How has the digitalization of commerce affected the financial and organizational structures of small and medium-sized enterprises in Pakistan?
Commerce is the most important field in the world today. Without it, trade is not possible. Commerce is defined as “the exchange of goods, services, or something of value, between businesses or entities.” (Chen, 2022) With the development of information technology, commerce has been digitalized and is no longer the orthodox exchange of goods.
Some firms have taken immense benefits from digital commerce or simply E-commerce, defined as: “the buying and selling of goods or services using the internet.” (Winter, 2023)Businesses like Amazon, whose main source of revenue is from their e-commerce websites, have a whooping net worth of approximately $1.7 trillion. (woods, 2021) The number of E-commerce websites keeps on increasing at a rapid rate. There were about more than 20 million E-commerce websites in 2020. But, the main question arises: who benefits from digitalizing commerce? Is it only the large firms that are defined as the enterprises that employ more than 500 employees, or do the SMEs (small and medium-sized enterprises) who employ less than a certain number of people (varies countrywise) also benefit?
THE PROBLEM
Starting from scratch, what difficulties do SMEs face from the digitalization of commerce? The biggest threat is faced by the presence of bigger businesses online. Money is invested to compete with other large and small firms. “If a small entity doesn’t have a website, it’s as if they are not real,” John Talbott, an Indiana University business professor, said in an interview, “It’s almost more important than a storefront these days.” (PYMNTS, 2014) Money is invested to hire experts to design a website and to buy the necessary apparatuses like a stable internet connection and computers, which are expensive. A computer-literate person is also needed to see orders coming in from the websites, which adds expenses in the form of wages. Without operating online, a business will lose potential sales. Even more revenues would fall, as people nowadays prefer buying goods online, and the number is increasing gradually.
Furthermore, small firms cannot benefit from the better customer service provided by a large firm that has employed several people, especially for this purpose. Large E-commerce firms may have departments like customer complaints and hired experts who make the website a lot more interactive and user-friendly. For example, they may give essential details like a delivery tracking system, enabling them to facilitate their customers better. Small firms with limited revenue and capital cannot afford to provide services like these. Similarly, small firms cannot afford to have delivery vans; they would instead hire a courier, which increases the cost of production and the prices of products increase when they reach the final customer. This inclines people to buy from large enterprises that offer cheaper goods. In addition, investing in your website design alone is not enough. To make your business appear in the search results to potential customers, a higher fare must be paid to come on top while a customer searches for something. In addition, small businesses may also lose a mass % of revenue if some customer’s negative review goes viral. The research found that one negative review makes a company lose about 30 customers. (McCambridge, 2019)
On the other hand, e-commerce has helped small firms develop as well. After all, Amazon was a small firm once. Business start-up costs are reduced significantly as you do not need hired labor or a building (which would probably be rented). Advertising on the Internet is cheaper, and it has a broader audience as well; you have an audience reach throughout the world; compare this with a shop in your neighborhood, which has a small audience. The figure below compares the budget required to reach an audience of 2000 using traditional methods and via E-commerce.
Reaching an audience using E-commerce is a lot cheaper. Furthermore, existing shop owners have experienced increased revenues once they start their operations online.
The figure shows that about 18.1% of the retail sales were online in 2021, which is expected to increase to 22% by 2023. One of the reasons for increasing online sales is that online businesses operate 24/7, unlike traditional shops, which are open for fixed hours. Other than growing sales online, firms benefit from the costs saved by sending messages online. For instance, in the pre-e-commerce period, firms used to send letters via post or by an employee to ask for delivery of supplies or ask credit customers to settle their accounts, etc.; this involved transport costs or the fare couriers took to deliver the letter. Nowadays, all this is done via email, which is free of cost. Moving on, with the presence of vast material online, a business can carry out secondary market research or Desk research (a research method that involves using already existing data. Existing data is summarized and collated to increase the overall effectiveness of research.) and use statistics present on government sites, other business sites, etc. to develop their marketing strategy. (Bhat, 2018) This saves them time and money, which would have been invested while carrying out primary market research (research you conduct yourself or hire someone.) Primary research has also been made cheaper; questionnaires could be sent to potential customers via email, and their responses could be sent without printing or distributing them. (Types of Research: Primary vs Secondary, 2023)
In the same way, a small business could get reviews from their customers online and improve themselves to satisfy their customers better. Bill Gates, the founder of Microsoft, values the reviews of unsatisfied customers; he said: “Your most unhappy customers are your most important source of learning.” Nevertheless, small businesses can’t afford to stop their operations. E-commerce allows them to continue their operations even in the worst possible times. Recently, there has been a worldwide lockdown, and many small businesses would have failed if e-commerce did not exist. The picture below shows the percentage of online sales during the pandemic. Imagine what would have happened if commerce had not been digitized.
