Retail trends indicate that approximately 51 percent of Americans prefer procuring services, shoes, accessories and clothing, a pattern which has enabled e-commerce to grow by 23 percent annually (Popomaronis 2017). Moreover, brands and business embrace Omni-device/Omni-platform and voice search options. However, based on the fact that business started during the Dotcom era failed, current small e-business face several challenges (including insolvency). Despite the problems, more customers incorporate e-commerce into their shopping habits (Popomaronis 2017). According to Rad et al. (2015), e-business entrepreneurs have poor strategic vision and proficiency in online business engagement or marketing. Drawing an example from one of the failed Dotcom era company, Furniture.com, which overspent on marketing and information technology with the hope of maximizing profit. The dangerous approach made the company end up spending $33.9 million on marketing and sales expenses compared to revenue of $10.9 million (Rad et al. 2015, p.611).
As reported by Ravisankar, Ravi and Bose (2010), the world economy witnessed several challenges that originated from the introduction of e-business in the 1990's. The barriers include (1) liquidations, (2) erosion of profit and (3) financial deficit of online businesses. Also, (4) aggressive competition which is the norm for the digital environment, (5) inefficiencies, and (6) deficient decision-making process (Ravisankar, Ravi and Bose 2010). Besides, more than 65 percent of e-business entrepreneurs lacked book-keeping competency and online marketing skills. An estimated annual growth rate of 23 percent is a promising statistic for any entrepreneur. This trend indicates the existence of profitable business opportunities to exploit in the e-commerce environment. The extensive study carried out by Rad et al. (2015) show that the sector is growing at a favorable rate yet several e-businesses tend to have stunted growth or fail altogether. Therefore, the study thesis establishes an analysis of the barriers that small-scale e-businesses face regarding profitability.
1.2.Problem Statement
The project explored obstacles to small e-business cost-effectiveness for SMEs which joined e-business in 2006. Sustaining competitive advantage for online ventures entails difficult hurdles. The problems include choosing the right partners and technology, deciding on the perfect product or service to sell. Moreover, attracting potential customers, generating a target level of traffic and potential leads, nurturing prospects and conversion, retaining buyers and long-term profitability. Porter's five-factor model elaborate on the threat of new entrants. The online environment there exists unlimited room for new business. The e-business cost less to start. In most occasions, the initial incorporation of online activities in a business generate profits, but the competitive advantage exists in the short-run.
The need to identify challenges e-business face in attaining long-term profitability. In achieving competitive advantage, current online entities must consistently improve their services and products (Antlova 2009). The decision makers of an organization utilize ICT and up to date management methods. Business, knowledge and information strategy play an essential role in maintaining a competitive advantage in e-business. Therefore, an online entity which does not focus on the strategy will find difficulties in navigating the highly competitive e-commerce environment (Antlova 2009).
1.3.Theoretical Framework
The project based on Porter's five-factor model. The theory identifies five forces of competition which include: “supplier power, buyer power, competitive rivalry, the threat of substitution, and the threat of new entrants” (Dobbs 2014, p.32). An online business faces the five forces simultaneously but sustaining competitive advantage exert more pressure on small-scale e-business compared to a firm operating in a physical location. First, suppliers’ power- any business acquires raw materials or other aid to trade from another store. In some instances, such as monopoly market structure, suppliers have the ability to dictate high prices to buyers (e-business). Also, suppliers offering unique services or products can drive prices up. The high cost of production implies the e-commerce will have to cut on the profit margin thus reducing profitability.
Second, buyers power – factors linked to customers’ threat in a business include number of buyers, lack of demand from consumers, loyalty and size or frequency of an order (purchase rate) (Dobbs 2014). For instance, a business with a few influential customers faces the challenge of setting the price. In this case, the buyers dictate the price. Third, competitive rivalry- An online dealing in a product or service which have several similar services or products face the challenge of maintaining customers. However, e-commerce has a large pool of buyers with high levels of competition for market shares. The factors associated with the rivalry include the cost of exiting the market, variations among competitors, consumers’ loyalty, and the number of competitors.
