Small Enterprise as Users and Suppliers of Information on the ICT Sector.

4th Floor Campus Building Corporation no. 2002/047290/23 999 Hilda Street www.feedbackra.co.za Hatfield 0082 Small Enterprise as Users and Suppliers of Information on the ICT Sector. Submitted to SEDA Project Management Contact Details Feedback Research and Analytics Feedback Research and Analytics 999 Hilda Street, Hatfield 0083 Tel: +27 12 430-2009. Fax: +2712 3420931 Page 1 of 105

Table of contents 1. List of Abbreviations... 5 2. Introduction... 8 2.1. Brief... 10 2.2. Purpose and objectives... 11 2.3. ICT SMME: A definitions... 11 3. Methodology... 12 3.1. Approach... 12 3.2. Ways in which sources were elicited... 13 4. ICT technologies used by small businesses... 14 4.1. Social and economic benefits of ICT... 14 4.2. ICT and productivity... 15 5. The Benefits of ICT to SMME s... 16 6. Barriers and issues related to the use of ICT... 29 7. Defining the ICT Value Chain... 36 7.1. Primary Groups... 37 7.2. Networked Interaction... 37 8. Activity & Opportunity within the ICT sector... 39 8.1. Performance Trends within the ICT Sector... 39 8.2. SWOT analysis... 45 8.2.1.1.1. Strengths... 46 8.3. ICT Spend in BRICS Countries 2000 05... 48 9. NGOs and ICT for Development... 49 10. Demographic of the sector... 49 11. Future growth prospect of SMMEs within the ICT sector... 49 Page 2 of 105

11.1. Policy environment... 49 11.1.1. Provincial ICT Development planning... 49 11.2. Funding environment... 50 11.3. Unexploited markets and under serviced areas... 50 12. Opportunities and challenges... 50 12.1. Opportunities... 50 12.2. Challenges... 51 13. Issues for Possible Further Exploration... 53 13.1. Trends Impacting the ICT Sector... 53 14. Recommendations... 53 14.1. Recommendations: ICT developments to benefit SMMEs... 53 14.2. Challenges and corrective measures... 56 14.2.1. Leveraging ICT enabling from business use... 56 14.2.2. Promoting the use of ICT to enable exports across all SMMEs... 57 14.3. Potential support mechanisms that could be applied... 58 14.3.1. Enhancing `ICT enabling' through skills development... 58 14.3.2. Liaison with industry... 59 14.3.3. Enhancing local ICT import competing firms... 59 14.4. Opportunities and how they can be explored... 59 14.5. Specific interventions or quick gain strategies for SEDA... 61 15. Bibliography... 64 16. Annexure A: Annotated bibliography... 68 Page 3 of 105

Executive Summary Page 4 of 105

1. List of Abbreviations ADSL B/OSS DSL EDI EFT I/O ISD ISP Asymmetrical Digital Subscriber Line. ADSL is a form of DSL, a data communications technology, that enables faster data transmission over copper telephone lines than a conventional modem can provide. Business Support Systems. The complementary term for OSS, BSS is a newer term and typically refers to "business systems" dealing with customers, supporting processes such as taking orders, processing bills, and collecting payments. The two systems together are often abbreviated BSS/OSS or simply B/OSS. i Digital Subscriber Line. Generic name covering several different technologies for data transmission over fixed phone lines. Electronic Data Interchange. A system for exchanging trading information in standard form by computer systems through the use of electronic messaging systems for instance, examination entries, personnel records and transactions between trading partners. Electronic Funds Transfer. An electronic-based transactions for instance Internet Banking transactions. Input/Ouput Internet Service Developer Internet Service Provider. An Internet service provider is a business or organisation that sells to consumers or business access to the internet and related services. - Page 5 of 105

LAN Local Area Network. A communications system linking computers within a restricted geographical area such as a building or campus. This also allows computers to share information from a central source. OSS PC PSTN SVC TV VAN VPN Operations Support Systems. The network systems" dealing with the telecom network itself, supporting processes such as maintaining network inventory, provisioning services, configuring network components, and managing faults. Personal Computer The Public Switched Telephone Network (PSTN) is the concentration of the world's public circuit-switched telephone networks, in much the same way that the Internet is the concentration of the world's public IP-based packet-switched networks. Originally a network of fixed-line analog telephone systems, the PSTN is now almost entirely digital, and now includes mobile as well as fixed telephones. Scalable Video Coding. The objective of SVC is to offer content in a "scalable" way; i.e. content can be coded once, and can then offer streams of various quality. ii Television Value Added Network Services. A term used to refer to other alternative, telecommunications service providers, generally known as VANS licensees, that provide telephony services to the telecommunications market. Virtual Private Network. A service that links a company's local and telecom networks with the computers and phones of employees who work remotely, forming a telecom or data Page 6 of 105

communications network that looks to users like a single business network. WAN Wide Area Network. In contrast to a local area network, which links computers at the same site, a network which links computers over a large geographical area, including telecommunication links such as satellites. iii Page 7 of 105

