SMALL BUSINESS PROPENSITY FOR INNOVATIVE MARKETING VIA THE INTERNET. Jacqueline A Flint and Anton Kriz University of Newcastle

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1 SMALL BUSINESS PROPENSITY FOR INNOVATIVE MARKETING VIA THE INTERNET Jacqueline A Flint and Anton Kriz University of Newcastle Track: Entrepreneurship, Innovation, and Large and Small Business Marketing Keywords: small business, internet, marketing, innovation Abstract Internet technology provides small businesses with unprecedented opportunity to extend their reputation as significant business innovators particularly with regard to their marketing activities. Regions outside urban areas are the home of many small businesses and this paper reports survey data from the Central Coast region in the growth corridor north of Sydney, NSW, Australia, in terms of the use by these small businesses of the internet and their perceptions of its importance for their future. Fundamentals are largely in place for these small businesses to take up the opportunity to be innovative marketers via internet technology, although there are some significant differences according to firm size. However, perception of the importance of the internet for the future of the business is more evident amongst larger businesses and for those already connected to the internet. Of interest is the relatively high proportion of businesses that do not perceive the internet to be important for their future, including for those that already have an internet connection. Reasons that may underlie these findings are discussed, and directions are suggested for future research. Introduction Business innovation is seen as a necessary activity for growth and increasingly for survival (O Doherty 1995, p. 6). It can involve new products, new processes, advanced technologies and new ideas (Baldwin & Johnson 2001).Three decades ago, it was large firms with access to extensive capital and human resources and benefits of economies of scale that were prominent in taking advantage of the opportunities provided by innovation (Stokes 2002). In parallel with the technological revolution, however, it is now small firms that are regarded as being more innovative (Baldwin & Johnson 2001; Rothwell 1995). Lerner (2001) notes that empirical studies of technological innovation are identifying the critical role played by small firms. Acs (2001, p. x) suggests that small firms have a crucial role as leaders of technological change and productivity growth, while Turpin (2002) reports that it is small firms that are making significant contributions in Australia, Taiwan, Indonesia, China, Japan, UK, US and that are contributing at a faster rate than larger firms to recovery from the recent Asian economic crisis. All this suggests that small businesses play an important innovatory role in the economy and warrant study in their own right. One recent area of major technological innovation is, of course, the internet. The existence of this global tool provides an unprecedented capability to transform the way in which we work and manage, and to do so at speeds unimaginable even a decade ago (Kennedy 2001, p. 155). Indeed, Lou Gerstner, Chief Executive of IBM has suggested that Businesses will not achieve their goals of innovation until they integrate internet technology into all their processes (Kennedy 2001, p. 156). Thus, the aim of this paper is to report results of a survey of small businesses in terms of Entrepreneurship, Innovation and Large and Small Business Marketing Track 799

2 their use of the internet, their perceptions of its importance, and the associated propensity they may have for innovative marketing via the internet. Internet Fundamentals and Small Business The commercialisation of the internet provides extensive opportunity for small businesses to be innovative marketers. They face reduced obstacles from geography, time zones and location so that communication barriers between customers and employees are lessened (Quelch & Klein 1996). They have available to them new, more efficient ways in which to conduct marketing operations, communications, sales and customer service and to be innovative in the application of these (Burgess & Cooper 1998; Zampetakis 2000). As well, where small businesses were previously unlikely to have resources sufficient to provide a viable IT facility, internet service providers (ISPs) offer them a tool to help compete with larger businesses and extend their catchments or geographic markets to the point of having a global presence (Hamill & Gregory 1997; Poon 1999). A two-person tourism business, for example, can now develop a global catchment area using a Web presence rather than relying only on a smaller catchment area generated by local traffic, agency networks and limited advertising. Similarly, the reality of remote access to customers can be converted into ongoing customer relationships for small businesses with simple products, although complex products are more likely to need sustained face-to-face interactions, particularly across national boundaries (Zaheer & Manrakham 2001). At a fundamental level, commercialisation of the internet provides extensive opportunities for innovative marketing by small and medium-sized enterprises (SMEs). These businesses are of interest not just because of their capacity to innovate but also because of their overall economic and political importance. In East Asia, SMEs comprise more than 95% of businesses, employ more than half the working population, contribute to half the output of that working population, source around 30% of exports and about 70% of net employment growth (Hall 2002). In Australia, SMEs comprise 99% of businesses, employ 66% of the nation s working population, and make a significant contribution to national revenue (ABS 2001, 2002a; NOIE 2002a). As well, in Australia, SMEs in growth corridors such as the Central Coast of NSW are recording higher growth rates than those in urban areas for employment, sales and profits (Pacific Access 2001, 2002a). Similarly, in Mainland China, with State Owned Enterprises declining in power and importance, there has been exceptional growth in the Town and Village Enterprises (TVEs) from 1.5 million TVEs employing 28.3 million people in 1978 to more than 20 million TVEs employing over 125 million people a decade later (Harvie 2002). Korea and its rapid adoption of broadband indicates that the Korean Government understands the urgency for small, medium and large businesses to harness the internet (OECD 2002). Unsurprisingly, there is Australian Government interest in increasing the rate at which SMEs go online and develop e-business practices (NOIE 2002b). When SMEs do go online, they can make use of the internet in many ways. These can be understood via different models which present internet adoption as a staged process from, say, brochure-ware through intermediate value-add activity, to interactive processing through a site and/or virtual enterprise (Burgess & Cooper 1998; Fox 2000). However, the details of these models also suggest that the later stages of internet adoption are likely to be beyond the resources of many SMEs. Similarly, research on perceived barriers to internet adoption on the part of SMEs suggests a range of factors from security, limited knowledge and experience through ANZMAC 2003 Conference Proceedings Adelaide 1-3 December