Fourth, substitutes – the factors linked with the threat of substitutes include the cost of choosing an alternative, the cost of making the change to an option, and market share or presence of the substitute (Dobbs 2014). Therefore, to remain profitable an SME deciding on joining the online environment must consider these three factors in analyzing the alternatives. Finally, the threat of new entrants – The challenges associated with barriers to entry include technology protection, economies of scale, cost advantages, the special knowledge required and the cost of entry (Ojo 2016). Besides, the five threats Porter’s model suggest measures aimed at tackling the challenges. The solutions involve the adoption of competitive strategies such as cost focus (niche approach), product or service differentiation, and cost leadership. Moreover, with the cost focus approach, e-business owners (managers) have the opportunity to concentrate on a narrow market segment.
1.4.Research Objectives and Questions
The primary aim of this study is to explore barriers e-businesses face that hinder them from achieving sustainable advantages. Small e-commerce in this study implies one with at least a hundred full-time employees, a definition borrowed from Boswell (2014). Also, Campbell and Wright (2008) maintained that aggressive marketing is the critical variable in ensuring profitability in e-business. Therefore, it will be of importance to test if this claim holds for small e-businesses. The broad question is narrowed down to four specific issues which include:
1) What methods, processes, and risk assessment tools are employed to reducer hindrance to e-business profitability for small business?
2) How are the risk assessments, methods and procedures implemented?
3) What are the main problems encountered in the implementation of techniques aimed at eliminating the barriers?
4) What models of profitability do small e-businesses use to generate income?
2.0.Chapter 2: Literature Review
E-business refers to a company whose primary operations take place online. Although e-businesses face numerous challenges, they have undoubtedly revolutionized business in the 21st Century. Propelled by the growing influence of the internet and other digital media, e-commerce has quite literally taken over the business world. From the big industry players like Amazon and E-Bay to startups like Jumia, doing business over the internet is not only proving practical but also profitable. Although global e-businesses have significant success in the sector, the converse may not be true for small businesses or startups. This is ironical considering that the uptake of online shopping is increasing in the United States and globally. However, small business entities are having a hard time taking full advantage of this new trend. The challenges small e-businesses face is quite surmountable. However, it is important to understand what these problems are, how they come about and the best strategies to tackle them.
Yunna and Yisheng (2014) identify five key factors affecting competition based on Porter's five forces model; Supplier power, barriers to entry, the threat of substitutes and rivalry. Although their research focuses on the energy sector, Porter's model also holds true for e-business. In his book, Michael Porter argues that the success of any business lies in its ability to understand the level of competition in the market and streamline its strategies to improve its competitive advantage. Thus, as Yunna and Yisheng identify in their research, Porter's five forces model will help to identify the competitive landscape of given market niches thus ensuring sustainable growth strategies for the industry players. This literature review will look at the obstacles that an upcoming or a small e-business is likely to face in the face of competition, with regards to Porter’s five forces model.
According to Porter (2008), one of the primary competitive forces, is the entry of a new entity into the market. Porter argues that these new entrants bring in new ideas, strategies or even products that completely transform their respective market. For instance, the current advancement in mobile phone technology is such that over 50% of the world now have access to a smartphone and working internet. Therefore, a company that is able to quickly adapt itself to mobile web application development is able to capture a significant market portion, specifically individuals that spend more time on cell phones than they do on personal computers (Turban et al, 2015). E-Commerce platforms like E-Bay or Amazon are continuously taking advantage of mobile applications to improve customer experience and gain a further competitive advantage. However, small business entities may not have the requisite financial strength to continuously develop and improve mobile applications. Thus, a startup e-business may find itself out-competed by a new market entrant with enough technical and economic capabilities to reach a wider client base. Although the Business to Consumer (B2C) market is a favorite for most startup companies, the increasing competition makes Business to Business (B2B) business quite promising as it requires fewer interactions.
