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Analysis of the State of E-Commerce Adoption by the SMEs in Northern Malaysia

and Factors that Might Hinder its Adoption: An Empirical Study

By
LIEW VOON KIONG
Bachelor of Science (Hons)
University of Malaya
1981
Master of Management
University of Malaya
2001

International Graduate School of Management


Division of Business and Enterprise
University of South Australia

Submitted in the year 2004 for the partial requirements


of the degree of
Doctor of Business Administration

Acknowledgements
I wish to convey a special thank to my supervisor, Associate Professor Dr. Mark Goh K.H for
his invaluable guidance and assistance in helping me to complete this research. I am very
much indebted to him for helping me to overcome many challenges and obstacles during the
course of working on this research paper.

I would also like to extend my thanks to all those lecturers from UniSA who have selflessly
shared their knowledge and provided the necessary guidance and assistance during the course
of doing my DBA.

Besides, I wish to express my gratitude to the Staff of ITD and IGSM of UniSA for their
assistance in providing me the necessary information and resources crucial for my research
work. Special thank also to be extended to the Staff of the UniSA online library who have
done an excellent job in setting up such a complete resource centre. The online library is
extremely important for an overseas student like me as I could access all the necessary
information without having to be physically present at the library.

Last but not least, I would like to express my heartfelt gratitude to my beloved wife and
children for their patient and constant support. Without them, I might not have the motivation
to complete the course.

II

Contents

Page

Acknowledgements

II

Table of Contents

III

Abstract

Chapter 1: Introduction.

1.1 Overview of the study

1.2 Objectives of the study

Chapter 2: Literature Review


2.1 Types of e-commerce applications

2.2 Stages of e-commerce adoption

2.3 Benefits realized through e-commerce adoption

2.3.1 Benefits of e-commerce adoption in the B2B area

2.3.2 Benefits of e-commerce adoption in the B2C area

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2.4 Factors hindering the adoption of e-commerce

19

2.5 Conceptual model and hypotheses

22

Chapter 3: Research Design and Methodology


3.1

Measurements development

27
27

3.1.1

Measurement of e-commerce usage

27

3.1.2

Measurement of e-commerce benefits

29

3.1.3

Measurement of factors hindering the adoption

31

of e-commerce
3.2

Research Method

32

3.3

Population and Sample

32

3.4

Data Analysis

34

36

Chapter 4: Analysis and Findings

4.1 Profile of the organizations

36

4.2 Usage of electronic commerce applications

37

III

4.2.1

Electronic marketing

37

4.2.2

Electronic advertising

37

4.2.3

Customer support service

38

4.2.4

Order and delivery

38

4.2.5

Payment system

38

4.3 Benefits realized through adoption of e-commerce

41

4.4 Factors hindering the adoption of e-commerce applications

42

4.5 Discussion of the findings

48

Chapter 5: Conclusions, Implications and Future Research

50

5.1 Conclusions

50

5.2 Implications

51

5.3 Limitations of the study

52

5.4 Recommendations for future research

52

53

References

Appendix A Questionnaire

A1 A5

Appendix B Coding form

B1 B5

IV

Abstract
The purpose of this study is to assess the state of e-commerce adoption by the SMEs in
Northern Malaysia and to examine the factors that might hinder the adoption. The
methodology employed in this study was questionnaire survey. Questionnaires were sent to
the SMEs in Northern who were listed in the latest official business directory of SMI
association of Malaysia as well as other sources. Analysis of the data obtained found that the
general usage of e-commerce among the SMEs in Northern Malaysia is low; most firms
seemed to have implemented only basic e-commerce applications and do not adopt advance
e-commerce applications. For example, the most used e-commerce application is email
whereas the least used application is online payment system. Furthermore, while a substantial
number of the SMEs have implemented web sites, they were used merely to display products
and company information rather than having advanced features such as providing online
transactions and online payment services. Analysis of benefits realized found that most of the
SMEs in Northern Malaysia, which have adopted e-commerce, only gained some of the
benefits of e-commerce. Benefits realized were in the areas of customer service, market
expansion, and back-end efficiency and inventory management. On the other hand, the SMEs
who have adopted e-commerce seemed incapable of improving their overall performance and
profitability. Examination of the factors that might hinder the adoption of e-commerce by the
SMEs in Northern Malaysia were initially identified through factor analysis as environmental
barriers, financial barriers, governmental barriers, organizational barriers, technical barriers
and behavioural barriers. However, correlation analysis showed that only factors related to
organizational, governmental and environmental barriers have some negative influence on the
extent of e-commerce usage. Out of the three factors, only the factor associated with
environmental barriers has a significant correlation with the extent of e-commerce adoption.
Regression analysis confirmed that the factor related to environmental barriers has significant
negative influence on the extent of e-commerce adoption. Therefore, it was concluded that
while many factors could be hindering the adoption of e-commerce by the SMEs in Northern
Malaysia, only the factor pertaining to environmental barriers has significant negative
influence on its adoption.

Chapter 1: Introduction

1.1 Overview of the study


Electronic commerce has accelerated at an incredibly fast pace in recent years (Kardaras &
Papathanassiou, 2000). The value of the e-commerce market in Europe is predicted to
increase from $6 billion to $230 billion by the year 2005, while in the US the figure will
skyrocket from $31 billion to $291 billion within the same period. Worldwide e-commerce
transaction was $474 billion in 2001 and it is estimated to reach $2400 billion by 2004
(Daniel, 2003). The revenue for worldwide B2B e-commerce in the year 2002 was $823
billion and is predicted to reach $1400 billion by 2003 (BizReport, 2003). These figures
indicated that e-commerce has survived the shake-up of the dot-com companies and is
proceeding to show positive growth.

Electronic commerce refers to conducting business transactions over the Internet, which
includes exchange of information of value in the form of products and services as well as
payments, using web-based technologies (Fraser, Fraser & MacDonald, 2000). The
emergence of electronic commerce is expected to change traditional business practices. The
great impact on businesses is anticipated as the advent of the World Wide Web has created
electronic or virtual marketplaces where trading could be conducted without any
geographical and time barriers. Electronic markets, which have the advantages of greater
reach and richness than the traditional markets (Tse & Soufani, 2003) has enabled firms to
contact more potential customers and exchange much more detailed information with them.
Indeed, e-commerce has already redefined relationship between suppliers and customers
(Daniel & Wilson, 2002). Rapid changes brought about by e-commerce have offered new
opportunities as well as threats for business organizations (Fraser et al., 2000). Kardaras et al.
(2000) suggested that many companies were making use of the opportunities to explore new
ways of doing business in order to deal more effectively with the increasingly competitive
environment. It is believed that electronic commerce will provide new sources of revenues
and prospects for companies that have well designed strategies.

The emergence of e-commerce has profound impact on industries as well as individual firms
in terms of the nature of competition as well as sources of competitive advantage (Pitts &
1

Lei, 2000). Earlier researches have shown that electronic commerce has an impact on
competitive forces that affect the industries as well as the value chain of firms. According to
Haynes, Becherer and Helms (1998), the Internet has resulted in an increased number of
competitors as geographical barriers have broken down. One of the effects of e-commerce is
the levelling of strengths among competitors, as smaller firms are able to compete with larger
firms in terms of quality and accessibility. Javalgi and Ramsey (2001) argued that ecommerce has created a large impact on businesses by improving distribution of resources,
relationships and efficiency of economies as well as increasing competitiveness and
diminishing costs. Fillis, Johansson and Wagner (2003) examined the adoption of ecommerce by SMEs and found that SMEs could gain competitive advantage through
adopting e-commerce as it could improve their market performance by having better access
to the market. Evidently, e-commerce has the potential to help SMEs to achieve cost savings
by streamlining business processes by nature of its ability to handle information
electronically which enables faster and more efficient information processing over the
Internet and private networks, thereby reducing costs in areas such as searching and acquiring
customers, matching suppliers and buyers and reduction in the use of paper (Daniel et al.,
2002). Moreover, new communication technologies could transform the competitive
environment of all firms, irrespective of their sizes (Hughes, Golden & Powell, 2003).

Although electronic commerce was already well established in developed countries like the
US, Japan and the European countries, the concept of electronic commerce is relatively new
in Malaysia, especially in the smaller towns. While the use of electronic commerce
applications is on the rise in Malaysia, the level of adoption is not high. According to
McKinsey (2001), most Asian companies are slow in adopting electronic commerce as only
about 8% of the Asian companies have adopted e-commerce applications. Khatibi,
Thyagarajan and Seetharaman (2003) found that e-commerce is not well established in most
Asian countries as only a small percentage (23.7%) of the worldwide Internet users were
from the Asia-pacific region. Out of the total Internet population in the Asia-Pacific region,
the Malaysian wired population only constituted 1.2%, which is extremely low compared to
developed nations such as the USA (30%) and even other developed Asian countries such as
Singapore (14%). A recent research by Sulaiman (2000) revealed that although there was an
encouraging trend of e-commerce adoption among Malaysian businesses, the usage is still
limited. For example, while 71% of the companies surveyed use e-mail for communication
2

purposes, only 16% conduct research on suppliers online and less than 7% engaged in online
payment such as the use of smart card.

The usage of e-commerce applications among the SMEs in Malaysia is even lower.
According to a recent report (Economist Intelligence Unit, 2001), only about 30% of the
Malaysian SMEs have adopted e-commerce applications, which is certainly low compared to
the approximately 80% in Europe. While the above statistics could provide some insight
about the usage of e-commerce in Malaysia, more current and detailed information regarding
commerce adoption especially among the SMEs is required as e-commerce is a rapidly
changing phenomenon. Therefore, there is a need to carry out additional research to obtain
the latest trend and statistics in the above area. The reason why SMEs are of particular
interest here is because SMEs form an important sector of a nations economy (Daniel et al.
2002; Tse et al. 2003) and any radical change in the way businesses are conducted in this
sector would have profound a impact on a nations economic growth

In view of the low usage of e-commerce among the SMEs in Malaysia, there is a need to
examine factors that could have contributed to the low e-commerce adoption among the
SMEs in Malaysia. Sulaiman (2000) and Khatibi et al.(2003) attempted to explore the
possible reasons by examining barriers that might hinder the adoption of e-commerce among
businesses in Malaysia. However, both papers were merely exploratory in nature without any
in-depth study regarding the hindering factors of e-commerce adoption. Besides, they
examined e-commerce adoption among firms in general without focusing on the SMEs. In
another study, Paynter and Lim(2001) examined the drivers and impediments to e-commerce
in Malaysia, but it focused only on the Internet users rather than the firms, although some
insights might be drawn surrounding the trend of Internet shopping, it did not provide much
clues with respect to the barriers to e-commerce implementation faced by firms in Malaysia,
particularly the SMEs.

This study will attempt to fill the gap by exploring the factors that might hinder the adoption
of electronic commerce applications among the small and medium enterprises in Northern
Malaysia. It could provide insights regarding the status of e-commerce adoption among
SMEs in this region. The reason why SMEs in Northern Malaysia were chosen is because this
region constitutes some of the most developed states in Malaysia and no research in similar
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area has been conducted in this particular region.

The above preliminary review and

arguments lead to the following research questions:

Research question 1: What is the extent of e-commerce adoption among the SMEs in
Northern Malaysia?

Research question 2: What are the benefits realized by SMEs in Northern Malaysia by
adopting e-commerce?

Research question 3: What factors could be hindering the adoption of e-commerce among the
SMEs in Malaysia?

1.2 Objectives of the study


The first objective of the research is to study the extent of e-commerce adoption among the
small and medium enterprises in Northern Malaysia.

The second objective is to assess benefits realized by SMEs in Northern Malaysia by


adopting e-commerce.

The third objective is to examine the factors that could be hindering the adoption of ecommerce among the small and medium enterprises in Northern Malaysia.

It is hoped that the research findings would provide useful insight for academicians to
understand current state of e-commerce usage among SMEs in Northern Malaysia, which
includes the extent of adoption and benefits realized, as well as to identify factors that might
be hindering its adoption. It is also expected that the results will help SMEs as well as the
government in this region to overcome barriers and speed up the rate of e-commerce
adoption.

