SMEs to drive innovation in Internet-related services: McKinsey

  • Quality and cost of broadband access remains top constraints for SMEs to fully leverage the Internet
  • 4G networks and 'business-in-a-box' solutions to boost Internet adoption by SMEs

SMEs to drive innovation in Internet-related services: McKinseyIN the next two to three years, Asia will see very rapid innovation and proliferation of Internet-related services amongst small and medium-sized enterprises (SMEs).
That was the observation made by Anu Madgavkar (pic), senior fellow from the McKinsey Global Institute during a regional briefing hosted by Google in Singapore last month.
Madgavkar said that SMEs already contributed significantly to the gross domestic product (GDP), in countries across Asia Pacific. There are approximately 120 million SMEs in the region, accounting for about 50% of the GDP and employing three-quarters of the total workforce.
The Internet is increasing the scope of what a small business can do and levelling the playing field in terms of consumer reach and cost. However, she pointed out that the extent to which SMEs extract value from the Internet varies significantly from country to country.
“The extent to which SMEs extract value from Internet really depends on how developed the Internet ecosystem is in their country,” she said.
Citing research done by McKinsey, Madgavkar noted that this varies from 10-20% in some countries in Asia, to 80-90% in others.
“The higher the Internet penetration, the higher the sophistication and spread of the Internet among the general population; the more typically SMEs are able to extract value,” she added. 

Pointing to an online study conducted by the global economics think-tank which polled 3,000 SMEs across several Asian countries, Madgavkar said that a high proportion of them are thinking about or already using the Internet in their business.

The usage of the Internet has helped them increase revenue and reduce costs, not just in sales and marketing but also on the back-end, and improve productivity. About 80-90% had high-speed broadband access for their employees and 30-35% are already using the Net for both front- and back-end operations. Companies surveyed also reported an increase in productivity of 13-15% with a 20% impact on their bottom line.
“Bear in mind, this is not just online-only companies but also includes traditional enterprises as well that use the Internet to augment and enhance their current business,” she said.
The survey also looked at barriers to SMEs fully leveraging the benefits the Internet had to offer, with quality and cost of Internet access topping the list. Madgavkar said that SMEs tend to not use the Internet to its fullest potential because the quality and speed of access is not enough and the cost of bandwidth is too high.
“The lack of education is also a constraint, with many SMEs reporting that they feel it is too complex to manage the whole ecosystem and have no skills to navigate it,” she added.
Despite the uneven state of Internet ecosystems across the region, McKinsey is confident that the rollout of 4G (Fourth Generation) or Long Term Evolution (LTE) wireless technology in Asia will dramatically change the landscape.
“We think it’s a matter of hope not pessimism because the rollout of 4G within the next two years in many Asian countries promises to make high-speed Internet access a reality even in rural parts of the country, and will lower the cost of doing so,” Madgavkar said.
In Malaysia, telco operators have begun to roll out LTE coverage in selected parts of the country with Maxis leading the charge with its LTE launch in January of this year.
Celcom officially rolled out its 4G LTE network in late April with trial runs with customers, and will soon introduce promotions with plans and bundles. DiGi is expected to launch its 4G LTE services by the end of the second quarter this year.
Madgavkar noted that today, SMEs can access a range of services but from different providers, which means that businesses owners have to be somewhat tech-savvy to order to navigate the options. “The lack of education about how to go about it is quite a big restraint for SMEs.”
However, she also highlighted an upcoming trend of 'business-in-a-box' offerings which are integrated solutions from front-end applications such as websites and e-commerce gateways to back-end tools such as inventory control, distribution, accounting, marketing, finance and human resources.
“These solutions are designed to be intuitive, easy to use and more importantly, customised to the industry that the SME operates in,” said Madgavkar.
She added that McKinsey is seeing a lot of innovation in this space, driven in significant part by telco operators in tandem with their rollout of 4G services, seeking to provide value-added services to their portfolios for customers.

“There’s some exciting innovation coming off the back of the proliferation of affordable high-speed Internet access which will disproportionally benefit SMEs. That’s what we’re looking at in the next two years,” she said.

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