Another significant factor in Porter’s model is supplier power. Tony Grundy (2006), in his discussion of Porter's competitive forces, places particular emphasis on the ability of suppliers to exert influence on the market. In any market, suppliers determine the price, quality, and availability of products. According to Porter, a successful business needs to have a strong network of reliable suppliers. Porter argues that a business that has a higher bargaining power over its suppliers has a greater advantage over a business that relies on a limited number of suppliers. An e-business platform relies heavily on suppliers for its stock and therefore needs to cultivate a good relationship with them. However, a small business may not have the necessary cash flow to purchase goods upfront thus requiring credit. This reliance on credit leaves small entities completely exposed to exploitation by suppliers who may easily change product quality, quantity and availability at the expense of the business. According to Adi (2015), reducing reliance on single suppliers, product diversity and consistent cash flow may provide a business with greater bargaining power over suppliers, limiting their control of the market and ensuring competitive growth. However, it is quite difficult for a small business entity, operating in a highly competitive market, to have sufficient bargaining power over its suppliers.
Chae et al (2017) in their study, evaluate the ability of customers to influence the quality and availability of certain products in the market. Chae et al (2017) evaluate the need for customers to use both coercive and reward powers to influence products in their markets. Chae et al (2017) argue that although coercive buyers are less prone to exploitation by the sellers, they are a burden as manufacturers have to increase their production costs to satisfy the demanding buyers. However, coercive buyers greatly improve competition. On the other hand, reward buyers are susceptible to the whims of the sellers and are likely to suffer exploitation and therefore reduce the need for competition in the market. Thus, Porter's analysis points to the need to find a balance between strong buyers and weak ones (Porter, 2008). Finding this balance is quite challenging, especially for small e-businesses as they may not have access to wide enough market that would guarantee diversity. Therefore, these businesses often find themselves with buyers on both ends and have to work extra hard to satisfy their needs whilst maintaining a competitive edge.
According to Porter and Heppelmann (2014), The increasing influence of the internet, the so-called ‘Internet of Things' is continuously transforming the way consumers view and acquire products and the way companies re-invent themselves. Porter and Heppelmann (2014) further argue that the advent of smart interconnected products has led to an increase in innovation and purposeful competition. That is to say, more and more manufacturers are seeking to gain a competitive advantage by constantly adapting their products to satisfy a wider range of consumer need simultaneously (Porter & Heppelmann, 2014). One positive impact of the ‘internet of things' is that consumers have more information on the kind of products they need. Therefore, online service providers need to take extra care to avoid falsification of information. Thus, small e-businesses with relatively limited capacity have to spend more on market research and product diversification. Although necessary, such changes may take time leaving these small e-businesses in competition with established industry players that adapt easily. Whereas the new trend in internet marketing and interconnected products is changing the e-business sector, it is proving to be a substitute threat for small e-businesses that are not able to produce these products. This situation confirms Porter's five-factor model, that places the threat of substitution as a primary concern for companies, in this case, small e-businesses, that seek to compete effectively (Porter, 2008).
3.0. Chapter 3: Methodology
For the purpose of this study, primary research methods, specifically interviews and questionnaires, was involved. The reason for this approach was that the topic of the study required a more personalized first-hand view of the trends under investigation. Furthermore, interview as a data collection method presented key advantages to the study. First of all, personal interactions with the respondents provided an opportunity to get a more in-depth explanation of the issues. In addition, interviews limit the ambiguities from questionnaires. Moreover, the sample data is quite small, twenty-one companies, which enabled a structured interview that was able to obtain more detailed explanations. The structured interviews were used to complement the interviews on instances where getting a proper sitting for an interview was impossible. These circumstances are explained further in the subsequent sections.
The study group comprised of twenty-one e-business entities as follows; Seven startups, who were completely new to the e-business sector, six small-relatively established firms, six national companies that carry out shipments across the country and two international organizations. Structured interviews were carried out for all startups and small companies. However, only three out of the six national companies agreed to an interview due to restrictions in their privacy policy, in this case, questionnaires were employed. Both the international companies, however, agreed to an interview, although some of the interview questions were struck off, to comply with the company's strict privacy policies. Overall, the sampled organization take seriously their privacy policies, and in this regard, this paper has done enough to maintain the anonymity of the organizations and as such, there is no mention of any of the companies' names or identity.
