Enterprise and Small Business Principles

E-commerce and the small business

Nigel Lockett and David Brown

22.1 Introduction

This chapter looks beyond the extraordinary developments in information and com­munication technology (ICT), particularly e-commerce and e-business, to the oppor­tunities and challenges presented to small businesses by the emerging digital economy. E-commerce is but one, albeit high-profile, element of the e-business revolution in which small and medium-sized enterprises (SMEs) are able to utilise modern technologies to conduct business in new and innovative ways. Whilst business to consumer (B2C) e-commerce attracts much attention, over 85% of e-commerce revenues are generated within the business to business (B2B) sector. Furthermore US B2C e-commerce retail sales, whilst rapidly approaching $20bn per quarter, still represent only 2% of US retail sales across all sectors. Figure 22.1 shows the threefold rise in sales over the past four years.

Clearly there is considerable variation across market sectors with some sectors dom­inated by online sales, such as low-cost European airlines where over 95% of ticket sales are online. E-business, however, is more than e-based transactions and extends to new business models and new processes, both internal and external, many of which are collaborative. Dealing with such ICT-led change requires any company to constantly evaluate and respond appropriately. However, the strategic, organisational and financial impact on small businesses can present particular challenges. Unlike large firms they are unlikely to have the human and financial resources to appreciate fully the threats and the emerging opportunities from new ICT, such as broadband or 3G mobile technologies.

To discuss the implications of these radical developments the chapter is divided into three main sections. First, the context for e-business in small businesses is developed, including: definitions, government policies, nature of e-business engagement and the barriers and drivers to adoption. Second, three main strands of theory relating to e-business in small businesses are reviewed, namely: ICT adoption, inter-organisational networks and e-business models. Recent research into the role of aggregation and intermediaries is also discussed since this is likely to prove to be highly significant for small businesses and their engagement in e-business. Finally, the importance of trusted third parties is considered.

Source: US Commerce (2005)

22.2 Learning objectives

1 To understand the challenges and opportunities of e-business for small businesses.

2 To appreciate the current levels of engagement of small businesses in e-business.

3 To understand the strategic context and impact of e-business in small businesses.

4 To appreciate the role of aggregation and intermediaries in e-business adoption by small businesses.

Key concepts

■ e-business ■ e-commerce ■ ICT adoption ■ networks ■ intermediaries

■ aggregation

22.3 E-commerce in context

Governments in many leading economies, including the UK, have established national policies to encourage small businesses to adopt ICT, particularly e-business, and have

set benchmarked targets to monitor their progress. Research between 1999 and 2004, within the UK government’s authoritative Department of Trade and Industry (DTI) series of International Benchmarking Studies, suggests that this adoption is proving more problematic then anticipated:

the trend of smaller businesses ‘clicking off’ is unmistakeable. It is particularly marked in the UK, and has been sustained for the last three years. . . smaller businesses face a real hurdle in moving beyond simple e-commerce to becoming true ‘e-businesses’ . . . smaller businesses, more than any, need someone to help them exploit the technology, but no one’s set up to do it.

(DTI, 2004: 14)

However, the DTI’s most recent study suggests some improvement with the UK’s micro and small businesses showing significant gains in the uptake of websites and trading online (DTI, 2004: i). Other studies looking across various industrial sectors in Europe (European Commission, 2004b) present a more varied and complex picture. Clearly the use of ICT in large companies tends to be more complex and sophisticated than that in small businesses. This often translates into more intensive and advanced e-business practices. Even in those sectors, such as the automotive and chemical indus­tries, that are international leaders in e-business adoption, there remains a significant ‘digital divide’ between the large companies and the many small businesses within their supply chains.

It is within this context of the relative low engagement by small businesses in the more complex e-business technologies, resulting in a perceivable ‘digital divide’ between large and small firms, that this chapter seeks to explore how individual firms and groups of firms approach engagement in e-business.

22.3.1 Definition of e-business and e-commerce

E-business and e-commerce have been variously defined to mean the same, or different, concepts. Kalakota and Whinston (1996) defined e-commerce from four perspectives, namely:

■ Communication - as the delivery of information, products/service or payments over telephone lines, computer networks or any other electronic means.