3 to need for additional skills and resources as inhibitors to a small business establishing an internet presence (Auger & Gallaugher 1997; Dowler & Lawrence- Slater 1998; Poon 1999; Slegers Singh & Hall 1998). However, there seems to be little research interest in the fundamentals of internet use, namely, having a basic capability to go online in the form of owning and using a computer, and having an internet connection in place. Auger and Gallaugher (1997) identify motivating factors and perceived barriers to the internet for small businesses but their data are from businesses that already have an internet capability. Poon and Swatman (1997) provide helpful identification of some pre-conditions and outcomes of internet use by SMEs, but the study does not address the capability of these businesses to establish an internet presence. Hamill and Gregory (1997) investigate the propensity of SMEs to use the internet, but as an internationalisation tool. In contrast, it is industry and government that are tracking the fundamentals of internet use. For example, the Australian Bureau of Statistics (2002b) notes that, in June 2001, 67% of Australian SMEs use a computer and that, as the size of a business increases, so does the likelihood that it will have a computer. As well, 62% of micro businesses are connected to the internet, with this figure increasing to 73% for small businesses (micro businesses have fewer than 5 employees and small businesses have between 5 and 100 employees). In July 2002, however, another study indicates that 91% of SMEs own a computer and 80% of these are connected to the internet, with an increase in the percentage of small businesses being connected to the internet to 79% (Pacific Access 2002b) (differences relate partly to the inclusion of medium enterprises ). In the broader international environment, Dun and Bradstreet in their recent 20 th Annual Small Business Survey identified that 80% of US SMEs have at least one computer, with some sectors reaching saturation (Cyberatlas 2002). On the whole, however, the Australian and US data do not address urban and non-urban differences in any detailed way. One aspect of understanding the fundamental capability of micro and small businesses (MSBs) to use the internet for innovative marketing is to acknowledge likely differences in needs and perceptions of urban and non-urban businesses. Bandwidth and ease of finding an ISP are recognised as inhibitors to use of the internet (Hoffman et al. 1997; Larsson & Lundberg 1998). These are arguably more of a problem for non-urban businesses where slow infrastructure roll-out causes some regions to install their own local carrier network (Lynch 2000), and where there is less choice of ISPs together with fewer points of presence for ISPs to provide local call access (Grant 2003). Consistent with these kinds of factors, non-urban MSBs may also be less likely actually to use a computer and/or appreciate the potential of the Internet and, at this fundamental level, have little capability to take advantage of the innovative marketing opportunities it can provide. Thus, this study has investigated the extent to which non-urban MSBs use a computer and the internet, as well as how important they perceive the internet to be for the future of their business. The nonurban region selected is one of the fastest growing populations in Australia, namely, the Central Coast of NSW (CCRF 2000). Profiling the uptake of the internet by Central Coast MSBs will help develop a more comprehensive understanding of small business internet activity and its propensity for associated innovative marketing. Methodology A mail-ready population of 3626 enterprises was purchased from a call centre bureau which had confirmed details of the 2000 Central Coast telephone Entrepreneurship, Innovation and Large and Small Business Marketing Track 801