2. Introduction The African business graveyard is littered with corpses of small and medium scale businesses that would have survived if anyone took notice. Governments, bankers, policy makers, even the World Bank institutions all agree that small businesses are the engine of growth in any economy. The key to unlock this vast potential wealth of Africa and create sustainable prosperity is however missing. BusinessinAfrica, 1 March 2004 1 Small Micro and Medium Enterprises (SMMEs) are the backbone of a growing economy. In the South African context, SMMEs operating in the Information and Communication Technology sector are more than an engine for economic growth. They are creators of jobs and play a key role in opening access to mainstream economy by the marginalized parts of the population. The Government of the Republic of South Africa, in recognition of the key role played by SMMEs in the ICT sector in its broad development and poverty alleviation strategy has sought to give these organizations a priority attention. It is cause for concern that sector is far less than expected considering substantial amounts of resources that have been invested in this sector in the last few years. The South African SMME sector is, nonetheless, not as productive and as competitive as it should be. For the most part, this is due to the fact SMMEs still use old-fashioned technologies and most of them have no access to facilities for the testing and promotion of innovative ideas. There is also very poor or no technology support for SMMEs. As a result, there are very low entry rates of SMMEs into the productive "value added" sectors and this leads to the high failure rate among startup SMMEs. As a result, there has been a focus and drive by government and other stakeholders on Information and Communication Technologies (ICT) and the creation of Small Medium and Macro Enterprises (SMMEs) to address the critical 1 http://www.businessinafrica.net/opinion/editorials/315011.htm Page 8 of 105

underdevelopment. Consequently, there is an urgent to need to support SMMEs through technology transfer and technology diffusion programmes. ICTs revolutionalised the way in which societies interact, conduct business and compete in the international market. Its potential impacts on the productivity and competitiveness through cost and turnover reduction, increase in profitability and ability to establish, advance customer relations, enhancing knowledge and facilitating innovation of products and services, to name but a few, makes ICT important to all types of enterprises including SMME s (Wakelin & Schadrach, ed). The differentiation of Duncombe and Heeks (2001, p.9) is applicable to the South African micro and small business enterprises. The authors differentiate between survivalist, thunddlers and flyer enterprises. Survivalist enterprises were pushed into starting a business for the sake of obtaining an income to support a family they have no other source of income, although the income generated from the enterprise is still typically below the poverty line. Thundlers typically have a static turnover and have no motivation to expand or grow. The income provided by the enterprise is sufficient to meet basic needs. Flyers are market driven enterprises focussed on growth. The income generated by flyers meets more than basic needs. The SMME sector in South Africa makes up 99,3% of all private enterprise in the country (Coetzee, Denner, Eksteen, Eloff, Govender, Hirsch, Morwala and Van der Merwe, ed). There are about 3 million micro enterprises in South Africa and more than half of the employed are employed in some micro or small business in the private sector (Dahl & Normark, 2004, p. 5). ICT holds numerous benefits for SMMEs and more specifically SMME s in developing and African countries such as South Africa. Since the benefits may enable enterprise development and growth it becomes especially important to explore its use in SMMEs in South Africa, where a lot of development and investment have taken place in ICT infrastructure over the past decade without congruent growth in SMMEs (Ndiwalana & Tusufira, 2006). An estimated 20% of the countries total domestic income is derived from the Page 9 of 105

informal sector (Dahl & Nordmark, 2001). 50% of small enterprise consists of survivalist enterprises (Jackson, 2004). Flyers generally have better access to and resources to make use of ICTs. As such, they are in the position to reap more benefits from the investment of ICTs (Duncombe & Heeks, 2001, p. 9). Flyers will potentially also use more advanced ICTs such as Internet and e-mail and can more easily overcome user requirements such as training and high entry and maintenance costs. However, given a survivalist can gain access to ICT and gain the needed training to use it effectively, growth and development of the enterprise is a given consequence. 2.1. Brief In March 2007, Feedback Research and Analytics (Feedback) was commissioned by the Small Enterprise Development Agency (SEDA) to conduct a desktop research into Small Enterprises as Users and Suppliers of Information on the Information and Communication Technology (ICT). Sector. The research is undertaken in pursuance of SEDA s mandate as prescribed in Sections 9A and 10 (1) [a-d] of SEDA s enabling legislation National Small Business Amendment Act no. 29 of 2004, whose objectives and functions are to: (a) design and implement development support programmes (b) promote a service delivery network that increases the contribution of small enterprises to the South African economy, and promotes economic growth, job creation and equity; and (c) Generally, strengthen the capacity of: (i) service providers to support small enterprises and (ii) small enterprises to compete successfully domestically and internationally. Page 10 of 105