Chapter 2: Literature Review

2.1 Types of e-commerce applications


According to Daniel et al. (2002), not many researches have been conducted to explore the
adoption of e-commerce by SMEs compared to studies on larger organizations in the same
area. However, based on the handful of previous studies on adoption of e-commerce
applications by SMEs as summed up by Daniel et al. (2002), usage of e-commerce could be
categorized into the following areas: communication, researching for information, marketing,
business with suppliers and business with customers. On the other hand, Martin and Matlay
(2003) found that the main applications of e-commerce are related to marketing activities. It
is suggested that common e-commerce applications such as email and websites could be
employed as cost-effective marketing tools in terms of information dissemination,
advertising, customers support and servicing as well as brand building (Auger & Gallaugher,
1996, Korgaonkar & Wolin, 2002). Further, Tetteh and Burn (2001) suggested that SMEs
could employ Internet infrastructure to develop a virtual community or rather a virtual
marketplace that could encourage interaction between manufacturers, service providers,
suppliers and customers through exchange of information via websites.

Website usage can be categorized into commerce, promotion, content, corporate information
and search agents (Hsieh & Lin 1998). According to Michalak and Jones (2003), the main
product of online commerce is information. Other e-commerce applications are online
transactions, which includes internet-based order processing and fulfilment (Phau & Poon,
2000) and supply chain management, which includes e-procurement and the use of EDI
(Murilo, 2001). Research by Hoffman, Novak and Chatterjee (1995) found that the basic
usage by commercial websites is in the area of marketing communication.

Study by

Sulaiman (2000) in the Malaysian context suggested that e-commerce applications could be
categorised as electronic marketing, electronic advertising, customer support services,
ordering and delivery and online payment. Based on the above studies, the usage of ecommerce could be summarised as:
(a) Marketing communication such as using email and websites to advertise products and
services as well as other information

(b) Online transactions which include order processing and fulfilment as well as payment
facilitation
(c) Relationship management which includes customer support and service such as
providing web-based FAQ and auto-feedback
(d) Supply chain management such as online procurement, which includes the use of
EDI.

Although there are many possible uses of e-commerce, empirical studies showed that most
SMEs have not fully adopted e-commerce applications. According to a research conducted
by Poon and Swatman (1997), small businesses normally use Internet as a communication
tool and the most popular Internet-based communication tool is email. However, even e-mail
usage by SMEs was still very much lower than the usage of conventional communication
tools. A study by Chapman, Moore, Szczygiel and Thompson (2000) found that the usage of
Internet tools such as email by small and medium enterprises was lagging behind the larger
firms. The reasons that SMEs lagged behind in e-commerce usage could be because they
have less resources and expertise in implementing e-commerce applications.

Besides, most companies surveyed by Poon et al. (1997) did not implement advanced ecommerce applications such as online order processing, electronic payments and so on.
Instead, empirical evidences showed that many firms have adopted basic web applications.
For example, according to a study by Kardaras et al. (2000) in Greece, a large number of
organizations were using Internet to provide information about products and services such as
prices, availability and new features. A survey study by Poon et al. (1997) found that many
firms use e-mail as a communication tool because it could enable asynchronous and
multimedia communication, and it is more cost effective. In fact, most SMEs surveyed by
Poon et al. (1997) were using the Internet for communication.

Mackay, Gemino, Igbaria and Reich (2001) in an empirical research in British Columbia
found that the majority of the SMEs use websites to share information with suppliers as well
as clients but only a handful of SMEs have adopted advanced e-commerce usage such as
online retailing and information sharing with their staff. This report is supported by a separate
study by Haynes et al. (1998) where it was discovered that Internet usage by most of the
companies is still relatively low. Besides, a survey by Mackay et al. (2001) also shows that
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online transactions are rarely used by SMEs. From the above findings, the most commonly
used Internet applications were found to be e-mail and websites. On the other hand, there was
evidence that most businesses especially the SMEs are not keen to use Internet to access their
suppliers, contrary to the opinions of many researchers who believe that Internet could offer a
cost-effective supply chain management.

In addition, many other studies also showed that many firms have not made full use of
advanced Internet-based technologies such as relationship marketing to gain competitive
advantage. For example, LaMonica in 1999 (cited in La and Kandampully, 2002) pointed out
that many websites are slow to response or do not even response to inquiries from users. The
discrepancies between suggested usage and actual usage might be due to certain factors,
which could influence the extent of usage of e-commerce by SMEs. These factors are
explored in another section of this study.

2.2 Stages of e-commerce adoption


Although the previous section shows that SMEs have adopted many types of e-commerce
applications, they might be at different stages of adopting those applications in accordance
with the level of complexity. Therefore, it is important to examine the state of e-commerce
adoption among the SMEs. In order to study different stages of e-commerce adoption, a
conceptual framework is needed. One of the earliest models with respect to the usage of ecommerce was proposed by Ho (1997) who has used this model to evaluate the value of the
commercial websites from different parts of the world. In his study, he categorised usage of
e-commerce into promotion of products and services, provision of data and information and
processing of business transactions. This model was then adapted and merged with the
Internet business models (APT, 1997) by Burgess and Cooper (1998) and developed into a
graphical model of e-commerce adoption which was labelled as Internet e-commerce staged
model. This model was later developed further by Lawson, Alcock, Cooper and Burgess
(2003) but without much modification to study the adoption of e-commerce by SMEs in
Australia. This model was termed as Model of Internet commerce adoption (MICA) and it
basically describes the three stages of e-commerce adoption proposed by Ho (1997) in
graphical form. Details of the three stages of e-commerce adoption are shown in Table 1.

Table 1: Stages of e-commerce adoption suggested by Lawson et al. (2003)


Stages

Descriptions

Promotion

Promotion of products and services

Provision

Online enquiry, technical information, FAQ and value-added links.

Processing

Online sales, online ordering and payments, order status enquiry, Links
warehouse and links distributors.

In addition, another adoption model known as the IBM model of stages and states suggested
by Stone (2003) categorises e-commerce adoption into the early stage, the integrating stage
and the advanced stage and these three stages again subdivided into six states as described in
Table 2.

Stones IBM model and MICA are similar. Beside these two models, there is yet another
model which was proposed by Rao, Metts and Monge (2003). It divides the stages of ecommerce development into presence, portals, transactions integrations and enterprises
integrations. This model is summarised in Table 3.

Table 2: Stages and states of e-commerce suggested by Stone (2003, p.349)


Stages

Early

States

Descriptions

Access

Uses the web for email and support a simple web page.

Publish

Maintains a multi-age web site and use it for email and


communication or publication of business information.

Integrating

Transact

Enables customers to conduct one-way or two-way transactions.

Integrate

Uses the web to integrated core business processes within the

internally

organization.

Integrate

Uses the web to integrate business processes across enterprises

externally

Advanced

Adapt

Uses the web as the foundation for existing in a digital

dynamically

community.

Table 3: Stages of e-commerce suggested by Rao et al. (2003)


Stages
Presence

Portals

Descriptions
-

Use web site to display information on products and services

One way communication

No integration with internal and external processes

Uses website for two-way communication with suppliers and customers

Provide services such as ordering, product feedback, product survey and


customisations but without financial transactions

Transactions

Online financial transactions and order fulfilments

integration

Low level collaborations and e-marketplaces

Enterprises

Complete B2B and B2C integrations across value chains

integration

Implementation of CRM and SCM and full collaborations

2.3 Benefits realised through e-commerce adoption


Many theoretical and empirical studies have provided sufficient evidence that e-commerce
adoption can help firms to improve their performance and reap benefits. This section
examined whether these benefits have been realised by SMEs through e-commerce adoption
in the business-to-business area as well as in the business to consumer area.

2.3.1 Benefits of e-commerce adoption in B2B area


According to Subramaniam and Shaw (2002), the most important function in a business-tobusiness trading is the procurement of products and services, which incurs the highest
expenditure among firms activities. Therefore, the analysis focused mainly on benefits
derived through improved procurement process enabled by web technologies.

As e-

commerce is picking up its momentum, more suppliers could be accessed online, enabling
firms to have more options to select their suppliers (Haynes et al., 1998). With the availability
of more choices, the bargaining power has shifted to the purchasing firms over the suppliers.
In fact, according to Stone (2003), the value chains have become so open that buyers could
obtain real-time information such as prices and hence could bargain for better terms. Indeed,

the shift of bargaining power has enabled small firms to improve some of its value adding
functions such as improved cost control as well as getting better services from the vendors.

The implementation of electronic supply chain management was started with the use of EDI
via the Intranet in the 1970s (Murillo, 2001). However, supply chain management within ecommerce via Internet-based EDI has begun to take shape in recent years. Gebauer and
Segev (2001) suggested that Internet and web technologies could help to improve the
procurement process by enabling access to pre-purchase information and facilitating
automations in many of its activities such as inventory management, making payment and
contract checking. It is found that web-based technologies such as Internet-based EDI is
particularly useful for SMEs by offering a cheaper way in supply chain management in
particular and adoption of e-commerce in general than the traditional more expensive
networks such as VAN. For example, web-based applications could automate many activities
in supply chain management such as providing online products related information including
pricing, online ordering and purchasing and exchange of documents. Wyld (2002) estimated
that companies could significantly cut down procurement costs by conducting purchasing
through the Internet directly.

Smaller firms could better manage their supply chains using e-commerce technologies
through shortening lead-time and better and more accurate order processing. Haynes et al.
(1998) argued that e-commerce could help smaller firms to manage their value chains
strategically, a thing that formerly only the larger corporations had the capability to
accomplish. Therefore, e-commerce has allowed smaller firms to gain some competitive
advantage over their suppliers. Fraser et al. (2000) study on e-commerce leads to the
suggestion of four sources of competitive advantage; among them is the effect on supply
chain management. It was said that E-commerce allows cost savings in purchasing activities
by cutting down time and effort in performing these activities.

Furthermore, smaller firms could also improve supply chain management through the web in
terms of reduced lead times and quicker and more precise order-processing abilities.
(Hoffman et al., 1995). By having easier access to the markets, small firms are able to skip
over parts of the value chain that traditional suppliers had depended on for competitive
advantage. As firms are now less dependent on particular suppliers, the bargaining power has
10

tilted from the suppliers to the purchasing firms. Gupta and Dubelaar (2000) observed that ecommerce could streamline the procurement process by enabling electronic transactions and
standardisation of the trading process, thus allowing firms to focus on searching for suppliers
and bargain for better deals and reduced cost, which indirectly shifts the bargaining power to
the purchasing firms. The procurement benefits can be measured in terms of various cost
savings resulting from improved procurement activities. Organizational performance
variables can be measured by inventory level, inventory carrying cost, stock outs, order cycle,
fill rate, price and availability (Leonard & Cronan, 2002), which can be classified as
inventory management, costs savings as well as improved efficiency.

The above benefits could be summarised into a few categories. The first category of benefits
is related to improved searching capability enabled by e-commerce thus reducing search
costs. This in turn contributes to the reduction in transaction costs. Moreover, the Internet
enables firms to have more vendor choices as argued earlier; they could save purchasing costs
by bargaining for the best price. The second category of benefits were derived from improved
order processing involving electronic documents and information handling, therefore
reducing labour cost by eliminating the need to carry out those jobs manually (Subramaniam
et al., 2002). This will contribute to lower transaction costs. Web-based procurement system
can also cut data entry errors and this will also result in lower transaction costs. By having
automatic products request and order placement, it can also help to reduce transaction cycle
time. Reduction in transaction cycle time will lead to a more efficient inventory management
thus lowering inventory costs.

The last category of benefits is cost savings through better co-ordination between the
purchasing firms and their suppliers enabled by e-commerce technologies. These
technologies allow both firms to communicate and exchange information with their suppliers
more efficiently and in real-time, thus reducing communication costs as well as cycle time.
These will contribute to the reduction of transaction and inventory costs. Based on the above
analysis, the benefits brought about by B2B e-commerce are improved inventory
management, cost reduction as well as back-end efficiency, which is in line with the
measures proposed by Zhuang and Lederer (2003). The benefits of e-commerce could be
summarised in Table 4. The measures used to define e-commerce benefits match the items
listed in Table 5.
11

Table 4: Summary of potential benefits of B2B e-commerce


Inventory management

Back-end efficiency

Cost reduction

Reduced lead-time (Fraser et al., 2000)


Lower inventory costs (Subramanian et al., 2002)
Better and more accurate order processing (Haynes et al.,
1998; Subramanian et al., 2002)
Reduced search costs (Subramanian et al., 2002)
Reduced product price (Gupta et al., 2000)

12

Table 5: Measures of electronic commerce benefits adapted from Zhuang and Lederer (2003)

E-commerce Benefits

1. Back-end Efficiency

2. Market Expansion

Items

3. Inventory
Management

4. Cost Reduction

5. Customer Service

Sources

Facilitated order entry processing


Facilitated billing
Facilitated electronic auditing
Improved control of data
Improved operational efficiency
Facilitated shipment tracing
Improved operational effectiveness
Provided access to new markets
Provided opportunities to niche marketing
Increased customer awareness of products/ services
Provided customers with better information about products
and services
Increased sales
Permitted differentiation of products/services
Provided better information for management decision
Making
Streamlined the inventory replenishment
Streamlined the procurement process
Reduced the time required to repackage products/services
Reduced inventory costs
Reduced administrative costs
Reduced customer support costs
Reduced marketing costs
Reduced information processing costs
Permitted better interaction with customers
Provided customer intimacy
Permitted better understanding of customers
Helped maintain current customers.

