JURNAL BISNIS DAN EKONOMI, SEPTERMBER 2005
PROBLEMS ENCOUNTERING SMALL FIRM USE OF
INTERNET IN INDONESIA'S EMERGING MARKET
Oleh : Vincent Didiek Wiet Aryanto
Faculty of Economics Soegijapranata Catholic University Semarang
The entrepreneurial small firms are the backbone of the Internet and e-commerce development in Indonesia. Although the business has yet to be lucrative today, but would be promising in the future, they have courage and entrepreneurship spirit to set up their business in the country. To be viable in the future, they have to cope with many obstacles or problems such as lack of infrastructure, lack of consumer awareness, cyber frauds, culture and habit of consumers and quality assurance.
Keywords : Entrepreneurship, e-commerce, emerging markets.
E-commerce has experienced dynamic and rapid growth in the wake of 2000's. It was estimated that there were 401.1 million Web users worldwide (NUA Internet Surveys, 2000). In Indonesia, there are various kinds of E-commerce that have developed, such as E-banking, E-trading, E-games, E-education. Although there is no accurate data about Internet users in Indonesia, but it is estimated that there are 1,680 thousand Internet subscribers and 4,200 thousand Internet users. (Prayitno, 2003).
The Internet has made it possible for small firms to gain access to an information infrastructure larger than that owned by any major corporation. Indeed, the Internet allows small businesses to communicate as widely with individuals or trading partners as any large corporation can. The importance of the Internet to small firms is reflected by the increasing number of research efforts focus on the topic worldwide (Poon and Swatman, 1997).
The electronic marketplace presents an extraordinarily challenging environment for entrepreneurs and their organizations. The rapid acceleration and availability of technology is shaping a new economy, with different forms of distribution, marketing, selling, and arranging work becoming observable. Attributes of this new economy include collapsing boundaries between firms, suppliers, customers and competitors (Hartman et al., 2000).
Jurnal Bisnis dan Ekonomi – Vol.11 – No.2 – September 2004
The Internet can provide much leverage depending on the demand and supply of a product. As such, broadcasting the release announcement over the Internet can heighten the demand for a long-waited product. Moreover, new markets (e.g., the international market) can be created through the Internet by market customization or global branding (Quelch and Klein, 1996). Indeed, even for a firm that produces traditional products, the Internet may be used to support the virtual value chain - an integrated information underlay that contains and transports information related to the physical value chain. The virtual value chain will introduce new economies of scale and scope and shrink transaction costs (Rayport and Sviokla, 1995).
Despite the enormous potential the Internet has for firms offering digital products, there is limited objective evidence beyond anecdotal examples. Many of the speculated benefits (e.g. lower unit cost for products or elimination of intermediaries), which are supposed to help small companies to compete with larger firms, have not been realized (Poon and Swatman, 1998).
Research studies in small business and entrepreneurship reveal that small firms face problems such as lack of resources, inability to market effectively and many organizational problems (Cromie, 1991, Perrow, 1992). In the 1990's additional competitive pressures such as continuous demand for improved product/service quality, working with narrower profit margins and globalization means small firms have to transform in order to survive (MIRL EC, 1998). It is not surprising that earlier studies on Internet commerce show that a high percentage i.e. 65 percent of those involved in Internet commerce are small businesses (Fink et al., 1997).
This research aimed at investigating the emergence of entrepreneurial small firms use of Internet in Indonesia. Since Indonesia is in the early stage of developing E-commerce, Indonesia’s small firms that engaged in e-commerce can be considered as entrepreneurial pioneering firms. The researcher classified small entrepreneurial firms by having of less than five persons. There has been noteworthy entrepreneurship research on factors influencing small business start-ups, but most of the research examined entrepreneurs already working in new businesses that they established (Reynolds and White, 1997; Mazzarol et al., 1999). However, individuals still in the pre-entrepreneurial start-ups process are in need of additional exploration and further understanding in light of recent socio-economic events. The recent economic crisis in Indonesia and the large number of widely known e-business failures may have an effect on the perceptions of individuals who are considering starting a business or e-business.