■ Business process - as the application of technology towards the automation of busi­ness processes and workflows.

■ Service - as a tool that addresses the desire of firms, consumers and management to cut service costs while improving quality and increasing the speed of service delivery.

■ Online - as the capability of buying and selling products and information on the Internet and other online services.

Turban et al. (2004) in their widely cited book state: ‘we use the term electronic com­merce in its broadest scope, which is basically equivalent to e-business.’ In the important UK Cabinet Office’s e-commerce@its. best. uk report, which became the early reference point for much of government policy, it is stated: ‘what the government describes as e-commerce is recognised in industry as e-business’ (Cabinet Office, 1999). The report, however, made a distinction between process and transactional e-commerce, namely:

Figure 22.2 Elements of e-business activities

Source: European Commission E-Business Watch initiative (2004)

■ process - B2B activity for intermediate goods and a wide variety of information.

■ transaction - both B2B and B2C activity for final products and services.

Currently, the DTI defines e-commerce as ‘any form of business transaction carried out electronically over public telephone systems’ and uses a progressive model of e-adoption. In this model e-commerce is defined as ordering and paying online, thus reducing transaction costs, whereas e-business is seen as supply chain integration, so that manu­facture and delivery become seamless. This is a helpful distinction.

Confirmation of this distinction can be seen in the recently introduced European Commission E-Business Watch initiative (European Commission, 2004b), which tracks e-business activity in Europe and states ‘e-commerce will be taken to cover external transactions, and it therefore may be seen as a sub-group of e-business activities’ (Figure 22.2).

The E-Business Watch benchmarking programme also went further and proposed a detailed scoreboard of e-business technologies and applications (Table 22.1).

Over time the clear trend has been towards using e-business as the broad term for all ICT-supported activities and e-commerce to be more directly concerned with transactions. This chapter adopts that convention and e-commerce is taken to be trans­action focused and defined as: selling or buying of goods or services using electronic communication networks. Similarly e-business is viewed as transaction, process and collaboration focused and defined as: the use of electronic communication networks to transact, process and collaborate in business markets. Hence in this definition e-business incorporates e-commerce.

Within these definitions there is a broad spectrum of applications from simple e-mail and websites to the more complex applications of customer and supplier integra­tion, which are collaborative in nature. It is the latter higher-complexity applications that may provide the major economic and competitive benefits; yet in 2004 UK small businesses were typically four times less likely than larger firms to be engaged in these higher-complexity collaborative applications (DTI, 2004).

22.3.2 Nature of e-business engagement

The recent and rapid emergence of e-business applications has been primarily as a result of the availability of a low-cost, ubiquitous electronic communication network - the Internet. Telecommunication, technology and service companies have emerged or evolved to provide a range of e-business services or web services designed to exploit existing and emerging communication infrastructures. Typically these companies are known as application service providers (ASPs) and variously defined as:

■ ‘third-party entities that manage and distribute software-based services and solutions to customers across a wide area network from a central data facility’ (Webopedia, 2005);

■ ‘provides a contractual service offering to deploy, host, manage and rent access to an application from a centrally managed facility, responsible for either directly or indirectly providing all the specific activities and expertise aimed at managing a soft­ware application or set of applications’ (Gillan et al., 1999);

■ ‘a secure, flexible and integrated approach to delivering differentiated business value by combining the systems and processes that run core business operations with the simplicity and reach made possible by Internet technologies - IBM’ (Amor, 2000).

The technology used by ASPs to deliver services relies on ‘thin-client’ application server products, such as Microsoft’s terminal server and Citrix’s WinFrame applications, addressing client devices, such as PC and Windows terminals. The use of web browser technologies on the client devices both reduces the sophistication of the client device (thus reducing purchase and support costs resulting in a lower total cost of ownership) and increases the interoperability of devices (as more devices incorporate web browsers). Whilst ASPs are external to organisations, larger enterprises can use these technologies to provide ‘in-house’ services, which effectively moves applications off PCs on to application servers, resulting in central control over application cost, usage and sup­port. The provision of these hosted applications, by ASPs, on a rented basis is viewed as of particular relevance to small businesses.