4 listings but excluded organisations identified only by mobile phone numbers. This population was culled further to exclude non-profit organisations and government agencies. The resultant 2866 enterprises were mailed in 2001 with 605 in the final sample, a 21% response rate. A questionnaire was developed and piloted with MSBs. The final version contained 32 questions, comprising a mix of nominal, ordinal and rating scales. Data for this paper are drawn from demographic items in the questionnaire, and items relating to computer and internet usage in the business. Occasional non-response on individual items means some variation in reported sample sizes. Results and Discussion Of the 605 businesses in the final sample, 69% are micro businesses and 31% are small businesses. As indicated in Table 1, 88% of all businesses use a computer, leaving 12% that do not (cf. 91% reported by Pacific Access (2002b) as owning a computer). Micro businesses are less likely to use a computer (84%) than small businesses (95%), a significant difference in a contingency test [χ 2 (1,604)=12.979, p<0.000]. This suggests that the fewer the number of employees in a business, the less likely it is to use a computer, consistent with ABS (2002b) results. It also suggests that the smaller the business, the less likely it is to have a basic computing capability to allow it to market innovatively via the internet. Of the businesses that use a computer, 88% do so daily (see Table 1). Micro businesses, however, are less likely to use a computer daily (82%) than are small businesses (98%). This is a significant difference between the two groups in a contingency test [χ 2 (1,520)=27.037, p<0.000], suggesting that the smaller the business, the less likely is a computer to be used frequently. Of the businesses that use a computer daily, 91% are connected to the internet but, where businesses use a computer less frequently, only 9% are connected to the internet. This is a significant difference in a contingency test [χ 2 (1,514)=18.403, p<0.000] and suggests that, as frequency of computer use reduces in a business, so does the incidence of internet connection. These two results, in combination, suggest that the smaller the business, the less likely is it to be connected to the internet. However, this is not borne out in a contingency test where the difference between the 77% of micro businesses connected to the internet and the 83% of small businesses is only weakly significant [χ 2 (1,521)=2.823, p=0.057]. Thus, it seems that frequency of computer use may be a more useful indicator of internet connection than number of employees in a business (cf. Flint & Kriz 2002; Flint, Herbert & Leeves 2002). As well, however, where businesses are connected to the internet, there is a significant difference in frequency of computer use between the 86% of micro businesses connected to the internet that use a computer daily and the 100% of small businesses that do so [χ 2 (1,402)=21.043, p<0.000] (see Table 1, bold figures). This compares with the significant difference between 82% of overall micro businesses using a computer daily and 98% of small businesses (above). Thus, it seems that smaller businesses continue to be less likely to use a computer frequently even when connected to the internet. This may mean that micro businesses are generally time- and/or resource-poor in a manner that caps the frequency with which their computers are used. Table 1: Computer Use & Internet Connection by Size of Business ANZMAC 2003 Conference Proceedings Adelaide 1-3 December

5 Number of Employees Less than five (micro) Frequency of Computer Use Daily Less than Daily Use a Computer Internet Connected? Total Yes No Total Total (a) Do Not Use a Computer (b) Total (a)+(b) # % # % % of column 65 Five or more (small) # % # % % of column 35 Total # % # % % of column 100 * Figures in bold are businesses connected to the internet Given the significant differences identified between MSBs with regard to use of a computer and frequency of computer use, but the similarity between them with regard to internet connection, it is also of interest to investigate where there are any differences with regard to their perceived importance of the internet for the future of the business. Table 2 suggests differences in perception based on size of the business and these differences are significant across all businesses [χ 2 (1,577)=11.749, p<0.000] and for the sub-sample of businesses that use a computer [χ 2 (1,515)=7.283, p<0.01]. Unsurprisingly, there is no significant difference among those businesses that do not use a computer where 87% do not consider the internet to be important for the future of the business. For the sub-sample of businesses connected to the internet, the difference in perception based on size of the business is only weakly significant [χ 2 (1,403)=2.028, p<0.10], also not surprising given that the businesses have already chosen to have an internet connection. However, there is a significant difference among businesses that own a computer but are not yet connected to the internet [χ 2 (1,103)=3.886, p<0.05]. For all these results, it is small businesses rather than the micro businesses that perceive the internet to be important for their future, with the implication that it is small businesses that are also more likely than micro businesses to recognise the innovative marketing opportunities available. Entrepreneurship, Innovation and Large and Small Business Marketing Track 803

