DIGITAL TRANSFORMATION CHALLENGES TOWARDS SMALL AND MEDIUM-SIZED ENTERPRISES

Author: Tsogtbaatar Gankhuyag

Publication date: July 08, 2022 (for APP, The UniMelb)

Abstract

In a rapidly changing and developing modern world, businesses, even Small and Medium-Sized Enterprises (SMEs), are being pushed to adopt digital technologies to adapt or survive. It has been proven that companies or nations equipped digitally at first could be the leader in their sector or the world. Thus, large companies and developed nations have already started their competition to become digital companies or digital nations. Therefore, as a significant economic contributor to any nation, SMEs should not be left behind. This study, therefore, aims to examine challenges and solutions related to digital transformation (DT) for SMEs. Research findings and conclusions were based on literature review only, which on the other hand, represents this study’s limitation. The new aspect of this study is that the study subject, DT challenges of SMEs, was considered a global issue, not just a country or a sector issue. After the literature review, all main digitalization challenges were classified into two groups, internal and external. As regards the internal challenges, technical, organizational, human resource, strategical and behavioral issues were identified. In terms of the external obstacles, cyber risks, lack of government support, and countries’ underdeveloped technological infrastructure were found. To tackle these digital barriers, the SMEs and the Government should work together.

Keywords

Digital transformation, Digitalization, Digital Era, Industrialization 4.0, SMEs, Internal and External challenges

Introduction

In the Era of Industrialization 4.0, businesses have been pushed to utilize digital technologies to improve or change their traditional ways of doing business. Some have tried to adopt digital technologies, Call centre, Sales and marketing software, Enterprise Resource Planning (ERP), etc., in their support-oriented processes, while others have already automated their service and production processes using advanced technologies, Artificial Intelligence (AI), Blockchain, Additive manufacturing (AM), Internet of Things (IoT) etc. This process refers to the acceleration of digital transformation (DT) in business, and it has been proven that SMEs have been getting a massive benefit from DT (Okfalisa et al., 2021).

However, there is a range of internal (inside aspects of a company, strategy, HR, resources, etc.) and external environment (outside elements of a company, market, competitors, government regulations, etc.) challenges for SMEs to transform their operation digitally. SMEs and government contributions are significant in tackling the problems in DT of SMEs. This assignment will examine SMEs’ barriers and practical solutions related to DT.

Aim and scope

This study aims to find out what challenges related to DT have been confronted with SMEs in general and give recommendations to tackle them. This research looks at internal and external issues that impact SMEs’ DT. The study’s primary information and resource were secondary data, including books, academic journals, and research reports.

A Brief History of the Digital Transformation

DT is a relatively new concept compared to the advancement of technology utilization in business. It refers to a process intending to improve a business by significantly adjusting its features through mixtures of connectivity technologies, computing, communication, and information (Tarutė et al., 2018; Vial, 2021). Generally, it means transforming a company’s process, product, or service to be digitally available for its stakeholders, including customers, partners, investors, and employees, to increase overall efficiency and competitiveness. It might be challenging to define the exact beginning time of DT as it varies the perspectives of researchers. However, many academics (Schallmo & Williams, 2018; Wenzel, 2022) agreed that even though DT is a hot and prevalent discussion topic, the concept of digital product, service and channels were already known well in the 1990s. And then ‘Digital age’ started in 2002 when the world’s information was first able to be stored digitally because of technological inventions (Hilbert, 2020). During the last 20 years, the development of intelligent technology and social media platforms has enabled businesses to improve and change their operations enormously (Schallmo & Williams, 2018). During the digital age, a range of technological creations, including Artificial intelligence, VR, 3D printing, blockchain technology, etc., have been used for businesses purpose. The factor that accelerates DT like never before was the СOVID 19. According to the McKinney Global Survey of executives, the digitalization process of companies has accelerated by three to seven years in their customer, supplier, and related operational processes because of the pandemic (COVID-19 Digital Transformation & Technology | McKinsey, n.d.). SMEs are also getting benefits through digitalization, even in the pandemic challenges. OECD (2021) reported that approximately 70% of SMEs worldwide increased their digital technology utilization; as a result, customer relationships, customer acquisition, process agility, and many other improvements appeared during the pandemic. However, the DT process is not an easy task for all organizations, including SMEs. According to McKinsey (2021), just 26% of businesses have accomplished their DT goals. Due to resource limitations, lack of capabilities, and many other internal and external difficulties, SMEs are being confronted with higher challenges to make DT compared to big companies.