The new (hosted) applications that facilitate e-business are very different from tra­ditional (resident) applications in one main regard, namely that the user interface, application software, data processing and data storage can be located on different and multiple software and hardware platforms, and can be provided and supported by dif­ferent entities (Figure 22.3).

They are, in essence, hosted services accessed by the user via a simple interface, such as a web browser, over electronic communication networks, such as the Internet. This is a fundamental change in the relationship between user, hardware and software and presents opportunities for new business models for service provision. Typically these hosted applications are offered on a rental or fee basis, rather than the traditional pur­chase model. The fee typically includes the use of the software and the provision of the processing and storage platforms, but not the provision of the electronic communica­tion network. Importantly, these electronic communication networks are increasingly being considered as ubiquitous and are rapidly evolving from the public Internet through virtual private networks to grid computing and 3G mobile platforms. They provide the communication platforms on which ASPs can deliver hosted services. Service providers, however, come in many guises including ASPs, storage service providers (SSPs), network

service providers (NSPs), content service providers (CSPs) and wireless application ser­vice providers (WASPs).

To begin to understand the issues involved in e-business engagement we need to classify e-business applications, as there are significant differences between e-mail and e-marketplace applications both in terms of complexity and added value. The intro­duction of the EC E-Business Watch synthesis report represented an important move towards tracking e-business engagement across 15 industry sectors and over a range of e-business applications throughout all EU Member States (European Commission, 2004b). The report concluded that access to ICT was no longer a barrier to e-business uptake with connectivity at 84% for small businesses. It stated: ‘the use of e-mail and the www has become nearly ubiquitous in the business world’ (European Commission, 2004b: 7). However, this indicates an oversimplification evidenced by the tendency to equate e-business with e-mail usage and web access. A classification for e-business applications based on application complexity is shown in Table 22.2.

Importantly, this classification of application complexity stresses the roles of col­laboration and interaction as key features of e-business applications, and recognises the resultant increase in complexity. This taxonomy of e-business complexity incorporates both technical and organisational factors. For example, both the security technology issues underpinning higher complexity hosted applications, and the perceived com­mercial risk of storing sensitive client information in third-party data centres increase with higher complexity. In this way application complexity provides a meaningful framework in which to consider, compare and analyse e-business engagement. Using this classification recent survey data (EC, 2003b; DTI, 2004) is analysed to show the level of e-business engagement by small businesses in terms of application complexity (Figure 22.4).

In summary, Figure 22.4 suggests that most small businesses appear comfortable with e-mail and web access (lower complexity, about 80%), are tentative with the use of the Internet for online buying and selling (medium complexity, about 30%), but have little or no engagement in the high or very high complexity applications, such as e-marketplaces, supply chains or inter-organisational collaborative networks (less than 10%). This is despite the early promise of ASPs facilitating such access to complex

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Source: EC (2003b); DTI (2004)

applications. Hence the trend in Figure 22.4 is not merely surprising in terms of the early expectations of engagement, but raises the important question of what this relative lack of engagement will mean not only for small businesses but also the larger organ­isations that have significant numbers of small businesses in their supplier networks.

This ‘digital divide’, which is evident in the widely differing rates of e-business adoption, has crucial theoretical and policy implications. Regarding theory, our under­standing of ICT adoption by small businesses is largely characterised by the single firm as the unit of analysis and by a user perspective. Less well understood theoretically is the impact on adoption of other factors including the ‘provider’ perspective, the signi­ficance of ‘application complexity’, the role of aggregation and not least the behaviour of small businesses within networks such as supply chains. Regarding policy, the cen­tral belief that Internet access per se would be the key to increasing adoption of higher complexity applications for all firms has been shown to be inadequate as over 90% of UK businesses now have access to the Internet, but without a corresponding increase in their use of the more complex e-business applications.

23.3.3 Drivers and barriers for e-business engagement

The reasons why businesses, both small and large, choose to adopt e-business tech­nologies are important in order to identify the value and benefits businesses have either achieved or believe they will achieve. Recent DTI studies (2003c) have highlighted a number of drivers or enablers to ICT adoption, including: increasing business turnover; increasing customer base in existing markets; communicating better with customers;

more efficient operations; communicating with workforce; enabling better financial management; operating more effectively with suppliers; improving delivery of goods and services; and better integration of business processes. Increase in turnover is con­sistently identified as the main driver to adoption. Drivers highlighted by other authors include: cost reduction; business partnership development; providing quality service; meeting customer/supplier demands; and creating/gaining competitive advantage (Hawkins and Prencipe, 2000; Clegg, 2001).