6 Table 2: Perceived Importance of the Internet for Future of the Business by Size of Business Number of Employees Less than five (micro) Five or more (small) All Businesses Businesses that Use a Computer Businesses Connected to the Internet I* NI* Total I NI Total I NI Total # % # % # Total % * I = Of Highest Importance, Very Important & Important NI = Not Very Important, Not at all Important It is also interesting to note from Table 2 that nearly half the businesses (48%) do not perceive the internet to be important for their future. Similarly, while 66% of businesses connected to the internet perceive it to be important, 34% do not. This may result from disenchantment with the benefits of the internet (information, not knowledge; investment of time, money and expertise needed before it becomes a useful marketing tool), or because it is used primarily for communication purposes. Indeed it is the smaller businesses that are more likely to use the internet only for and internet searches (ABS 2000). Conclusions and Future Research An underlying premise of this paper is that an internet connection enables and, by its availability, facilitates a business being innovative in its marketing activity. For example, an internet connection enables more direct and efficient communication with suppliers and customers alike; facilitates more targeted and customised direct marketing applications; provides a source of 24/7 information for products and purchases; and extends both the breadth and depth of creative opportunity in an integrated marketing communications mix. As noted earlier, however, these opportunities for innovative marketing are not available if fundamentals are not in place in the form of computer installation and internet connection. Similarly, if a business does not perceive the internet to be important for its future, it seems consistent that it would be unlikely to try to use the internet tool creatively and, consequently, its propensity to use the internet for innovative marketing activity would be likely to be low. This study has pursued these points in the context of non-urban SMEs. It has found that fundamentals are largely in place for a sample of non-urban SMEs in that 88% of businesses use a computer and, of these, 79% are connected to the internet. Thus, there is opportunity and, by availability, some propensity to use the internet for innovative marketing activity. At the same time, only little more than half the total sample (52%) perceives the internet to be important for the future of the business and, as such, could be suggested to have relatively low propensity to use the internet for innovative marketing activity (a proposition that would require explicit testing in ANZMAC 2003 Conference Proceedings Adelaide 1-3 December

7 future research). On balance, these results suggest that the non-urban SMEs have technical fundamentals in place for innovative internet marketing but that strong indicators to take advantage of these fundamentals are not evident. In a similar way, a low propensity to use the internet for innovative marketing seems more evident the smaller the size of the business. It is micro businesses that are less likely to use a computer and are also less likely to perceive the internet to be important for their future. By the earlier argument, this suggests that they may also be less likely to use the internet for innovative marketing activity. Given that these micro businesses make up 80% of businesses and employ 26% of the working population of Australia (ABS 2002a), this may be of concern to policy-makers. However, it is also worth noting that results of this study suggest that it is not size of business that provides a useful indicator of internet connection but, rather, frequency of computer use. It may therefore be appropriate to seek more subtle explanation of differences in business internet activity rather than rely just on broad indicators such as size. It is also of interest that more than two-thirds of businesses (66%) already connected to the internet perceive it to be important for their future. As such, these businesses have both the fundamentals in place and the perceptions of internet importance to suggest that they may have a strong propensity to be innovative in their marketing use of the internet. Given that this contrasts with 52% of the total sample perceiving the internet to be important, it may be that business benefits of internet access become apparent only after trial. If so, policy-makers that are seeking to prompt non-urban SMEs to seek innovative marketing opportunities available via the internet may wish to consider serious incentives with regard to internet connection. Overall, results of this study prompt many areas for future research. It would be useful to establish whether frequency of computer use continues to act as an indicator of internet connection and, by proxy perhaps, establish whether a more appropriate indicator is computer literacy. It would also be helpful to investigate why SMEs establish an internet connection and the extent to which they use it for innovative marketing activity. Similarly, it would be valuable to establish in what ways businesses perceive the internet to be important for their future and whether these reasons differ across urban and non-urban businesses. Finally, it would also be interesting to test the proposition that there may be some relationship between perceived importance of the internet for the future of the business and propensity to use the internet tool for innovative marketing activity, in particular for non-urban SMEs. References Acs, Z (ed) 2001, Are small firms important? Their role and impact, Kluwer, Boston. Auger, P & Gallaugher, J 1997, Factors affecting the adoption of an internet-based sales presence for small businesses, The Information Society, vol.13, pp Australian Bureau of Statistics (ABS) 2000, Business use of information technology , Catalogue # , ABS, Canberra. Entrepreneurship, Innovation and Large and Small Business Marketing Track 805

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