2.2. Purpose and objectives The overall purpose of the study is to assist SEDA to identify opportunities and challenges of small businesses operating in the ICT sector in order that it can develop appropriate support mechanism. The objectives of the study are: to identify current ICT technologies used by small business to identify future growth prospects of SMMEs within the ICT sector to identify capacity building needs of SMMEs within the ICT sector to increase the quantity, quality and accessibility of information on currently active SMMEs operating in the sector to identify opportunities and challenges faced by SMMEs within the ICT sector by province 2.3. ICT SMME: A definitions Both terms ICT and SMMEs are not easy to define, mostly due to lack of consensus on any one definition. The Western Cape Provincial Government defines ICT as The industries that provide goods and services that support the electronic Display, processing, storage and transmission of information. 2 In defining an ICT company, we have adopted the definitions developed by the Organization for Economic Cooperation and Development (OECD) and Price Waterhouse Coopers (PWC) as described in the Terms of Reference document. Key words in the OECD definition are processing, transmission and display of information by electronic means. PWC goes further to develop a list of core 2 Naidoo, R. et al. 2004.. INFORMATION AND COMMUNICATION TECHNOLOGY (ICT) FIRST PAPER:Research to inform Strategic Policy and Initiatives for the Information and Communication Technology Sector in the Western Cape. Cape Town South AFrica Page 11 of 105

activities of an ICT company grouped in four categories -- bandwidth, hardware, applications and enterprise management. With regard to the definition of small, micro and medium size enterprise, we are fully cognizant of controversies and lack of consensus on definitions that are based on number of employees, or total business assets. We have adopted SEDA s own definition as found on its website, to mean a firm with up to 200 employees. This definition will be further defined in consultation with SEDA to take into account firms that have less than 200 employees that are obviously not SMMEs, a phenomenon that is not uncommon in the ICT sector where you find multi-billion rand companies that were definitely not intended to fall within SEDA s mandate. 3. Methodology 3.1. Approach The methodology for this literature survey evolved in the following manner: The first step was to pull together a four person team of consultants. Three senior researchers and one junior researcher. Initial Brainstorming to decide on possible issues to discuss o Current ICT technologies used by small businesses o Identify Future growth prospect of SMMEs within the sector o Capacity building Needs of SMMEs within the sector o Ways to increase the quantity, quality and accessibility of information on currently active SMMEs operating with the ICT sector o Opportunities and challenges faced by SMMEs within the ICT sector per province,. Initial Search for Sources, Development of detailed research questions Page 12 of 105

Develop Report Outline Literature review and analysis Additional Search for Sources Write up of Literature Review. 3.2. Ways in which sources were elicited Sources were elicited by: Internet search using Google Scholar with the following key words o SMME ICT o ICT Barriers SMME Development o ICT SMME Development Calling well-known authors on the topic of ICT and SMMEs Name David Barnard Racuni Naidoo Chalwyn Vorster Seana Nkhahle Ceri Oliver-Evans Organization Sangonet Matchbozology Creative Incubator Sustainable Development consulting South African Cities Network Graduate School of Business, UCT Journal Articles o Identified through the abovementioned internet search o UP library search with keywords o St. Augustine College library o Wits Library Page 13 of 105

Books o UP library search with keywords o St. Augustine College library o Wits Library All relevant sources published in the past 7 years were included, and although the focus was on research conducted in or about South Africa, a limited number of significantly relevant international publications were also included in order to provide a perspective on the lessons learnt in other developing and developed countries around the world. 4. ICT technologies used by small businesses 4.1. Social and economic benefits of ICT Industry is the engine of growth, because its ability to extend markets, increase productivity and generate technological innovation It is an instrument of social cohesion and inclusion as it connects people over distances. It finds application in all the sectors of the economy. For example, the following sectors of economy depend of ICT. 3 Banking and insurance Manufacturing Health care Other Financial services and real estate Energy and utilities Retail and wholesale Trade Agriculture, Forestry and Fishing Construction 3 Western Australia Information and Communications Technology Industry Development Forum. 2006. Enabling Growth: The contribution of ICT to West Australian Economy. Perth, Australia. Page 14 of 105

Mining Education Government administration and service delivery Professional and other services IT: Internet Transport Telecommunications Broadcasting Social enterprise and non-profit work 4.2. ICT and productivity It common knowledge that there is a direct link between the ICT and improved productivity. ICT is a great enabler of productivity. Studies undertaken in Australia 4 provide abundant proof of this point. Use of IT provides companies with an opportunity to: undertake existing tasks more quickly, cheaply and effectively by substituting ICT for other inputs, especially labour; and to improve multifactor productivity (the efficiency and effectiveness of input use) by using ICT as a means to innovate - to develop and introduce new value-adding and efficiencyenhancing products, processes and organisational structures 5 Further the above-mentioned Australian study shows that investment in ICT can affect labour productivity growth in two main ways. A capital deepening effect - (increasing the capital to labour ratio) raises labour productivity because on average, each unit of labour has more capital to work with in order to produce more output; and 4 Productivity Commission 2004, ICT Use and Productivity: A Synthesis from Studies of Australian Firms, Commission Research Paper, Canberra. p. 8. 55 Western Australia Information and Communications Technology Industry Development Forum. 2006. Enabling Growth: The contribution of ICT to West Australian Economy. Perth, Australia. Page 15 of 105

