Poverty and Development Division
last updated : 20 December 1999
ELECTRONIC COMMERCE AND SMALL BUSINESS
While electronic commerce technologies are important for SMEs, evidence reveals that growth in electronic commerce remains predominantly limited to more technically advanced companies. Only 2 per cent of businesses worldwide currently use EDI, which is the backbone of electronic commerce. Almost 80 per cent of the EDI traffic exchanged today is generated by less than 20 per cent of companies. While it is true that these users represent a critical mass of EDI volume, they do not represent a critical mass of users.
Table V.2 outlines the main features, both attributes and limitations, of the most widely used electronic instruments for conducting trade transactions. The most pervasive instruments of electronic commerce for small business continue to be the telephone and the fax machine. Even these instruments are often out of reach for some poor and rural micro-enterprises. The annex to this chapter presents an interesting case study (the village phone programme of the Grameen Bank, Bangladesh) of a modality for encouraging access at least to the basic telephone for the rural poor, with possible future extensions to fax, ATMs and the Internet. For SMEs, the telephone allows goods and services to be advertised, purchased and paid for (in conjunction with a credit card). Selected services can even be distributed over the phone and then paid for through the phone bill. Examples include telephone banking, telephone directory enquiry and the like. Non-standard transactions which require negotiation can be conducted much more easily by interactive communication over the telephone than by mail. Similarly, fax offers speedy business communication and document transmission. It has replaced traditional mail services and the telex. There are, however, limitations to the use of the fax. Actual transactions can be concluded only on paper with physical delivery of products. Similarly, although in principle a number of commercial functions such as advertising, purchasing or the initiation of payments can be carried out by fax, it lacks the potential for transmission of voice and sophisticated images. Interactive communication is not possible, and complications in a transaction require an additional fax or telephone call. Higher-level applications such as telephone conferences require considerable upfront investment in equipment and bandwidth. Charges for long-distance and international calls vary dramatically across countries. This limits the use of the telephone for long-distance purposes by small businesses, especially those in developing countries.
For electronic commerce to be embraced by SMEs, it must meet criteria similar to those that led to the widespread adoption of the fax machine: low cost, ample benefits, simplicity of installation and universal use. The Internet is perceived to be the enabling technology that may make the use of electronic commerce more widespread. Internet applications offer clear cost advantages. Firms worldwide spent $60 billion in 1997 sending fax reports. This is expected to decrease dramatically, since Internet-based faxing can slash a firm's fax expenses by as much as 35 per cent, according to a study by Mercer Management Consulting.6 This is due to the fact that such faxes go over the Internet to a remote server near the intended recipient and the fax is sent from there using local phone lines and therefore costs as little as a local telephone call. It is also claimed that an Internet phone call can be up to 95 per cent cheaper than a traditional international call. This has ramifications for payment transactions too; telebanking charges are about half the normal transaction charges of a bank. Savings on the cost of purchase of electronic commerce tools, for example software on a diskette, can be at least one third when delivered through an Internet connection. Even advanced electronic commerce technologies such as EDI are within the reach of small businesses for the first time with the advent of the Internet.
In general, SMEs face difficulties in adjusting to a liberalized trading environment. They face higher barriers in terms of language and culture, large physical distances, access to business information, and differing business and administrative practices that the larger firms can easily cross. Internet-based electronic commerce could help them to overcome these barriers. Since traders will be using transaction formats that are internationally accepted and in a transparent manner, the possibilities for misinterpretation that arise from differences in culture and language are diminished. Similarly, as business and administrative processes are harmonized, the need to keep track of hundreds of practices is no longer a consideration. Finally, with electronic communication, data messages are transferred at near the speed of light; physical distances therefore, do not matter much.
The most significant business benefits for SMEs from the use of electronic commerce are described below.
Better service quality. The self-service model which underlies many forms of electronic commerce can improve the quality of the marketing, sales, support and procurement process of SMEs by delivering more accurate, more timely and more complete information to the point of sale, point of decision or point of support. Service can also be delivered over a broader geographic and temporal base worldwide, or "any time, anywhere".
Reduced service costs. The self-service Internet-based electronic commerce model is characterized by relatively low variable transaction costs, with increasing cost-effectiveness as the scale of activity increases. At higher volumes of activity, Internet commerce channels for sales and support services are likely to be low-cost channels.
Increased revenue. Extended geographic sales channels and improved service quality may lead directly to increased market share, improved competition among brands and greater revenue.
Reduced time to complete a business transaction. By communicating electronically, the time required to place and confirm an order can be compressed by hours or, in some cases, days or weeks. This shortens the lead time for product delivery. As a result, it may be possible to reduce parts or finished goods inventories or receive critical products more rapidly to gain a competitive advantage.
Reduced administrative costs. The cost of processing purchase requisitions, purchase orders and payments can be dramatically reduced, as can invoice and bill presentation costs. The accuracy of business transactions is improved, increasing customer satisfaction, reducing transaction, auditing and administrative expenses, as well as reducing the costs of expedited manufacturing and/or shipping to correct erroneous or late orders.
Improved return on capital. By shortening the "product turn" and payment cycles, enterprises can reduce the amount of material requirements and the time for which funds must be committed to pay for the production of inventory, materially lowering capital requirements.
Increased return on investment through better planning. More timely planning and information allows more efficient acquisition and scheduling of capital equipment, reducing unit costs, increasing the return on investment, and ensuring a better match between manufacturing capacity, production and market demand.
6 Cost saving is only one of the benefits of Internet faxing. It can save time by allowing firms to send a document only once even if they are faxing to 50 or 100 trading partners. It also frees the fax machine to receive important documents. See "Faxing via the Internet provides significant savings", Mercer Management Consulting Fourth Quarter 1997 Briefs <http://mercermc.com/news/briefs1q98/faxtraff.html> (4 February 1999).
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