"Integrating Small to Medium Businesses (SMB) into the digital economy"

Jack attended the 2018 OECD Forum in Paris. Jack is currently studying a Bachelor of Commerce at the University of Melbourne Faculty of Business and Economics and is also an Outgoing Exchange Manager for AIESEC Melbourne. 

Abstract

Small to medium-sized businesses (SMB) are fundamental components of the Australian economy and inextricably linked to middle-class welfare. With over 2.1 million SMB in Australia, they constitute two-thirds of the economy’s jobs and over half of private sector economic activity (Deloitte, 2017). With the rise of globalisation and the rapid growth of technology in the last two decades, the transition to a digital economy poses both risks and opportunities for SMB. Research has found that 87% of Australian SMB are not taking full advantage of the digital tools available to them, especially in regional areas. Given that SMB adoption of these digital tools can add $49.2 billion in untapped economic potential over the next 10 years (NPV), SMB adoption rates not only impact future economic growth and living standards but, on a broader level, impacts Australia’s capacity to compete on an international level (PWC, 2018). 

As such, the Australian Government has a clear prerogative to assist SMB. Although the reasons why digital technology is underutilised by SMB vary by geography, industry and characteristics of owners, recent reports have highlighted reoccurring themes of: a lack of education and training; limited financing opportunities; and a decentralised and disjointed support system, as key factors hindering their adoption of new technologies (Deloitte, 2017). With the rapid pace of digital technology making it difficult for SMB to stay on top of best practices, this report recommends that the Australian government establish a website and toolbox that can provide businesses with easy to understand information. Paired with a comprehensive marketing campaign, this website would assist in communicating the benefits of digitalisation whilst developing SMB digital capabilities. With the rollout of the NBN and other digital infrastructure projects taking place in remote areas of Australia, coupling this with streamlined training and information will assist in overcoming the divide between regional and urban SMB. Additionally, this report recommends developing a small business network to support the promotion of community digitalisation. 

 

Context

The development of new ways of delivering goods and interacting with consumers has fostered a shift in what customers expect of businesses. Chief amongst these has been the growing integration of digital technology into conducting business, which has been broadly defined by the term ‘e-commerce’. Where once consumers would utilise local knowledge and sources to influence their purchase decisions, now the advent of the internet has resulted in a greater reliance on technology in these decisions where, for example, 82% of smartphone users now consult their phone when deciding what to buy (Ramaswarny, 2015). Businesses that have embraced this change are 1.5 times more likely to have growing revenue, 14 times more likely to be innovative and 8 times more likely to be creating jobs (Deloitte, 2017). Despite these financial results, Australian businesses continue to lag behind on a number of key indicators of digital engagement, where they rank 45thin digital and technological skills, 18thon the World Economic Forum’s Network Readiness Index, and 23rdout of 144 countries in the Global Competitiveness Index (Microsoft, 2018; Schwab, 2018; Schwab, 2015). This underutilisation of digital technology relative to other OECD countries highlights a role that the Federal and State government can play in keeping Australian businesses competitive and receptive to consumer demand. 

SMB are particularly vulnerable to these changes, owing to their size and financial capabilities when competing with larger and generally better-resourced firms. As consumers desire greater ease of interactions with businesses, low loading times and user-friendly pages on websites, the use of inadequate technology is increasingly turning customers, who desire instant information, away (McKinsey, 2015). For instance, Google has found that the average mobile landing page takes 22 seconds to fully load, despite 53% of mobile site visitors leaving a page if it fails to load within 3 seconds (Google, 2017). The pace of change has taken many by surprise; it previously took 15 to 20 years for three-quarters of enterprises to develop a website, whilst now it has taken only a few years for over 30% of businesses to become active on social media (OECD, 2014). The result has been a deficient response by businesses to develop a comprehensive strategy for digitalisation. Indeed, only 15% of companies categorised as having low digital engagement have developed a marketing strategy (Kane et al., 2015). Given the increasing need for local communities to compete in a global marketplace and the consequential vulnerability of these communities to international market conditions for goods, services, skills and capital, the necessity of innovating to remain competitive is intensifying (OECD(b),2016). As such the following section aims to highlight the reasons that have prevented SMB from adopting digital technology and will provide recommendations to overcome these issues.

 

Policy Recommendations

1. Education: Develop a National website designed to provide small businesses with comprehensive information and training and offer financial incentives to undertake training to enable them to digitalise.

2. Marketing: Link NBN road shows and information sessions with digital training in regional areas to support SMB outside of capital cities. This could be facilitated through partnerships with local and trusted business organisations.

3. Small Business Network: Establish a small business network designed to support SMB through pooled information and shared experiences, including financing benefits and lessons learnt. 