13

Hansen & Hill (1989)


Hansen & Hill (1989)
Lee & Clark (1996-1997)
Hansen & Hill (1989)
Zhuang et al. (2003)
Hansen and Hill (1989)
Zhuang et al. (2003)
Zhuang et al. (2003)
Zhuang et al. (2003)
Zhuang et al. (2003)
Zhuang et al. (2003)
Zhuang et al. (2003)
Zhuang et al. (2003)
Zhuang et al. (2003)
Hansen and Hill (1989)

Zhuang et al. (2003)


Zhuang et al. (2003)
Zhuang et al. (2003)
Zhuang et al. (2003)
Zhuang et al. (2003)
Zhuang et al. (2003)
Zhuang et al. (2003)
Hansen, and Hill (1989)
Zhuang et al. (2003)
Zhuang et al. (2003)
Zhuang et al. (2003)
Zhuang et al. (2003)

Cronbachs
Alpha

0.89

0.86

0.88

0.86

0.79

2.3.2 Benefits of e-commerce adoption in B2C area


Auger et al. (1997) found that the use of Internet helped businesses to gain better access to a
wider range of customers, due to the borderless nature of the Internet. Ritchie and Brindley
(2000) suggested that the Internet offers the opportunity for the smallest enterprises to
conduct businesses on a global scale, thus enabling the SMEs to compete with larger
organizations. Tetteh et al. (2001) advocated that Internet business offers a very attractive
choice for SMEs to broaden their market into a global scale without high expenditure. The
study by OECD (1998) found that electronic commerce could provide a better prospect for
SMEs to reach out to new markets on a global scale.

Quantitative data show that the Internet enables businesses to disseminate information at a
much lower cost than traditional media such as the print media (Auger et al., 1997). This
implies that small and medium enterprises could take this cost advantage to use the web as an
alternate or additional marketing channel such as placing online advertisements, catalogue,
support material and other information. Businesses are able to gather more information over
the Internet more easily as much more resources are readily accessible online than traditional
resources (Auger et al., 1997). This improved information gathering capability also applies
to smaller companies as the Internet enables them to gain access to a vast information
infrastructure and thus enabling them to communicate extensively with customers just as
efficiently as any large business organization (Poon et al., 1997).

Besides, Hoffman et al. (1995) also suggested that the web technologies enable firms to
conduct market research by gathering useful information related to customers preferences
and buying behaviours. This will enable firms to obtain more accurate information regarding
the needs and demands of the market (Reynolds, 1997), which will then help them to design
better marketing strategies. The above market research, which can also be termed as
customized research is normally monopolized by larger organizations, as the smaller firms do
not have enough resources to conduct such research (Haynes at al, 1998). However, Haynes
et al. (1998) suggested that the Internet would enable SMEs to overcome this through
examining customers comments and feedback over the web, which does not incur a very
high cost.

14

.
The development of electronic commerce has amplified competitiveness in the marketplace
to an extent that companies have to focus more on long-term relationship building in order to
retain loyal customers (Papadopoulou, Andreou, Kanellis & Martakos, 2000). Relationship
management

includes

business-to-business

and

business-to-customer

relationship

management. In the business-to-business sector, trading between customers and suppliers has
long been conducted over private electronic networks such as EDI networks. However, ecommerce technologies have greatly enhanced relationship between customers and suppliers
through interactive collaborations in new product development, integration of important
processes and cross-functional information sharing (Mclvor, Humphyeys and Huang, 2000).

One new phenomenon brought about by e-commerce was the development of new marketing
and sale strategies known as mass-customisation and personalised marketing enabled by
Internet technologies. These have great impact on the relationship between buyers and sellers
as they could revolutionise the way firms deal with their customers (Bloch, Pigneur & Segev
1996; Tse et al. 2003). The above strategies were made possible through the use of Internet
technologies to gather information on customers buying habits, preferences as well as taste.
Regarding this development, Wang, Head and Archer (2000) have provided a relationship
marketing model in the e-commerce context which comprises database marketing, interaction
marketing and network marketing. Traditional relationship marketing focuses mainly on
business-to-business marketing rather than business-to-customer marketing mainly due to
limitations in communication and data collection techniques and the high cost of
implementation.

Papadopoulou et al. (2000) also indicated that conventional customer relationship


management is very costly. However, Wang et al. (2000) suggested that these limitations are
greatly reduced in the Internet marketplace because the new innovations of advanced
Information and network technologies such as data warehousing and data mining have
enabled online user interaction and more effective data collection and analysis. Additionally,
Korgaonkar et al. (2002) suggested that e-commerce enables firms to develop and manage a
close bond with countless customers at the same instant through the Internet at a much lower
cost than conventional media. Therefore it becomes feasible to conduct relationship
marketing in the business-to-customer market over the Internet.
15

Wang et al. (2000) further suggested that web-based relationship management has enable
customers to acquire more thorough, custom-made, and up-to-date information. The
interactive nature of the web environment could significantly improve processes such as
information exchange, buying activities and after-sales services. Customers could exchange
information easily in the web environment therefore enhancing long-term relationship
building. Research by Hoffman et al. (1995) found that the web enables firms to manage and
improve customers relationship than traditional media. Web technologies also help to
enhance relationship between firms and their customers (Maes, Guttman & Moukas, 1999).
Besides, response time to inquiry from customers could be greatly reduced through electronic
dissemination of information enabled by the web technology (Auger et al., 1997). These
mean customers would be able to search for information faster and more accurately online.
Tang, Powell, Worlock & Bingham (2000) examined the impact of e-commerce and found
that Internet could facilitate quicker responses to customer needs and the changing nature of
the marketplace. By providing better customer support through more efficient handling of
customer feedback, businesses could greatly enhance their relationship with the customers.

In another study, Haynes et al. (1998) found that web tools such as FAQ (Frequently Asked
Questions) provides a low cost mean for smaller firms to build and maintain relationships
with their customers. Besides, the web has the potential to facilitate customer interaction,
enable relationship marketing and improve customer support (Hoffman et al., 1995). Tse et
al. (2003) research found that smaller firms are better in carrying out the activities with
respect to customers relationship management especially in relation to niche markets as they
have more flexibility. This will lead to collaboration between SMEs and their customers in
product development. By involving customers in the product development process will allow
customers to have more bargaining power thus forcing firms to improve customer support
and service and lead to better relationship between firms and customers.

In the context of SMEs, the emergence of new relationships between suppliers, firms and
buyers brought by e-commerce has a great impact on their value adding activities. According
to Filis et al. (2003), the Internet has permitted SMEs to obtain information from an
information infrastructure much bigger than those that belong to many big business
organizations. Better access to information and improved communication with their suppliers
as well as customers and business partners has enabled smaller firms to boost their value
16

adding activities within the value chain such as new product development and improvement
in service quality. Indeed, e-commerce has enabled SMEs to enhance relationship with their
suppliers and customers, as electronic networks such as the Internet is able to transmit rich
information between all parties in an electronic market. Through the Internet, even small
firms are able to reach suppliers and customers without being limited by physical barriers
such as the distance between markets. Therefore, it could be seen that SMEs are also
following the trend of getting into a more collaborative relationship with their suppliers as
well as customers in an effort to develop better products as well as providing better services.

The benefits of e-commerce adoption could also be gained through a process called
disintermediation. Firms could now omit parts of the value chain and have direct access to the
end users. In doing so they are bypassing the intermediaries (Allen & Fjermestad 2000; Stone
2003, Hoffman et al., 1995). Besides, Hooft and Stegwee (2001) argued that Internet
technologies could facilitate direct connection between different levels of the supply chain
without going through the intermediaries, hence making the e-market more transparent. Tse
et al. (2003) suggested that intermediaries have become irrelevant because everyone could
communicate with each other through the Internet. By not engaging the traditional
intermediaries to perform part of the functions in their value chain, firms are able to save
considerable transaction costs (Javalgi et al., 2001).

Chopra and Mieghem (2000) have provided a comprehensive analysis on the benefits of ecommerce from the perspectives of cost and revenue. First of all, it was pointed out that firms
could boost their earnings by selling directly to the buyers enabled by disintermediation. Ecommerce could also streamline marketing management through online information
dissemination about products and services as well other relevant information. By having
online promotions, time to market is greatly reduced. Furthermore, the online nature of ecommerce permits firms and customers to discuss price, service and products thereby
resulting in product and price customisation and thus enabling better support and service for
the customers. Another advantage of e-commerce is that it allows firms to reach potential
customers irrespective of geographical and time barriers, thus providing an excellent prospect
for market expansion and increased profits.

Finally, Chopra et al. (2000) suggested e-

commerce could help to reduce order-processing costs as well streamlining order fulfilment
process and costs.
17

Based on the above literature on the impact of B2C e-commerce, the adoption of e-commerce
applications could help firms including the SMEs to improve their business performances
through lower information dissemination costs, better access to wider range of customers and
prospect to increase market share. Besides, the use of e-commerce applications could also
enable firms to provide better service and support to customers by managing customer
relationship more efficiently, better understanding of customers needs and preferences
through low cost market research, lower search costs as well as opportunities to develop new
products through collaborative efforts with the customers.

Putting the above benefits

together, they could be fitted into the categories suggested by Zhuang et al. (2003), namely
market expansion, customer service, and back-end efficiency and cost reduction. They are
summarised in Table 6.

Table 6: Summary of potential benefits of B2C e-commerce


E-commerce benefits
Measures
Market expansion

Customer service

Back-end efficiency
Cost reduction

Prospect to increase market share (Fraser et al., 2000)


Better access to wider range of customers (Auger et al.,
1997)
New sources of revenues (Fraser et al., 2000)
Better access to information (Fillis et al., 2003)
Faster time to market (Chopra et al., 2000)
Better support and service through CRM (Hoffman et al,
1995
Better interaction with customers (Korgaonkar et al,
2002)
Better understanding of customers needs and
preferences (Reynolds, 1997)
Faster response time to enquiry (Auger et al., 1997)
Improved operational efficiency (Zhuang et al., 2003)

Lower information dissemination costs customers (Auger


et al., 1997)
Lower marketing costs (Auger et al., 1997; Haynes et
al., 1998)

18

2.4. Factors hindering the adoption of e-commerce


Many factors could be responsible for the low usage of e-commerce among the SMEs in
Malaysia. MITI (1999) suggested that the barriers behind the low adoption of Internet
applications among the SMEs in Malaysia could be due to lack of understanding about ecommerce, doubts about its benefits, lack of qualified IT human resources, high
implementation cost and worry about security. Furthermore, Economist Intelligence Unit
(2001) also reported that credit card users in Malaysia are not willing to buy through the
Internet due to security concerns. This might explain the slow adoption of e-commerce usage
among businesses in Malaysia.

The preceding reports seem to match a study done by OECD (1998) on hindrances to ecommerce adoption in OECD countries. The study suggested that those hindrances are lack
of understanding and awareness about e-commerce benefits, security concern, lack of
products suitable for e-commerce, set-up cost and lack of Internet legal system. A more upto-date survey by OECD (2002) showed that barriers to e-commerce among businesses
remain basically unchanged, where slackness in Internet security is the main concern.
However, the report did indicate that there exist some differences between small and large
firms regarding the barriers of e-commerce, where larger firms are more concern about
security than smaller firms and smaller firms rate the cost factor as a greater obstacle in ecommerce adoption than the larger firms.

The above findings were more or less consistent with some of the inhibitors of e-commerce
adoption by SMEs in Australia listed by Pease and Rowe (2003) as lack of awareness and
understanding of e-commerce, lack of skill and time to implement e-commerce, resistance to
technological changes, cost of implementation, lack of awareness of the benefits associated
with the adoption of e-commerce, worry about security and privacy, lack of suitable software
standards, lack of easily accessibility and bandwidth and infrastructure issues. On the other
hand, telecommunication infrastructure issues could be linked to insufficient support from the
government. For example, Michalak et al. (2003) suggested that one of the reasons that ecommerce in Canada was lagging behind the USA is because of slower bandwidth as most
telephones lines could only support the connection speed of 56.6 kbps. This situation is not

19

expected to change as the Canadian government has delayed the project to enable broadband
access for majority of the Canadian population.