Internal challenges of SMEs’ Digital Transformation

First and foremost, SMEs have been struggling with internal issues when adopting digital technologies in their operations. Those barriers impact SMEs’ decision to digitalize their company or the successful implementation of DT. The previous researchers identified several challenges in their way. Peillon and Dubruc (2019) acknowledged several barriers to digitalize  SMEs and classified them into four groups, technical, organizational, human resource, and customer-related. Technical barriers are mainly linked to difficulties in choosing suitable technologies or lack of resource issues to upgrade or redesign digital tools, especially in their product or service based on technology.

Regarding organizational barriers, SMEs mostly struggle and experience new competencies, resources, leadership, and even cultural shock. The reason is that during the digitalization process, radical adjustments are made in companies’ core processes. The human resource barrier refers to skills and competencies required for using digital technology. In that regard, the main problem with digitalizing services or products is the lack of staff with the knowledge and ability to develop and deliver them. The final one is customer-related barriers. It is not an internal barrier, so it will be discussed in the external barrier section. Another research finding captured by Hulla et al. (2021) found six challenges for SMEs towards DT. Like Peillon and Dubruc (2019), they identified a lack of digital skills and limited resources to support technology as SMEs’ DT issues. However, unlike them, Hulla et al (2021) found additional internal barriers to SMEs’ DT, which include lack of digital strategy, ignorance of benefits of digitalization, less information regards to digital solutions, and employees’ a negative mindset regarding implementation and utilization of digital technologies. Interestingly, SMEs’ owners’ and employees’ attitudes and mindsets towards DT are popularly noted in research reports. Even some owners are not interested in digital technologies as they might not desire to expand their small business to big (Ericson et al., 2020). In addition, many researchers (Ericson et al., 2020; Moeuf et al., 2020; Peillon & Dubruc, 2019; Šimberová et al., 2022; Zhang et al., 2022) have made similar results with them. Thus, it is clear that several internal groups of obstacles, including technical, organizational, human resource, strategic and behavioral, have been impacting SMEs’ digitalization process.

External challenges of SMEs’ Digital Transformation

Turning now to external challenges of digitalization towards SMEs. Through the study, three types of external challenges, including cyber security risks, poor government support and countries’ underdeveloped technological infrastructure were found.

Although advanced digital technologies opened tremendous opportunities for SMEs, but, in turn, digital security risks, including hacker attacks and information security risks, are emerging (OECD, 2021). Exposure to digital security threats and breaches continues to increase among SMEs. Hackers tend to focus on SMEs’ technological vulnerabilities. For instance, a research noted that since SMEs tend to invest less in their cyber security, to have lack of knowledge regarding cyber security issues, not to have formal digital security procedures and dedicated work officers responsible for it, they might be impacted by this cyber security attacks. Thus, cyber threats and data privacy are the first external challenge for SMEs and are proven by many studies (Alraja et al., 2021; Thrassou et al., 2020).

Another external obstacle is the lack of the Government support which is vital for SMEs’ digital motivation (Khin & Hung Kee, 2022; Turkyilmaz et al., 2021; Vrchota et al., 2019). It is not arguable that SMEs significantly contribute to the national economy worldwide. Likewise, Digitalization is a key to development in the current Digital Age. In that regard, although the governments should have their policy to support SMEs through funding, grants, or financial incentives, some governments are reluctant to do so. For instance, there is currently no such program that directly supports SMEs for their DT in Mongolia. In addition, some countries, Kazakhstan, for example, have a range of Government support programs. However, their SMEs do not use or are unaware of them because of the lack of marketing and communication issues (Turkyilmaz et al., 2021).

