Internet Business

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1.0Introduction...............................................................................................................................1 Internet Commerce – An Overview ............................................................................................3 The Small Medium Enterprises (SMEs) in Malaysia.................................................................5 Issues of e-Commerce among SMEs in Malaysia.......................................................................6 Advantages e-Commerce for SMEs in Malaysia........................................................................9 Advantages e-Commerce for SMEs in Malaysia......................................................................12 Barriers to successful e-commerce application by SMEs in Malaysia....................................14 Conclusion....................................................................................................................................16 References.....................................................................................................................................17



Information and communication technologies (ICT) are radically changing the competitiveness of organizations (Cohen and Kallirroi, 2006). Brian (1998) defined electronic commerce as the use of electronic methods, means and procedures to conduct various forms of business activity in cyberspace, which he stated has become a priority for many corporations within the context of ICT, since managers see it as a way to overcome certain limitations of the traditional distribution channels.

There are many studies which showed that e-commerce development offers a promising way for business to meet the challenges of this dynamic environment. Electronic commerce provides effective and efficient ways such as gathering information rapidly about the availability of the products or services, evaluate or negotiate with vendors and so on (Jetol, Obit, Asing and Tanakinjal, 2005).

SMEs face many challenges especially in a globalized environment, including a lack of financing, low productivity, a lack of managerial capabilities, access to management and technology, and a heavy regulatory burden. In the Malaysian context, APEC Survey (1994), the SMI development Plan, 2001-2005 (SMIDEC, 2002), Ting (2004), the UPS survey (2005) and others showed that SMES face major problems such as lack of access to loans, limited adoption of technology, lack of human resources and competition from MNCs and globalization.


The purpose of this paper is to highlight issues pertaining to e-business, particularly with relation to SMEs in Malaysia. The specific objectives of this paper are stated below: (a) To present a brief overview of e-commerce and SMES in Malaysian context; (b) To highlights issues of internet businesses among SMEs in Malaysia; and (c) To explain the advantages of disadvantages of e-business for SMEs in Malaysia.


Internet Commerce – An Overview

The millennium era of the 21st century embraces a new way of doing business – the virtual trading or electronic commerce. E-commerce, as defined by Wigand (1997), is about the use of electronic connection to conduct economic activities while others. Turban, Lee, King and Chung (2002) added that e-commerce is about use of computer networks and the Internet infrastructure as a medium of business transactions. The World Trade Organization (1998) stated that e-commerce is about usage of the Internet as the Internet provides platform for companies to conduct exchange and transactions from e-mails, leisure reading, browsing to selling, purchasing and providing services.

Kalakota and Whinston (1997) expanded the definition of e-commerce, seen from four different perspectives: communication, business process, service and online. Lewis and Cockrill (2002) added two more perspectives: connectivity and adoption ladder. The connectivity aspect includes the use of web sites, e-mail or EDI whereas the adoption ladder focuses on the full business processes participation including messaging, online marketing, online ordering, online payment, order/progress/online sales support and ebusiness (Daniel, Wilson and Myers 2002).

According to Malaysian Minister of Energy, Communications and Multimedia during the launching of the National E-Commerce Expo 2002, business to consumer (B2C) and business to business (B2B) E-Commerce activities in Malaysia are set to increase its


potential revenues by almost nine fold from USD1.5 billion in 2002 to USD9.4 billion by 2005. MATRADE (2003) reported that domestic online sales totaled RM46 million in 1999, however, several State and commercial agencies estimated a rise to between RM750 million and RM1 billion by 2003.

Electronic business, also known as e-business is defined as the application of information and communication technologies (ICT) in support of all the activities of business. E-business involves business processes spanning the entire value chain: electronic purchasing and supply chain management, processing orders electronically, handling customer service, and cooperating with business partners. E-business is conducted via the Web, the Internet, Intranets, extranets or some combinations of these (Timmers, 2000).It is a term usually confused with e-commerce.

Commerce constitutes the exchange of products and services between businesses, groups and individuals and can be seen as one of the essential activities of any business. Electronic commerce focuses on the use of ICT to enable the external activities and relationships of the business with individuals, groups and other businesses. Basically, ecommerce is the process of buying, transferring, or exchanging products, services, and/or information via computer networks, including the internet (Beynon-Davis, 2004).


