Small and medium enterprises should embrace Internet

By Ethan Choi

The impact of the Internet on the Korean economy is large and growing rapidly. The country's Internet economy in 2010 was valued at an estimated $75 billion, equivalent to 7.3 percent of GDP and its contribution in 2016 is projected to grow to 8 percent.

Definitely, the Internet will become an even greater pillar, driving the country's growth and innovation. Moreover, 22 percent of Korean children aged five and under are Internet users. This is the highest percentage globally. Therefore, Korean companies should make more efforts to gain a deeper insight into consumers' and companies' online behavior before it is too late. Especially small and medium enterprises (SMEs) need to build an "Internet advantage.” For SMEs often considered to be the "the growth engine of most economies,” the impact of the Internet will be huge. Companies that use the Internet are also deriving benefits in the form of revenue growth, job creation and contributions to economic prosperity.

Over the last 18 months, BCG has surveyed workers at more than 15,000 companies that operate in the world’s biggest economies and that employ fewer than 250 people. We grouped the companies into four categories (in accordance with their level of Internet use): high-Web, medium-Web, low-Web, and no-Web. High-Web companies are the ones using the Internet for marketing, sales and interactions with customers and suppliers. It turns out that not all SMEs are embracing the Internet at the same level (or in an identical way), leaving an enormous opportunity untapped.

There are striking differences in the use of the Internet across high-Web and no-Web companies, which translate into differences in growth rates. Across 11 of the G-20 countries, high-Web SMEs have seen 5 to 15 percent higher revenue growth than SMEs in similar conditions with low or no use of the Web. High-Web SMEs in the U.S. set the standard for the rest of the world, with all of them using the Internet to improve their presence, marketing, customer interactions and sales. In the U.S., high- and medium-Web businesses expect to grow by 17 percent over the next three years, compared with 12 percent for low- and no-Web companies.

Furthermore, high- and medium-Web SMEs generate more jobs. In Germany, 93 percent of high-Web and 82 percent of medium-Web companies increased employment over the past three years, compared with only 50 percent of the no-Web firms. Japan experienced similar results. In Korea, employment increased at 94 percent of high-Web SMEs and at 60 percent of no-Web companies.

We have identified five value levers that explain the “Internet advantage” of High-Web SMEs. The first value lever is geographic expansion. The Internet creates a borderless world for many SMEs, enabling them to compete with much larger, multinational companies by accessing markets that were previously out of reach.

The second is marketing, which is enhanced thanks to the Internet. Online marketing delivers expanded reach and measurable returns. It also yields valuable data about consumers and their preferences, enabling expressly targeted advertising and offers.

The Internet also improves customer interactions. Social media make it possible for companies to engage in real-time dialog with customers not only to boost sales but also to build loyalty and even to help create, refine, and enhance products and services.

Leveraging the cloud is one of the value levers, too. SMEs can access sophisticated, often cloud-based, tools to enhance a wide range of functions, including customer relationship and information management, and customer payments. As a result, these companies can grow quickly without requiring large investments in infrastructure.

Lastly, staff recruitment becomes easier and quicker. The recruiting options available today are more powerful and less expensive than ever before and enable SMEs to tap a global talent market.

The most powerful lever may be improved customer interaction, which is achieved principally by exploiting the participatory nature of today’s Internet. Nearly two-thirds of high-Web SMEs are moving quickly to match their customers’ engagement in social networks.

But fewer than half of low-Web SMEs in the U.S. have a website, just a third use e-commerce and only 6 percent use search engine optimization. And this is not a different situation in Korea.

The barriers keeping SMEs from engaging more broadly or deeply online fall into five general categories: poor access to the requisite technology, lack of capabilities, lack of resources, doubt over the potential returns, and an unfavorable business environment.

Not surprisingly, access problems and the unfavorable business environment were cited far more often by SMEs in developing markets than by their developed-market counterparts. Almost half of SMEs in India and Indonesia pointed out “local business culture” as a significant impediment; one-third of Chinese SMEs said that they are held back by lack of access to computers. Inadequate staff knowledge and time were named the biggest barriers in Japan, and about one-quarter of U.S. and U.K. firms reported a lack of necessary financial resources. Then, what keeps Korean SMEs from getting an Internet advantage? There are many who still doubt the potential returns.

The Internet will change even more in the next five years than it has in its first twenty-five. It will have more users (especially in developing markets), more mobile users, more users using various devices throughout the day, and many more people engaged in an increasingly participatory medium.

Businesses in particular need to make a choice. For those willing to think big, embrace change, move quickly, and organize differently, there are countless opportunities to reap the rewards of the Internet’s creative destruction. We even expect to have a second Samsung in Korea.

Ethan Choi is a partner and managing director of the Boston Consulting Group.