 

Education

The need for a centralised website to deliver training and financial assistance stems both from a fractured and overlapping information system and a skills shortage in digital technology. With a variety of programs and advice services coming from a range of private and public sources including local, state and federal government websites, the ability of SMB owners to gain the information they need from a centralised and trusted source is lacking (OECD(a),2016). The cross-cutting nature of SMB policies across various departments and authorities means that their design and delivery must be coordinated across a range of stakeholders to prevent gaps and/or duplications of information (OECD(a), 2016). With a growing need to overcome this, it is clear that an up-to-date and consolidated website coordinating information from local and state governments will assist in reducing the cost of searching for new technologies to use and streamline adoption rates. Indeed, the Small Business Digital Taskforce (SBDT) has found that many business owners feel overwhelmed by the amount of information on digitalisation and that the capacity to assess which information is credible and relevant is nearly impossible (SBDT, 2018). Additionally, such an approach would facilitate the synergy of information and expert knowledge from different levels of government to be combined together. Similarly centralisation of information has occurred for exporting businesses through Austrade, in coordination with the Department of Treasury and Department of Foreign Affairs and Trade, and could be utilised as a model for providing step-by-step guides to developing digital capabilities. 

This is especially relevant given the current skills gap many local businesses have in digital technology. With over 61% of SMB citing either their own or their staffs’ skills shortage in digital tools as a significant barrier to digital engagement, SMBs are more than ever requiring new training and assistance (Deloitte, 2017). Skills in information technology, designed to develop and manage digital products, along with soft skills including problem-solving and information processing are becoming more and more critical to the diffusion of digital technology (Australian Government, 2017; OECD(b), 2017). Given that SMB are “relatively late adopters” of new technology, transferring this information to businesses in a timely and easy to understand manner is critical to empowering businesses to make these necessary changes. For instance, providing a working assessment of website speed and compatibility to various mobile devices is critical to maintaining consumer interest and fostering e-commerce for their business. Developing an online program through the website that addresses these technical gaps along with management skills training to properly leverage digitalisation and/or scale businesses will be critical to building smarter SMB. 

 

Marketing

Aside from providing clear and relevant information to SMB, the Australian Government must promote a cultural change in attitudes to digitalisation. Although Australian consumers have one of the highest adoption rates to new technology, Australian SMB continues to fall behind in their awareness of the benefits of incorporating digital technology (Australian Government, 2017). Such a divide inevitably invites competition from larger corporations with a capacity to meet these growing demands at a faster rate. This culture of stagnation and complacency has led to Australia lagging on a number of innovation indicators including placing 17th in the Global Innovation Index (PWC, 2016). It is clear that governments can play a role in maintaining SMB ability to compete and innovate effectively. This is especially pertinent given that 29% of SMB believe that digitalisation is irrelevant or not useful to them (Deloitte, 2017). Facilitating a change in attitudes that communicates this overwhelming evidence of increased growth and higher productivity from digitalisation remains a critical goal to lifting Australia’s potential economic output. This could be achieved through a mass-marketing campaign targeted specifically to a local chamber of commerce, business support, and government organisations. Through this adaptive culture, the Australian government can cultivate the conditions for a smooth transition to a digital economy, where SMB are not swept up in the pace of change but enjoy the innumerable benefits. 

One key area of focus for this marketing campaign should be on regional SMB, including rural, remote or isolated businesses, which make up 30% of all SMB in Australia and trail behind their urban counterparts. Given their history of connection issues, rural SMB are 3 times more likely to have a lower level of digital engagement than metropolitan SMB (Richmond,2017). Despite this, regional SMB has the greatest potential to benefit from new technology (Deloitte, 2017). The capacity of the internet to bridge geographic divides between customers and businesses means that regional SMB - through the utilisation of mobile and internet technology for cloud-based bookkeeping, developing their e-commerce and monitoring consumer trends and business best practices - have the capacity to gain approximately 25 billion dollars in untapped economic potential over the next 10 years (NPV) (PwC, 2018). As such, the government must play an important role in targeting specifically regional SMB. A possible model for this marketing campaign can be seen through the information and roadshow sessions conducted in the wake of the NBN expansion in regional areas. These roadshows show consumers the benefits of the NBN and can provide businesses with information and strategies to improve both their perception of digitalisation and provide actionable steps and drop-in sessions to begin the process of adoption. Linking these roadshows together would assist in communicating the benefits of digitalisation and ensuring gaps in skills are overcome more quickly. 