The researcher conducted pre-survey to twenty two small firms engaged in e-commerce and came up with obstacles i.e., lack of proper infrastructure, lack of consumer awareness, cyber-frauds, consumer’s culture and habit and quality assurance. Therefore this research focuses to deal with infrastructure, consumer awareness, cyber-frauds, and consumer culture and habit and quality assurance.
Entrepreneurial Small Firms and E-Commerce
A small firm will be entrepreneurial because the individual or group of individuals leading it is entrepreneurial. Key characteristics are that such people are: constantly innovative, continuously opportunity focused and comfortable with change (McGowan et al., 2001). Consequently, the firms they direct and manage are committed to growth as a fundamental strategic aim. However maintaining the entrepreneurial effort needed to drive the process of growth forward in a proactive way, presents the lead entrepreneur with different challenges (Gartner, 1989). With growth the simplicity of the pioneering firm gives way to increasingly more complex circumstances as the firm seeks to address the changing needs of a growing, increasingly more complex circumstances as the markets, new collaborators (e.g. suppliers, intermediaries and distributors) as well as competitors. Consequently, the entrepreneurial firms will need to equip themselves appropriately to deal with these changing circumstances. The emerging new complexities that come to characterize the growing firm increasingly open up gaps in the competency portfolio of the lead entrepreneur or personnel in the entrepreneurial team. To be effective however they must be able to acquire the competencies necessary to meet the emerging new challenges facing the growing firm. The Internet is considered such a new challenge representing as it does a discontinuous innovation (Moore, 1995).
The definition of Electronic commerce is the sharing of business information, maintaining business relationships and conducting business transaction by means of Internet-based technology (Zwass, 1996). While Wen et al. (2001) defined Electronic commerce as buying and selling of product, services or information via computer networks mainly the Internet. The use of electronic commerce is a belief that electronic markets have the potential to be more efficient in developing new information-based goods and services.
Since electronic commerce (e-commerce) is relatively new in Indonesia, the foundation that will support the future market has yet to be solidly defined where much of the thinking and building needed to harness its potential has only just begun. The fast-paced environment of e-commerce causes many firms to try new approaches, quickly share successes and failures, and monitor what is new and useful within their respective industries while still remaining focused on their business goals and market growth (Keenan and Mullaney, 2001).
Early use of the Internet by SMEs was driven by a combination of management enthusiasm and the need for improved communications and marketing. Poon and Swatman (1997) studied 23 small businesses in Australia that were active Internet users in order to establish the pre-conditions for success and the strategic effects from its use. Multiple case studies were created based on interviews and site visits. The authors found that perceived benefits formed a key reason why participants adopted and continued to use the Internet. They put forward a framework for perceived benefits related to Internet use based on the classification of benefits into short term and long term, direct and indirect. Their findings indicated that small business was not reaping significant short-term benefits from the Internet. However, most participants believed that it provided a cheap way of accessing the global marketplace, prior to setting up serious business relationships. They believed that not having an Internet presence would soon become a competitive disadvantage.
In the late of 2001, the total internet users in Asia and Pacific were 76.8 million and involving US $ 338.5 million in the form of business to business (B2B) as well as business to consumers (B2C) transactions (Donny, 2002). There are 100 million of the Internet users based in the European Union. US-based trade on Internet is expected to rise from current levels of $ 109 billion to $ 1,300 billion in 2005 with over 90 percent of this being represented by business-to-business (B2B) exchanges (Nua, 2000; Anderson and Choobineh, 1996; Stuck, 1996). The opportunities inherent in such dramatic growth rates clearly that warrant attention by the innovative and opportunity focused entrepreneur.
Influencing buyers is a function of websites that is very similar to the objective of advertising in the classical media (e.g., print and broadcasting media). It is necessary to understand how websites affect both the attitude and behavior of customers. Huizingh (2002) studied the awareness of consumer awareness in e-commerce. He came up with the hierarchy of effects model, that advertising influences consumer through four subsequent stages. These four stages are labeled attention i.e., being aware of a stimulus, cognition (knowledge, perception, beliefs with regard to a stimulus), affection (feelings, emotions in relation to stimulus) and conation (behavior as a response to a stimulus). The research found out that consumers were still reluctant or hesitate to use the web for making purchases.
