THE DEGREE OF THE APPLICATION OF E-BUSINESS IN SMALL AND MEDIUM-SIZED ENTERPRISES UDC 004:007]: /.32. Biljana Rondović

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1 FACTA UNIVERSITATIS Series: Economics and Organization Vol. 9, N o 1, 2012, pp Review paper THE DEGREE OF THE APPLICATION OF E-BUSINESS IN SMALL AND MEDIUM-SIZED ENTERPRISES UDC 004:007]: /.32 Biljana Rondović Faculty of Economics, University of Montenegro Abstract. One of the characteristics of the past decade has been the digitization of the total economic sphere. Pervasive influence of the information and telecommunication technology (ICT) was visible in small and medium sized enterprises. Unfortunately, it was not visible enough. The situation in the field of electronic business in the small and medium-sized enterprises is at an enviable level. There are a lot of open questions, regarding the scepticism protection problems, the method of payment, guarantees, the possibility of return of goods purchased in the electronic environment, etc. The objective of this paper is to indicate in which quantity the SMEs apply the concept of business in the electronic environment, which are the limiting factors of the low degree of e-business appliance and what steps should be taken for its affirmation. It is also known that the usage of ICT in modern business has an effect on a company's production as well as its future development; however, the electronic way of doing business does not exist yet. Why? Key Words: e-business, small and medium-sized enterprises, information, information and telecommunication technology globalization, development. INTRODUCTION Numerous attempts of the individuals and institutions who contribute to the defining of the term of e-business and its abstraction from the total business system can be found in literature. It is possible to notice that all definitions consider e-business as a part of the developing access to business and administration, which is based on applications of the information and telecommunication technology. However, a very small number of studies have been prepared so far, which deal with the degree of use and potentials of e-business in the SMEs. Constructive and comprehensive studies should comprise a detailed analysis Received January 28, 2012 / Accepted March 02, 2012 Corresponding author: Biljana Rondović Faculty of Economisc, University of Montenegro, Jovana Tomasevica 37, Podgorica, Montenegro biljaro@ac.me

2 140 B. RONDOVIĆ for all enterprises, make a clear delimitation of influences in the enterprises of developed and non-developed countries of the world and should apply an adequate methodology for quantitative and qualitative analysis of the current influences, as well as the projections and prognosis for the future. What is clear without a comprehensive survey is that modern changes implemented in the electronic market have a series of consequences on the relations of the economic forces in the virtual world. E-Business has become a great opportunity for enterprises and economy and a great opportunity for customers and society as a whole. In this paper, the analyses are based on the results of the previous surveys which are carried out for SMEs of different size and activity. The survey data which are collected in the enterprises that have a positive attitude towards e-business are considered, but the data are also comprised from the enterprises where a certain resistance is noticed towards the information-telecommunication technology and its impact on the business sphere. The objective of this paper is to demonstrate why the situation regarding the use of the potential of e-business is not at an evitable level and the manner in which these problems could be resolved. 1. CURRENT ACHIEVEMENTS AND LIMITATIONS OF APPLYING e-business IN SMES The meaning of the e-business term is in various degrees recognised in SMEs. Therefore, according to the Gartner research ( thus far, only 40% of SMEs is fully conversant with the meaning of the e-business term and its potentials. The greatest number of these enterprises use electronic environment for carrying out commercial activities. The awareness exists in many other SMEs that e-business represents a revolutionary new way of doing business via information and communication technologies, especially the Internet. However, the overall status in the terms of e-business can be defined as not sufficiently developed. The statistical data which relate to the use of ICT demonstrate that an insufficient ICT is not the problem but its initiatives and its greater implementation. Enterprises which recognise the potentials of the electronic market are mainly focused on online research (not on electronic transactions) but they lack critical mass of users. A small number of enterprises have a commercially oriented Web page. Employee resistance toward the new technologies, incomprehension of its potential, personal contact preference and distrust in IT are evident. There are significant differences of SMEs in the developed and non-developed market economies. The e-business awareness as an unconditional imperative of the good organisation of business activities in the SMEs is at a very low level. Even where the Internet infrastructure is sufficiently developed and reliable, where there is a great interest for the Internet and where the top management is mostly conversant with the possibilities of e-business, it is possible that this concept is not a matter of priority in the business plans. The needs for the use of the Internet in the enterprises which operate electronically are various. This confirms the fact that from the total number of enterprises which entered in the electronic environment, 61.3% consider that there is no equal need for the Internet in all sector of business, while 38.7% consider the Internet to be equally needed in all organisational units of the enterprise (Castells M., 2009, 29).

