS allowed them to either produce better or cheaper products or services. This result suggests that IBS do not affect a firm's products or services directly, but instead enhance business processes that support the marketing, manufacturing, and delivery of products and services.

Figure 10: Sources of Competitive Advantage Based on the Adoption and Use of IBS

Produce cheaper products or services: agree 14.4%, neutral	38.7%, disagree 40.8%, don't know 6%; Produce better quality products/services: Agree 32%, neutral 33.5%, disagree 30%, don't know 4.4%; Operate more quickly: Agree 48.9%, neutral 31.1%, disagree 17.5%, don't know 2.4%; Operate more efficiently: Agree 51.1%, neutral 29.3%, disagree 16.1%, don't know 3.6%; 
Provide better customer service: Agree 53.2%, neutral 30%, disagree 13.9%, don't know 2.9%;

Impacts of IBS Adoption on Supply Chain Relationships

Customer Relationships

Results from the 2004 survey suggest that IBS adoption by Canadian SMEs has resulted in a positive impact on customer relationships in at least two ways (see Figure 11). First, IBS adoption has advanced the scope of the customer relationship. Second, IBS adoption has improved the operational performance of the customer relationship. Both of these benefits are positively related to one another. This finding is interesting since it suggests that firms are experiencing longer term benefits of improving the scale and scope of the customer relationship (i.e., with new product development, information sharing, and longer term relationships) in addition to the financial and competitive benefits discussed above.

Figure 11: The Impact of IBS Adoption on Customer Relationships, 2004

The Impact of IBS Adoption on Customer Relationships, 2004

A close examination of Figure 11 reveals that customer impacts are not realized equally. For example, while most SMEs agreed that IBS contributed to increased customer satisfaction, there was no agreement on the impact on cost reduction, delivery times, or increased control.

Larger SMEs, and those in the manufacturing sector believed that IBS adoption increased the sharing of information with customers (i.e., plans and schedules). This result can be attributed to the greater demand to co-ordinate operationally, particularly among manufacturers in integrated supply chains. Wholesalers tended to be less positive about the effect of IBS adoption on customer relationships than either retailers or manufacturers.

Larger SMEs also believed that IBS adoption increased customer loyalty and contributed to longer term customer relationships. Smaller SMEs were generally more ambiguous about the ability of IBS to positively affect customer relationships.

Supplier Relationships

SMEs were generally positive about how IBS adoption affected supplier relationships, although the effect was less strong than with customer relationships (see Figure 12). SMEs tended to agree that IBS adoption led to better control of their supplier relationships. This may be attributable to the widespread adoption of e-procurement and supply chain management software, which helps firms to increase operating efficiencies by monitoring spending and reducing or eliminating waste. However, there was no agreement on the effect of IBS on reducing transaction costs, or providing better delivery times.

Figure 12: The Impact of IBS Adoption on Supplier Relationships, 2004

The Impact of IBS Adoption on Supplier Relationships, 2004

There were a number of significant differences between industry segments in terms of supplier relationships. Retailers believed more strongly than wholesalers that IBS adoption reduced transaction costs such as ordering, and increased on-time delivery from suppliers. Further, retailers believed more strongly than wholesalers or manufacturers that IBS adoption reduced ordering and delivery errors from suppliers, and led to more cooperative relationships with suppliers. It is possible that the relative power of retailers over wholesalers and manufacturers has allowed them to control the implementation of solutions of their own choosing and thus contributed to their more positive view of the impact of IBS on supplier relationships.

Larger SMEs felt more strongly than smaller SMEs that IBS adoption reduced delivery times. This result may reflect the greater power of larger firms in the buying relationship to get suppliers to conform to online processing through their proprietary systems. This is further supported by the fact that the smaller SMEs did not agree that they achieved better control of their purchasing as a result of IBS adoption.

Section 1 – Summary

Net Impacts I, II, and III, along with new survey data from 2004 suggest that the impact of IBS adoption on the Canadian SME population has been positive. SMEs that adopt IBS have realized substantial increases in revenue. Operating costs have also been reduced, particularly among larger SMEs. The data suggest that SMEs can use IBS to achieve and sustain a competitive advantage in their industry segments. Further, there is evidence to suggest that IBS adoption can enhance supplier and customer relationships.

While a good deal of progress has been made, the data suggest cause for caution. In the next section, we focus on the gaps and challenges facing Canadian SMEs, and outline possible courses of action to address these issues.