Research by Raymond (2001) found that adoption of innovative technologies could be


influenced by environmental and organizational factors. One of the organizational factors is
the lack of resources. In addition, Auger et al. (1997) identified the following factors that
might hinder the adoption of e-commerce, namely, the problem in tracking online users,
security issues, bandwidth problem, insufficient company resources in terms of availability
of qualified IT personnel and suitability of products that could be marketed online. In a
separate study, Clarke (1999) also suggested that reluctance to change and poor infrastructure
and slackness in technology as barriers to implementation of business-to-business ecommerce. Besides, earlier study by Hoffman et al. (1995) asserted that the main obstacle
related to e-commerce adoption is Internet accessibility problem, which includes issues such
as insufficient bandwidth, security and privacy and technological issues

Useful insight about the hindering factors on e-commerce usage among SMEs could also be
drawn from a study on obstacles that might affect the adoption of EDI among the small firms
in the US by Jun and Cai (2003) as EDI and e-commerce have similar characteristics because
both involve in business transactions over electronic networks. EDI is B2B electronic
commerce conducted over a private network. Jun et al. (2003) proposed that hindering factors
are issues related to managerial support, costs and benefits, technical complexity, human
resource management, relationship with trading partners, security risks and legal problems. In
addition, a research about the impact of e-commerce on the competitiveness of SMEs in EU
highlighted barriers surrounding the adoption of e-commerce by SMEs as cost constraints,
lack of IT expertise and lack of management foresight (STOA, 2000).

One of the major issues that could hinder e-commerce implementation is the perceived
security risks and trust issues related to business dealings over the Internet (Labuschagne &
Eloff, 2000). It was suggested that two kinds of risks could be encountered in the electronic
market, namely business risks and technological risks. Some of the business risks are IT
crimes, over-dependence on technology, a rapidly changing or volatile business and
technological environment and lack of qualified information-security personnel. On the other
hand, examples of technological risks are difficulties in ensuring security over the Internet
20

due to its vastness and complexity, rising hacking activities due to easy access to hacking
tools, and difficulties in the prevention of hackers attack due to unpredictability associated
with Internet technologies. In a separate study, Furnell and karweni (1999) also stressed that
security has not been fully established for trading over the Internet. Although currently two
systems are employed to handle secured online transactions, namely Secure Sockets Layer
(SSL) developed by Netscape and Secure Electronic Transaction (SET) developed by major
credit companies, they have not provided complete solutions to online security and trust
issues. Indeed, the empirical study by Furnell et al. (1999) found out the main factors that
deter people who were not shopping on the Internet were insecure Internet infrastructure and
perceived dishonesty of the merchant.

Problems associated with trust in the electronic market can be non-technical in nature but
rather has something to do with branding. According to a study by Boston Consulting Group
in 2000(Reynolds, 2000), trust is an important element in establishing brand in the electronic
market. Indeed, Reynolds (2000) suggested that trust is more important in e-commerce than
conventional market because consumers are comparatively unfamiliar with the Internet
environment and the many new online brands. Furthermore, trust is vital in B2B e-commerce,
as it is one of the important characteristics of vendors with respect to electronic transactions
(Swaminathan, Lepowska-White & Rao, 1999). In addition, lack of trust could be due to the
perceived risks of the products offered in the electronic market as online customers cannot
touch and feel the products physically (La et al., 2002). Empirical studies found that most
consumers still have no trust in online stores (Jarvenppa & Tractinsky, 1999).

In addition, a big concern about e-commerce is the use of certain e-commerce technologies
such as cookies that could potentially threaten individual privacy and confidentiality
(Whysall, 2000). Besides, intellectual property may not be well protected, as there are many
pirated versions of well-known brands such as McDonald and Levis. In Malaysia, the study
by Sulaiman (2000) indicated that the reasons for low adoption of e-commerce applications
among Malaysian firms are insufficient security, sales and marketing which required high
human interaction and the high costs of setting up e-commerce. Malaysian companies listed
hindrances of e-commerce adoption as problems keeping up with changing technology, lack
of skill workers, uncertainties about its operations and legal aspects as well as high switching
costs (Khatibi et al., 2003).
21

2.5 Conceptual model and hypotheses


Research concerning factors affecting adoption of e-commerce especially among the SMEs is
still at an exploratory stage, as e-commerce is still a relatively new business practice.
Therefore, a conceptual framework was developed in this study to examine the factors that
might hinder the adoption of e-commerce by SMEs in Northern Malaysia.

The conceptual model was built by adapting a model developed by Love, Irani, Li, Cheng
and Tse (2001) as well as findings from other studies, including literature reviewed earlier. In
this model, Love et al. (2001) classified the barriers under four categories, namely
organizational, technical, financial and behavioural barriers. This model is shown in Figure 1.

Technical

Organizational
Knowledge

Risk

Barriers

Change

Uncertainty
Financial

Behavioural

Figure 1: Barriers to adoption e-commerce illustrated by Love et al. (2001, p.37)

Most of the past researches seemed to match the barriers groupings suggested by this model,
although some barriers suggested by other researches could not properly fit into it. For
instance, a study by Wirtz and Wong (2001) on B2B e-commerce found that the main barriers
affecting e-commerce implementation among non-adopters were security issues, customers as
well as firms not ready for e-commerce, and lack of in-house competence. Besides, the study
further pointed out that in addition to the above barriers, firms who were interested in
adopting e-commerce also cited the high set-up cost as another obstacle to e-commerce
implementation. From the above study, the security issues could be classified as technical
barriers, firms not ready for e-commerce could be classified as an organizational barrier, set22

up and maintenance costs could be categorized as the financial barriers and lack of in-house
competency could be put under the organizational barriers. However, customers and
suppliers readiness could not be suitably classified under any of the categories. As these two
factors are external to organization, it is suggested that they be put under a new category,
which could be named as the business environment.

Moreover, some of the items from one category could be merged with another category. For
example, all the items under behavioural could be moved to the organizational category as
these barriers are related to employees attitudes in the organization. Therefore, regrouping
of the item seems to be necessary. Combining Love et al.s model and other literatures would
produce the model required in this study. For example, Lawson et al. (2003) classified the
barriers into technical and social. It was suggested that slackness in telecommunication
infrastructure and lack of security in online transactions could be considered the technical
barriers while lack of trust in ICT, lack of knowledge about e-commerce and lack of IT skills
as well as lack of awareness could be grouped under the social barriers. These barriers could
fit quite nicely into Love et al.s model except that the social barriers need to be put under the
organizational category.

On the other hand, Gibbs, Kraemer and Dedrick (2003) examined two types of macro-level
factors that might influence the adoption of e-commerce, namely national environment and
national policy. According to Gibbs et al. (2003), national environmental factors are factors
related to demographics, economic and financial resources, information infrastructure,
industrial structure and competition, organizational environment as well as social and culture.
National policy is related to issues such as liberalization of telecommunication and ICT
markets, government support in promoting e-commerce activities as well as e-commerce
legislation. Further more, Lawson et al. (2003) also found that the lack of government
incentives as one of the barriers to e-commerce adoption. Therefore, two new categories of ecommerce barriers were added here, which are environmental and governmental factors.
Putting these two new categories into Loves model formed the conceptual as illustrated in
figure 2.

23

Technical barriers
Financial barriers
Extent of
e-commerce
adoption

Organizational barriers
Behavioural barriers
Environmental barriers
Governmental barriers

Figure 2: The conceptual model to examine factors that hinder the adoption of e-commerce

The technical barriers were described by Love et al. (2001) as problems related to acquiring
suitable technologies to meet business requirements, lack of education and expertise about
the system requirements and risks related to security and authentication. These barriers could
prevent firms especially the smaller businesses to adopt e-commerce applications. Indeed, a
number of studies indicated that technical issues especially those related to security risks
were hindering the adoption of e-commerce (Lawson et al. 2003; Sulaiman 2000; Furnell et
al. 1999; Nambisan & Wang 1999). The preceding discussions led to the first hypothesis:

H1: Factor related to technical barriers has negative influence on e-commerce adoption

According to Love et al. (2001), the financial barriers to e-commerce adoption are those
issues related to the set-up and maintenance cost of the e-commerce system as well as
investment risk, training cost and cost incurred because of market uncertainty. It was pointed
out that without sufficient investment in ICT, small firms will not be able to gain any benefits
from e-commerce (Love et al., 2001). Many previous studies suggested that the high cost
requirements in setting up e-commerce system have prevented businesses particularly the
SMEs to adopt e-commerce applications (Sulaiman 2000; Khatibi et al. 2003; Fillis et al.
2003; Lawson et al. 2003). Therefore, the factor related to financial barriers could be a
roadblock to the adoption of e-commerce by the SMEs. The above arguments led to the
following hypothesis:
24

H2: Factor related to financial barriers has negative influence on e-commerce adoption

The organizational barriers that could discourage the adoption of e-commerce by firms
especially the SMEs are issues such as lack of employee knowledge, lack of an IT
infrastructure, reluctance to collaborative partnership (Love et al., 2001), lack of managerial
support and organizational readiness (Jun et al., 2003). A number of studies (Chau & Hui
2001; Lawson et al. 2003; Khatibi et al. 2003) found that the lack of employee skill and
knowledge particularly in IT was found to be a significant barrier to adoption of e-commerce.
The above arguments led to the formulation of the next hypothesis:

H3: Factor related to organizational barriers has negative influence on e-commerce adoption

Lawson et al. (2003) found that one of the main barriers to e-commerce adoption by the
SMEs in Australia was the lack of government incentives. In contrast, it was found that the
adoption of e-commerce by businesses in Singapore was very encouraging because the
government has played an important role in promoting and supporting the use of Internet
(Chan & Al-Hawamdeh, 2002). Additionally, Gibbs et al. (2003) argued that the government
could play a crucial role in driving e-commerce adoption through the establishment of
various policies such as deregulation of the telecommunication sector and the legislation of
cyber law, as well as its initiatives in promoting the use of Internet among the business
sectors by providing training and funding. Therefore, it could be assumed that the
government is vital in spearheading the adoption of e-commerce among businesses,
especially the SMEs. Conversely, the lack of government support and effort would mean that
adoption of e-commerce would be slow. Indeed, the study by Michalak et al. (2003) showed
that Canadian businesses were much slower in e-commerce adoption than their USA
counterparts as there was lack of support from the government. The preceding discussions led
to the following hypothesis:

H4: Factor related to governmental barriers has negative influence on e-commerce adoption

A study by Gibbs et al. (2003) showed that the environmental factors such as the
characteristics of a market that include demographics and consumer preferences, as well as
organizational environment, could encourage or inhibit e-commerce adoption by firms. For
25

example, the preceding study found that countries with low IT literacy and underdeveloped
telecommunication infrastructure have low diffusion of e-commerce both in the B2C and
B2B areas. On the other hand, issues related to the organizational environment such as
readiness of trading partners could affect the adoption of e-commerce (Jun et al., 2003). If
trading partners such as the suppliers have not adopted e-commerce, it would be difficult for
firms to perform e-commerce transactions. The above arguments led to the following
hypothesis:

H5: Factor related to environmental barriers has negative influence on e-commerce adoption

The behavioural barriers to e-commerce adoption are related to attitudinal issues involving
people in an organization. E-commerce development has brought about rapid changes in the
way business is conducted. However, many people are reluctant to change themselves in
order to adapt to the new working routines, and they are worry about the need to participate
in extra staff development and training programme to improve their skills (Love et al., 2001).
Thus, the negative behaviour of its staff could prevent a firm from adopting e-commerce.
However, there is need to test the following hypothesis in order to confirm or reject the above
assumption.

H6: Factor related to behavioural barriers has negative influence on e-commerce adoption

26

Chapter 3: Research Design and Methodology

3.1 Measurements development

3.1.1 Measurement of e-commerce usage


The conceptual models discussed earlier had provided a comprehensive picture about the
stages of e-commerce adoptions and a basis for the development of measures of e-commerce
usage. However, due to the facts that the adoption of e-commerce among firms especially
among the SMEs in Malaysia was low (Sulaiman, 2000; Khatibi et al., 2003), a simpler
adoption model is needed. In fact, Sulaiman classified e-commerce applications into five
categories namely electronic marketing, electronic advertising, customer support services,
order and delivery and online payment. The model developed in this study used all the stages
of e-commerce adoption in MICA and some of the stages in the IBM model and the model
proposed by Rao et al. (2003), as well as some of the e-commerce applications mentioned in
the studies by Sulaiman (2000) and Khatibi (2003). The proposed conceptual model of ecommerce adoption is illustrated in Figure 3. However, this model will not be used to test any
hypothesis. Instead, it will be used to measure the state of e-commerce adoption by the SMEs
in Malaysia. It is suggested that a firm will be placed in a certain stage as long as it has
adopted one of the applications in that stage.

