SMEs contribute to the national economy by providing work and contributing significantly to Gross Domestic Products (GDP) and Gross National Product (GNP) (DeLone 1988; Diermen 1997; Foong 1999; Guinea, Kelley & Hunter 2005; Gutter & Saleem 2005; Hill 1995; Kuan & Chau 2001; SMIDEC 1998a; Tambunan 2005; Utomo & Dodgson 2001; Walczuch, Braven & Lundgren 2000). The definition of SMEs itself varies between organisations and countries. There are various indicators used across the world to define SMEs. For example, the Small and Medium Industries Development Corporation (SMIDEC) in Malaysia uses the following criteria to define SMEs (Drew 2003; SMIDEC 1998b):
- Number of employees
- Invested capital
- Total amount of assets
- Annual sales turnover
- Production capacity
- Average income
The World Bank‘s definition of SMEs is as follows (IFG 2002):
- Small enterprise: up to 50 employees, total assets of up to $3 million and total sales of up to $3 million.
- Medium enterprise: up to 300 employees, total assets of up to $15 million, and total annual sales of up to $15 million.
The World Bank definition of SME incorporates three criteria (number of employees, total assets, and total sales). In general, definitions of SMEs usually use the number of employees, sales turnover, and total assets as indicator. However, in many previous studies such as Dutta and Evrard (1999), Drew (2003), and Fink (1998), the number of employees criterion has been used to define SME in accordance to the local regulations.
The Indonesian government uses total assets and annual sales to define SMEs. Their definition of an SME is any business organisation that possesses assets less than US $1 million (excluding land and buildings) and has annual sales turnover less than US $5 million (Drew 2003; SMIDEC 1998b). We found no official explanation of why the Indonesian Government uses total assets and annual sales rather than number of employees. One could speculate that one reason relates to the Indonesian government’s effort to reduce the unemployment rate. With a population of more than 200 million, the number of unemployed in Indonesia is quite high. The development and growth of SMEs is one of the methods employed to reduce unemployment (Diermen 1997; Hill 1995). Since the focus of the Indonesian government’s assistance to SMEs is to help them grow and reduce unemployment, the number of employees as a criterion of SMEs is not relevant. Some research on Indonesian SMEs used different definitions than the Indonesian government’s (for example Berry, Rodriguez & Sandee 2001; Utomo & Dodgson 2001 using the number of employees). However, there is no explanation why such definitions were used or where they came from. The second reason may be that the number of employee within Indonesian SMEs can be very fluid. It can change rapidly from time to time to accommodate fluctuations in the company’s operation, especially in manufacturing companies. Results from our field study confirmed this observation.
Characteristics of SMEs
Attributes often discussed as typical of SMEs are limited resources (Welsh & White 1981), informal management style (Kotey 1999; Kotey & Slade 2005; Wilkinson 1999), flexibility (Aragon-Sanchez & Sanchez-Marin 2005), and dependence on single decision makers (Feltham, Feltham & Barnett 2005). Those attributes influence how SMEs are managed and run.
The most common problem for SMEs is their limited resources compared to big enterprises. This creates what Welsh and White (1981) called “resources poverty”. SMEs usually have limited options in their business, and must focus on their core business and expertise. This has led to many SMEs outsourcing their non-core business activities such as IT to third parties whenever they could afford such an investment.
Resources poverty leads to more constraints for SMEs in their operations. Limited financial resources mean that SMEs must be careful with their investment and spending. In terms of capital spending, most investment is aimed at supporting core business functionalities. New technology investment for the core business is difficult (Berry et al. 2001; Sandee & Rietveld 2001), let alone for supporting technologies such as IT.
Limited financial resources also affect the human resources. Limited financial resources lead to limited capabilities to recruit, train, and retain employees. Human resources practice within SMEs is usually informal (Kotey & Slade 2005), meaning that staff are recruited not according to prescribed theory with formal procedures and standardised recruitment as in bigger companies. With a limited number of staff, it is not unusual for SME staff to perform multiple functions that require different skills and knowledge, yet limited financial resources mean that the skills and knowledge have to be acquired using the cheapest means. It often means they must learn by themselves or wait for external assistance such as government and educational institutions to provide training and education (Utomo & Dodgson 2001). However, a study involving SMEs in the European Union by Dutta and Evrard (1999) showed that most government assistance did not meet its original intention. It was too generic and did not meet the individual SME’s needs.