 

Small Business Networks

The role of industry groups, professional services firms, and employee unions as trusted advisors to small businesses offers a poignant path for the rapid dissemination of best practices to SMB. As businesses are generally cautious in following government advice, engaging in public-private partnerships and leveraging on already trusted organisations serves as a key pathway for the government (SBDT, 2018). Australian organisations have already become heavily involved in programs to support their members, such as the Council of Small Business Organisations that provides advice and programs to address cybersecurity concerns; and rural R&D collectives that provide newsletters on best practices for agricultural produce. Seeking long-term partnerships with organisations with a proven and trusted record of benefitting businesses in their sector offers an immediate pathway to not only market the benefits of digitalisation, but to also utilise their networks to deliver education programs on technical and management skills. The OECD has already highlighted the benefits that engaging with local institutes, small-firm networks and clusters can have on facilitating a dynamic SMB sector (OECD, 2000). Through these systems, the opportunity to pool resources and cultivate inter-firm linkages can strengthen local systems and assist in the exchange and diffusion of knowledge and technology.

Additionally, building on local strengths and systems can assist in providing tailored advice and education to different industry sectors and geographic regions. Taking into account regional and local factors that may impede a ‘one-size-fits-all’ approach, digital training programs and advertising may lean on expert opinion in various sectors and refine programs to meet differing needs (OECD, 2000).  This focus is especially pertinent given the complexity of developing these programs on a vertical level, between different levels of government, and horizontally, between different communities and sectors. The 2016 OECD Job Creation and Local Economic Development report emphasises the significant variations of SMB environments across communities from different labour market conditions and access to finance and business regulations, thereby emphasising the need to utilise local knowledge and local organisations (OECD 2016). Organisations with the resources and connections have the capacity to improve strategic directions and delivery on national objectives in a more effective manner. 

The Australian government can play a key role in this by creating and strengthening these networks. Finland’s Centre of Expertise Program provides Australia with a model to develop a similar type of network that connects key non-governmental actors together. In the Finnish program, businesses may connect with each other and/or a range of regional actors, such as regional businesses, higher education institutes, and research and innovation centres, to share assets that help them achieve innovative measures, which in turn cultivate regional economic growth (OECD(a), 2016). By creating and encouraging these networks, the Australian government has the opportunity to connect SMB together for mutual gains, whilst utilising the network to assess SMB needs in the region and deliver tailored policies.

These networks may also assist in pooling resources together to overcome financial constraints and disperse government incentives more effectively. This is particularly relevant given access to finance has been a long-standing bottleneck that limits SMB potential to innovate and utilise digital technology (OECD(a), 2017). Compared to larger businesses, SMB often struggles with access to funding due to under-collateralisation, high financial costs and lack of financial skills (OECD, 2015). As it stands, typically 38% of Australian SMB identify financial costs as a concern in either delaying or preventing them from incorporating digital technology (PWC, 2018). Utilising trusted networks to communicate the incentive structures in place and to ensure there is a clear streamlined process to financial enticements will assist in developing a comprehensive approach to support SMB adopting the new digital technology. Current policies such as the $20,000 asset write-off have already had a positive impact on allowing SMB to develop their digital infrastructure (SBDT, 2018). As such, utilising intermediary organisations and networks to act as a vehicle to communicate these benefits and through access to shared resources and assets, the Australian government can facilitate economies of scale to improve business growth. 

 

Limitations

A critical challenge to these recommendations stems from the heterogeneity of small to medium-sized businesses preventing a ‘one-size-fits-all’ approach. The deep diversity of SMB in terms of geographic, demographic and industry amongst a variety of other differentiators means that the government cannot simply design a single website to fit all SMB. This also stems from inherent differences in benefits of digitalisation in certain sectors and the differing attitudes of business owners based on demographics. Deloitte has found that the age of a business and its business owner has a significant impact on the likelihood of adopting digital technology whilst the Small Business Digital Taskforce (SBDT) has found younger generations of business owners are more likely to engage with experimenting with new technologies (Deloitte, 2017; SBDT, 2018).  Given the current divides in digital engagement between regional and metropolitan areas, developing a tailored marketing strategy to deal with these limitations will be critical to the overall success of the recommendations. 

 

Conclusions

For the majority of Australians to truly take part in the benefits of globalisation and digitalisation, the Australian government must ensure that SMB are provided with the programs and opportunities that incentivise innovation at a sufficient scale, with sufficient funding, and long-term support. Currently, the fragmentation of information and advice to these key pillars of the middle-class quashes growth and limits businesses’ capacity to reap the benefits of digitalisation. As the reduction of inequality and investment in inclusive growth becomes a priority in Australia, the role of digitalisation will become increasingly prominent in fostering local development and reducing widening gaps in the development between regional areas. Fundamentally, the government would do well to address the current gaps in education, culture and business networks. By leveraging local intermediary organisations, the Federal government can play a fundamental role in delivering education and training, tailored development policies, and cultivating a collaborative environment that supports digital advances. Implementing a comprehensive strategy that addresses the key structural challenges of digitalisation facing SMB will be a key determinant for future economic prosperity and inclusive growth.
 

References

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