In terms of barriers to engagement many studies have been conducted in order to identify the barriers to ICT adoption by all enterprises, and small businesses in par­ticular (DTI, 2003c). These highlighted a number of barriers to adoption, including: security; risk of fraud, concerns about confidentiality, set-up costs; running costs; not enough customers with online access; employees without IT skills, lack of information or knowledge. Security is consistently identified as the main barrier to adoption.

The broad theme of e-business engagement by small businesses, central to this chap­ter, is developed further below through a review of the relevant theory and later by considering recent research initiatives.

22.4 Understanding e-business within small businesses - theory and practice

In terms of informing our understanding of e-business and small businesses three main strands of theory are relevant. The first is the adoption of ICT by small businesses, including the diffusion of innovation. The second is the concept of aggregation and of inter-organisational networks as an organisational form. The latter provides the wider context within which the third strand of theory dealing with the emergent e-business model literature is discussed, with particular attention focused on the role of new intermediaries.

22.4.1 ICT adoption by small businesses

The broad antecedents for a theoretical appreciation of ICT adoption by small busi­nesses are studies of technology transfer and the diffusion of innovations. Technology transfer can be seen as largely purposeful and is characterised by planning and delib­erate actions. In contrast, innovation through diffusion is seen more as a natural process. In reality both mechanisms of technology transfer and diffusion are likely to coexist. However, this distinction, highlighted by Chakrabati and Rubenstein (1976) in their study of interorganisational technology transfer, is helpful since policy makers need to delineate the areas of intervention for facilitating e-business engagement, while recognising that other mechanisms will be at play.

Although studies on the adoption of e-commerce by small businesses are relatively recent, research antecedents are well established. Rogers’ work on the diffusion of innovations (1962, 1995, 2003), whilst initially neither ICT nor SME-focused, has evolved to incorporate diffusion networks and critical mass in order to appreciate the adoption of interactive innovations, such as the Internet (1995: 313). The early work of Rogers took a provider (or supplier) perspective and identified the characteristics of innovation, which would impact on its rate of diffusion including such factors as com­patibility, complexity, observability, relative advantage and trialability. In particular Rogers highlights the important roles of change agents (intermediaries) in influenc­ing innovation decisions, including developing a need, establishing communication, diagnosing problems, creating an intent to change and then action. Theoretically the role of the intermediary as a means of facilitating the diffusion of complex ICT has been observed by a number of other authors, most notably Swan and Newell (1995) and Newall et al. (2000).

Within the specific domain of ICT adoption by small businesses, recent studies utilising Rogers’ model of innovation include Kendall et al. (2001) and Mehrtens et al. (2001). These two studies provide support for the applicability of the model when related to e-business engagement by small businesses. Many other authors have con­tributed and three themes of work can be identified which, although overlapping, can usefully be separated, namely technological, strategic and organisational. All three strands can be interpreted within the long-established technology-push and need-pull models of technology innovation adoption in information systems (IS) (Zmud, 1984; Chau and Tam, 2000). These models typically identify ‘push’ factors, such as Govern­ment initiatives or technological drivers, and ‘pull’ factors, such as organisational crises or market opportunities.

The first literature theme, and arguably the most prolific, is the technological theme that views adoption as an outcome of a complex process of evaluation, frequently informal, by small businesses of multiple factors both external and internal. These factors are frequently cast as enablers or barriers to adoption (Lefebvre et al., 1991; Cragg and King, 1993; Walczch et al., 2000; Mehrtens et al., 2001; Windrum and Berranger, 2003). Iacovou et al. (1995) focused on the single technology of electronic data inter­change (EDI) and identified perceived benefits, organisational readiness (resources) and external pressures (competitive and non-competitive) as the critical factors in adoption. Since EDI is a complex application (but not necessarily Internet-based) these findings may be particularly relevant in the adoption of similar, higher-complexity e-business applications.