A multifactor productivity (MFP) effect - MFP growth reflects the combination of inputs so that more output is produced for any given quantity of input. How ICT affects firm performance Labour Key area of impact Facilities and outsourcing Production and distribution processes Management practices Product characteristics and mix Relationship with customers and suppliers Nature of impact Enhancement of human capital. Staff reduction in some instances, but not all. Reduction of some facilities and outsourcing of certain functions, sometimes overseas. Greater consistency of product quality as well as quality enhancement. Process change across the spectrum from little change to major re-engineering of entire process. More timely and accurate management of information. Greater centralisation of decisionmaking. Improved communications and reporting systems. Improved inventory control. Development of customised products and services (for example, in banking and mining services). Better and more frequent communication with customers and suppliers. Greater responsiveness to customer needs and more certainty in new product design. Source: Productivity Commission 2004, ICT Use and Productivity: A Synthesis from Studies of Australian Firms, Commission Research Paper, And Canberra. p. 4. 5. The Benefits of ICT to SMME s There are numerous specific benefits that SMMEs can reap from the use of ICTs that can potentially increase enterprise competitiveness, productivity and management. The specific benefits highlighted in literature include: Better marketing efforts Better internal and external communication Page 16 of 105

Better access to and use of more accurate information Better facilitation of administration Improved business processes Improved services Increased innovation Reduction of costs Positive impact on turnover Increased profitability Increased client growth Increased customer relationship Time efficiency Increased sales Potential to build human resources capital with less loss in productivity In turn, the effects of these specific benefits, feed into increased competitiveness, productivity and better management of SMMEs. When ICT is used as a secondary processing technology in SMMEs it will benefit them if it is used as a business communication tool. ICT can facilitate and enable communication. In Uganda and Kenya, community organisations use ICT to facilitate communications, especially if combining for example e-mail with traditional community communication systems. ICT could also be used to establish networks between community members and with the outside world (Dahl & Nordmark, 2004). According to Dahl and Nordmark (2004) it is very important for people in rural areas and in townships to be able to communicate with people outside their own environment as it will possibly increase the accuracy of information. The use of ICT as a method of internal and external communication is not limited to flyers only, but includes survivalists as well (Duncombe & Heeks, 2001). In South Page 17 of 105

Africa mostly all enterprise owners have access to mobile phones. It is used very effectively for marketing and communication. There is a great risk that information to poor entrepreneurs in informal settlements and rural areas are inaccurate information as they rely mostly on informal information systems from those around them and like them (Duncombe & Heeks, 2001). While it is essential to sales and appropriate to small enterprises to establish such informal information systems, it is often of poor quality and is restrictive in its range. In such instances, ICT can be a valuable tool for business communication. In South African Townships, the most used informal system of information transfer is the mouth to mouth method. Although this is a reliable way of information exchange, the accuracy of the information may diminish as the transfer takes place between more than two people that do not share the same location. ICT is also a time efficient method of information transfer. To travel to the source of information to obtain more accurate information may be quote expensive and less time efficient. By implementing ICT, this problem of information accuracy, time and costs can be reduced. Fast effective communication via ICT, especially telephone, has become an essential commodity to many informal SMEs in South Africa (Dahl & Nordmark, 2004). Text messaging is for instance used as communication tool by street vendors as a low cost communication tool. Other common ICT tools used for business communication purposes in developing countries includes, landline telephones, payphones and fax facilities are commonly used. With ICT, marketing efforts can also be improved through the dissemination that travels quicker and reaches more customers and potential customers. Marketing via Page 18 of 105

ICT increase the potential client base of as it reaches more potential clients through marketing efforts (Dahl & Nordmark, 2004). By using ICT to market SMMEs customers can be made more aware of the channels to do business. Price of services and important information can easily be communicated to clients and potential clients in remote areas. Web-enabled online activities allow local business enterprises to market their goods and services globally and to generate interstate and international sales without incurring brick and mortar expenses. This will increase also the global competitiveness of South African SMME s. Tanburn and Singh (2001) mentions that the mobile phone has some many benefits to SMEs in developing countries that even informal sector owners can use it to find customers. She mentions the uptake of informal-sector owners in Asia that use it. It is also used by SMEs in the informal sector in South Africa. Text messaging is for instance a cost effective manner of marketing. According to Dahl and Nordmark (2004) ICT is very useful to women entrepreneurs in South African Townships since they want to market to potential customers outside the Townships. Women entrepreneurs with small and micro enterprises have a need to draw foreign customers, in which case ICT, specifically the Internet can be of use. ICT can enable better and more frequent communication with customers and suppliers. As such it also enables the development of closer customer relations. If more frequent and quicker communication with clients can be established, the match between demand and supply can be better which provides improved services to customers. Page 19 of 105