Stage 1:
Promotion

Stage 2:
Provision

Stage3:
Transaction

Stage 4:
Integration

. Email
. Simple web
page
. Electronic
advertising

. FAQ
. Online
Enquiries
. Value added
info
. Customer
support services
. Electronic

. Online sales
. Online
orders
. Order
fulfilments
. Online
payments
. Order status

. Linked
warehouse
. EDI
. SCM

Figure 3: Conceptual model of stages of e-commerce adoption

27

Additionally, the measurement of e-commerce usage will be adapted from the measures used
by Sulaiman (2000) who categorized the usage of e-commerce into electronic marketing,
electronic advertising, customer support service, order and delivery and payment system. The
detail items under each category were adapted from the measures used in the e-commerce
research by the National Productivity Corporation (2000). These measures are shown in
Table 7.

Table7: Usage of electronic commerce

E-commerce Applications
Electronic Marketing
Research on consumers preferences
Research and evaluation of new suppliers
Research on Competitors
Electronic Advertising
Displaying company information and products/services offered
Web site hosted by another company
Web site hosted by own server
Advertising on third party web site
Electronic catalogues
Customer Support Service
Online help- Frequently Asked Questions
Online help- products updates
Handling customers feedback/queries online
Personalised email communication
Online application/registration
Order and Delivery
Processing sales order from customers online
Coordinating procurement with suppliers online
Tracking incoming and outgoing goods delivery
Electronic Data Interchange (EDI)
Payment System
Electronic Fund Transfer (EFT)
Online credit card processing
Smart card
Prepaid card

28

3.1.2 Measurement of e-commerce benefits


The conceptual model of e-commerce benefits was built based on a model proposed by
Subramaniam et al. (2002), which laid down constructs that could be applied to measure the
benefits of e-commerce and other literatures. This model attempts to assess the impact of ecommerce on firms business processes that are related to supply chain management and to
examine whether the improvement in those processes might lead to increased companies
performance.

However, the model was only focusing on the business-to-business

transactions while ignoring the B2C area. As many SMEs are also involve in B2C
transactions, a model that is used to evaluate the benefits of e-commerce should also examine
its effects on the value-adding activities in the business to consumers area. To investigate the
impact of B2C e-commerce, a number of prior researches were reviewed and the study by
Zhuang et al. (2003) was selected because an instrument for measuring the business benefits
of e-commerce retailing was available in this paper. Therefore, the proposed conceptual
model was developed based on the model constructed by Subramaniam et al. (2002) and the
measures of B2C e-commerce benefits suggested by Zhuang et al. (2003), as well as other
literatures that have presented some kinds of measures on benefits of e-commerce such as the
model on impact of e-commerce on organizational performance by Leonard et al. (2002).

In this model, the firm performance is measured in terms of productivity, sales, profitability,
competitive position and overall performance (Powell & Dent-Micallef, 1997). In another
study, Leonard et al. (2002) suggested that the firm performance is normally quantified as
return on investment, return on assets and market share, which are financial indicators related
to profitability. Besides, the model also shows the benefits that could be realized through ecommerce adoption. These benefits are improvement in back-end efficiency, market
expansion, and inventory management, cost reduction as well as customer service, which
could contribute to the improvement in firm performance. The model is depicted in Figure 4.

The above model will not be used to test any hypothesis but to develop measures for the
purpose of assessing benefits of e-commerce adoption. The measures of e-commerce benefits
will be adapted from the instrument developed by the National Productivity Corporation of
Malaysia, which was used to conduct nation-wide e-commerce research in Malaysia in 1999.
This instrument was selected because the measures used matched those suggested in the
29

model and fewer items were used compared to that proposed by Zhuang et al. (2003). The
survey instrument with fewer items was necessary as the respondents might find it difficult
and time consuming to answer the items if there are too many of them in the questionnaire.
Besides, the instrument was used in the survey in the Malaysian context. These measures,
which comprise 12 items, are listed in Table 8.

Cost Reduction

Firm Performance

Inventory
Management

1. Productivity
2. Sales
3. Profitability
4. Competitive position
5. Overall performance

Market
Expansion

Powell et al. (1997),


Zhuang et al. (2003)

Customer
Service

Back-end
Efficiency
Figure 4: The conceptual model to assess the benefits of e-commerce adoption
Table 8: Measures of e-commerce benefits
No. Benefits of e-commerce

Items

1.

Market expansion

2.

Customer service

3.
4.
5.
6.

Back-end efficiency
Cost Reduction
Inventory management
Firm performance

Increase in market share


Enhance company brand and corporate image
Improved customer service
Increased accessibility to the end-users
Increased responses from end-users
Increased customer loyalty and retention
Improved business processes flow
Reduce in cost
Increase in efficiency in dealing with suppliers
Increase in profit
Increase in productivity
Increase in Return on Investment

30

3.1.3 Measurement of factors hindering the adoption of e-commerce


Measures of e-commerce barriers were adapted from the instrument developed by the
National Productivity Corporation of Malaysia, which was used to conduct nation-wide ecommerce research in Malaysia in 1999 (National Productivity Corporation, unpub.). These
measures are the independent variables of the conceptual model that was developed earlier
pertaining to factors hindering the adoption of e-commerce. These measures are categorized
in Table 9. The dependent variable, extent of e-commerce adoption was computed by adding
the number of e-commerce applications adopted by the SMEs.

Table 9: Measures of e-commerce barriers

Financial

Cost of setting up e-commerce is high


Need additional staff to manage e-commerce applications
Difficult to justify the cost with desired benefits

Item
label
V1
V2
V3

Environmental

Information from e-commerce is not useful


Market potential of e-commerce users is too small
E-commerce is not as effective as traditional channel
Most suppliers do not have access to e-commerce

V4
V5
V7
V8

Insufficient qualified vendors for developing applications


It will upset existing distribution channels

V12
V9

Barriers

Organizational

Items

Our sales/marketing requires high degree of human interaction


V6
Lack of skilled workers to handle or maintain e-commerce V13
Lack of knowledge about the potential applications of e- V14
Weak support from top management
V18

Technical

Insufficient security for online credit payment and transactions


Insufficient security to prevent hacking and viruses

Governmental

Lack of standards/regulations from government on e-commerce V15


Telecommunication infrastructure is not adequate
V16
Lack of government leadership
V17

Behavioural

Keeping up with changing technology


Mindset shift towards using e-commerce

31

V10
V11

V19
V20

3.2 Research Method


The survey method was chosen in this study. This approach was used because the study
attempted to gather information from a large number of respondents who are spread widely
geographically. Besides, it intended to test several hypotheses empirically. The questionnaire
was adapted from the research instrument designed by the National Productivity Corporation
University of Malaysia research team. This was validated and used in a nationwide ecommerce research in Malaysia in 1999(National Productivity Corporation, unpub.).

The first part of the questionnaire consists of dichotomous questions that require the
respondent to indicate types of e-commerce applications they are using as well as those that
are not being used. These questions are categorized into electronic marketing, electronic
advertising, and customer support service, order and delivery and payment system. The
second part of the questionnaire consists of mostly Likert scale type of questions. There are
20 items on a 5-point Likert scale questions that require respondents to rate the hindrances of
e-commerce where 5 indicates very high hindrance while 1 indicates very low hindrance. The
third part of the questionnaires consists of Likert scale items that measure benefits of ecommerce for those who have adopted e-commerce, where 1 indicates very high profit while
5 indicates virtually no benefit. The last part of the questionnaire consists of questions about
the profile of the firm that includes questions like what sector the firm is in, type of industry
or business involved, sales turnover, amount of investment in electronic commerce and so on.

3.3 Population and Sample


The population of this study comprised SMEs of Northern Malaysia. SMEs are often defined
based on certain quantitative measures such as the number of staff, the amount of capital, the
amount of assets and sales turnover. In Malaysia, the more commonly accepted definition is
the one given by the Ministry of International Trade and Industry of Malaysia and Hashim
(1999, p41), stated as follows:
i. A small-sized firm is a firm with less than 50 full-time employees, and with an annual
turnover of not more than RM10 million.
ii. A medium-sized firm is a firm with between 51 and 150 employees, and with an annual
turnover of between RM10 million and RM25 million.
32

Therefore, the definition of SME is defined as a firm with no more than 150 employees and
an annual sales turnover of no more than RM25 million. Although this definition could be
used for the purpose of this research, discretion and flexibility need to be exercised. The
reason is that this definition might not sufficiently classify firms that could only fulfill one of
the conditions. For example, a firm with an employee of more than 150 but with an annual
turnover of much less than RM25 million might still need to be considered as SMI although it
could fulfill one of the stated conditions. This is true especially for labour intensive
industries. On the other hand, a firm with only 50 employees but with an annual turnover of
more than RM25 might not be considered as SMI. In order to solve the above problem, all the
firms in the chosen sampling frames would be classified as SMEs even though they might not
fulfill the conditions perfectly, as long as the discrepancy is not too great.

Northern Malaysia is an area that includes the four northern states of Perlis, Kedah, Penang
and Perak with a total area of 32253 km2. The total population of the four states is 5, 218,891,
which make up 22.4 % of the total population of Malaysia. The largest state is Perak in terms
of area as well as population but Penang has the highest urban population. The smallest state
is Perlis both in terms of population and area as well as the urban population. The above
figures were obtained from census of the year 2000 released by the statistical department of
Malaysia. Details of the statistics are listed in Table 10.

Table 10: Statistics of the area and population of Perak, Penang, Perlis and Kedah

Perak

Penang

Perlis

Kedah

Total

Area (km2)

21002

1031

795

9425

32253

Population

2,051,236

1,313,449

204,450

1,649,756

5,218,891

% of National
Population
Urban Population

8.8

5.6

0.9

7.1

22.4

58.7%

80.1%

34.3%

39.3%

Source: Malaysian Statistical Department

33

Two sampling frames were used in the study. The first sampling frame comprises 424 small
and medium enterprises of Northern Malaysia who were listed in the latest official business
directory of SMI Association of Malaysia, which was compiled in the year 2002. The second
sampling frame was a list which comprises 167 firms compiled by the Penang Development
corporation from various sources of industrial associations such as SAMENTA, Malaysian
Plastic Manufacturers Association (MPMA), Credit Guarantee Corporation website and SMI
directory. The questionnaires were mailed to the respondents in the sample frame.

3.4 Data Analysis


As the first part of the paper is to assess the state of e-commerce adoption among the SMEs
in Northern Malaysia surveyed in this study, frequency distributions will be used to describe
the number as well the types of e-commerce applications being implemented. Besides, the
study will also use frequency distributions to evaluate the stage of e-commerce adoption by
the respondents in the sample obtained.

Descriptive statistics will be used to evaluate the benefits realized by the SMEs surveyed in
this research. Means for each benefit will be obtained using the SPSS software. As the Likert
scale used to measure the benefits is 1 for very high profit and 5 for virtually no profit, a
mean with value less than 3 will imply that that particular benefit has been realized while
those with means more than or equal to 3 will imply that those benefits have not been
realized.

To analyse the factors that might hinder the adoption of e-commerce, a number of statistical
methods will be used. First of all, factor analysis with varimax rotation will be employed to
reduce the variables that are used to measure hindrance of e-commerce into fewer numbers of
factors. The factors will be categorized based on suitable factor loadings depending on the
sample size. The grouping of variables into various factors will be used to compare the
factors that were categorized under the proposed conceptual model. Reliability analysis will
also be performed to examine whether the factors obtained above were reliable measures or
not. Any factor with Cronbachs alpha less than 0.7 will be discarded, as it will not be
considered reliable (Hair, Anderson, Tatham & Black, 1998). The above analysis will be
done using the SPSS software.
34

Next, correlation analysis will be used to examine whether there is any association between
each of the factors and the extent of e-commerce adoption. The extent of e-commerce
adoption will be computed by adding the number of e-commerce applications being adopted
by the respondents, which means that the higher the score, the higher the adoption and vice
versa. Lastly, in order to examine whether the factors have any influence on the extent of ecommerce adoption, that is to test the hypotheses formulated earlier, regression analysis will
be used. For the purpose of regression analysis, the extent of e-commerce adoption is the
dependent variable while the factors are the independent variables. It will be performed using
the SPSS software.