The second theme is that which emphasises the strategic logic in the decision to adopt ICT (Blili and Raymond, 1993; Kowtha and Choon, 2001; Sadowski et al., 2002). In this context small businesses can be both victims and beneficiaries depending on their degree of proactivity. Blili and Raymond (1993) showed that IS planning was increasingly critical for SMEs as technology became more central to their products and processes, and they concluded that IS planning needed to be integrated with business strategy. Hagmann and McCahon (1993), however, concluded that in reality few small businesses plan their adoption of IS and that the limited planning that was evident was focused on operational improvements and was not concerned with competitiveness. The notion of strategic information systems planning in small businesses is further developed in Levy and Powell (2000, 2003) and Levy et al. (2001). This strand of research has resulted in frameworks, such as Levy’s ‘focus domination model’, to help position and integrate ICT investments - some of which could be e-business applica­tions. A model of the strategic use of IS by small businesses was proposed by Levy and Powell (2000, 2003) consisting of three interdependent factors, namely strategic con­tent, business context and business process.

The third theme is that which takes an explicit organisational stance, and frequently that of the owner-manager and the social parameters within which the firm operates. As such, the approach counters the strategic or technological emphasis of the first two strands (Blackburn and McClure, 1998; Fuller and Southern, 1999; Poon and Swatman, 1999; Southern and Tilley, 2000; Quayle, 2002). An important observation of Southern and Tilley is that ‘when small firms use IT complex relations unfold. It is by no means a simple linear development whereby observers can expect an incremental build up of knowledge and expertise on ICT to be established within the firm’ (1999: 152). In the context of the adoption of increasingly complex e-business applications this view appears highly pertinent. Indeed this explicit organisational stance is very important in the context of the ‘technology-push/need-pull’ models applied to small businesses, since the analysis of social factors can identify the antecedents that need to be satisfied before the initial decision to adopt can be made.

22.4.2 Inter-organisational networks and aggregation

Since the medium - and higher-complexity e-business applications are essentially col­laborative in nature the theoretical perspective of organisational networks is particu­larly relevant for explaining firm behaviour. Although ‘networks’ have always existed the recognition of networks as a distinct organisational form, amenable to analysis and theoretical development, is more recent (Granovetter, 1985; Thorelli, 1986; Miles and Snow, 1986; Provan and Milwood, 1995). As products have become increasingly mod­ular and knowledge distributed across organisations, firms have recognised an increas­ing requirement to collaborate with other firms both formally and informally (Baldwin and Clark, 2000). Consequently, the locus of innovation and adoption is no longer the individual or the firm but increasingly the network in which a firm is embedded (Jarillo, 1998; Ebers, 1997; Powell et al., 1996; Furtardo, 1997). The importance of the strength of ties in the supplier network for productivity has also been demonstrated (Perez and Sanchez, 2002) and the standards necessary for a technology to function across dif­ferent markets depend increasingly on networks of firms (Munir, 2003). For smaller firms the ability to gain access to new technologies is one of the principal reasons for engagement (Grandori and Soda, 1995) and cross-industry networks have been shown to play an important role in the diffusion of complex technologies (Erickson and Jacoby, 2003). These theoretical developments have been complemented by other advances on many different fronts: strategy, competition and collaboration (Doz and Hamel, 1998); network structure and embeddedness (Granovetter, 1985; Shaw and Conway, 2000); trust and governance (Johannisson, 1986a; Ring and Van de Ven, 1994); classification and evaluation (Cravens et al., 1996; Sydow and Windeler, 1998). What all these above theoretical contributions have in common is that they were developed outside a specific e-business context (i. e. offline). Nevertheless they provide many of the antecedents for the later emerging concepts of e-business networks (i. e. online).