Enterprises function on the basis of four tangible resources, namely money, people, materials and technology, and one intangible resource - information (Wakelin & Schadrach, 2nd). Information with regard to supply, demand, the operating environment and internal processes is crucial to the effective management of any enterprise, for without quality information if it is properly interpreted and applied as knowledge is a principal source of power within communities (Ndiwalana & Tusubira, 2006, p. 1). The lack of information is one of the non-financial aspects that constrain small enterprise development (Jackson, 2004). Information poverty in small enterprises results in wrong decisions as well as an inability to learn from such erroneous decisions. This in turn results in the loss of valuable resources such as money, time, income and business relationships (Wakelin & Schadrach, nd). Better informed SMME s will generally have enhanced prospects for emerging opportunities. It is especially informal small and micro enterprises that stand a chance of being effected by inaccurate information since they rely mostly on informal information systems. As such, the risk exists that accurate information from outside the local context may not reach them. Rathgeber and Adera Ofwona (Dahl & Nordmark, 2004) cited that information is known as the most important thing for a sustainable and equitable development. Poor access to information and access to poor information by SME may lead to incorrect strategic or tactical decisions, loss of potential income, and failure to learn from past mistakes (Ndiwalana & Tusubira, 2006, p. 2). Small enterprises in Africa are subjected to increased competition, as well as to increased demands for quality of products and services. Surviving in this competitive environment will require raising the overall productivity of small Page 20 of 105

enterprises, which in turn will require higher levels of management capacity. In this regard the ability to acquire, process and effectively use business information tools becomes central (Duncombe & Heeks, 2001). ICT can enable SMME s to gain access to timely and quality information, and thus empower them to take informed decisions in their business (Dahl & Nordmark, 2004; Wakelin & Schadrach, Ed). Where access to information is limited for many people, as is the case for SMME s in rural areas in Africa, ICTs such as the Internet can facilitate access to information. For instance, Dahl and Nordmark (2004) found that women entrepreneurs in townships in the Western Cape can benefit from the use of Internet when searching for information. Market research can also be conducted with more ease and efficiency through the use of ICT. As consequence, SMMEs that use ICT for such purposes will have more comprehensive knowledge of their market. Evidence suggests that business information is a critical demand for SMEs. Most demanded information include those related to assistance with training and skills development; sources of financial assistance; technology; and business support services (such as registration, technology and book keeping) (Duncobe, 2006). ICT is a driving force for enterprises capacities to access, adapt and apply information and knowledge in their production and marketing, ICTs offer enormous opportunities for transfer and acquisition of skills, technical knowledge and business-related information (Wakelin & Schadrach, Ed). Information with regard to customers and markets is another important benefit that the ICT holds when it is used as a secondary processing technology. The internet shows to have the greatest impact for accessing market information amongst flyers in developing countries. Access of market information via the Internet is mostly used by exporter/importers (including the tourist sector) (Duncombe & Heeks, 2001). Page 21 of 105

Flyers usually have greater access to internet, fax and telecommunications technology for information access than survivalists and thudllers (Duncombe & Heeks, 2001). This can be an entry point for ICT development as well as an opportunity for SMMEs in South Africa to provide such as service. The use of ICT directly impacts SMMEs by improving the efficiency of business processes and services (Duncombe & Heeks, 2001, p. 8). In a study conducted in Western Australia (Western Australian ICT Industry Development Forum, 2006) it was found that a lot of companies use ICT to improve customer services, offer innovative products and to improve internal and external communication with customers. In terms of increased innovation, ICT has the potential to enable SMEs to develop new products and services, thereby establishing new business opportunities and markets (Duncombe & Heeks, 2001, p. 6). In South Africa, specifically in the Townships, ICT can be of great benefit to innovative services in the tourism sector as Tourism is rapidly increasing in South Africa (Dahl & Nordmark, 2004). Overall the effective use of ICTs can facilitate better business administration. ICT provide a data processing tool to SMME s. Internal data processing, including business accounts, payroll, invoicing and so forth is an important area for all SMEs, particularly with regard to controlling enterprise finances and cash flow (Dahl & Nordmark, 2004). The use of ICT can structure and organise business process better. For instance, better operational and financial records improve business processes (Ndiwalana & Tusubira, 2001). A lack of financial records is for instance cited by Jackson (2004) as one of the weaknesses in SMME s in both developing and developed countries. Using ICT for better business administration do not necessarily imply the use of the Internet, but rather the use of a stand-alone computer. It is thus less expensive and Page 22 of 105

this enable more SMME s to reap this benefit of ICT. Still some computer knowledge is necessary, which may still be a barrier for most SMME s not always in terms of cost but also in terms of time. Dahl and Nordmark (2004) mentions an alternative for survivalists and thudllers would be to share ICT, such as a computer, for business administration. A possible alternative could be that two or a few more businesses could share one computer, but this is only possible if they are located close to each other. Administrative processes that need connectivity include booking confirmations and invoices. Although e-mail and internet will be the most cost effective solution especially if international customer must be reached, Dahl and Nordmark (2004) found that fax facilities are still the most economical for SMME s in rural areas. ICT also improves production control through better administration. There is however a need to develop tailor made software products for SMME s since off the shelf product for administration is often inappropriate and expensive (Duncombe & Heeks, 2001). ICT reduces cost to company and therefore increase organisational efficiency and financial control. In the 2003, the SME Survey indicated 59% of the SMEs indicated past positive impact of ICT on cost reduction. 69% expected a positive impact on cost reduction in the future (Goldstuck, 2003). Because of its cost reduction qualities, ICT is usually adopted in developing countries (Tanburn & Singh, 2001). Take for instance the difference in cost between an international telephone call and sending an e-mail. In South Africa the use of internet through dial-up connections (narrow band) is still very prevalent for SMEs. By implication, an international e-mail will cost the same as a local telephone call. It is however still much more affordable than an international land line phone call. Page 23 of 105

