Increasing Productivity in SMEs Essay

Introduction The literature indicates that Small and Medium Enterprises (SMEs) contribute a significantly to a country’s GDP. In addition, they employ large numbers of people. According to the Bank of England Quarterly Report on Small Business Statistics (2001), almost 99.8% of businesses in the UK, one for every 10 workers, are SMEs, employing less than 250 people. This means that one out of eight workers is self-employed. Similarly, according to Cole (n.d.), the World Bank believes that one significant difference between high and low income countries is the percentage of SMEs in each. In a typical high-income country about 57% of employment comes from the SME sector, while in a typical low-income country only 18% of employment comes from the same sector. An example of a high-income country is the US, with 85% of companies designated at SMEs, contributing 50% of the GDP and employing 50% of the labor force (Cabello, 2010). Another example of a high-income country is Japan with 99.5% of bu sinesses designated as SMEs employing fully two-thirds of the entire labor force (Cabello, 2010). Given the sizeable contributions SMEs make in terms of employment and adding to a country’s GDP, it is tremendously important they increase their competitiveness in a globalized economic environment. Unfortunately, there is significant evidence that SMEs lag in productivity—the reasons vary based on what line of business the SME is in. For example, in a small factory, low worker output may be due to problems with the machines or low morale because of bad worker-manager relations (Calzado, 2003). However, another reason that SMEs are unproductive is their inability to effectively utilize Information and Communication Technology (ICT), sometimes simply referred to as Information Technology (IT) (Calzado, 2003). According to Qureshi and York (2008), Ho, Kauffman, and Liang (2008), and Bharadwaj (2000), there is a large consensus among scholars and policymakers that the adequate use of ICT increases the competitiveness of employees and strengthens the position of companies in the global economy (as cited in Millis, 2008). This literature clearly shows that companies who integrate ICT in a proper way score significantly better than their competitors in the field of cost control and profit. In fact, a high level of computerization and networking is perceived as a crucial factor to enhance the efficiency of employees and thus to remain competitive, which is one reason that governments around the world have responded to these finding by launching initiatives to encourage companies to adapt ICT more aggressively (Millis, 2008). However, while there is agreement that SME productivity must be increased and that this can be achieved by the successful integration and use of ICT, the literature also indicates that SMEs are not successful at acquiring, utilizing or integrating ICT. Therefore, while large corporations have successfully integrated ICT so as to generate more output with fewer resources, SMEs have been left behind (Wielicki & Arendt, 2007). Therefore, this paper seeks to investigate the reasons why SMEs do not utilize technology effectively and possibly provide some recommendations for dealing with this situation. The Problem with Technology Integration and Utilization in SMEs Why Government Initiatives Fail In an analysis of policy measures designed to advance the computerization levels of SMEs, Millis (2008) indicates that governments around the world have launched initiatives to encourage companies to adapt ICT more aggressively. However, while this has met with success in larger companies, adaptation of ICT in SMEs has not yielded the same return on investment. He found the following reasons for this lack of success: Inadequate standards. Generally, hardware expenses are used as a benchmark standard to measure level of computerization in companies. However, this does not work well in SMEs because some companies rent rather than own hardware, and ownership does not equate with effective usage. This has resulted in a lack of empirical data by which to assess the effectiveness of government initiatives (Millis, 2008). Oversimplified assumptions and underestimation of SME diversity. All initiatives to encourage the adaptation of ICT are based on a model that assumes a structured sequential process for optimal use of new technology. The model oversimplifies the complexity of the process and overlooks the individual differences between SMEs. For example, some SMEs with an export component are better positioned to computerize faster than companies that do not have an export component. As a result of the diversity of SMEs, government initiatives are too bureaucratic to be effective. Moreover, they lack in SME engagement. This results in many initiatives missing their goals (Millis, 2008). Mismatched expectations. It is ultimately the SME manager’s decision to adapt ICT. This means that each manager must be well informed about the opportunities and threats of the market that they are operating in. In addition, they need to have some knowledge of how to integrate the technology effectively. Oftentimes SME management is suspicious of government initiatives. That, coupled with the lack of engagement between government agencies and SMEs, results in mismatched expectations between managers and government bodies (Millis, 2008). Integration of IT Alone does not Guarantee Increased Performance Francalanci and Morabito (2008) took an in-depth look at the literature regarding the relationship between Information Technology (IT) and business performance. They concluded that integrating IT does not automatically guarantee increased business performance, unless the organization completes the learning curve associated with the integration of data and applications, also known as Information Systems (IS). The authors, labeled this integration of IS as the organization’s â€Å"absorptive capacity† and claimed that it plays an intermediary role between IS integration and business performance, where IS integration is the degree to which data and applications have become routine in the day to day activities of an organization. Therefore, the authors hypothesized that â€Å"IS integration leads to greater business performance through absorptive capacity, that is, that absorptive capacity has a mediation role [in how a business performs]† (Francalanci & Morabito, 2008, p. 298). The hypothesis was tested on 466 Italian SMEs who lacked economies of scale in the business setting; exhibited a general lack of IT literacy; and were led by management that was rarely IT-oriented. Absorptive capacity defined. Cohen and Levinthal (1990) and Zahra and George (2002a) defined â€Å"absorptive capacity† as an SME’s ability to first identify/recognize knowledge from external sources, then to assimilate this knowledge in relation to its needs, and finally to exploit this knowledge to its advantage (as cited in Francalanci & Morabito, 2008). This might include the ability to imitate competitors’ products or processes, or to exploit less commercially focused knowledge (e.g., scientific research or IT solutions). Integrating anything external requires a learning curve on the part of the entity attempting its integration. Since IT is a complex technology, it too requires a learning curve so that data and applications may be effectively integrated with the company’s day