The concept of business aggregations is well understood. These emerging, stable, non-equity based collaborative arrangements have become increasingly important as a means of reducing cost (Contractor and Lorange, 1998; Zajac and Oslen, 1993) or to increase revenue (Contractor and Lorange, 1998) or to mitigate risk in response to

Figure 22.5 Taxonomy of aggregations for SMEs

Source: Brown, D. and Lockett, N. 'The Potential of Critical Applications for Engaging SMEs in E-Business', 2004, European journal of Information Systems, Vol.13 No.1, Palgrave Macmillan, reproduced with permission of Palgrave Macmillan

economic factors (Ebers, 1997). Such aggregations have generally been termed strategic networks and Jarillo’s definition has been widely adopted:

Strategic networks are long-term purposeful arrangements among distinct but related for profit organisations that allow those firms in them to gain or sustain competitive advantage vis-a-vis their competitors outside the network.

(Jarillo 1988: 32)

Even within the above definition there are many possible manifestations of the network form and many ways of classifying them. In short, all inter-organisational networks (IONs) are aggregations but not all aggregations are networks. This presents potential difficulties in comparing ION research. Grandori and Soda (1995) differentiate networks by the extent to which the links between organisations are formalised and networks are termed bureaucratic, social or proprietary. A further classification from Cravens et al. (1996) links the type of network relationship (from short-term, transactional to long­term, collaborative) to the degree of unpredictability, and hence risk, in the environ­ment. In the context of small businesses, Brown and Lockett’s (2004) classification draws on the above, particularly Grandori and Soda, and links the degree of structure (informal to formal) to the degree of integration (independent to integrated) - see Figure 22.5.

Within the broad concept of aggregation this taxonomy locates ‘networks’ as one form of strong or complex aggregation that can be contrasted with other weaker or simpler aggregation forms - a distinction useful when considering the nature of a small business’s engagement in an aggregation and the role of any intermediaries. Whilst online aggregation, at small business or industry level, was seen as a way of engaging the small business, consideration needs to be given to existing offline aggregations or groupings. Small businesses operate in business markets comprising relationships within their supply chain or industry sector, which can range from simple to com­plex in nature. The degree of structure (informal to formal) and degree of integration (independent to integrated) provides a taxonomy suitable for both online and offline aggregations and comprises four types:

■ Limited - any relationships are loose and participants are independent, charac­terised by little or no aggregation. Intermediaries range from local business groups to more sophisticated organisations.

■ Association - including trade associations and professional bodies, where reputa­tion is enhanced by membership and structure is high, but businesses remain largely independent.

■ Cluster - forming part of an identifiable business market, business cluster or eco­nomic cluster (Porter, 1998) where small businesses are increasingly dependent on complex linkages within a sector, but structure is low.

■ Network - represents a more highly developed form of cooperation that exhibits both relatively high structure and integration. In the literature these networks are often implicitly described from a large business perspective.

The reality of practice challenges our theoretical understanding of both the adoption by small businesses of e-business and the emergence of aggregations as a meaningful development within the context of adoption. Here aggregation is defined as any group­ing of enterprises where there is evidence of inter-organisational relationships that go beyond simple transactions. These aggregations can range from local retail traders campaigning for improvements to their local infrastructure to the highly developed supplier-based networks of the aerospace industry.

22.4.3 E-business models

The final strand of theory is the emergent e-business model literature, which includes insights into alternative business models and changing industry structures as a result of Internet-based technologies. A number of authors have offered broad conceptualisa­tions of e-business models (Amit and Zott, 2001; Timmers, 2000; Hamel, 2000; Alt and Zimmermann, 2001; Afuah and Tucci, 2001; Weill and Vitale, 2001; Currie, 2004). Other authors have developed models specific to particular situations. Examples include: business-to-business (B2B) vertical supply chains (Kalakota and Robinson, 2000) and value adding intermediaries (Earle and Keen, 2000).

The need to encourage e-business engagement by small businesses has been readily acknowledged by industry and government but just how this was to be achieved, par­ticularly with the more complex e-business application areas, remained unspecified. When examining the uptake of e-business among small businesses the concepts of collaborative networks, interdependence, power and trust provide important contribu­tions. For example, whether owner-managers use adversarial or collaborative approaches to purchasing relationships may impact on their adoption of ICT (Cox and Hines, 1997). Similarly, the scope for intermediaries to play a crucial role in the support and provi­sion of SME-orientated e-business applications has been noted (Currie, 2002, 2004; Smith and Kumar, 2004; Mazzi, 2001). In the specific context of ASP models and small businesses, several critical and reflective analyses have recently emerged (Kern et al., 2002; Susarla et al., 2003). In the main, all the above contributions reinforce the

general significance of intermediaries as trusted third-party facilitators of IT diffusion, as noted by Swan and Newell (1995) and Newell et al. (2000), and cited earlier. However, the setting for these latter authors’ works was not SME-specific. A conceptualisation that is small business grounded and focuses on intermediaries and their role in facilitat­ing e-business engagement by small businesses is the eTrust Platform (Figure 22.6).