The way forward
what can be done to ensure that small enterprises do not face threats from the digitalization of commerce? What can be done to make sure that small enterprises do not face threats from the digitalization of commerce? You cannot expect businesses to return to their former operations; there is undoubtedly no turning back, so small, medium, or large businesses must adapt to these changes. A way of improving their performance digitally is through government aid. Governments could subsidies enterprises to invest in E-commerce. This would overcome the main problem for small enterprises, namely budget. Governments could also advise enterprises on how to improve their business performance. Small enterprises could win a better market share and have the upper hand over their competitors by providing personalized services to customers, which would improve customer satisfaction. They repeatedly return to the business for a particular good or service, creating brand loyalty. For example, a small retailer of air conditioners could provide better after-sales service such as free home delivery and fitting, it could also offer repair facilities, which would incline a customer to buy from him rather than someone on the internet who doesn’t provide these services. Another solution is government intervention in these markets. The government could impose protectionism (government policies that restrict international trade to help domestic industries) (Walters, 2022). For example, a government may impose a tariff (a tax imposed by one country on the goods and services imported from another country). This would increase the prices of imported goods and reduce demand. Hence, small industries will prosper in the home market. The government could also impose an embargo (a government order restricting commerce with a specified country or exchanging specific goods). This would eliminate the threat of foreign firms dominating the market. When these protectionism measures are implemented, the supply of foreign goods will be reduced, and people will have no other option than to buy locally produced goods. If these necessary steps aren’t taken, an economy will see the closure of many small and medium enterprises, resulting in unemployment for many people and poor living standards. The annual tax collection will fall due to reduced sales and enterprise profits. At the same time, the government may need to allocate funds to help the unemployed, which would cause an extra burden on the economy. Altogether, this will reduce the GDP of an economy. From our national point of view, small firms have not quite been successful compared to other firms in the world by going ahead. This is due to many reasons. Firstly, there is a lack of internet connectivity in many places (mainly Baluchistan), hindering firms from making the most profits from E-commerce. In January 2020, 76.38 million Pakistanis, about 25% of the total population, were using the internet. Whereas in the USA, over 90% of Americans have access to an internet connection. Fewer people having internet access would mean fewer customers and fewer sales. Moreover, many people need debit/credit cards, which are essential to pay for online goods. The latest value from 2017 shows that about 8.3% of Pakistanis own a debit card. The world average in 2017, based on 142 countries, is 44.40 percent. This fact greatly hinders online purchases as most businesses are reluctant to give the option of “Cash on Delivery.” Further, a new report, “2019 NPS Study of Local E-commerce,” conducted by PriceOye.pk, the Islamabad-based price comparison website, looks at customers’ major reservations regarding online businesses.
The picture shows the major problems of our E-commerce industry. Dissatisfied with local businesses, customers turn to better foreign businesses and order goods from there. This increases the number of imports of a country and adversely affects the balance of payment position. The diagram compares the impact on the economy of consumers spending $100 on a local business against spending the same amount on a non-local business. The results show that spending on a foreign business is unsuitable for the local economy. However, Pakistan has also made the opportunity of e-commerce positively available. The biggest online shopping platform in Pakistan, Daraz, employs more than 4,200 people.
This reduces unemployment, and living standards improve. Daraz has started operations in several other countries like Sri Lanka, Bangladesh, Nepal, and Myanmar and had E-commerce sales worth $4051 million in Pakistan in 2020. Multiple E-Commerce sites have also allowed people to ship goods out of the country, which brought in foreign exchange to improve the Balance of Payments position. There is no turning back, and commerce will continue to get digitalized; small and medium enterprises can’t simply blame E-commerce for their failure. Firms need to update themselves with time. However, governments can take measures to improve the sustainability of small and medium-sized enterprises in the country. The government could subsidize new start-ups or subsidies existing firms to invest in E-commerce. It could also lend some experts to advise businesses on succeeding on the digital platform. Another way of saving these businesses is to place restrictions on foreign e-commerce sites, which pose a threat to local businesses. In a nutshell, despite the many disadvantages digitalization of E-commerce has had on small firms, small firms have taken advantage of the digital platform to increase their global reach and have more chances of extending their operations more cheaply.
