E-commerce and the small firm - opportunity or threat?

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E-commerce presents both a major opportunity and a very real threat for small businesses according to economists at The Royal Bank of Scotland (RBS).

At the Federation of Small Businesses (FSB) annual conference, RBS economists looked at the way the economy, social legislation, the Budget and the increasing amount of business conducted over the Internet will impact on Britain's nearly three million smaller firms.

Expected higher levels of growth will provide a positive climate for SMEs but accompanying increasing pressure on prices, margins and profitability will test firms' ability to exploit niche markets and 'value-added' products and services
The trend towards consolidation in many sectors will mean that small firms will have to focus on costs and efficiency, the impact of social legislation including the Part-Time Working directive, maternity provision, and legislation on employment disputes.

The budget must be considered, including improvements on capital gains tax and capital allowance, corporate venturing tax relief, discounts in VAT and tax for SMEs that file returns electronically, and a £60 million package to help small business get online.

Benny Higgins, deputy chief executive at the Royal Bank said: "Last year we reported on the challenges ahead for small businesses. Economic conditions are better this time around and the UK has come through the period of slower growth in 1999, avoiding recession. However, a range of other issues remains to be addressed, such as regulatory changes and new budget measures.

"Perhaps of most importance is electronic commerce. Growth in e-commerce is expected to be much faster than growth in internet penetration and one source estimates that growth in e-commerce in Western Europe will be 151 per cent per annum until 2003. 

"Estimates of the value of online retailing in the UK vary significantly and go up to around £2.5 billion in 1999. This is forecast to grow quickly over the next five years to reach £7 billion by 2004, an average annual growth of 63 per cent.
"E-commerce has the potential to change market structures, levels of competition, prices, business efficiency and some would argue overall economic performance.

"There has been a tendency in the media to focus on the threats of e-commerce - increased competition, potential to drive down prices and the costs of setting up online. However, e-commerce represents one of the greatest opportunities for small businesses, who perhaps stand to gain most by being able to access global markets, to improve efficiency, make savings and improve their marketing.

Higgins concluded: "The next few years are unlikely to be substantially different for small businesses, presenting many challenges and issues to be overcome. Whilst regulatory changes and other one-off events will continue to increase costs and the complexity of running a small business, sector-specific issues will be paramount. E-commerce will exacerbate trends in many sectors and represents both a threat and an opportunity for small businesses. As ever, the laws of evolution will apply and it will be survival of the fittest." 

There are indications that within five years the net will achieve penetration rates that took 13 years for television to achieve. Levels of household access is currently estimated at over 17 per cent in the UK. This compares to around 50 per cent in the US. Adoption of the net is dependent upon PC penetration, price of access and telephone tariffs, as well as new means of access, like mobile phone and digital TV. There is general agreement that growth will be substantial, around 33 per cent per annum.

The Government has made its support for e-commerce clear, and is likely to be pushing for adoption of the net for its own operation. Thus smaller businesses may come under increasing pressure to have a presence online.
There are, however, factors which currently limit the potential of the e-commerce:
*the impersonal factor may deter some customers
*lack of IT and business skills
*the net will never achieve 100 per cent penetration
*concerns about security of transactions
*the timely delivery of goods
*cultural and language barriers will limit penetration of the European market by UK. Conversely, US operators will find it easier to target the UK.

There is a definite first mover advantage when it comes to net trading, with companies that move onto the net first gaining a significant advantage over 'me-too' operators. There is a risk that European operators have already ceded much of the advantage to US companies. 

The net threatens some intermediaries by allowing businesses to trade directly with the consumer. Even in sectors where consumers cannot access companies directly, there will be greater competition from new intermediaries which are low cost and price driven. Auction sites, sites which allow group purchase and sites which make price comparison easy are likely to increase price competition.

E-commerce has the potential to change market structures, levels of competition, prices, business efficiency and, some would argue, overall economic performance. The Bank of England is already looking at the impact of e-commerce on inflation and the government has a strong focus on high-technology start-ups as a means of creating employment and wealth.

Many of the gains will go to consumers rather than shareholders. However, e-commerce represents one of the greatest opportunities for small businesses, who stand to gain most by being able to access global markets, to improve efficiency, make savings and improve their marketing.

Traders most at risk from e-commerce are those which previously hid behind geographical or physical barriers to entry, as are those which cannot differentiate themselves by means of a strong product, branding or service offered. Essentially, the net accelerates polarisation between the weak and the strong at the same time as increasing price pressure.

Companies need to focus upon defending existing business where possible, and exploiting opportunities to cross-sell and access new markets, devising a strategy for operation which is based upon business and not technology.
The DTI has produced a guide for small businesses, and there is a wealth of information, of varying quality, on the net itself.

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