22.4.4 Aggregation and intermediaries in e-business adoption

The eTrust Platform conceptualisation of the role of intermediaries in the digital eco­nomy discussed above highlights the relationships between multiple small businesses and the intermediaries necessary for online aggregations of small businesses to function. There are three kinds of intermediary. The role of the technology intermediary is to provide the ICT infrastructure on which services can be provided and could include hardware, security and communications. The role of the enterprise intermediary is to provide the services including applications software, hosting and consultancy. The technology and enterprise intermediaries can be considered as generic. In reality these functions could be provided by one or more organisations. The community intermediary, however, is specific to a particular aggregation. It has a critical role in gaining the com­mitment of potential participants to enter the e-aggregation and can be considered as a trusted third party. It is the community intermediary, providing a broad governance function, which is a distinguishing characteristic of the eTrust Platform conceptualisa­tion. A trade association would be an example of a potential community intermediary.

Three major findings have emerged from recent research, which focused on the role of aggregation and intermediaries in engaging small businesses in the more complex, high value-adding e-business applications (Brown and Lockett, 2004, 2005; Lockett and Brown, 2006). The research serves as a guide to how small businesses, through aggrega­tion and the support of intermediaries, can access in a cost-effective way sophisticated applications. Given the growing trend towards hosted applications outlined earlier in the chapter more small businesses are likely to follow the trusted platform route. The findings are summarised below.

22.4.5 Emergence of critical e-aggregation applications

Community intermediaries, such as trade associations, confirmed the importance of SME-focused applications that attempted to meet a specific, important and common need by the group of small businesses. In some cases community and enterprise inter­mediaries collaborated in order to identify both the initial business needs of the small businesses within the aggregation and any subsequent desirable modifications to the critical e-aggregation applications. Early examples of critical e-aggregation applications developed in this collaborative way included:

■ project management - for the construction industry (www. biwtech. com/)

■ dairy herd management - for dairy farmers (www. milknet. sac. ac. uk/)

■ community management - for knowledge-based workers (www. pcg. org. uk/)

■ advertising artwork management - for artwork agencies (www. adfast. co. uk/)

■ field management - for the organic farming industry (www. organicecology. com/),

where a critical e-aggregation is defined as: an e-business application, promoted by a trusted third party, which engages a significant number of small businesses by addressing an important shared business concern within an aggregation. In the main these critical e-aggregation applications were relatively new and in the early stages of development but already they appeared to be successfully measured by the level of uptake. Commun­ity intermediaries reported that some service providers of critical e-aggregation applica­tions took the lead and developed the applications without a guaranteed market for the product. These service providers had identified community intermediaries early in the application’s development and sought to establish collaborative arrangements that mitigated the risk and developed trust.

Critical e-aggregation applications are characterised as offering new functionality that was valued by aggregation members, was developed by interaction with com­munity intermediaries and used a ‘one-to-many’ business model. On this basis these e-aggregation applications can be seen as ‘critical’ both in terms of functionality and perceived importance. The innovative nature of these ‘critical e-aggregation applica­tions’ was the single most important factor for using the application.

22.5 Importance and role of trusted third parties

Trusted third parties proved to be key in establishing the confidence necessary for small businesses to engage in the more complex e-business applications. There was recogni­tion by many community intermediaries that existing trusted offline relationships, be they a lead company in a business network or a trade association, could be import­ant in recruiting small businesses to online services. Trade associations, in particular, identified a new role for themselves as a sponsor or facilitator, rather than a direct provider of e-business services.