3 The Degree of the Application of e-business in Small and Medium-sized Enterprises 141 The greatest number of enterprises which were the subject of the research use the Internet as the channel for providing information about themselves, their products and services. Since these enterprises give the possibility of ordering products through their Web location ( contact), electronic business does not often exist in its true meaning. Inertia often exists on the market. Generally, the reasons of small steps in this area could be found in the enterprises themselves but also in the environment where they do business. The out-of-date information technology, lack of skilled IT personnel, the production which is not adjusted to market demands, the fear of accepting the information and network technology, passive attitude of the managers towards these innovations are the problems of these enterprises. The problems in the business environment mostly relate to the inadequate economic policy, customs and tax regimes, the chronic distrust in the legal system and the important social institutions and state institutions, lost confidence of the domestic investors in the financial sector, business which is limited due to the economic closeness and the like. Small and medium-sized enterprises are not fully present on the Internet. The reasons for such state are numerous: Almost all technology intimidated companies act inertly. They are waiting for the outcome, for someone else to start first, to learn from other people s mistakes, and then to start e-business; Most of them have long-term plans, but in those plans the Internet is not present enough; Most of them think advertising on the net is expensive, some companies really do not have money, but none have enthusiasm; Due to the untreated so-called Internet myopia, most companies see e-business as an insecure and momentary trend. In the Internet terminology the term myopia is used to describe incomprehension or short-sightedness to understand the possibilities provided by the Internet. The uninformed, with no knowledge and internet education, do not want to compete with "the big players"; Satisfied with regular channels of trading and providing services, they have no intention of changing their selling platform; Due to an uncertain economic and political situation and bad business environment, they have no intention of giving up traditional ways; Most small and medium-sized enterprises considered that there is no critical mass of customers on the net nor will there be in the future. They fear that e-business will disturb the long-built way of doing business and connections with their partners; Managers of some companies have no sense for e-business, and thus give no support; Uncertainty in which direction the international negotiations will go, and how the issue of conflict of interests will be solved; Risks connected with the security of data, its degradation and destruction, protection of privacy and information security; Undeveloped and incomplete system of standards; Problems that come from social division; Deficit of IT personnel; Problems with national system of payment.

4 142 B. RONDOVIĆ Beside these limiting factors, there are numerous obstacles for the development of e- business in relation to the protection of customers. These are the following: Possible misuse of information collected about consumers and compromising their privacy on the Web; Only a few companies operating in the electronic environment adhere to their own standards for protection of consumer privacy; Misuse of personal financial information by unauthorized and criminal persons or organizations (Radovanović P., Ćosić, 2010, 211); Obligation to the contents on the Web which were previously out of charge (Rondović B., 2010, 220). The above mentioned facts clearly indicate that despite a positive attitude toward e- business, its potential is not sufficiently used in a larger number of small and mediumsized enterprises, due to the relatively large number of factors that hinder the promotion of electronic commerce. 2. ECONOMIC IMPLICATIONS OF ELECTRONIC BUSINESS IN SMES The principal reasons for the acceptance of the e-business concept are of economic nature. The economic potential of the e-business concept is significant but the tempo and diffusion models are frequently different. This form of business never appears immediately in standardized form, but depends greatly on the receivables of certain industries, their own products and the type of connection between business partners that needs to be preserved or created. However, there are certain economic stimulations which promote electronic business and exceed the corporate and sectoral limits. Nowadays, digital business has become a standard form of business, without having physical business premises and goods in storehouses, without physical presence of the employer, with a small number of employees who work from home and with the annual turnover measured by hundreds of millions of dollars. There are numerous economic promoters of this new form of business. Some of them are: Decrease of business costs (low investments at the start, low costs of advertising, promotion and economic propaganda) and increase of work efficiency, The need to change the business model, sectoral organisation and change of market structure, Advantages of the openness and economies of scale, Catalytic effects of e-business, Need to practise the form of business which has become the norm, Taking advantage of the time factor, Possibility of low cost experimentation and testing of new ideas Nowadays, the impact of electronic business on the structure of costs is evident on the electronic market. Pilot studies of electronic market in the USA have shown that 15% of cost savings already exist and that the decrease of 5% will have significant effects ( Although some artistically created Websites cost hundreds of millions of dollars, simpler ones could be made and maintained for a few thousands