35

Chapter 4: Analysis and Findings


A sample of 65 responses was obtained from the first sampling frame, out of which 61 were
usable; this gave a response rate of 14.3 percent. The sample size was further reduced to 53
after rejecting four public listed companies and five of them with more than 300 employees.
The questionnaires were later sent to the second list of 167 firms and a sample consists of 15
usable responses were obtained, which gave a response rate of about 9 %.
The low response rates could be explained by the growing trend that people are reluctant to
response to random questionnaire survey (Bryman, 1989). In order to assess the differences
between the two samples, t-tests were conducted using key variables such as the usage of ecommerce, paid-up capital, investment in IT and websites. It was found that no significant
differences exist between the two samples and so the two samples were combined to make a
single sample, which comprises 68 respondents. Although the sample size is not very big, a
sample size of more than 30 could be considered sufficient for most research (Sekaran, 2000).

4.1 Profile of the organizations


Most of the firms participated in the survey are in the manufacturing sector as shown in Table
11. Out of the total valid sample, 86.4 % of the firms are involved in the manufacturing
sector, while the rest of the firms are in other sectors.
Table 11: Classification of firms by business sector

Sector
Construction
Wholesale
Retail
Manufacturing
Others
Total
Missing data

Frequency Percentage
1
2
2
57
4
66
2
68

Valid Percentage

1.5
2.9
2.9
83.8
5.9
97.1
2.9
100.0

1.5
3.0
3.0
86.4
6.1
100.0

36

4.2 Usage of electronic commerce applications


Initial results from Table 12 indicated that most SMEs in Northern Malaysia are at a fairly
high state of e-commerce adoption. Out of the firms surveyed, 11.4% of them have not
adopted any e-commerce application, 2.9% are at the promotion level, 29.4% are at the
provision stage, 27.9% are at the transaction stage while as high as 27.9% have moved on to
the integration stage. However, the figures might not be very accurate as the firms were
classified in a certain stage as long as they have adopted one of the applications in that stage.
Therefore, it is also important to examine percentage of usage in each individual e-commerce
application.

Table 12: State of E-commerce adoption


Adoption stage

Frequency

Non-adopter
Promotion
Provision
Transaction
Integration
Total

Percentage

8
2
20

11.8
2.9
29.4

19
19
68

27.9
27.9
100.0

4.2.1 Electronic marketing


From the statistics obtained (Table 13), the extent of usage in this area is considered low as
only 26.5 % of the surveyed firms have implemented research about their customers
preferences, 29.4 % of them are carrying out research and evaluation on their suppliers and
slightly less are doing research on competitors (20.6%).

4.2.2 Electronic advertising


The adoption rate in this area among the companies surveyed is considerably higher than in
the electronic marketing. Out of the sample, 58.8% of the companies are displaying their
corporate as well as products or services information online. However, most of the websites
are hosted by other companies (61.8%), only very few companies are having their own web
37

servers (11.8%). In addition, not many firms are advertising on third party web site (16.2%)
or using electronic catalogues (20.6 %).

4.2.3 Customer support service


This is an area that is related to relationship management. It is apparent that most companies
are providing some support services to their customers through the Internet as 77.9 % of them
are using personalized email to communicate with their customers. However, besides using
email, not many companies have implemented web-based support services. Out of the total
number of companies surveyed, only 14.7% are providing FAQ (frequently asked questions)
service while 23.5% of them are displaying products updates over the web. In addition,
30.9% of them are handling customers feedback online and 28.6 % of them provide online
application as well as registration. The main reasons behind this phenomenon could be due to
the cost constraints and the lack of technical expertise. It is much easier and cheaper to use
email than web-base technologies.

4.2.4 Order and delivery


This area comprises two very important functions of the companies, namely order processing
and fulfillment. However, not many companies are capitalizing on Internet technologies in
this area. While quite many companies (35.3%) are processing sales order from customers
online, only 25.0 % of them are involved in online procurement and much fewer companies
engage in online orders tracking (17.6%). In addition, EDI seems to be the least use
application in this area (10.3%). The above facts could again be explained by cost constraints
and lacking in technological know-how.

4.2.5 Payment system


It is apparent that the usage of online payment system is very much lower compared to the
other e-commerce applications. From the data obtained, only 16.2% of the sampled
companies are using EFT (electronic fund transfer) and 13.2 % of them provide online credit
card processing while much fewer are using smart card (7.4 %) and prepaid card (5.9 %).

38

Table 13: Usage of e-commerce applications by SMEs


Percentage (%)

E-commerce Applications

In use

Not in use

Research on consumers preferences

26.5

73.5

Research and evaluation of new suppliers

29.4

70.6

Research on Competitors

20.6

79.4

Displaying company information and products/services offered

58.8

41.2

Web site hosted by another company

61.8

38.2

Web site hosted by own server

11.8

88.2

Advertising on third party web site

16.2

83.8

Electronic catalogues

20.6

79.4

Online help- Frequently Asked Questions

14.7

85.3

Online help- products updates

23.5

76.5

Handling customers feedback/queries online

35.3

64.7

Personalised email communication

77.9

22.1

Online application/registration

30.9

69.1

Processing sales order from customers online

35.3

64.7

Coordinating procurement with suppliers online

25.0

75.0

Tracking incoming and outgoing goods delivery

17.6

82.4

Electronic Data Interchange (EDI)

10.3

89.7

Electronic Fund Transfer (EFT)

16.2

83.8

Online credit card processing

13.2

86.8

Smart card

8.6

91.4

Prepaid card

7.1

92.9

Electronic Marketing

Electronic Advertising

Customer Support Service

Order and Delivery

Payment System

39

The above results obtained have adequately answered the first research question raised in this
study, which is to find out the extent of e-commerce adoption. Although initial results
indicated that SMEs in Northern Malaysia are at a fairly high state of e-commerce adoption,
subsequent statistical analyses show evidence that the general level of e-commerce usage
among the SMEs in Northern Malaysia is low. This was confirmed by examining each and
every e-commerce applications as listed in Table 8. The result is further supported by
splitting the sample into high usage and low usage group based on the number of applications
being adopted where those firms which are using less than 10 applications are classified as
low usage group while those firms with more than 10 applications are considered as high
usage group. It was found that 88.2 % belong to the low usage group while only 11.8 %
belong to the high usage group (Table 14).
Table 14: Extent of e-commerce usage
Frequency Percentage
Low usage
High usage
Total

60
8
68

88.2
11.8
100.0

Valid
Percentage
88.2
11.8
100.0

On the other hand, most firms have implemented company websites but many of them are not
fully functional as most of them do not provide online sales processing and order tracking,
online procurement and online payment. In fact, one of the least used e-commerce application
is online credit card payment (13.2%). On the other hand, the top application being
implemented by most companies is personalized email communication (77.9 %). The
preceding findings could also be reflected by the amount of investment in websites and the
number of IT personnel the firms employed. About 42.9 % of the firms did not invest in web
sites at all and only 3.2% of them have invested more than RM50, 000 in web sites (Table
15). With respect to IT personnel, 52.4 % of the firms do not employ any IT personnel while
up to 95.2 % employed two or less IT personnel (Table 16).

The results are almost similar to the situation in Australia, where most small firms were using
email (75%) but only 13% of them provide online payment facility (Jones, Hecker & Holland
2003, p.287). The statistics obtained are also consistent with findings of previous research
such as by Lawson et al. (2003) Poon et al. (1997), Haynes et al. (1998), Chapman et al.
40

(2000), Mackay et al. (2001) and Zwass (1998) where they found that advanced Internet
usage by most companies especially the SMEs was low and the most used application was
email while the least used application is the online payment system.
Table 15: Investment in web site

No
investment
<RM10000
<RM20000
<RM30000
>=RM50000

Percentage

Cumulative
Percentage

42.9

42.9

34.9
15.9
3.2
3.2

77.8
93.7
96.8
100.0

Table 16: Number of IT personnel


Number of IT personnel
0
1
2
4
5
10

Percentage
52.4
23.8
19.0
1.6
1.6
1.6

Cumulative Percentage
52.4
76.2
95.2
96.8
98.4
100.0

4.3 Benefits realized through adoption of e-commerce


To analyse the realized benefits of e-commerce, the sample size was reduced to 45 by
omitting the non-adopters as well as missing data. As the sample size is only 45, factor
analysis was not performed, as the minimum sample size required for factor analysis is
50(Hair et al., 1998). Therefore, only descriptive statistics were used.

First of all, the means of all the benefits were computed. Out of the 12 benefits of ecommerce, only half of them were considered realized benefits based on the means (<3.0) as
the scales for measuring benefits were coded 1 for very high benefit while 5 coded for no
benefit. Another half of the benefits (with mean>3) were considered not realized. From Table
17, the realized benefits were improved customer service, increased accessibility to endusers, increased responses from end-users, increased efficiency in dealing with suppliers,
enhanced company brand and image and improved business processes flow. One the other
41

hand, the unrealized benefits of e-commerce adoption were increase in market share, increase
in profit, increase in productivity, reduce in cost, increase in ROI and increased customers
loyalty and retention.
Table 17: Realized benefits of e-commerce
E-commerce benefits
Improved customer service
Increased accessibility to end-users
Increased responses from end-users
Increased efficiency in dealing with suppliers
Enhance company brand and image
Improved business processes flow

Mean
2.78
2.73
2.84
3.00
2.78
2.80

Table 18: Unrealized benefits of e-commerce


E-commerce benefits
Increase in market share
Increase in profit
Increase in productivity
Reduce in cost
Increase in ROI
Increased customer loyalty and retention

Mean
3.29
3.40
3.38
3.42
3.40
3.13

The preceding findings showed that SMEs in Northern Malaysia have realized some of the
benefits proposed in the conceptual model by adopting e-commerce applications. Benefits
realized were in the areas of customer service, market expansion, back-end efficiency and
inventory management. However, despite so many realized benefits, SMEs who have adopted
e-commerce did not to improve its overall performance and profitability as cost reduction,
increase in productivity and increased in ROI were not achieved. Although the findings have
basically answered research question 2, further research need to be carried out to find out the
reasons why some of those benefits of e-commerce adoption were not realized.

4.4 Factors hindering the adoption of e-commerce applications


Before examining the factors that might hinder the adoption of e-commerce applications by
SMEs in Northern Malaysia, the sample size was further reduced from 68 to 64 as four
respondents failed to provide answers for the items that measure those factors. To have an
42

initial feel about barriers to e-commerce adoption, a frequency table was obtained for all the
items that were used to measure those barriers. Out of the twenty items, only two items gave
a mean of less than 3 while the rest returned a mean of more than three. This implied that the
respondents considered eighteen of the measures are barriers to e-commerce adoption. From
the results, insufficient security to prevent hacking and viruses was the top perceived barrier
(mean =4.03). The second barrier most concerned by the respondents was the need to have
additional staff to manage e-commerce (mean=3.91). Three subsequent barriers were sales
and marketing requires high degree of human interaction (mean=3.88), cost of setting up ecommerce is high (mean=3.84), difficult to justify cost with desired results (mean=3.73). The
top ten barriers are listed in Table 19.

Table 19: Top ten barriers perceived by SMEs in Northern Malaysia


No. Barriers

Mean

Insufficient security to prevent hacking and viruses

4.03

Need to have additional staff to manage e-commerce

3.91

Sales and marketing requires high degree of human interaction

3.88

Cost of setting up e-commerce is high

3.84

Difficult to justify cost with desired results

3.73

Most suppliers do not have access to electronic commerce

3.72

Insufficient security for online credit payment and transactions

3.64

Lack of skilled workers to handle or maintain e-commerce system

3.59

Lack of standards/regulations from government on e-commerce issues

3.55

10

Keeping up with changing technology

3.53

These findings closely coincided with other studies such as that by Lawson et al. (2003)
which found that the top four barriers were concern about security and privacy of
transactions, cost of consultants, lack of government incentives as well as lack of IT expertise
of staff, only in different orders. The results were also similar to the studies by Sulaiman
(2000), Love et al.(2001) as well as Khatibi et al.(2003).