Limited funds for training and education lead to limited knowledge and skills possessed by SMEs. They must choose which knowledge and skills are most relevant to their business. This usually means skills related to production, marketing, finance and accounting. IT skills and knowledge, as long as they are necessary to carry out their normal business, are deemed important. However, more sophisticated and complex IT functions are either outsourced or ignored.
Despite their limited resources, SMEs are also known for their flexibility (Aragon-Sanchez & Sanchez-Marin 2005). SMEs can quickly adapt themselves to new challenges and pressures. SMEs’ flexibility is possible since their internal structure tends to be simple and informal.
The informal management style means that decisions are made quickly, since there are only a handful of staff to be consulted and there is not the complexity of bigger companies. In SMEs, managers directly control all the resources and manage all the staff. The SME’s structure is usually flat and allows direct communication between manager and staff.
The informality and flexibility of SMEs may be attributed to the fact that many SMEs are started as family businesses (Berry et al. 2001; Feltham et al. 2005; Sandee & Rietveld 2001). As a family business, the relationship between manager and staff is like in the family, in fact they are often closely related to other members of the company. The consequence of this is that SMEs usually depend on a single decision maker, the manager (Feltham et al. 2005), who is often also the owner of the SME.
SMEs and IT in Indonesia
In Indonesia, SMEs have contributed greatly to the national economy, even during the economic crisis that started in 1997 (Berry et al. 2001; Hill 2001). Many SMEs, especially export-oriented ones, have survived and even experienced considerable growth. International markets have increasingly purchased Indonesian SMEs’ products such as garments, furniture and handicrafts. The key to such acceptance is the improvement in quality of products and ability to meet demand on time (Schiller & Martin-Schiller 1997). This is the result of improvements in productivity through varied mechanisms such as technological upgrading (Berry et al. 2001). Technological upgrading is deemed as a cause for improvements in an SME, among other things better machinery (Sandee & Rietveld 2001), better workplace organisation, improved production management which could be attributed to technological upgrade, and advances in product design (Schiller & Martin-Schiller 1997).
There are several reasons for these improvements. First, international customers have played a significant role in exporting industries (Schiller & Martin-Schiller 1997). They demand a certain level of product quality and they want to make sure that the production process can achieve such levels of quality. Therefore, Indonesian SMEs must comply with certain levels of quality standards that affect the choice of machinery, raw materials, and finishing. International customers also want their orders delivered on time. To coordinate such orders, international customers usually communicate intensively with the Indonesian SMEs. The most affordable and efficient way to do so is by using email. This means that Indonesian SMEs must have access to computers to be able to utilise email. Using email can reduce the cost of communication significantly, since SMEs often have to report regularly to their international customers during the period needed to manufacture and ship orders. The report will contain text and pictures of product and design; picture quality will be better if they are sent using email rather than facsimile.
A second reason for improvement is the encouragement to introduce automation machinery to Indonesian SMEs, especially in manufacturing activities (Sandee & Rietveld 2001; Schiller & Martin-Schiller 1997). The Indonesian government has promoted SMEs as a priority in their economic program since 1995 (Indonesia 1995). Therefore, many programs aimed at assisting SMEs have been introduced. Some are aimed at improving the manufacturing and administrative processes. The government provides financial loans and training to improve SMEs’ capability in those areas.
The third reason for improvement, especially in technological upgrade, is the vendors’ efforts (Berry et al. 2001). Vendors often provide information on new technological solutions as part of their marketing effort. The promotional efforts by the vendors have created awareness in SMEs of alternative ways to improve their current business. Moreover, vendor’s information usually can be demonstrated by showing tangible products rather than abstract concepts.
International customers’ demands, government encouragement, and vendors’ information inputs have inspired Indonesian SMEs to adopt new technologies in their organisations. They can afford such investment by using the profits gained from foreign currency received for their exported products and government-sponsored loans. One of the technologies adopted is computers (information technology). Although IT usually is not considered as a core business technology, Indonesian SMEs use IT to communicate with international customers or to improve their administrative and manufacturing process. Considering the limited financial resources and human resources within Indonesian SMEs, adopting IT could be problematic.
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