The Small Medium Enterprises (SMEs) in Malaysia

The small and medium enterprises (SMEs) in Malaysia are basically divided into two groups: the first comprises of manufacturing and agro-based industries with fewer than 150 full-time employees or with annual sales turnover not exceeding RM25 million. The second group consists of services, agriculture and information and communication technology (CT) with fewer than 50 full-time employees and annual sales turnover not exceeding RM5 million (Ramayah, 2004).

SMEs play a vital role in the Malaysian economy and are considered as the backbone of industrial development in the country (Alias, Mimi Liana and Amin Mahir, 2008). SMEs comprise of 99.2% of businesses in Malaysia and contributed about 47.3% of the GDP and employing 65.3% of the nation’s workforce (Ramayah et al, 2009).

In 2005, output from SMEs registered an average annual growth rate of 5.3 percent which contributed to an increase in total manufacturing output from 22.1 percent in 1996 to 29.6 percent in 2005. Also, the growth of value-added by SMEs was 9.2 percent, compared with the overall growth of 9.8 per cent for the manufacturing sector in 2005. The SMEs also employed 394,670 workers in 2005, representing 31.1 percent of total employment in the manufacturing sector, compared with 329,848 workers, or 29.6 percent, in 1996. In terms of trade, SMEs exported 25.6 percent of their total output in 2005, compared with 20.8 percent in 1996 (National Productivity Centre, 2005).


Issues of e-Commerce among SMEs in Malaysia

The use of Internet in business is now a common application. In particular, e-commerce application is a well-accepted tool to improve effectiveness and efficiency of a firm’s operation (Rosli and Noor Azizi, 2008). According to UNCTAD (2003), e-commerce enables the firm’s market to expand as well as ensures new business models and embraces globalization. However, Daniel and Grinshaw (2002) noted that large firms are more dominant and more pervasive than SMEs as far as e-commerce is concerned. Nevertheless, SMEs also benefit from use of Internet and e-commerce. Rosli and Noor Azizi (2008) argued that e-commerce fits better the SMEs because of their less complicated structures that make them more easily adapt to any changes.

It is pertinent that SMEs adopt e-commerce in their business operation as SMEs represent the largest proportion of established businesses in most countries. This implies that SMEs plays a greater role towards the nation’s growth with respect to the economic, employment as well as gross domestic product (GDP). It is obvious that information and communication technology (ICT) becomes one of the potential means to facilitate their business operations (UNCTAD, 2003). Thus, enabling IT helps them to respond to business environmental pressures, to fulfill customers’ demand, and to face globalization challenge (Bernades & Verville, 2005).


As Malaysia moves toward the IT era, SMEs face huge setbacks because they are not ready to use such technology to remain competitive. The Star (July 17, 2001) stated that the Malaysian SMI Association revealed only 30% of the local SMIs have their own Website; worse, not all of these sites are regularly updated. This implies that use of such technology is not wide among SMEs.

The SMI Association of Malaysia in its 2004 annual report showed that e-commerce had contributed only 5.0% (USD451.6 million or RM1,592.6 million) of the business-tobusiness (B2B) market of Malaysia. This implies that e-commerce activities has slow adoption rate among SMEs (Nitty and Nolila, 2009).

According to a survey by MPC from June to December 2009 on 296 SME companies, only 17 per cent of the respondents had e-commerce transactions during the year (Bernama, 2010). The Federation of the Malaysian Manufacturers (FMM) identified three factors that are sources of SMEs usage problems of information technology: (1) Lack of awareness in the importance of IT in SMEs; (2) Low distribution of IT usage in SMEs; and (3) Business associations are not good role models in state-of-the-art IT usage (, 2001). Bernama (March 16, 2010) also quoted Malaysian Productivity Corporation (MPC) which stated that the adoption and implementation of e-commerce has not been widely embraced by the Small and Medium Enterprises (SMEs), particularly in enhancing their productivity and competitiveness. Mohd Razali Hussain, MPC’s Director General stated that the main reasons are: lack of understanding of e-commerce benefits and a refusal to leave the comfort zone; and perceived high cost.