Culture and Habit
The foundation of business is trust, it is molded by the culture and habit, no matter how advanced the technology is, or how sophisticated the products are, or how knowledgeable customers become, the formula for a successful sales transaction has not changed over the ages. The bond of trust, especially in the depersonalized setting of the Internet, is very fragile. If that trust is broken, no matter how or who is responsible for that break, that sale will not be realized (Prabhaker, 2000). Gibbs (2003) studied that B2C’s determinants of e-commerce with respect to culture and habits were consumer reluctance to buy online and lack of trust due to preferences for in-store shopping, lack of customer service, and language differences. Whereas, barriers of B2B are business environment and culture: risk aversion, difficulty changing organizational processes, lack of resources and skills in businesses, especially SMEs.
Internet Security / Cyber Frauds
Dennis (2002) studied the understanding of e-consumer; one of his research finding was that Internet needed more trust – concerned for safety of financial transactions and credit cards. According to Digital transaction (2004) revealed that web merchants to lose 1.7% of their revenue, down from 2.9% in 2002. On average one out of 100 transactions is fraudulent. Stoney et al (2003), put emphasis that the success of B2C e-commerce depends, in large part, on the existence of satisfactory supporting legal infrastructure coupled with the implementation by virtual organization of appropriate strategies that will achieve optimum business protection, consumer trust and legal compliance.
Quality assurance is the established practices of an organization used to ensure the highest level of customer satisfaction and to measure organizational performance with respect to its mission. A strategic management function concerned with the establishment of policies, standards and systems for the maintenance of quality (Early, 1995).
This study utilized the descriptive method of research; it was appropriate since it presented facts. These were recorded, described, categorized, analyzed and interpreted. Twenty-two website visits and interviews through telephone were conducted with small firm entrepreneurs who to a greater or lesser extent engaged in the use of Web and e-commerce. They comprised the population of small Indonesian firms engaged in e-commerce. The firms were sourced across different sectors including manufacturing, services and retail. Entrepreneurial small firms were categorized by small number of employees engaged in the business i.e., less than five persons. Method for gathering data was undertaken by two phases first, researcher interviewed the respondents asking for the most problems encountered them. Second, after having the research variables e.g., infrastructure, consumer awareness, culture & habit, cyber-fraud or Internet security and quality assurance, researcher conducted phone-interviews with them on the said variables.The following table portrayed the profile of the respondents.
Table 1. Profile of E-Commerce Entrepreneurs by Size of Firm
Firm Size Nature of Business Number of Websites Number of Employees
Micro Services 3
Small Services, retail, & handicrafts 17
2 – 5
Medium Manufacturing 2
Source: Primary data
Small firms that engaged in e-commerce can be classified as entrepreneurial firms because they were pioneer in their field. Although market is still in turbulent because of economic distress, however they have courage to take initiative in developing e-commerce. In a country that is beset by economic crisis, the purchasing power of the consumers tend to diminish rapidly, they prioritize to fulfill their basic needs first. Although there are some obstacles to cope with, the emergence of cyber small entrepreneurial firms in Indonesia is an unprecedented phenomenon. In terms of new business ventures, twenty-two e-commerce firms perhaps are not comparable with the growth of similar business in other countries. Some of them are actually categorized as micro firms inasmuch as the firms are managed and run by only one person.
Internet in Indonesia
The Internet was first introduced in Indonesia in 1994 through an academic institution. Nowadays the Internet in Indonesia is growing rapidly. However, an absolute number shows little compared with developed countries but show high growth. To date, there are 46 ISP (Internet Service Provider) licenses in Indonesia, but only 35 ISPs are in active operation. Some of the licensed ISPs could not operate for several reasons, mostly because of the economic crisis (Boerhanoeddin, 2003).