5 The Degree of the Application of e-business in Small and Medium-sized Enterprises 143 (anyone who has a few thousand dollars and has something to sell, may become an e-retailer). In any case, it is simpler to maintain a chain of electronic stores than a chain of ordinary stores because of their openness, their global market and small price variations. The key factor of cost decrease is the adoption of the system: "Just in Time", "Quick Response" and "Concurrent Engineering". In addition to this, electronic market is very efficient for reducing costs in order to attract new clients. Even far from the term "without friction", advertising is regularly cheaper and more requested. The Micron Computers reports that their Web retailers approximately spend 2 minutes on conversation over the phone with the clients who have visited their site and 20 minutes with those who have not done so. Auto dealers on the Web report similar improvements. They spend about 25$ on concluding business at auction in the electronic environment and about 200$ is spent on "face to face" transactions (Boston Consulting Group, 2012, 103). For an auto site, dealers on the Web spend about 200$ for advertising and taxation of the cars which are sold and this would also cost about 450$ if traditional media would be used ( Having necessary information accessible in acceptable form, e-business largely increases the efficiency of the sale process. In this way, companies could expose many things and customers could have direct access to databases and "smart" manuals which reduces prices and increases the quality of service. Numerous examples from e-praxis support the statement that "saving" of personnel represents the most important element for the decrease of e-commerce costs. The sale process is made significantly simpler by direct contact between the retailer and the customer. Besides reducing the sale costs, e-business leads to the decrease of procurement and storage costs. Thanks to the possibility of using EDI system, the decline of costs from 10% to 40% was seen (Fasil, M. 2007, 49). Electronic business causes a significant decrease of distribution costs (to 60%) for digital (immaterial) products in the electronic banking, electronic stock exchange business, and companies oriented towards electronic reservations (Ames, B., 2007), How does this make an impact on pricing? The process of conversion of lower costs into lower prices is not an automatic one for all products. In the business-consumer sector (B2C), clients are mostly busy, rich, highly educated and they use the so-called "suitability factor". For this reason, e retailers often prefer to use offered circumstances and do not reduce prices. In this very segment, the differential pricing is widely adopted. E-retailers mostly collect information concerning customers habits through an application which is called "cookie" in the Internet terminology. Various prices for different customers and the same product are formed. In the business to business sector (B2B) the price level is mostly determined by the pressure of competition. The prices of many products often approach zero and contribute to what is called "Free Internet economy". Advanced information and communication technologies together with the possibilities of work on the network open previously closed relations, deepen relations between sectors, enable small and large enterprises to communicate, make transactions, flexibly and easily cooperate at lower prices than ever before. The research made on this topic showed that the costs and risks of investments have never been lower and potential incomes higher. In this developing business environment, the need towards innovations is greater than on the traditional markets, which contributes to the improvement of business planning and

6 144 B. RONDOVIĆ efficiency of production and distribution. E-Business has the potential to be the platform for new product arising, out of which many will be digitalized and delivered online. The new products have a tendency to create more new products, making a dizzy spiral. Open and potentially global nature of the Internet increases the market size, changes its structure in the sense of the number and size of participants and the way they cooperate. Beside the existing enterprises in the existing sectors, new competitors on the e-market are often enterprises from other sectors. Microsoft, for example, put itself in the position to become an intermediary who can be trusted in the electronic banking, while Amazon.com plans to make a change from an online bookseller to the giant of the total Internet commerce. The enterprises oriented towards e-business often use the advantage of the so-called "strategic partnership". Partnerships which are based on the Web differ from conventional in at least three aspects: they include a larger and heterogeneous group of competitors, rely on informal relations and coordination mechanisms and request the leadership of one or more enterprises which define the standards and incentives for attraction of other enterprises. Enterprises adapt e-business solutions even more in order to conquer new markets and market segments. The key for the exploitation of new markets includes a combination of contents and communications and virtual communities could play an important role here, acting as catalysts and creating "critical mass". Electronic business favours combination of major processes of business of the weak hierarchy organisation, constant training and acquiring of skills, cooperation between participants and "networking". Electronic business has a catalyst effect. It accelerates fundamental reforms which are already present in enterprises, such as establishing of electronic connections, globalisations of economic activities, H&R reform. Also, local trends are accelerated: electronic banking, direct electronic reservations and trade "one on one". Relative importance of time is the base for understanding the economic impact of electronic business. Many factors which define economy and society are a function of time. E-Business reduces the importance of time by accelerating the production cycle, enabling enterprises to work in close coordination and enabling customers to make transactions without time limits. As the role of time changes, thus would change the structure of business and social activities, potentially causing big changes. Electronic business becomes the norm even more. The number of "cyber enterprises" in the world has reached the critical mass of 70% of the total number of enterprises which do business in the real environment, out of which more than 30% are highly profitable ( Many enterprises have made their "name" through the Web (Virgin, AOL...), and small businesses have found the opportunity for affirmation and to gain reputation and put themselves on the "network map". Only in this kind of environment can the small enterprises stand "shoulder to shoulder" with the great giants such as General Motors, City Bank, General Electric and Microsoft. 3. RECOMMENDATIONS FOR THE AFFIRMATION OF ELECTRONIC BUSINESS IN SMES An important mechanism of acceptance and affirmation of e-business is its popularisation. The transition from physical to virtual is bound to demand the promotion of telecommunication environment. Without investments in the telecommunication technology,