Bibliography
Chen, J. (2022). Commerce: What It Is, How It Differs From Business and Trade. Investopedia.
Winter, D. (2023, May). What Is E-commerce? A Comprehensive Guide (2024).
Woods, L. (2021). Jeff Bezos Has Stepped Down as Amazon CEO. How Much Is the Iconic Billionaire Worth?
PYMNTS. (2014). eCommerce Poses Threats To SMBs. CHRON.
McCambridge, J. (2019). Negative reviews can impact your business, but you can overcome them. CMG local solution.
Bhat, A. (2018). Secondary Research: Definition, Methods and Examples. QuestiohnPro.
Types of Research: Primary vs Secondary. (2023). The Hartford.
Walters, T. (2022). Protectionism: Examples and Types of Trade Protections. Investopedia.
BIBLIOGRAPHY
1) commerce definition: https://www.investopedia.com/terms/c/commerce.asp
2) E-commerce definition: https://www.shopify.com/encyclopedia/what-is-ecommerce
4)number of e-commerce sites in the world: https://kommandotech.com/statistics/how-many-ecommerce-sites-aret-there/
5) sizeable firm definition: https://smallbusiness.chron.com/determines-small-business-vs-large-business-20302.html
6) “If a small entity doesn’t have a website, it’s as if they are not real,” John Talbott, an Indiana University business professor, said in an interview, “It’s almost more important than a storefront these days.”: https://www.pymnts.com/news/2014/ecommerce-poses-threats-to-smbs/
7) research found that one negative review makes a business lose about 30 customers.
8)Secondary market research definition: https://www.questionpro.com/blog/secondary-research/
9)Primary market research definition: https://www.thehartford.com/business-insurance/strategy/market-research/primary-second-research#:~:text=Primary%20research%20is%20research%20you,ask%20questions%20and%20gather%20information.
10) protectionism: “government policies that restrict international trade to help domestic industries”: https://www.investopedia.com/terms/p/protectionism.asp#:~:text=Protectionism%20refers%20to%20government%20policies,for%20safety%20or%20quality%20concerns.
11) Tariff is “a tax imposed by one country on the goods and services imported from another country.”: https://www.investopedia.com/terms/t/tariff.asp
12)Embargo:” a government order restricting commerce with a specified country or exchanging specific goods.: https://www.investopedia.com/terms/e/embargo.asp
13) In January 2020, 76.38 million Pakistanis were using the internet: https://datareportal.com/reports/digital-2020-pakistan
14) in the USA, over 90% of Americans have access to an internet connection: https://www.statista.com/topics/2237/internet-usage-in-the-united-states/
15) The latest value from 2017 shows that about
8.3% of Pakistanis own a debit card. In comparison, the world average in 2017 based on 142 countries is 44.40 percent: https://www.theglobaleconomy.com/Pakistan/people_with_debit_cards/
16)Bill Gates: “Your most unhappy customers are your most important source of learning”:https://ecommercetips.org/ecommerce-quotes/
17) Daraz employs more than 4,200 people in Pakistan: https://www.owler.com/company/daraz
18) E-commerce had sales worth $4051 million in Pakistan in 2020: https://ecommercedb.com/en/markets/pk/all
19)Figure 1: https://kalyan-city.blogspot.com/2011/03/what-are-aids-to-trade-in-commerce.html
20) Figure 2: https://www.oberlo.com/statistics/how-many-people-shop-online
21)Figure 3: https://assetdigitalcom.com/social-media-and-small-business-latest-statistics/
22)Figure 4: https://www.oberlo.com/blog/ecommerce-statistics
23)Figure 5: https://www.oecd.org/coronavirus/policy-responses/e-commerce-in-the-time-of-covid-19-3a2b78e8/
24)Figure 6: https://www.dawn.com/news/1514770
25)Figure 7: https://growmap.com/greatest-ecommerce-competitive-risks/
- Digital World and Business Enterprises in Pakistan - 31/12/2023