Internet café (warung Internet) is now proliferating mostly in big cities. These are places where users are able to access the Internet without becoming subscribers of ISP. Users just pay the rental fee on the basis of time they used the Internet. They do not need to register as ISP subscribers. Consequently, there is no monthly Internet fee and telephone bill for the use of Internet. More importantly, they are free from technical problems such as modem problems, network connection problems etc.
Currently, the number of Internet subscribers in Indonesia is around 1, 680 thousands (Prayitno, 2003). Unfortunately, the absolute number of Internet users cannot easily be measured, an estimation of them might vary between double to quadruple than that figure since three to five people used one personal computer in the Internet cafés. Geographically, Indonesia is a country of more than 13,000 islands; therefore, it is a big challenge in developing a fiber-optic-based global infrastructure to facilitate the Internet use. As an archipelago country, it is quite difficult to build fiber-optic-based backbone. PT. Telkom, a domestic telecommunication company is responsible for developing domestic infrastructure. Most parts of it still use copper wire, only in selected big cities use fiber optic, but connection to end-users are still using copper wire.
Other aspects that can be categorized as infrastructure are telephone and Internet access fees that are relatively expensive. Unlike in the United States and many other countries where telephone fees are charged only for the month, in Indonesia telephone fees are charged not only for the month but also by usage. On top of that, Internet users also have to pay the ISP for Internet usage.
The huge and widely spread population in Indonesia is a potential market for Internet as well as e-commerce. Total population of Indonesia is around 220 million; yet, Internet penetration is limited to only 6%. This figure contrasts with neighboring country e.g. Singapore 19.6%, but it is slightly higher than Malaysia 4.8% or Philippines 0.6%.
Phone line penetration is limited to only 6.67%, this is important because phone lines are vital for Internet access. ISP service coverage is limited to several big cities. Among 35 operating ISPs, just a few numbers that is able to provide Internet access in remote area. One of them is WASANTARA NET owned by Indonesian Post Corp. that is available in 26 provinces. Another one is INDOSAT Net owned by Indosat Corp, serving 12 big cities in Indonesia.
Examples of micro enterprises operated by one person are first, www.indokado.com - a micro burgeoning e-commerce firm offering various souvenirs and flowers. The firm is a service business by nature since it organizes network of floral and handy craft shops for its consumers. It acts like an information broker linking the consumers and the sellers or shops through its Internet network. The initial outlays were very minimum i.e. one personal computer, printer, facsimile machine, telephone networks and a 30 mega bytes Internet domain / homepage capacity with monthly subscription fee US $ 7.06. The firm (indokado.com) sends bills to its floral and handy craft shops for referral fees.
Likewise, www.srikandi.com is the second small firm operating in selling second hand cars through e-commerce. As the previous one, the firm acts as information referral or broker to its cyber customers. Third example, there is also an Indonesian’s version of U.S’ e-bay i.e., www.gado-gado.com - a micro e-commerce firm operating in auction and selling second hand stuffs or brand new electronic goods, cellular phones, camcorders, digital cameras, software etc.
Based on the interview with the respondents, most Indonesian users treat the Internet as a tool of communication. They love to send e-mail of share information with each other. For live communication they prefer to talk through a chat room, especially youngsters such as students. Some of them like to search and gather any information needed from the Internet, especially news. This is in line with a survey conducted by Nielsen (2002) that can give us a brief overview of what Indonesian users like to do on the Net.
According to the respondents’ statement how they perceive to their consumers, using e-mail is the biggest percentage, about 42%. Then reading local or national newspaper (39%), searching for information about products or services (29%) reading magazines (27%) and chatting (23%).
E-commerce has yet to be part of the main Internet activities among Indonesian users. According to the small firm entrepreneurs’ interview, not many of the Internet users realize that the Internet can also be a powerful media for business and making transactions. Approximately, only ten percent of the Internet users are willing to transact through the Internet. This figure exemplifies that e-commerce awareness among the Indonesian are still low.