Apart from these, countries’ underdeveloped technological infrastructure might be an external obstacle for SMEs’ DT (Alraja et al., 2021; Ebert & Duarte, 2018; Turkyilmaz et al., 2021) pointed out in their research that ICT level and overall infrastructure level are also one of the issues for SMEs. Because of that, there is a dramatic difference in the internet access level between Kazakhstan’s urban and rural areas. Similarly, Alraja et al. (2021) found that the level of internet penetration in a county has a positive and significant effect on SMEs’ digitalization in Oman. In overall, cyber risks, lack of government support and underdeveloped technological infrastructure of the countries can be external barriers of digitalization of SMEs.

Practical solutions to erode SMEs’ Digital Transformation Challenges

This section considers the possible solution to the DT challenges of SMEs. Although scholars suggest many types of solutions, it is clear that successful DT requires effort from both SMEs and Governments. First, let us pay attention on the recommendations for tackling SMEs’ internal digitalization issues. Eller et al. (2020) developed some recommendations for SME managers to solve DT problems. From my perspective, it should be considered for SMEs before starting their digitalization journey. First, SME managers should develop a digital strategy that prevents the digitalization process’s undesired outcomes and clear their DT pathways. Second, SME managers should train their staff to obtain technical knowledge and skills. Third, SME managers should invest in digitalization to meet and exceed their current and future customer needs. In turn, digitalization positively impacts SMEs’ financial performance. Fourth, SME managers should adopt data processing technologies, cloud computing, mobile technologies, and social media channels, as they are suitable digital tools that positively impact SMEs’ marketing side, assisting them in increasing the number of customers. Similarly, other researchers suggested the Development of Digital strategy (Ghobakhloo & Ching, 2019), technological skill training (Sommer, 2015), etc., that might help to make a smooth digital transformation.

Regards to the practical solutions for external issues that impact SMEs’ DT can be government actions to encourage and support SMEs’ digitalization. OECD (2021) recommended that the governments develop and implement support programs, including financial incentives and advisory services to assist SMEs’ DT. Some best practices are in place, for instance, SME Digital program of Denmark and the Australian Small Business Advisory Service. In addition, Chile, Israel, Latvia, and Spain have been providing digital skill training to SMEs. Iceland and Costa Rica have a policy for upgrading digital infrastructure, while digital skills exchange and networking projects are being implemented in Belgium and Germany.

However, Ghobakhloo and Ching (2019) argued that the Government provided a range of DT-related incentives, workshops, and training that are not efficient for SMEs. Because even after receiving enough knowledge and information, most SMEs cannot invest in advanced digital technologies, AVR, AI, and industrial robots. Hence, they recommended that governments offer assistance packages, including affordable digital technologies, financial support, incentives, and other welfare-based support models. In addition, they suggest that national and international associations must be responsible for developing and implementing innovative manufacturing supportive policies. The reason is that many SMEs working in manufacturing sectors are unaware of Smart Manufacturing related Information and Digital Technologies, artificial intelligence, etc. Thus, similar projects like WATIFY, which was an awareness-raising campaign that aims to inform opportunities of digitalization to SMEs, regional authorities, and other intermediaries across Europe implemented by The European Commission in 2014, can be created and implemented by the Governments (Directorate-General for Internal Market, 2020).

In any case, it seems that the support of the government is needed for tackling internal and external digitalization challenges of SMEs.

Conclusion

In conclusion, DT is a crucial development accelerator for SMEs in the modern digital era that has thrived for three decades. It refers to both utilization of digital technology or a radical digital revolution in the entire system, process, service, and product of enterprises. However, it is a challenging task for companies, especially for SMEs. After reviewing several research articles and reports, there can be two groups of barriers for SMEs in terms of DT. First, internal obstacles, which include technical, organizational, human resource, strategic, and behavioral issues; second, external obstacles, including cyber risks, lack of government support, and underdeveloped technological infrastructure of the countries. Those are the main challenges of SMEs that negatively impact their DT success rate, yet digital success may not depend on one side; it will be solved with the equal participation of both SMEs and the Government.

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