The impact of cost reduction seems to increase with company size. In 2003 (Goldstuck, 2003) micro enterprises in South Africa reported a 50% positive impact on cost reduction while in companies sized 101 150 and 151 200 the positive impact increased to 70%. This is similar to trends in Africa (Dahl & Normark, 2004) as well internationally. In Western Australia for instance, a main motivator for industries to use ICT products and services is to cut costs. The cost efficiency of ICT use goes hand in hand with the time savings associated with it since time is money. The impact of ICT on cost reduction may not be shared by SME s in all sectors however. The engineering sector and construction sector in South Africa share a lower positive impact on cost reduction (although the impact is still generally positive), while the IT Software and Services sector have much higher positive impact rating (Goldstuck, 2003). ICT have a positive impact on turnover also. In the 2003 the SME Survey in South Africa, reported that an overall of 46% SME s reported positive past impact on turnover with 52% expecting a positive impact in future (Goldstuck, 2003). SMEs in construction and Engineering did not report the same high positive impact (35% and 33.81% respectively) while the IT software and services sector reported the highest impact with 76%. The use of ICT can increase SMME s ability to retain existing clients and win new clients. Consequently market share growth potential may also increase (Goldstuck, 2003). In 2003, 55% SME in the SME Survey in South Africa indicated that ICT had a positive impact on retaining and winning clients during the past, with 64% indicating that they expect a positive impact in future (Goldstuck, 2003). Although still relatively high ratings existed, SME s in the engineering and construction did not share the high positive impact of ICT on winning new clients and retaining existing clients (43.32% - 45.8%). IT Software and Services on the other hand had Page 24 of 105

the highest positive impact rating of 76% and financial services followed them closely with 65.67%. The proportion of companies reporting positive impact of IT on winning new clients and retaining existing clients in the past rises in direct relationship to the size of the company. Micro enterprises reported 46% positive impact and companies with 81 90 employees reported 67% positive impact in the 2003 SME Survey. Companies with more than 100 employees indicated 67% positive impact (Goldstuck, 2003). The increase of product use and sales is another consequence ICT as marketing with ICT can increase client base, as well as the method of doing business with clients. Internet technology specifically enables SMME s to sell products and services online. Poor access to markets for output is one of the weaknesses mentioned by Jackson (2004). ICT can increase market access (Ndiwalana & Tusubira, 2001). ICT use has a positive impact as well on SME profitability. In 2003, 57% SME s in the SME Survey indicated that ICT had a positive impact on profitability in the past. 66% expected a positive impact in future. The impact seemed to less for companies with fewer then 20 employees (49 52% positive impact) and 31 40 employees (57% positive impact). As company size increased, positive future expectations seemed to increase with 10% with each band of company size. SME s in the engineering, construction, Health Services and Utilities had the lowest positive rating of the positive impact (ranging from 49% - 50.6%) on profitability, with IT Software and Services (74.53%) and financial services (63.91%) sectors reported the highest positive impact on profitability. Page 25 of 105

ICT can reduce time needed for transactions. Especially for SMME s owned by women in Townships, saving time by using ICT is an advantage. In South Africa, as in many other African countries, women are responsible for both raising children and for their home. By using ICTs in their businesses women entrepreneurs could support their families and also spend more time with their children and take care of their homes. (Dahl & Nordmark, 2004:, p. 51). Training opportunities world wide is moving towards more flexible training solutions which include web-based training. SMME s see the profit of developing in human resources development, but struggles to balance workload of employees, costs of training and time lost on training to name but a few considerations. More flexible options such as online training programmes may be a viable alternative to train employees without having to loose human resources capacity as well as spend money on travel and stay (Goolnik, 2002; Brink, Munro & Osborne, 2002). The ICT industry also creates allot of opportunities for growth of SMMEs. That is when ICT is used as an enterprise output of SMME s through manufacturing for instance, computer hardware and telecommunications products and the production of software. Although hardware is manufactured on a large scale by mostly macro enterprises on a large scale, there is an opportunity for SMMEs to create tailor made hardware and software specifically for their local market (Duncombe & Heeks, 2001). In other developing countries, small scale software producers have succeeded by focussing on the local market (Duncombe & Heeks, 2001, p. 11). When ICT is used as a primary processing technology by SMMEs there are a lot of benefits in the production of tailor made digital products and software customisation. An SMME may also choose to build information systems themselves and customise software internally to the needs of the business. Evidence shows that enterprises that tend to be more successful (Duncombe & Heeks, 2001). SMMEs can also benefit from providing ICT based services to other enterprises and individuals. Services can include data entry, Internet service provision, web design Page 26 of 105