Brown (2002) stated that there are several reasons why SMEs owners are not adopting e-commerce, which are: (1) E-commerce was seen to be a distraction from core business; (2) significant perceived cost and risks associated with e-commerce; (3) Lack of strategic vision; and (4) Lack of realization of value/benefits of e-commerce to individual SMEs.

Engsbo et al. (2002) and Scupola (2002) believed that most SMEs adopt e-commerce in a “just-by-chance” or casual manner and not because of a consequence of systematic consideration and planning. Shireen and Ainin (2001) noted that security issues are also considered as the main barrier to implementation of e-commerce. They elaborated that organizations were reluctant to use e-commerce because they felt the transactions conducted electronically were open to hackers and viruses, which are beyond their control. They were also skeptical about the security measures that were implemented to safeguard on-line payment transactions.

Others cited factors such as insufficient Internet facilities leading to slow speed of Internet connection, resistance to change regular business methods, ‘wait and see’ attitude among companies and the issue of Internet security and trust as the reasons for not adopting e-commerce in their business models. It was also shown that many companies in Malaysia are still comfortable with their old ways and rather slow to adopt and adapt ecommerce as a tool to better manage their business (Le and Koh, 2002; Liew, 2002); Mohd Zulkifli, 2001); Sulaiman, 2000); and Suraya, 2005).


Advantages e-Commerce for SMEs in Malaysia

The use of e-commerce has many advantages as well as disadvantages, in relation to SMEs. Raymond et al. (2003) stated that the use of e-commerce positively influence firm performances specifically firm growth where as Johnston et al (2007) mentioned that it favors financial gain while Teo (2007) believes that e-commerce contributes to competitive advantages.

Sam and Leng (2006) noted that the benefits from e-commerce are positively associated with the extent of e-commerce usage. Firms with more advanced EC applications tend to reap greater benefit in term of efficiency than those with limited use of such applications (Beck et al., 2005).

Bernama (2010) quoted Mohd Razali Hussain, MPC’s Director General who said, “"E-commerce provides opportunity to participate in global production networks that are becoming more prevalent in many industries and the ability to tap resources such as labour, capital and knowledge.” Thus, e-commerce provides many advantages to SMEs businesses.

Internet is therefore, a new means of conducting, managing and executing business transactions using modern Information Technology. The Internet provides access 24 hours a day, seven days a week – any time anywhere. Hence, time and place are no longer the

binding factors. In essence, the Internet is allowing businesses to enter niche markets at no additional cost (Kleindl 2000).

The benefits and advantages of e-commerce can be gleaned from success of firms such as Cisco Systems, Dell Computer and General Electric which show impressive payoffs by making the Internet a key element in their strategies and business models, and by transforming their “brick-and-mortar” operations into e-business organizations. Cisco Systems and Dell Computer report in excess of 250% return on invested capital and over USD 650,000 in revenue per employee from their e-business operations. They also have the highest gross profit margin in their respective industries (Ramayah, Lim and Mohamed, 2006).

A survey finding of over 400 information technology managers worldwide showed that SMEs that make effective use of Internet opportunities may also find that they are more innovative, faster in responding to environmental demands, and better able to quickly change or adapt business models to gain competitive advantage (Engler 1999).

Kartiwi and MacGregor (2007) stated that for SMEs, e-commerce has the potential to become a source of competitive advantage. E-commerce is a cost effective way of accessing customers globally and competing on par with large businesses. Lee (2001) suggests that e-commerce may alter the outlook of businesses from one that is focused on lean manufacturing (termed as economics of scarcity) to a focus on information which he

terms as economics of abundance. In fact, the Internet Economy Indicators (2003) stated that SMEs using the Internet have grown 46% faster than their counterparts who do not use the Internet (Bajaj & Nag, 1999; Khiang & Chye, 2002; Scupola, 2003).


