How to make Indian SMEs digital-ready

The role of small and medium enterprises (SMEs) in nation-building is indisputable. In India, around 63.4 million SMEs employ around 12 million people, including a significant rural workforce. Additionally, SMEs are important in achieving the "Make in India" targets and have been the focus of recent government policies. However, SMEs often suffer from neglect and fall victim to the "middle-child syndrome." Governments, academia, and the media are guilty of paying less attention to SMEs than large companies or start-ups.

To address this critical issue, we studied over 350 SME owners to determine their top challenges and how they leveraged digital tools to transform and remain competitive in the fast-changing business landscape. Unsurprisingly, the primary challenges faced by Indian SMEs were similar to those in other emerging markets, including financial stress, lack of growth, inability to attract talent, global competition, and challenges in navigating the digital landscape.

Many of these challenges are interconnected, and a low level of digital preparedness was a key reason for the inability of Indian SMEs to be future-ready. To enable SMEs to become digitally ready, we developed the concept of "Digital Readiness." The study proposes three key elements of digital readiness. The first driver, technology sensemaking, is how SMEs become aware of digital transformation and digital technologies. The second driver, agility, is how quickly SMEs can react to the information and adapt their mindset based on this information. The third factor, technology implementation, is how ready and skilled SMEs are to implement these changes. Additionally, it identified several factors contributing to SMEs' digital readiness, including leadership, strategic focus, resource availability, and customer-related, and market-related factors.

It provides several managerial implications for the digital transformation of SMEs, as shown in the graph blow.

Implications for SMEs

First, the significant role that leadership factors play in the digital empowerment of SMEs. It suggests that SMEs led by millennials are more digitally ready and can adopt emerging digital technologies more quickly. Therefore, entrusting the reins to the next generation can help SMEs accelerate their transformation.

Second, to achieve digital enablement, SMEs should identify data sources and implement systems of records (e.g., ERP) and systems of engagement (e.g., customer portals), with a dual focus on enhancing efficiencies and providing better customer value. Since financial flexibility is a crucial driver for the digital readiness of SMEs, they should prioritise investments that increase cost savings that can support digital rollouts.

Third, it demonstrates their strategic priorities drive the digital readiness of SMEs. SMES that target millennial customers and rural markets have been quicker at rolling out digital investments. Additionally, customer readiness to use digital technologies is another important driver, especially since most SMEs focus on other SME business customers. Therefore, SMEs should identify user-friendly technologies that offer personalised experiences to their customers.

Implications for Digital Vendors

The study offers important insights for digital vendors. First, many vendors have struggled to engage SME decision-makers who fail to appreciate the criticality and value of digital investments. It indicates digital vendors could initially focus on engaging with small firms led by millennials, who are more likely to understand and embrace emerging digital technologies.

Second, it highlights the importance of digital technologies that support operational efficiencies, as the business case of these are more obvious. To boost adoption, digital vendors could provide financing options, as small firms are challenged by financial constraints.

Third, vendors could prioritise digital offerings that cater to their expansion into rural markets. These technologies should be low-cost and adaptable to markets with limited telecom networks. Finally, digital vendors should support small firms with change management skills and provide training for their legacy employees to enable a smooth transition to digital technologies.

Implications for Policy Makers

Government and financial institutions have important roles in ensuring SMEs are prepared for the digital era. First, ready for digital change, SMEs are seeking knowledge and implementation partners. Policymakers need to design and provide an ecosystem that will support such transformation. Second, institutions should provide training programs and incentives in areas such as quality management and certification to help SMEs enhance their digital capabilities. Third, one of the most important determinants of digital readiness is financial flexibility.

Financial institutions should provide financial aid, including low-cost loans, to support and increase the digital readiness of SMEs. Fourth, they could provide subsidies to SMEs that aim to expand into rural areas. Finally, the importance of improved clarity on government policies to enhance SMEs’ digital readiness significantly. Therefore, government institutions should roll out guidelines for small firms-related policies, ensure transparency, and crack down on speed money among officials dealing with small and medium enterprises.

SMEs have the potential to undergo a successful digital transformation with the right inputs and resources. Also, SMEs that have embarked on their digital transformation journey have been more successful in the fast-changing business landscape.

(Srinivas Pingali is Professor of Practice, Mahindra University School of Management; Kiran Pedada is Assistant Professor and F. Ross. Johnson Fellow, Asper School of Business, University of Manitoba; S. Arunachalam is Assistant Professor, Rawls College of Business, Texas Tech University; and Sumanta Singha is Assistant Professor, Rawls College of Business, Texas Tech University)