Although the preceding results have provided useful information pertaining to barriers to ecommerce adoption by the SMEs in Northern Malaysia, these barriers needed to be
categorized into a smaller set of variables, as some of the items might be interrelated or
43

interdependent. Besides, they did not adequately show any relationship between those
barriers and the level of e-commerce adoption. Therefore, further and more sophisticated
statistical analyses need to be performed to achieved the two proposes. The two statistical
analyses adopted here were factor analysis and regression analysis.

The main objective of factor analysis is to analyse the structure comprising a large number of
variables and group them into a set of factors, thus achieving the purposes of data reduction
and summarization. Factor analysis is suitable for both confirmatory as well as exploratory
studies (Hair et al., 1998). In this study, it was exploratory in nature as there are no
established theories related to barriers of e-commerce adoption by SMEs. The issue of sample
size was addressed in this study, as the sample did not achieve the number of variables to
sample size ratio of 1:5 because the number of variables is 20 and the sample size is 64.
However, factor analysis could be used for sample size of more than 50(Hair et al., 1998).
Moreover, correlation matrix obtained using SPSS indicated existence of substantial number
of significant correlations (with significance level at 0.05) among the variables. Besides,
Barlett test of sphericity revealed that some of the variables are significantly correlated. In
addition, the value of Kaiser-Meyer-Olkin (KMO) computed was more than 0.5. Therefore,
the use of factor analysis was deemed appropriate for this study.

Principal components factor analysis was performed using SPSS with Varimax rotation. The
initial number of factors extracted was 6 by looking at latent roots or eigenvalues that have
values more than 1. However, the significance of factor loadings in relation to sample size
needed to be examined before the final set of factors was determined. According to Hair et al.
(1998), for a sample size of 50, a factor loading of 0.75 is necessary for significance, for a
sample size of 60, factor loading of 0.7 is necessary for significance and the factor loading for
a sample size of 70 is 0.65. As the number of respondents in this study was 64, a factor
loading between 0.65 and 0.7 was used to group the variables into the factors. Based on the
preceding criteria, the number of extracted factors was 6(Table 20).

44

Table 20: The resulting factors derived from factor analysis

Environmental Governmental
V1
V2
V3
V4
V5
V6
V7
V8
V9
V10
V11
V12
V13
V14
V15
V16
V17
V18
V19
V20

Factors
Financial Organizational
.670
.799

Technical

Behavioural

.709
.788

.698
.773
.828
.824
.785
.767
.739
.744
.825

The six factors were subsequently categorized and labeled as environmental, governmental
financial, organizational, technical and behavioural based on the variables that were loaded to
each of the factors. Variables that were loaded in each category closely resembled the
measures that were proposed in relation to the conceptual framework. For example, items V4,
V5 and V8 were loaded to factor 1, which was categorized as environmental barrier, were
grouped under the same category in the proposed measures, although three other variables
were excluded, as their loadings were not significant. Other variables also fit in exactly as the
proposed categorization of the e-commerce barriers. Therefore, the results of the factor
analysis have more or less confirmed that the conceptual framework could indeed be used to
explain the factors that were considered barriers to e-commerce by the SMEs in Northern
Malaysia.

Although the factor analysis had identified factors that were perceived by SMEs in Northern
Malaysia as barriers to e-commerce adoption, it did not examine the associations between
these barriers and the extent of e-commerce adoption. Therefore, tests of associations using
correlation and regression analyses were performed to analyse the relationship between these
45

factors and the adoption of e-commerce by the SMEs.

The scores of the e-commerce

adoption were obtained by computing the number of electronic commerce applications


adopted by the respondents. The summated scales were also obtained for all the factors by
adding all the variables that were significantly loaded to each of the factors. All the factors
were also tested for reliability. The values of Cronbachs Alpha were displayed in Table 21.
As financial and behavioural factors were having Cronbachs alpha less than 0.7, they were
considered unreliable measures and thus were dropped for subsequent analysis.

Table 21: Reliability of factors


Factor

Cronbachs Alpha

Environmental

0.7097

Governmental

0.7198

Financial

0.5847

Organizational

0.7129

Technical

0.7342

Behavioural

0.6053

Correlation coefficients between each factor and the extent of e-commerce adoption were
computed; the results are shown in Table 22. From the table, environmental, governmental
and organizational factors were negatively correlated to the extent of usage, indicated that the
higher the barriers related to the above factors, the lower the extent of e-commerce adoption
and vice versa. The results seemed to favour the acceptance of Hypotheses H3, H4, and H5.
However, out of the three factors, only environmental factor is significantly correlated to the
extent of e-commerce adoption, which implied that the environmental factor is the main
barrier to e-commerce adoption by the SMEs in Northern Malaysia. As for technical factor, it
was positively correlated to extent of e-commerce adoption, which seemed illogical. One
possible reason is that many SMEs might not be aware of the technical barriers especially
those related to security risks of e-commerce, as most have only adopted basic e-commerce
applications based on earlier statistics pertaining to e-commerce usage, where security risks
were not the main concern. Conversely, it could be that the more extensive the usage of ecommerce applications, the more the users is aware of the security problems. Therefore, the
level of awareness of Internet security risks could be a moderating factor, which could have
contributed to the above discrepancy. This moderating factor needs to be studied in future
46

research. As there was positive correlation between the extent of e-commerce usage and the
technical factor, the hypothesis that the extent of e-commerce is affected by factor related to
technical barriers was rejected. The above results indicated that only factors related to
organizational, governmental and environmental barriers have some negative influence on the
extent of e-commerce usage.

Table 22: Correlations between the factors and the extent of e-commerce adoption
Environmental Governmental Organizational
Extent of
e-commerce
adoption

Pearson
Correlation
Sig. (2-tailed)
N

Technical

-.275(*)

-.051

-.107

.138

.028
64

.690
64

.399
64

.276
64

* Correlation is significant at the 0.05 level (2-tailed).


The correlation analysis only showed that there existed some form of association among the
variables, without specifying which is the dependent variable and which are the independent
variables that could be used to predict the dependent variable. Therefore, regression analysis
was performed in order to find out whether the extent of e-commerce adoption is influenced
by the factors that are related to various barriers. The dependent variable of the model is the
extent of e-commerce adopted, which is the total number of e-commerce applications being
adopted.

The only independent variable worth considered here is the factor related to

environmental barriers, as the rest of the factors were excluded because these measures have
low reliabilities or low correlation with the extent of e-commerce adoption. Therefore, only
simple regression was performed. The results are shown in Table 23. From the analysis, the
regression model could be written as

Extent of e-commerce adoption = 10.700.528 factor related to environmental barriers

The model indicated that the factor related to environmental barriers has significant (p
=0.028) negative influence on the extent of e-commerce adoption. Therefore, the hypothesis
(H5) that the factor related to environmental barriers has negative influence on the extent of
e-commerce adoption was accepted. Hence, after performing correlation and regression

47

analysis, only the above hypothesis was accepted, while the rest of the hypotheses were
rejected.
Table 23: Simple regression analysis
Unstandardized
Coefficients

Model
1

(Constant)
Environmental

B
Std. Error
10.701
2.226
-.528
.234

Standardized
Coefficients

Sig.

Beta
-.275

4.808
-2.250

.000
.028

4.5 Discussion of the findings


The results of the study indicated that most SMEs in Northern Malaysia have adopted some
form of e-commerce applications. However, most have only implemented basic e-commerce
applications such as email and simple web sites. Most of the web sites do not provide online
order processing and payments facilitations. Moreover, not many SMEs seemed to have the
capabilities to perform online procurement and order tracking. The preceding findings
showed that the adoption of e-commerce is still low among the SMEs in Northern Malaysia.
These findings matched the results in similar studies conducted by Sulaiman (2000) and
Khatibi et al. (2003) in Malaysia.

Although many studies suggested that firms could gain a lot of benefits through the adoption
of e-commerce, this study found that SMEs in Northern Malaysia were not reaping many of
the benefits advocated by previous studies. While most SMEs who have adopted e-commerce
did realized some benefits in the areas of customer service, market expansion, back-end
efficiency and inventory management, they did not seemed to gain much benefits in terms of
improved company performance such as profitability and productivity. The reasons why
some these benefits were not realized could be due to the facts that most SMEs have only
adopted simple e-commerce applications, therefore they were not able to fully capitalized on
the many advantages of e-commerce, hence failing to gain those benefits.

Initial analysis of the reasons surrounding the low adoption of e-commerce by the SMEs in
Northern Malaysia found that the factors related to environmental, governmental, financial
organizational, technical and behavioural barriers. However, further analysis showed that
48

only the factor related to environmental barriers have significant negative influence on the
adoption of e-commerce by the SMEs in Northern Malaysia. The findings seemed to imply
that most SMEs have overcome other barriers particularly those that are technological and
financial in nature. In addition, there was also evidence that the government has done enough
to help the SMEs in this region to adopt of e-commerce applications. The preceding findings
are good news for the SMEs and policy makers, because it means that the SMEs only need to
deal with environmental barriers to increase the level of e-commerce adoption and the policy
makers need to just maintain the present level of support for the SMEs in terms of ecommerce adoption.

49

Chapter 5: Conclusions, Implications, Limitations and Future Research


5.1 Conclusions
The objectives of this empirical study were to examine the state of e-commerce adoption
(which includes the extent of adoption and benefits realized) among the SMEs in Northern
Malaysia as well as to determine factors that might hinder its adoption. A conceptual model
was developed to assess the possible influence of various factors on the adoption of ecommerce by the SMEs. The model was designed based on the study by Love et al. (2001)
and other literatures. The research method was questionnaire survey where the questionnaires
were mailed to all the respondents in the designated sampling frame. The data gathered were
then analysed using various statistical tools in order to provide answers to research questions
that were raised earlier. The research questions were (a) what is the level of e-commerce
adoption among the SMEs in Northern Malaysia, (b) what are the benefits realized through
the adoption of e-commerce by the SMEs in Northern Malaysia and (c) what factors might be
hindering the e-commerce adoption among the SMEs in Northern Malaysia.

Pertaining to the extent of e-commerce adoption, the results showed that most SMEs in
Northern have adopted some form of e-commerce applications, but the adoption level was not
high, as majority of them have only adopted basic applications. Indeed, the adoption of
advanced applications like online payment system, order processing as well as EDI is at a
relatively low level. The results have indeed adequately answered the first research question.
The findings implied that more efforts are needed to help and encourage SMEs in Northern
Malaysia to speed up e-commerce adoption, particularly the more advanced applications.

Regarding the second research question, only descriptive statistical analysis was performed,
as the sample was too small. Based on the mean scores of the benefits, it could be concluded
that SMEs in Northern Malaysia that have adopted e-commerce have gained some of the
benefits of e-commerce, particularly in the areas of customer service, market expansion,
back-end efficiency and inventory management. On the other hand, despite the benefits
realized, adoption of e-commerce did not seemed to help SMEs to improve their overall
performance and profitability as cost reduction, increase in productivity and increased in ROI
were not achieved. The above findings have basically answered the research question.

50

With respect to the third research question, a few statistical analyses were performed.
Descriptive statistics based on the mean scores showed that the top four barriers to ecommerce adoption were insufficient security to prevent hacking and viruses, the need to
have additional staff to manage e-commerce, a high degree of human interaction is required
in sales and marketing and the high cost of setting up e-commerce. The above findings were
found to be similar to most previous studies on e-commerce adoption. For example, precious
studies in Malaysia revealed that the main barriers to e-commerce adoption were lack of
security and privacy high set up cost, lack of skilled staff to manage e-commerce as well as
business required personal touch and interaction (Sulaiman 2000; Khatibi et al. 2003). Factor
analysis successfully grouped the barriers into six factors, which were labeled as
environmental, governmental, financial, organizational, technical and behavioural barriers.
The grouping was found to match the proposed conceptual model in this study.

However, correlation analysis showed that only factors related to organizational,


governmental and environmental barriers have some negative influence on the extent of ecommerce adoption. Among the three factors, only the factor related to environmental
barriers have significant negative influence on the extent of e-commerce adoption.
Regression analysis confirmed that the only the factor that has significant negative influence
on the extent of e-commerce adoption is the one related to environmental barriers. The above
results showed that although only factor related to environmental barriers has significant
influence on the extent of e-commerce adoption by the SMEs in Northern Malaysia, other
factors also have some influence on the extent of its adoption. The findings have sufficiently
answered the second research question.

5.2 Implications
The implication of the preceding findings means that the SMEs need to examine the reasons
why they are not making profit from adopting e-commerce. Perhaps they should need to
consider investing in more advanced e-commerce applications as well as redesign their
marketing strategies in order to reap profit out of the adoption of the above applications. The
government could lend a helping hand in terms of e-commerce investment by giving out
loans to the SMEs.