The selection of the sample group was not only limited to small or medium enterprises though these are the main focus of the study. It was important to include the other players in the sector as they provided a base for comparison. Thus, this sample group enabled information collection from a new and well-established firm, with the aim of assessing the uniformity of these challenges in the industry. However, care was taken to ensure that the majority of the sample group was from small and medium e-Businesses.
Although the interview questions were structured, they were flexible enough to obtain extra information not planned for. Moreover, the versatile nature of the sample size made it difficult to create uniform interview questions for all the organizations. The advantage of this flexibility was that it allowed the respondents to be more open when answering the questions and, in the discussions, thereafter, which enabled a more detailed data collection process. A majority of the respondents were top managers unless when personnel was delegated.
The interview questions focused on three key factors; The challenges faced by the business, strategies employed by the investigation to mitigate these challenges, and measures to ensure long-term profitability. Although an interview was prepared before the commencement of the interviews, most of the information was obtained from off-script questions. Below is a section of the interview script.
Manager:
Hello, how are you? Please have a seat.
Interviewer:
Thank you, Sir. I am John, and I am carrying out research on e-businesses, like yours. If you would allow me just a few minutes for a short interview, I will sincerely appreciate.
Manager:
Okay. Are you doing this research for an organization or is it purely academic?
Interviewer: This interview is for academic purposes only
Manager: Understood. You may begin.
Interviewer:
As a startup e-business, what kind of challenges do you face?
Manager:
Like any other company, one of the biggest tasks is gaining a competitive edge, especially in a market dominated by well-established firms. Without the right strategies, the business will most certainly fail.
Interviewer: What about the consumer base, is it easy for a start-up like yours to come to attract and retain customers?
Manager:
Customer attraction and retention are never easy. Consumer preferences are always changing and a company that cannot adapt to these changes may easily lose customers, especially in e-commerce where customers continuously demand better products and services.
Interviewer:
How do you cope with these challenges?
Manager:
The key to success in e-business is adaptability. Any organization transacting primarily online needs to keep updated on the trends of the market and keep a close on eye on the competition. Furthermore, a good understanding of what the customers want, when they want, and how they want it is key in providing a competitive advantage.
Interviewer:
That would be all. Thank you very much for your time.
Manager:
You are welcome.
Although the above script is short, the actual interviews were considerably longer, depending on the nature of information and cooperation of the participants. However, all the interviews followed a similar script.
4.0.Chapter 4: Results and Analysis
4.1.Theme 1: Challenges of e-business
The small and medium e-businesses identified customer loyalty and retention as a key challenge. Only 60% of these companies were able to retain a stable clientele throughout the year, with the remaining 40% registering a declining number of customers especially when a leading firm announces a major discount or loyalty reward program. Although all these companies have employed some form of customer loyalty or reward scheme, these were incomparable to the massive offers from leading online retailers. This fact was confirmed by the two leading firms that were interviewed, one of which was planning to launch a month of reduced prices on furniture and electronic products.
Another concern identified by the respondents was the lack of face to face interaction with customers. Although this was not a major concern for the established businesses, it was a major concern for the smaller firms that are just starting out. These firms cited the limited interaction as a key contributor to the difficulty in customer retention. Most of the respondents noted the ability of online platforms to reach a wider and more diverse audience partially if not completely, negates the lack of face to face interactions. However, the need to develop methods of personalizing consumer interactions was a key priority for all the firms, except those with a wider area of operation.