and other services which are growing rapidly in developing countries such as South Africa. Services need not be IT based, but can include secretarial and wordprocessing services, printing and design services. In other African counties as well as in Townships in South Africa the use of personal telephones as payphone services is an example of this as it is used by mostly survivalists. ICT related support activities that SMMEs can be involved in include also training and consultancy to other SMMEs (Duncombe & Heeks, 2001). In-house training in basic application of ICT and tailor made training services are for instance examples of SMME needs (Goolnik, 2002; Brink, Munro & Osborne, 2002). SMME s may use ICT for e-commerce as well. This is true for especially exporters. This reduces cost and time of transactions and improves transaction certainty and record keeping (Duncombe & Heeks, 2001). E-commerce may have further benefits for enterprises in developing countries: it will make it easier for local SMEs to access the world markets, stimulate global markets and allow SMEs to tap into the global supply chain. It will also encourage small scale service sector providers to link more effectively into world markets (Duncombe & Heeks, 2001). The reduction of costs, increase in client growth, and increase in profitability and decrease in turnover are key factors and advantages of investment in ICT that increase the competitiveness of SME s. In a Western Australian survey in 2006, findings indicated that ICT provides businesses with a competitive advantage including the enablement of: Better customer relationships More effective marketing efforts Better communications with staff and suppliers Improved knowledge of the market and facilitation of information gathering Cost efficiencies and time savings Page 27 of 105

In the same study, companies that did not perceive ICT use as increasing their competitive advantage it was very clear that ICT was a vital part of their business operations and that they perceived that their competitors would be using similar ICT. The UK government also place emphasis on the role of ICT in contributing the competitive gains by SME s (Brink, Munro & Osborne, 2002). The competitive advantage brought about by ICT is however not only limited to develop countries. In Uganda women entrepreneurs in believe that ICT could give them access to information that would help them improve their financial position of their business (Dahl & Nordmark, 2004). Various developing countries in search of economic competitiveness in the global economy have linked the diffusion and adoption of ICT with competitive gains for both SME and their economies (Ndiwalana & Tusubira, 2006, p. 2). The impact of ICT on competitiveness does however seem to vary according to company size. In the 2003 SME survey, company size seemed to be major factor in impacting the competitiveness of SME s as positive impact increase with company size in terms of all measures of competitiveness (Goldstuck, 2003). ICT may further lead to an increase of productivity in companies through its ability to decrease the time spent on tasks, decrease the costs involved in tasks and increase efficiency of task completion by substituting ICT for other resources, such as labour. It may also reduce the need for facilities and outsourcing of certain function. Ndiwalana and Tusubira (2006) mentions that ICT can potentially transform the productivity of SME s in two ways: 1. Using ICT as direct input with in the production process. E.g. village phones owned by rural women and used to provide payphone services to neighbouring rural communities. 2. Using ICT as tools to help streamline underlying business processes of an SME. For instance computerising inventory control or accounting. Page 28 of 105

From the previous discussions on the benefit of ICT on SMME s it is evident that ICT investment can lead to better enterprise management. Since more timely and accurate of information can be provided by ICTs, there can be greater centralisation of decision-making, improved communications and reporting systems and improved inventory control which are all aspects that can lead to improved management. Besides the availability and quick dissemination of information internally and externally, software programmes tailored for planning and management is available. Bosscha, Coetzee, Tereblanche, Gazendam and Isaac (2006) indicates however that there are high costs associated with such systems which put them beyond the reach of small manufacturing companies that employ less than 100 people. Even though less expensive and simpler systems are available, they are not useful to small companies but rather cater for medium sized manufacturing enterprises. For small manufacturing companies that cannot afford advanced management systems poor product quality and inefficiency can be the consequence. This is due to for instance, a delay in problem identification and intervention, poor job scheduling, poor inventory management of both raw materials and manufacturing products. A solution proposed by Bosscha et al (2006) is the use of open source software. The idea of using open sources software works well in theory, but needs a lot of development and research to reach full potential in practice. This may be an opportunity for output of SMME s in South Africa. 6. Barriers and issues related to the use of ICT The benefits of ICT may vary according to various sectors. Although all SMMEs will benefit, research by Duncombe and Heeks (2001) showed that service based enterprises (i.e. business, financial and technical) and importers/exporters (tourist Page 29 of 105

industry, manufacturing and services) will reap the most benefit from ICTs and will be in better position to transmit benefits to the wider community. Constrains to increase ICT use is considerable in developing countries such as South Africa. This is because: There is a lack of physical resources and infrastructure (Duncombe, 2006). Access to ICT is expensive. Technology education and extension institutions are weak. The local supply chain capabilities and access to international know-how are restricted Domestic demands are low due to underdeveloped public sector services and lack of medium-scale and large-scale firms driving ICT innovation. All these constraints, and more, mean that ICT diffusion into the SME sector is low (Duncombe & Heeks, 2001, p. 8). South Africa has a relatively large and growing population that has access to ICT. Although the concentration of accessibility and fastest growth areas are in urban areas of some provinces. There is however still many issues that hinder further growth of ICT. These include access to townships residents, rural areas and poor provinces. The digital divide in the country is large even though the telecommunication infrastructure and ICT access is better in South Africa than in the rest of the continent. Similarly, access to Internet is growing rapidly and is far ahead of the rest of Africa, but still lags behind developed countries (Dahl & Nordmark, 2004, 17-18). Coetzee, et al. (ed) mentions that the high cost and availability of telecommunications infrastructure is seen as a major cause of competitive disadvantage in a globalising world that affects SMMEs and rural communities the most. ICT ownership is also very expensive. Duncombe and Heeks (2001) cite that ICT ownership does not only relate to overt costs such as hardware and software, but Page 30 of 105