Culture and Habit
The Indonesian consumers consider shopping as an act of leisure or recreation. Indonesian people prefer to go to a shopping center or mall together with family or friends. They like to see and make detailed selection before buying or just window-shopping without intending to buy. By and large, they are reluctant to buy through the Internet because they would feel apprehensive about the quality of product they have ordered. In other words, it may not match their expectation.
Basically, the relationship between consumers and sellers or firms in Indonesia is developed as a low-trust relationship (Kusuma et al., 2003). In the absence of mutual trust relationship, sellers and consumers made deal by directly meeting face to face and set down their payment on cash basis. This business deal commonly happens particularly for the high involvement products such as cars, electronic goods, camcorders, digital cameras, personal computers, cellular phone etc. Unlike in the U.S, where unsatisfied consumers can return their products to the sellers, in Indonesia, once consumers bought their products, they cannot return their product for whatever reasons. In this regard, e-commerce in Indonesia functions no more than media of promotion and information.
Based on the interview with the respondents, relationship between consumers and sellers are exacerbated in recent years by a large amount of credit card frauds (cyber crime) through the Internet. Even e-commerce transaction in Indonesia are blacklisted among those that most vulnerable countries by the Asia-Pacific Association of Credit Card companies.
So far, Indonesia has yet to have cyber law that protects the e-commerce transactions in form of B2B and B2C relationships. More importantly, the law enforcement of new consumer protection is lenient; this is to explain why the distrust relationship between consumer and seller exist. Geographically, Indonesia is stretched out in three time zones, therefore, shipment or delivery is another handicap, since some merchants do not have or maintain a good, reliable, and fast delivery system.
Security or Cyber Frauds
According to the respondents, Indonesian Internet users insist that they want providers to guarantee a safe transaction through their sites. The main thing that keeps them from making transaction on the Internet is the security of their payment. In the absence of impersonal and decisive cyber law enforcement, the carders (the Internet’s credit card criminal) could disrupt the safeness of the e-commerce in Indonesia.
Some merchants admitted that quality standard and assurance were their big challenge in e-commerce. A number of consumers complains could be taken into account and it indicates problems with quality assurance. For example, indokado.com faces problems in standardizing the quality of souvenirs and flowers sent to their customers from its various suppliers.
The challenge for further development of e-commerce
So far, e-commerce in Indonesia is in early stage of development. Many ISPs are categorized as micro to small and medium size firms and mostly pioneered by young people. This business is vulnerable to economic crisis because of the distinction e.g., ISPs pay in US dollar to lease international bandwidth whereas the revenue is received in Indonesian Rupiah currency. When the Rupiah currency had sheer plummeted in 1997 most of the ISPs’ investment were at stake.
Moreover, the market is still small compared to the Indonesia’s population. Thirty-five ISPs accommodate 220 million populations. According to the survey (Nielsen, 2002), favorite goods ordered through e-commerce are low-involvement goods such as books, software, magazines, computer hardware, electronic gadgets, office supplies, sport goods and clothes. But what is unique, most of the cyber-stores are actually brick stores, meaning to say they have physical stores. Aside from Srikandi.com, Indokado.com and Gado-gado.com, Sanur on-line bookstore (www.i-2.co.id) getting the idea from Amazon.com is offering 30,000 books and having 11,000 on-line customers. Indeed the revenue from content business is not yet promising today. However, their existence is appreciated to build people’s awareness and educating the market.
Something that should pay more attention is how to build an Indonesian e-commerce community that is eager to transact their business through Internet. Apparently, the population’s characteristic of being a traditional people cannot easily be altered. However, in big cities like Jakarta, Surabaya, Medan, Semarang and Bandung, the Internet is now becoming a vital need. This can be seen from the appearance of Internet cafés that are mostly patronized by young people. These youngsters hopefully will become the generation that realizes the importance of information in the near future.
The number of domains in Indonesia increased 62 times in the past five years, from 86 domains in 1995 increased to 5,454 domains in 2000. This figure shows the right direction of development. However, the limit number of local Internet or e-commerce expertise and lack of awareness might hamper the Internet and e-commerce developments in Indonesia.
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