The trusted third parties in e-aggregations exhibited several characteristics. First, they deliberately worked with service providers (enterprise intermediaries) to appreci­ate the business needs within the aggregation and develop the e-business applications to meet these needs. Second, they were aware of the accumulation of valuable informa­tion about the aggregation resulting from interaction with the e-business application. Third, they participated in activities that attempted to increase e-business application engagement of small businesses in the aggregation. These activities included: shaping users’ perceptions; identifying and introducing the innovation to sub-groups within the aggregations; promoting (targeting) it to and through key actors; and providing incen­tives to early adopters.

In addition to the contribution made by the community intermediaries to the devel­opment of specific applications and to facilitating access to small businesses they had two further roles that derived directly from their trusted third-party status. First, as negotiators of the service fees charged either directly to users or themselves, and second, they acted as negotiators for the service level agreement with the service providers. Considering the importance of these agreements in the context of hosted applications, this implies a high level of trust on the part of the users, but also for many of them an indication of their dependence.

22.5.1 Evidence of increased structure and integration

From the research it appears that small businesses engaged in aggregation-based e-business applications had a propensity for further integration. This observation indic­ates that the impact of critical e-aggregation applications could be of strategic import­ance as it changes the very nature of these inter-organisational networks. First, the critical e-aggregation applications increased the degree of structure by standardising the format of information in order to facilitate information exchange. Second, the degree of integration was increased by the use of these critical e-aggregation applications. Significantly, the general effect of the critical e-aggregation applications was to move the inter-organisational networks towards the ‘network’ type shown in Figure 22.4.

In terms of the future outlook for small businesses’ engagement in e-business the role of critical e-aggregation applications and of trusted third parties appears to be pivotal. Despite this, however, there is little evidence of national or regional agencies having identified this as one possible method of achieving their stated objectives of increasing e-business engagement by small businesses. One notable exception is the Australian gov­ernment’s Information Technology Online (ITOL) programme which acts as a catalyst by funding projects to existing aggregations dominated by small businesses and offer­ing strong supporting evidence of the emergence of e-aggregation applications (NOIE,

2005) . There have been 13 rounds of funding since 1996 resulting in the selection of over 100 collaborative e-business projects that encourage the adoption of e-business solutions by small businesses across a broad range of industry sectors and geographic regions. Recent examples include: Beef Industry Genetics, which sought to provide Inter­net delivery of modern breeding methods through collaboration with beef producers (www. breedobject. com); and Flinders Ranges Online Reservations for the tourism accom­modation industry, which enabled customers to book and pay for accommodation over the Internet in a secure manner and receive immediate confirmation (www. frabs. com. au).

22.6 Chapter summary

This chapter presented three main areas relating to e-business and the small firm. First, the context was developed for e-business in small businesses including: definitions, government policies, nature of e-business engagement and the barriers and drivers to adoption. Second, three main strands of theory relating to e-business in small busi­nesses were reviewed, namely: ICT adoption, inter-organisational networks and busi­ness models. Finally, recent research into the role of aggregation and intermediaries was discussed since this is likely to prove to be highly significant for small businesses and their engagement in e-business, and has policy implications.

In terms of e-business adoption, recent surveys indicate high levels of connectivity and usage of very low complexity applications, such as e-mail and web browsers, among small firms in the UK, Europe and North America. One recent study concluded that connectivity was no longer a barrier to e-business engagement. This suggests that most small businesses appeared comfortable with e-mail and web access (lower com­plexity). However, as application complexity increased levels of engagement declined significantly, indicating that small businesses are tentative about use of the Internet for online buying and selling (medium complexity), but had little or no engagement in the high or very high complexity applications, such as e-marketplaces, supply chains or inter-organisational collaborative networks. From a theory perspective there are a number of important issues. A particularly important one is the relevance of network theory for understanding firm behaviour, including small businesses, and the fact that the introduction of new cost-effective ICT can create new partnerships and relation­ships. Viewed in this way firms are members of aggregations and the final part of the chapter visited recent research that highlighted the particular benefits to small busi­nesses acting within aggregations. In direct contrast to firms acting alone, the evidence is that small businesses acting as part of an aggregation with a trusted intermediary are more likely to be engaged in higher complexity e-business applications. These critical e-aggregation applications are both sophisticated and meet the particular needs of both the small businesses and the service providers in a cost-effective way.