7 The Degree of the Application of e-business in Small and Medium-sized Enterprises 145 e-business will remain at the lowest level. Many things must be changed in order for e- business to become common in SMEs, and that implies that various aspects have to be introduced. Enterprises need to realise the Internet environment, and to comprehend the new aspects of virtual economy (advantages and possible obstacles) and to be informed about "Gift Economy". Also they need support in the development of the strategic plan of Web positioning. The research shows that even though there are enterprises which have recognised the importance of websites, there are still those which can not see it in the right way. The awareness should be present in all SMEs that the network paradigm set by the Internet is optimal for all segments of electronic business, even when the condition of some devices is below the optimal. The Internet should be promoted as an example of the unitary mean of communication which can support commercial transactions at all levels of complexity. Additional information on the owners of enterprises and the higher degree of understanding of e-business and advantages it enables will also be the chance for its promotion and future usage. This will further create a chance for the production and the increase of the company s profit, which will lead to opening new jobs, increase of educational level and transformation of the present way of doing business. The important assumption for future implementation of electronic business in SMEs is an inevitable increase of informatics literacy. Transformation to e-business will make new demands to educational institutions and school means as well. It is necessary to start an initiative that will mean a revolution in the usage of new Internet technologies. In order to make all this possible, new technologies ought to be more accessible everywhere, in schools, post-offices, etc. It is also necessary for the domestic staff to go abroad to attend seminars, as well as for foreign experts to come to visit us and share their experience. On the other hand, permanent identification of the educational needs is necessary for the further education. Future research ought to be focused on the role of employees in business engineering and on that base strengthen the politics that will support this. It is also necessary to enable the High-Performance Workplace and in accordance with this work on the development of mechanisms for adoption to different categories of IT personnel. The measure to which companies will be reorganized in the new environment will mostly depend on the flexibility of the staff to adjust themselves. In order to use the new computer technologies adequately, new regulations must be passed, that is, The National Law Model that will be in the maximal compliance with the international law directives. What is certain is that the electronic business will become more active in SMEs when the regulatory and institutional conditions which promote the future development are created and when conditions for the enterprises to sell their products via the Internet are created. Since e-business offers a large variety of business conduct, the activity of legal experts ought to be transformed into firm laws in compliance with international regulations. Implementation of e-business in SMEs will demand adoption of internationally acknowledged standards, following instructions and papers. It is necessary to work on forming a commission for Standardization, which ought to become a member of all bodies of the International Organization for Standardization (ISO). Direct involvement of the Government should not be expected, but they should not be

8 146 B. RONDOVIĆ passive observers. The Government's experts from the region, ought to, under the "electronic democracy" symbol, readily await the changes in the monetary, fiscal and investment area and speed up the transition from physical to virtual. It is necessary to ask the Government to support the programs that would: Contribute to the development of more educated and better informed society; Remove differences between the ones with and without the possibilities to use modern information technology; Support the development of quality informational telecommunication infrastructure Create free trade, customs and taxation regime; Contribute to the restructuring of the financial sector; Cooperate with other international organizations from this area (WTO, WCO, OECD, UNCITRAL, UNCTAD, ISO ) In coordination with these necessities, attention must be also focused on consumers. That is, they must have trust in e-business at least at the level of trust in traditional business. To manage this, it is necessary to help the consumer to tell the difference between a regular and shady company. The transition from physical to virtual should provide: Transfer from specialized to general knowledge and skills; Transfer from inflexible production systems whose duty was rejection of standardized products with following services to flexible production systems which reject adjusted services with following product; Transfer from the usage of offered services to permanent creation and usage of business opportunities; Transfer from hierarchy management in state property and under state control to management without state coordination; In the modern global conditions of business, electronic business becomes a key factor of the competitive and profitable business of enterprises. However, the fact that this relates to all sectors and economy branches can not be neglected. By this, the issue of the regular implementation of e-business in SMEs should be an important part of the creation of the developing policies of each country, so that e-business has to be treated at a high level. The process of the development of e-business in SMEs comprises numerous questions: technical, legal, economic and institutional. Bearing this in mind, the implementation of e-business means multidisciplinary team work in which the representatives of the private and public sector of the country where an enterprise does business, have to be actively involved. According to the rule, the private sector should have to be responsible for the technical development and the practical e-business applications, while the Government should direct its competencies on the creation of a supportive environment for the application of e-business in the national economy and to support and coordinate the initiatives according to the model of cooperation of private and public sector. It should stimulate the foundation of the information society including preparation of the public as a whole, small and medium sized enterprises and public sector for the possibilities offered by ICT.