51

Additionally, since the environmental barriers were identified as the main obstacles to ecommerce adoption, the SMEs in Northern Malaysia need to work together to overcome the
above barriers. The SMEs could prevail over those barriers by helping each other to be ecommerce-ready, for example, by setting up advanced communication networks such as the
web-based EDI. Besides, the SMEs could share market information so that they could design
more effective marketing strategies, thereby achieving monetary gains. The government
should also play a more active in supporting the SMEs in this region in terms of training and
consultancy as well as the provision of more advanced telecommunication infrastructure.

5.3 Limitations of the study


Although the study has provided some meaningful answers to the research questions, a few
limitations needed to be addressed. First of all, the sample size is only 64, which is not big
enough. An ideal sample size for factor analysis is 100 so that the results will be more
significant. The problem of small sample size also affected the generalizability of the findings
in this study. The second limitation is that some moderating variables such as the level of
awareness of security risks might have some influence on the accuracy and significance of
the results, and they were not identified here.

The third limitation is that the study did not take the motivating factors into consideration in
assessing the level of e-commerce adoption. The motivating factors might have strong
enough positive influence on e-commerce adoption that they might offset the negative
influence of the limiting factors or barriers, which mean that the regression model may not be
sufficient to explain the influence of the barriers on the adoption level, as the adoption level
could be dependent on both type of factors.

5.4 Recommendations for future research


Because of the existence of the above limitations, future research needs to address the above
limitations in order to obtain more convincing results. First of all, future research should
attempt to obtain a bigger sample; preferably with a sample size of more than 100 so that
statistical analyses such as factor analysis will be more meaningful. Secondly, future research
needs to find out the reasons why SMEs (particularly those in Northern Malaysia) did not
52

realized some of the important benefits like improved profitability through e-commerce
adoption. Thirdly, future research should try to identify the moderating factors and take their
influence into considerations so as to minimize the confounding effects. Furthermore, future
research should include all the motivating factors or drivers of e-commerce adoption so that
the results of statistical analyses especially multiple regressions will be more accurate. Lastly,
future researchers could consider using qualitative research such as case study or other
methods in order to gain a richer picture of e-commerce adoption by the SMEs.

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63

Appendix A

Questionnaire

SECTION 1 ELECTRONIC COMMERCE APPLICATIONS


Please against the following electronic commerce applications that are relevant to your
organization:
In use Not
in use
1.
i.
ii.
iii.

Electronics Marketing
Research on consumers preferences
Research and evaluation of new suppliers
Research on competitors

2.
i.
ii.
iii.
iv
v

Electronic Advertising
Displaying company information and the
products/services offered
Web site hosted by another company
Web site hosted by own server
Advertising on third party website.
Electronic catalogues

3.
i.
ii.
iii.
iv.
v.

Customer Support Service


Online help- Frequently Asked Question (FAQ)
Online help- products updates
Handling customers feedback/queries on-line
Personalised email communication
Online application/registration

4.
i.
ii.
iii.
iv.

Order and Delivery


Processing sales order from customers online
Coordinating procurement with suppliers online
Tracking incoming and outgoing goods delivery
(shipment, courier service online)
Electronic Data Interchange (EDI)

5.
i.
ii.
iii.
iv.

Payment System
Electronic Fund Transfer (EFT)
Online credit card processing
Smart cards
Prepaid cards

A- 1

SECTION 2:
To what extent the followings hinder your organization from using or using more electronics
e-commerce applications?
(Please circle only ONE appropriate score on the scale 1 to 5)
Strongly
Disagree

Strongly
Agree

1. Cost of setting up electronic commerce is high

2. Need additional staff to manage electronic commerce


applications

3. Difficult to justify the cost with desired benefits

4. Information from the electronic commerce is not useful

5. Market potential of electronic commerce users is


too small

6. Our sales/marketing requires high degree of


human interaction

7. Electronic commerce is not as effective as traditional


marketing channel

8. Most suppliers do not have access to electronic


commerce

9. It will upset existing distribution channels

10. Insufficient security for online credit payment


transactions.

11. Insufficient security to prevent hacking and viruses

12. Insufficient qualified vendors for developing applications

13. Lack of skilled workers to handle or maintain electronic


commerce system

14. Lack of knowledge about the potential applications


of electronic commerce

15. Lack of standards/regulations from government on


electronic commerce issues

16. Telecommunication infrastructure is not adequate

17. Lack of government leadership

18. Weak support from top management

19. Keeping up with changing technology

20. Mindset shift towards using electronic commerce

A- 2

If you are not using any e-commerce applications, please omit section 3
SECTION 3: BENEFITS OF ELECTRONIC COMMERCE
How would you rate the benefits received from electronic commerce?
Please circle only ONE appropriate score on the scale 1 to 5 )

Very
High

High

Medium

Low

Virtually
no
Benefits

1. Increase in market share

2. Increase in profit

3. Increase in productivity

4. Reduce in cost

Increase in Return On
5. Investment(ROI)

6. Improved of customer service

Increase accessibility to the end7. users

8. Increase responses from end-users

Increase the efficiency in dealing


9. with suppliers

Enhance company brand and


10. corporate image

Increase customer loyalty and


11. retention

12. Improve business processes flow

A- 3

SECTION 4: PROFILE OF THE ORGANISATION


We need some information about your organization to enable meaningful interpretations of
the study. Please be assured that this information will be treated with strict confidence.
Please
1.

or fill in the blanks where appropriate

In which sector/sub-sector is your organization Classified:


Agriculture
Construction
Wholesale
Retail
Manufacturing
Others, Please Specify:

Transport
Tourist and leisure services
Finance
Information Technology
Education

2.

Year established: ________________________

3.

Major products/services

i
ii
iii.

____________________
____________________
_____________________

4.

Ownership of the Organization:


Sole Proprietor
Partnership
Private Limited
Others, Please Specify:____________

5.

6.

Total number of employees in your organization:

Paid-up capital:
Less than RM100, 000

RM500, 000-RM2,

RM100, 000 - RM499, 999

Above RM2, 500,000

499,999

7. Annual sales turnovers or revenue:


Less than RM500, 000

RM 2,000,000- RM4,

RM500, 000- RM999, 999

RM5, 000,000- RM9,

RM1, 000,000- RM1, 999,999

Above RM10, 000,000

999,999
999,99
4

8.

9.

IT investment in the last three years:


ALess than RM50, 000
RM50, 000-RM249, 999
RM250, 000-RM499, 999

RM500, 000-RM749,999
RM750, 000-RM999, 999
More than RM1, 000,000

Investment in electronic commerce in the last three years


Expenditure (RM)
i.
ii.
iii.
iv

Hardware
Software
Website development fees
Consultancy fees

_____________
_____________
_____________
_____________

10.

Who provides the system support for maintenance of the


electronic commerce infrastructure?
Own IT department
Vendors
others, please specify:

11.

Total number of IT personnel:

12.

Do you send your staff for electronic commerce related training?


Yes

13.

No

Types of electronic commerce training :(You may select more than one)
On-the-job training
In-house training
Local institutes

14.

Company Name & Address:


_____________________________________
______________________________________

_______________________________________

Local vendors
overseas training

A-

Appendix B: Coding form


Question
Number
Section 1

Label

Description

Code Value

Electronic Commerce Applications

A
1.

Usage of e-commerce applications


Electronic Marketing

em1

Research on consumers preferences

ii

em2

Research and evaluation of new suppliers

iii

em3

Research on Competitors

2.

Electronic Advertising

ea1

Displaying company information and

ii

ea2

Web site hosted by another company

iii

ea3

Web site hosted by own server

iv

ea4

Advertising on third party web site

ea5

Electronic catalogues

3.

Customer Support Service

css1

Online help- Frequently Asked Questions

ii

css2

Online help- products updates

iii

css3

Handling customers feedback/queries online

iv

css4

Personalized email communication

css5

Online application/registration

4.

Order and Delivery

od1

Processing sales order from customers online

ii

od2

Coordinating procurement with suppliers

iii

od3

Tracking incoming and outgoing goods

iv

od4

Electronic Data Interchange (EDI)

5.

Payment System

ps1

Electronic Fund Transfer (EFT)

ii

ps2

Online credit card processing

iii

ps3

Smart card

iv

ps4

Prepaid card
B- 1

1=In use
0=Not in use

Section 2

Hindrance to E-commerce Usage

v1

v2

v3

v4

v5

v6

v7

v8

v9

10

v10

11

v11

12

v12

13

v13

14

v14

15

v15

16

v16

17

v17

18

v18

Insufficient security for online credit payment


and transactions
Insufficient security to prevent hacking and
viruses
Lack of standards/regulations from
government on e-commerce issues
Telecommunication infrastructure is not
adequate
Lack of government leadership

19

v19

Keeping up with changing technology

20

v20

Mindset shift towards using e-commerce

Section 3
1
2

b1
b2

3
4

b3
b4

5
6

b5
b6

Cost of setting up e-commerce is high

1-Strongly
disagree
Need additional staff to manage e-commerce 2-Disagree
applications
Difficult to justify the cost with desired 3- Neutral
benefits
Information from e-commerce is not useful
4- Agree
Market potential of e-commerce users is too 5- Strongly agree
small
E-commerce is not as effective as traditional
channel
Most suppliers do not have access to ecommerce
Insufficient qualified vendors for developing
applications
It will upset existing distribution channels
Our sales/marketing requires high degree of
human interaction
Lack of skilled workers to handle or maintain
e-commerce system
Lack of knowledge about the potential
applications of e-commerce
Weak support from top management

Benefits of E-commerce
Increase in market share
Increase in profit
Increase in productivity
Reduce in cost
Increase in Return on Investment (ROI)
Improved customer service
B- 2

1=very high
2=high
3=medium
4=low
5= virtually no
benefits

7
8
9

b7
b8
b9

10
11
12

b10
b11
b12

Section 4
1.

2.
3.

sector

year

4.

p1
p2
p3
owner

5.

tne

6.

capital

7.

sales

Increased accessibility to the end-users


Increased responses from end-users
Increase the efficiency in dealing with
Enhance company brand and corporate image
Increased customer loyalty and retention
Improved business processes flow
Profile of the organization
in which sector is the organization classified

1. Agriculture
2.Transport
3.Construction
4. Tourism &
Leisure
5. Wholesale
6. Finance
7. Retail
8. IT
9. Manufacturing
10. Others

Year established
Major products/services

Ownership of the organization

1= sole
proprietor
2= partnership
3=private limited
4=public listed

Total number of employees


Paid-up capital

x=capital

1: x<RM100, 000
2: RM100, 000x< RM500, 000
3: RM500, 000x< RM2, 500,000
4: x RM2, 500,000
Annual sales turn over
1:y<RM500, 000
2: RM500, 000y< RM1, 000,000
3: RM1, 000, 000y< RM2, 000,000
4: RM2, 000, 000y< RM5, 000,000
5: RM5, 000, 000y< RM10, 000,000
6:y RM10, 000,000
B- 3

y=sales

8.

9.
i
ii
iii
iv

invest

hard
soft
web
consult

IT investment in last 3 years


1: t<RM50, 000
2: RM50, 000t< RM250, 000
3: RM250, 000t< RM500, 000
4: RM500, 000t< RM750, 000
5: RM750, 000t< RM1, 000, 000
6: t RM1, 000,000
Investment in e-commerce in last 3 years
Hardware
Software
Website
Consultancy

10.

maintain Who provide e-commerce infrastructure


maintenance

11.
12

itp
training

13

type

14

t1
t2
t3
t4
t5
location

Total number of IT personnel


Do you send your staff for e-commerce
training
Types of e-commerce training

t=investment

0=no investment
1: <RM10, 000
2: <RM20, 000
3: <RM30, 000
4: <RM40, 000
5: <RM50, 000
6: RM50, 000
1=own IT dept
2=vendors
3= Others
1= yes
2= no

On the job training


In-house training
Local institutes
Local vendors
Overseas training
1=Penang
2=Perak
3=Perlis
4=Kedah
Computed Variables

em

em=em1+em2+em3

ea

ea=ea1+ea2+ea3+ea4+ea5

css

css=css1+css2+css3+css4

od

od=od1+od2+od3+od4

ps

ps=ps1+ps2+ps3+ps4
B- 4

totaluse
stage

totaluse=em+ea+css+od+ps
(Measure extent of e-commerce usage)
Stage of e-commerce adoption

B- 5

1=stage 1
2=stage 2
3=stage 3
4= stage 4