Digital Transformation of Small and Medium Enterprises (SMEs) within the Covid-19 Pandemic

5 April, 2022

Following the trend of the 4th Industrial Revolution, digital transformation has become a keyword that always heats up socio-economic forums and shows no sign of ‘cooling down’. After more than a year and a half of being affected by the Covid-19 pandemic, Vietnam is more aware that the need for digital transformation is no longer a fashion trend or a technology concept, rather, a vital solution for all activities of a country, a business during and after the pandemic. In terms of national economical specificity, SMEs, accounting for a large proportion (97% of the enterprises), playing an important role (contributing 40% of annual GDP); therefore, digital transformation in Vietnam must focus on success in order to succeed.

Impacts of the Covid-19 pandemic and the concept of “digital transformation”

The Covid-19 pandemic has not only brought negative impacts to employees’ health but also altered their working and living habits as well as the operation and business methods of SMEs. In other words, businesses must let their employees work online, have online meetings and even increase online sales due to epidemic prevention measures. Therefore, it should be stated that SMEs themselves have been shifting from a ‘multi-touch’ business model to a ‘less-touch’, even ‘no-touch’ business model. The pandemic is also a pressure on SMEs to accelerate the digital transformation process, to seek a more flexible business model, to save costs and to optimize resources to overcome difficulties and continue to develop.

Digital transformation is the technology application in changing an enterprise’s business model, thereby, creating more opportunities and new values, helping businesses increase growth and achieve better sales. The process of digital transformation in enterprises is often divided into three levels: (1) Information digitization (Digitization) is the stage of transitioning from traditional methods (analog) to digital platforms, creating digital representations of data entities. This process opens up for enterprises a new space, a new business model and the potential for technological innovations waiting to be exploited (Rojers, 2018); (2) Digitalization is the use of digital data to streamline work. This level aims to innovate the business model of enterprises to adapt to the existence of digital environments (Brennen & Kreiss, 2016); and (3) Digital transformation is the application of data and processes in new business models (Nambisan et al., 2017). Digital transformation trends are forecasted to continue in the coming years (in terms of the context that both the world and Vietnam nation continue to be suffered more or less influence from the Covid-19 pandemic) listed as: Investment/ spending on digital transformation will almost double; 80% of enterprises will deploy Remotely Working solutions; Online working technology will replace the physical office in enterprises; 5G technical communication network will cover the globe; More concentration on omnichannel retail; The strong development of Cloud computing technology; as well as Acceleration in analytical, predictive and descriptive techniques in various fields.

Situation of digital transformation of SMEs in the context of the Covid-19 pandemic

The survey of the project research team on approximately 400 SMEs in the Southeast region in 2020, of which 61.3% are enterprises in the manufacturing and processing industries – a group of industries with special requirements for the ability to master technology and techniques in production, which is the driving force for the digital transformation process whereas the remaining 38.7% of enterprises are in the fields of construction, trade, services and so on – collectively referred to as non-manufacturing sector. Survey data shows that SMEs have also initially implemented digital transformation in activities listed as internal management, purchasing, logistics, production, marketing and sales and so on; however, the results achieved is rather modest. Although SMEs have been accompanied by the Government with a series of supporting mechanisms and policies to meet their practical requirements of digital transformation, only 57.6% of enterprises in the manufacturing industry as well as 41. 4% of the non-manufacturing industry applied digital technology before the Covid-19 epidemic; during the period that the Covid-19 epidemic took place, 18.6% more manufacturing enterprises and 35.8% non-manufacturing enterprises started and will continue to apply digital technology; 16.9% of manufacturing enterprises and 17.9% of non-manufacturing enterprises have not applied digital technology yet but they show their interest in digital technology; approximately 7% of manufacturing enterprises and 5% of non-manufacturing enterprises have not applied digital technology yet but they have no plan to apply digital technology in the future. In accordance with a survey by the Vietnam Software and Information Technology Services Association, only 6.6% of enterprises have enough resources to change from the old system to the new technology system; 34.6% of enterprises will change step by step due to insufficient resources; 27.5% are in the process of preparing capital and resources and up to 31.1% of enterprises have initiated nothing; more than 70% of SMEs react passively to market changes; only a quarter of SMEs have invested in modern technology in recent years while most of them use nearly 80% of machinery imported from the 1980s and 1990s; most SMEs have not developed a strategy for digital technology application yet and are proactive in innovation.

SMEs have also initially implemented digital transformation in activities listed as internal management, purchasing, logistics, production, marketing and sales and so on but the achieved results are rather modest. Source: Collected photo

Factors deciding successful digital transformation

In accordance with interviewing experts combined with data collection from the Digital stars showcase project (2020), it can be summarized that the basic reasons preventing SMEs from successfully implementing digital transformation as follows: (1) SME leaders, due to the lack of vision and limited awareness of digital transformation, become hesitate and stay out of the digital transformation trend; (2) Each SME itself has neither built a clear digital transformation strategy in line with its business strategy and resources yet as well as nor identified appropriate technology transformation directions, from that enterprises can easily lose direction, resulting in giving up; (3) Many businesses carry out digital transformation but have not built a suitable roadmap yet because they just pay attention to quick results, that is to say, they choose to perform many changes at the same time while lacking basic resources). This has caused delays and failures in the digital transformation process.

Solutions to promote digital transformation in SMEs

From the above-mentioned basic reasons, a number of solutions to promote the digital transformation of SMEs are proposed as follows: (1) Radically changing thinking and approach to business in a way that combines online keeping with offline (O2O) –  an important factor for SMEs to succeed in digital transformation; (2) Developing a digital transformation strategy in association with the business strategy, ensuring that it is suitable to the actual situation and transformation ability of enterprises; (3) Building a customer-centric digital transformation process, concurrently, being suitable to the circumstances, conditions and resources of each enterprise. The digital transformation process is suggested with the following steps: 1. Focus on customers; 2. Changes in organizational structure; 3. Changes in management; 4. Transformational leadership; 5. Decision on technology; 6. Integration; 7. Internal customer experience; 8. Logistics and supply chain; 9. Data security; 10. Development of products, services and processes; 11. Digitization; 12. Personalization.

In addition to the above solutions, a number of recommendations are proposed to the Government in order to create more favorable conditions for SMEs to implement digital transformation, namely: Institutional reform for enterprises to perform digital transformation; Moving towards phasing out and eliminating the need for paper documents in business processes; Organizing more seminars on the use of digital technology to guide enterprises to implement methodically and on a large scale; Supporting SMEs in finance and developing highly-qualified human resources in information technology besides supporting SMEs to connect with partner enterprises and digital solution providers; Being more proactive in participating in building Vietnamese legal framework in line with the regional and global framework on digital technology.

Please refer to the full research Digital Transformation of Small and Medium Enterprises (SMEs) within the Covid-19 Pandemic here tại đây

Author group: Assoc. Prof. Bùi Thị Thanh, Dr. Nguyễn Xuân Hiệp, Administration Faculty, UEH Business School

This writing is in series of spreading researches and applied knowledge from UEH with “Research Contribution For All – Nghiên Cứu Vì Cộng Đồng” message, UEH would like to invite Dear Readers to look forwards to Newsletter ECONOMY NUMBER #35 “APPLICATION OF CRITICAL DESIGN IN THEORETICAL DIGITAL TRANSFORMATION AND PRACTICAL LESSON”.

News, photos: Author group, UEH Department of Marketing – Communication.