includes also ongoing and hidden costs which includes operational costs, training costs, upgrading costs, and so forth. Hidden costs is said to make up more than 60-70 % of the ownership costs. The cost of ownership of ICT in South Africa creates on opportunity for the development of product and financing innovations that are more suitable to the needs of South African companies more specifically more affordable solutions to ICT. Using ICT as facilitator of information is an entry point for the development of SMME s through ICT (Ndiwalana & Tusubira, 2001). In South Africa a lot of SMME s rely on informal systems of obtaining information. Besides the threat of receiving inaccurate information it may also not be time efficient. SMME s owner s reliance on informal sources of information leads in part to a scarcity of information, which may have negative effects on the business enterprises. ICT can supplement or replace informal information resources by providing access to timely and high quality information. Computer technology can be used by SMME s for various tasks. They include payroll and accounting purposes, email and internet access, stock management and production control, data storage and retrieval, research and development, and human resources related tasks. Land-line telephone, cellular phones and fax technology is however mostly used, especially by SMME in Townships and rural areas in South Africa. The entry and maintenance of acquiring IT ICT, as well as training requirements which is also expensive, makes the probable use of computer technology in South African micro and small enterprises unlikely. Despite efforts to use ICT for advancement of SMME s in terms of infrastructure development in South Africa, growth in small business performance has not grown. Ndiwalana and Tusufira (2006) cite four reasons for this: Service costs of ICE remains high in South Africa Page 31 of 105

Users exploit ICT or entertainment and other social aspects rather than economic benefits. Access to information and data sources has not increased in proportion to the increase in access to telecommunications, primarily due to a lack of appropriate applications and services to leverage the existing infrastructure There is limited awareness of potential benefits, compounded by lack of basic ICT and computer literacy among the majority of the population. Survivalists form the majority of micro enterprises in developing countries (Cuncombe, 2006). Few survivalist enterprises 6 have direct access to digital ICT and indirect or intermediated access to ICTs will be the norm (Wakelin & Schadrach, ed). Since ICT can allow a reduction in transactions costs, improved communications with markets and in the supply chain and improved information about new opportunities it should be in some way promoted in these enterprises also. The most common way to promote ICT access, and more specifically digital ICT access, to survivalist enterprises is through telecentres. These facilities may include telephone, fax, documentation searches, video libraries for entertainment and education, health and nutrition training, government services, market process and more (Wakelin & Schadrach, ed, p. 34). The successful adoption of ICT by either flyers or survivalist is crucially dependent on the environment in which they are operating. An institutional and policy framework is required for the successful adoption of ICTs. The e-readiness of different countries, regions and even enterprises depend not only on the ICT capacity 6 Livelihood enterprises are micro and small enterprises which contribute to family income, enabling the purchase of essential goods and services. Survivalist enterprises are those who are typically income generating. Survivalists are pushed into enterprises by the lack of other income generating activities. The enterprise will usually be located at the home and is typically unlicensed and unregistered. They are commonly founded upon direct sales, trading or processing of natural resources. Page 32 of 105

of the enterprise but on the readiness of the wider business community and the institutional and political environment (Wakelin & Schadrach, Ed, p.36). Wakelin and Schadrach (nd, p.36) highlight four aspects of the external environment that requires attention: the policy and regulatory framework, the telecommunication (and other infrastructure), the ICT sector itself, and the promotion and awareness of ICTs and e-commerce. Full participation in e-commerce and the widespread adoption of ICTs for enterprise operations will require expansion of the ICT infrastructure and other essential services (such as electronic banking), the development of a strong user base to make it easier for enterprises to enter into e-commerce, and support services for SMME s such as public access facilities (telecentres) should be established (Wakelin & Schadrach, ed, p. 36). The benefits brought about by ICT will remain out of the reach for the majority of small enterprises. Most small African enterprises will neither own ICTs not access nor use ICT-based data. The benefits of ICTs can be extended to more enterprises via ICT intermediaries (Duncombe & Heeks, 2001). In a Western Australian study it would seem as though ICT is not only beneficial to business success, but rather to a larger extent vital to business. However, as in South Africa, the full potential of ICT is not accessed and used. For instance in South Africa, fixed line telephone, mobile phones and fax technology is widely used by SMME s. The use of e-mail, Internet and computer technologies could enhance business enterprises even more, but its use in small and micro enterprises in especially the informal sector is very limited. Micro and small enterprises in Western Australia use ICT mostly for accounting purposes. The barriers to using ICT to its full potential include the: Shortage of skilled people Page 33 of 105