Advantages e-Commerce for SMEs in Malaysia

There are however, some disadvantages of employing e-commerce by small and medium companies. According to the research done by Commerce.Net in 2000 of the top 10 barriers to E-commerce, the main disadvantage of E-commerce is the lack of a business model, lack of trust and key public infrastructure, slow navigation on the Internet, the high risk of buying unsatisfactory products, and most of all lack of security (Turban, King, Lee and Viehland, 2004).

Studies by Kleindl (2000) showed that smaller businesses can experience shortcoming due to internet usage. Firstly, competitive threats may increase as the new medium allows larger firms to mimic the traditional strength of SMEs in serving niche markets, developing customer intimacy and exploiting local knowledge (Cohen and Kallirroi, 2006). For instance, a regional firm with limited local competition previously, may be confronted with new threats from across the country or the globe once it began to use e-commerce. The new technology may also increase competitive rivalry and the pace of competition by reducing barriers to entry and increasing the rate of product and process innovation (Drew, 2003).

Another disadvantage of e-commerce is the absence of personal interaction between the seller and the buyer. Business via e-commerce is done by machines and computers that the customer is detached from everything else. Due to that, application of e-commerce

needs constant updating of product information which can be tedious and time-consuming (

Another limitation of e-commerce is that it is not suitable for perishable commodities like food items. People prefer to shop in the conventional way than to use e-commerce for purchasing food products. So e-commerce is not suitable for such business sectors (


Barriers to successful e-commerce application by SMEs in Malaysia

Although ICT has been acknowledged and welcomed by businesses for quite some time, it seems that SMEs are slow in the uptake of e-commerce application in their organizations. Maxis Bhd Vice President, Fitri Abdullah stated that “ICT is an integral requirement for all companies – including SMEs – to improve efficiency and productivity. It is now used more as a business enabler or differentiator” (The Star, 2010). In a borderless world where communications such as voice, data and video play an important role on individual and companies, lacking proper ICT usage can be a big loss (Dhesi, 2010).

The crucial role of e-commerce becomes even more as the popularity of the Internet and digital growth increase. According to IDC’s December 2009, Worldwide Digital Marketplace Model and Forecast, more than 1.6 billion people – a little over a quarter of the world’s population – used the Internet in 2009. By 2013, over 2.2 billion people – more than one third of the world’s population – are expected to be using the Internet (The Star, 2010). In addition, there are more than 1.6 billion devices worldwide were used to access the Internet in 2009, including PCs, mobile phones, and online videogame consoles. By 2013, the total number of devices accessing the internet will increase to more than 2.7 billion, with mobile internet ramping faster than desktop internet adoption (Dhesi, 2010).


Some of the barriers to successful application of e-commerce by small and medium companies are stated as follows:
1. Electronic payment and data confidentiality: Three factors i.e. immature electronic

payment methods, Internet security, and limitations of the legal framework regulating electronic transactions are the main barriers preventing SME from using e-commerce.
2. Quality assurance and proprietary requirements: SMEs may be uncomfortable

when trading in electronic marketplaces, where quality of goods is not guaranteed.
3. Human and capital resources: SMEs may have limited scales of operation, such as

family businesses with just enough manpower and capital to conduct day-to-day business, and usually cannot spare additional resources to train employees for the new e-commerce business.
4. Lack of drivers and initiatives and reluctance to change: most family businesses in

SMEs may have limited resources to develop new business channels. The general mindset of the SME owners is that of a “follower,” which poses as a major hurdle for using e-commerce.



It cannot be denied that ICT especially in the form of e-commerce is a crucial business innovation that should be adopted by small and medium enterprises. Large companies that are using e-commerce have managed to achieve profound success and productivity in their business endeavors. Thus, it becomes apparent that such adoption in SMEs may also result in productivity and growth of the companies.

In Malaysia, the Government has provided Internet access to business and individuals which further promote the growth of business via e-commerce. However, the low usage and adoption of e-commerce among Malaysian SMEs continue to become an issue in this country and therefore render our nation to achieve our potentials in keconomy.

In conclusion, SMEs should resolve the internal issues pertaining to poor usage of ecommerce and take up the opportunities provided by government to promote the use of ecommerce in business. Such a move could possibly thrust the development of small medium industries even more in this country.



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