to day functioning. If this is achieved, IT will have a positive impact on business performance. However, if this is not achieved, then the company not only does not perform better, but also fails to achieve a return on its investment in the IT. Francalanci and Morabito (2008) found that in order for IT to be successfully absorbed, the company first needed to align its processes with the new IT in order for it to result in the desired increase in efficiency. Next, the company needed to make sure that all IT users were sufficiently trained in its uses and applications. In addition, management must ensure that the organization is ready to embrace the change that IT integration and use will bring. And finally, the organization needs to display flexibility in adapting to the new IT integration so that there is little loss of time and cost. However, if a company has management that is not IT oriented or that is unwilling to train its employees in IT use, then the absorptive capacity of the company is low resulting in little or no increase in business performance even after an investment in IT. The Digital Divide Wielicki and Arendt (2007), agree with Francalanci and Morabito (2008) in their findings as to what barriers prevent the successful integration of IT. According to Wielicki and Arendt (2007), these barriers include a lack of elementary digital experience caused by lack of interest; computer anxiety and unattractiveness of the new technology; lack of computers and network connections; lack of digital skills caused by insufficient user friendliness and inadequate education or social support; lack of significant usage opportunities. These barriers are not dissimilar from the characteristics of the 466 SMEs chosen by Francalanci and Morabito (2008)—lack of economies of scale in the business setting; lack of IT literacy and management that was not IT-oriented. It is these barriers that, according to Wielicki and Arendt (2007), constitute the â€Å"digital divide† between SMEs and larger companies that have successfully and willingly adopted and absorbed IT to increase their competitive advantages. According to Wielicki and Arendt (2007), it is the failure to understand the digital divide which may have a profound impact on operations of business in this information-driven century. In other words, far from being a luxury, IT has become a necessity in this globalized economic environment. Without successful integration of IT, that is, moving beyond the basic use of the Internet and e-mail for basic communication purposes, a company might find itself unable to take advantage of e-commerce ventures due to the limited level of computer literacy of both employees and broad market participants. In particular, in developed and emerging markets, a company may find that the presence of the digital divide may prevent it from appreciating the benefits of technology-driven opportunities. As a result, the dynamic growth of the e-commerce economy could turn out to be somewhat deceiving unless we can move more businesses and more of society onto the right side of the divide. Implications and Recommendations Across the literature there is no doubt that integration of ICT has become a necessity for business success for SMEs. However, the literature also agrees that there are many barriers in the way of successful absorption and implementation of ICT in SMEs. In addition to the widespread agreement on these two points, the literature also provides proposals and recommendations for overcoming the barriers. One important factor in creating solutions is government involvement due to the lack of financial resources on the part of individual SMEs. However, one size does not fit all, and Millis (2008) provides the following suggestions about how government should proceed: * Creation of a proper standard for measuring the progression of ICT and e-technology adaptation * Taking into account the complexity of the reality and circumstances in SMEs that prevent computerization proceeding as a structured, sequential process. * Taking into account that a holistic approach to IT integration cannot work because of the large diversity between SMEs * Avoidance of high-level approaches and over-bureaucratized project structures * Avoidance of overestimating the impact of government initiatives on the behavior of participating SMEs * Provision of direct and specific support to SMEs designed to elicit concrete results * Creation of realistic and measurable goals and models that support the choices of the company rather than something generic that is imposed on the company be the government Another recommendation comes from Wielicki and Arendt (2007). Since the US is the most advanced country with regard to IT use and integration, they suggest that it be used as a model of study to determine how the barriers to successful IT integration be overcome in other countries. In addition, they counsel continued research to track the progress of SMEs in crossing the business digital divide, tracking the level of implementation of ICT-based solutions at the business process level and the role of ICT training in SMEs or of ICT in integrating business processes of SMEs. In an effort to successfully define these research objectives, Thurasamy, Mohamad, Omar, and Marimuthu (2009), have proposed an empirical study across 1500 Malaysian SMEs in order to determine the following: 1. To profile the type of technologies adopted by SMEs. 2. To profile the extent of usage of each of those technologies. 3. To develop an index for performance and technological adoption tracking of SMEs. 4. To investigate factors that encourage, as well as those that remain barriers to technology adoption. 5. To establish the extent of technology adoption and performance (financial and non-financial) plus Internationalization. As we can see, the objectives of this study mirror the suggestions of Wielicki and Arendt (2007) as to the nature of further research into IT integration in SMEs. Another reason cited for the unsuccessful adaptation of IT was lack of employee training. Therefore, government initiatives like the ones featured in a report released by the Directorate-General for Education and Culture in Belgium (2003), could be utilized towards increasing the effectiveness of employees in relation to the use and adaptation of IT. The report profiles 10 European employee training programs ranging from Worldwide web-based information and communication technologies training for manufacturing SMEs to a CD-Rom based program to help SMEs define their training needs. Conclusion As can be seen from the above discussion, there is a definite need to foster the integration of IT/ICT in SMEs in both developed and developing economies. While this need has been documented by the literature, it is also clear that there are many obstacles that stand in the way of the successful implementation of the technology. It would seem, therefore, that the stage is set for further investigation into the technological and educational needs of SMEs around the world. It would also seem that there are employment and business opportunities for those with the necessary know-how and skills to offer their services as consultants and trainers to SMEs desiring to integrate IT/ICT into their day to day activities. References Bank of England Quarterly Report on Small Business Statistics. (2001, January). 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