9 The Degree of the Application of e-business in Small and Medium-sized Enterprises 147 CONCLUSION Introduction of e-business in the SMEs is of particular significance. The greatest advantage for these enterprises is their flexibility which enables them to adapt to market conditions. However, problems arise mostly from financial and other numerous limitations. Not neglecting the importance of the problem of inclusion in the electronic environment, all the analyses of the current state and prognosis show that e-business and the digital market which is created have to bring numerous advantages which should be used by SMEs. The ubiquity, global reach, decrease of costs, higher degree of interactivity, the advantage of "information density", reduction of information asymmetry among market participants, the use of universal technical standards and the media, greater personalization are some of the obvious advantages of work in the electronic environment. SMEs should use the prognosis that the Internet density will significantly stimulate the entrepreneurship by 2020, which will lead to the increase of the number of new economic activities, foundation of new units, departments, areas of business in the existing enterprises ( All the research that has been done so far, in relation to the Internet density and the annual rate of foundation of enterprises shows that the increase of 10 percentage points in the Internet density is mutually related to the increase of 1% in the annual rate of foundation of new enterprises (Entner, R., 2008, 124). Beside the Internet appliance as a platform through which clients could be reached, it is expected that enterprises appear to provide support to the Internet, for example, through providing the services of payment, web hosting, and design of the web sites and such. There are estimations that the whole market on the planet will become e market by If the data on the exponential growth of the Internet access and data which relate to the constant growth of the contents on the Web are added, it is clear that SMEs have to start using the possibilities of e-business soon. REFERENCES 1. Ames, B., (2007), Online Spending Tops $100 bilion in PC World, 4. januar ( ) 2. Boston Consulting Group, (2012), Socio-economic impact of the Internet on the developing countries and transitional economies, Boston 3. Castells M (2009), The Information age: Economy, Society and Culture- The rise of the Network society, Blackwell 4. Entner, R. (2008), The Increasingly Important Impact of Wireless Broadband, Pearson Prentice Hall 5. Fasil, M. (2007), Agent Technology for e-commerce, John Wiley and Sons 6. ( ) 7. ( ) 8. ( ) 9. Laudon K, Traver, C. (2009), Business, Technology Society, 5 th ed, Addison-Wesley, Boston 10. Radovanović P., Ćosić D. (2010), Elektronsko poslovanje i elektronsko bankarstvo, Beogradska poslovna škola, visoka škola strukovnih studija, Beograd 11. Rondović, B., (2010), Preduslovi za razvoj elektronskog poslovanja u Crnoj Gori, Montenegrin Journal of Economics, No 12, Vol VI, Podgorica,

10 148 B. RONDOVIĆ ULOGA ELEKTRONSKOG BIZNISA U MALIM I SREDNJIM PREDUZEĆIMA Biljana Rondović Bitna karakteristika poslednje dekade je digitalizacija u celokupnoj ekonomskoj sferi. Vidljiv je značajan stepen upotrebe Informaciono telekomunikacione tehnologije (ICT) u malim i srednjim preduzećima. Nažalost, ne u dovoljnoj meri. Stanje na polju elektronskog biznisa u malim i srednjim preduzećima nije na zavidnom nivou. Postoji puno otvorenih pitanja, skepticzma po pitanju problema zaštite, načina plaćanja, garancija, mogućnosti povraćaja robe kupljene u elektronskom okruženju i sl. Cilj ovog rada je da ukaže u kolikoj meri MSP primenjuju concept poslovanja u elektronskom okruzenju, koji su limitirajuci faktori slabog stepena primene e-biznisa i šta se mora preduzeti u cilju njegove afirmacije. Svima je jasno da efikasna upotreba ICT u savremenom poslovanju daje doprinos kako povećanju produktivnosti kompanija, tako i njihovom budućem razvoju, ali elektronsko poslovanje u svom punom značenju još uvek ne postoji. Zašto?. Ključne reči: elektronski biznis, mala i srednja preduzeća, informacije, informacionotelekomunikacione tehnologije, globalizacija, razvoj.