Financial challenges were a serious concern for both small and medium e-businesses. However, this was particular with the smaller companies that had relatively lower cash flow. Due to these financial constraints, these companies had little bargaining powers with suppliers and were often forced to comply with supplier conditions. Furthermore, the ever-changing e-commerce environment calls for constant change, these changes are quite expensive and thus a lot of strain on these small e-businesses. Although these are expensive, they are an absolute necessity. The two leading firms revealed that the key to their success was mainly due to the ability to keep up to date with global trends, adapt to change and being one step ahead of the competition.
4.2.Theme 2: Techniques for mitigating the challenges
All twenty-one companies confirmed the use of regular customer loyalty and reward programs as a means of retaining customers. However, the smaller e-business was unable to carry more robust programs due to limited finances. Ten out of the thirteen small and medium e-enterprises faced customer migration and time a major retailer had a major promotion. However, these companies have learned to strategize on improving customer experience to mitigate against this migration. Due to their relatively smaller clientele, it was cheaper and less complicated to offer customer-centered services online.
The financial challenges were particularly difficult to address for both the small and medium companies. Conversely, the larger and more established did not identify any significant financial challenge. Seven of the thirteen small and medium e-businesses preferred to bring in investors to improve their capital. Four of the companies opted for a merger with a more established retailer or formation of a joint venture or a partnership. Interestingly, none of the companies were for the option of commercial loans. For the smaller businesses, loans presented too much of a risk in a business that is already high in uncertainty.
Although face to face interaction improves customer service and improves their experience. It is quite difficult in the online business environment. The challenge increases with a larger consumer base, as attested to by the two retailers interviewed. However, since smaller e-business has a relatively manageable clientele, it is easy for them to improve customer interaction. In the survey, all seven small companies had an interactive platform where customers can air their views on how they would like to improve their experience with the company. Two of the companies regularly organizes open forums where they interact directly with their clients
4.3.Theme 3: Approaches used to Ensure Profitability
All the interviewed companies agreed that to sustain profitability, it is necessary to rethink current marketing strategies. The small organizations had a lot of promise in this regard, with a majority already modifying their marketing methods to respond to the current market dynamics. One particular area of interests for these companies is the internet platform for which their business is already based. Of the twenty-one companies, seventeen were actively advertising on social media while the remaining four employed a combination of both social media advertising and search engine optimization. The smaller companies recorded a significant increase in profits once they adopted modern advertising methods with one company recording a fifteen percent increase in marginal profits in the last financial year. Therefore, as social media and internet advertising continues to evolve, both small-scale and large-scale companies able to take full advantage will guarantee steady growth.
The online retail sector is an ever-evolving field with continuous changes in consumer preferences, delivery methods, information dissemination, and supply chain management. Therefore, companies in this sector need to continuously adapt to the changes. One particular area of concern for the respondents was the increase in mobile application usage. Mobile phone apps have made transactions, both online and offline, easy and convenient and are continuing to improve the consumer experience. However, the respondents, especially those from the smaller e-businesses, raise concern over the cost of creating, maintaining and continuously updating these mobile applications. Therefore, most of these smaller e-businesses are out-competed by well-established companies capable of maintaining such systems. However, as the cost and complexity of developing these applications continue to drop, smaller companies will be able to utilize them and with creativity and innovation, create their own competitive advantage.
5. Chapter 5: Discussions, Conclusions, and Recommendations
The section includes a detailed discussion of the results recorded in the previous section. For each theme response, the observed results were related to the existing literature.
5.2.Discussions
Michael Porter, (2008) in his discussion, identifies five factors that affect a businesses’ competitive edge. These ideas are corroborated by the respondents who identify, albeit generally, the dynamic consumer interaction, financial power, and technology influence as major challenges. The similarity between the findings of Yunna and Yishang (2008) and those from this study, compounds the predictable nature of new and emerging sector. However, e-commerce is quite dynamic and thus Porter’s models should not be applied rigidly. For instance, one of the respondents, a manager at a small e-business, specializing in clothing, has a single supplier but still manages to have bargaining power over this supplier. According to the retailer, this unique relationship with the supplier is due to the uniqueness of their product.
“We specialize in creating leather-based fashion pieces. However, our leather is only sourced from traditionally prepared leather. There are few of these tanneries left, and even fewer companies going for homemade leather. Furthermore, artificial leather is really a huge chunk of the market. Through our platform, we get to publicize these products and create a source of income for these companies”
Therefore, it is not an absolute necessity to have a number of supplies to have bargaining power. By creating a symbiotic relationship between supplier and retailer, it is possible to create a mutually beneficial relationship whilst still having a slight edge of the supplier.
The internet is by far the key propellant for e-commerce. With the increase in global mobile phone and internet usage, the market for online retailing is expanding significantly. The internet not only provides information on goods and services but also enables transactions and facilitation of these goods and services. With the improving computing and processing power of mobile devices, mobile applications are becoming more personalized and dynamic, positively impacting user experience. Thus, from the responses, it is possible to see the uptake in mobile applications by online retailers who use them to provide services to clients on-the-go. This observation supports in part Porter and Heppelmann’s discussion on the ‘internet of things’ (2014). More and more consumers are looking to the internet for their goods and services. Therefore, most retailers need to find ways to create interconnected products that are able to satisfy the broad range of consumer needs. As one retailer puts it;
“You need to be able to efficiently get a product from the supplier, track it as it comes to you, showing it to the client, tweak it a little bit to satisfy the customer’s needs, get it to the customer and follow it up to confirm whether or not the product satisfies him or her. You cannot do this without the help of technology, especially these new apps, at every stage.”
However, the convenience these applications offer comes at a cost. Therefore, without the necessary capital, most small e-businesses find it hard to facilitate the development of such applications. As a result, these firms rely on free-to-use applications that may not offer all the advantages of a fully developed mobile application.
Like any other business, e-companies aim to satisfy consumer wants or needs. To be successful, these companies need to understand what the clients want, how they want it, and when they want. As one retailer remarks, “Customers change their preferences every day and since the customer is king, you have to change with them or risk losing them all together." This dynamic nature of customers means that these enterprises are continuously evolving. Although beneficial in the long run, the constant need to evolve is likely to take a toll on the company's finances, especially if the company was just starting out. However, understanding the psychological nature of consumers will enable these firms to better their products and services to fully cater to these customers. According to Chae et al (2017), the two types of buyers, those who are coercive and those who are more compromising. Thus, an e-business needs to find a balance between these two buyers in order to retain profitability.
5.3.Conclusion
The main purpose of the study was to identify the challenges that are unique to small e-businesses. Although largely profitable, success for a new market entrant is uncertain. The study relies heavily upon Porter's five-factor to put into context the challenges that these companies face. The identified obstacles are supported by responses from the interviews. The interview tries to compare the small e-businesses to their more established competitions to determine whether these challenges are uniform across the sector. From the findings, a diverse and ever-evolving client is a challenge for all the companies but is more pronounced for a small enterprise. Furthermore, most e-businesses face cash flow challenges and are thus unable to quickly adapt to new trends in the market. However, small e-businesses tend to have a more personalized relationship with their customers compared to larger retailers. As a result, these entities tend to have a better customer experience giving them a unique competitive advantage. Thus, although these challenges are likely to face any new or upcoming e-business, they surmountable and are thus not a hindrance to any company wishing to carry out e-commerce.
5.4.Recommendations
Small-scale e-business should consider the following recommendations motivated by the study findings: Mobile and web applications are becoming an essential business tool. To ensure success, e-businesses need to focus on methods of integrating these programs into their routine operations. As a matter of fact, the increased use of mobile devices opens a new world of possibilities for these companies.
Secondly, e-businesses should develop better methods for customer interactions. Although social media is a highly effective marketing tool, it is also a good method for reaching out to potential clients. For instance, recent upgrades to the platform enable for user surveys. Small e-businesses may use these surveys to gauge perception of customers, areas of change, and idea on products that they should or should not include in their line. These methods are not only effective but are also quite cheap.
Lastly, consumer psychology is a key area of research, especially in business. Understanding what the consumer wants reduces the uncertainty in any business venture.
