The Impact of Digitalization Competencies on the Firm’s

Sustainability in Small and Medium-sized Enterprises (SMEs)

A Financial Management Project Report by

G Harshavardhan (2019IMG-020),
Krishna Prasad Samudrala (2019IMG-029) &
P Sasank Reddy (2019IMG-046)

submitted to

Prof. Rajendra Sahu

ABV-INDIAN INSTITUTE OF INFORMATION

TECHNOLOGY AND MANAGEMENT
GWALIOR - 474015
2023
1. ABSTRACT
Purpose - The digitalization of small and medium-sized enterprises (SMEs) has become an
increasingly important topic in sustainability. This research paper aims to investigate the impact
of digitalization competencies on the sustainability of SMEs in India, using Mahatejas
Innovative Machinery India Pvt Ltd (MTI), a Drone spare part manufacturing unit in Gwalior, as
a case study.

Design/Methodology/Approach - A literature review was undertaken to identify essential

characteristics contributing to the successful adoption of digital technologies in SMEs, such as
digital infrastructure, knowledge and skills, and organizational culture. In addition, recent studies
on the digitization of MSMEs in India were reviewed, and a table was developed summarising
their study methodology, important findings, and implications. To fully reap these benefits,
SMEs must focus on strengthening their digital competencies, while the government and
industry groups should provide additional support in the form of infrastructure, training, and
financial incentives. The findings of this study may be valuable to policymakers, industry
associations, and small business owners in India who want to enhance the sustainability of SMEs
through the use of digital technology.

Findings –

Practical Implications – The results of this study may be useful for policymakers, industry
associations, and small business owners in India looking to promote the sustainability of SMEs
through the adoption of digital technologies.

Keywords - Sustainability, Small and Medium-Sized Enterprises, Digitalization competencies,

SMEs,

2. INTRODUCTION
Digitalization, or the process of using digital technologies to transform business operations, has
had a significant impact on Micro, Small and Medium Enterprises (MSMEs) in India. MSMEs
are an integral part of the Indian economy, contributing significantly to employment generation
and economic growth. However, they have traditionally faced challenges in accessing credit,
technology, and markets. Digitalization has provided MSMEs with new opportunities to
overcome these challenges and compete in the global marketplace. With the rapid adoption of
digital technologies, MSMEs are now able to digitize their operations, access new markets, and
compete on a level playing field with larger businesses.

One of the most significant impacts of digitalization on MSMEs in India has been increased
access to finance.

With the digitization of financial services, MSMEs can now access a range of financial products
and services, including loans, insurance, and payment systems, which were previously
unavailable or difficult to obtain. This has helped to address the long-standing problem of
MSMEs being underfunded and has enabled them to invest in new technologies, expand their
operations, and hire more employees. Digitalization has also enabled MSMEs to reach new
customers and markets. With the rise of e-commerce platforms, MSMEs can now sell their
products and services to customers across India and even internationally. This has helped
MSMEs to diversify their customer base, reduce their dependence on local markets, and increase
their revenue streams.

1.1 Small and Medium Scale Enterprises (SMEs)

Businesses and firms which have an annual turnover of less than Rs.250 crores and also have
less than 250 employees are classified into the category of small and medium-sized
enterprises(SMEs). When compared to larger firms, SMEs face many challenges in terms of
financial resources, limited resources, and cannot retain skilled personnel for long range.

1.2 About Mahatejas Innovative Machinery India Pvt Ltd

Mahatejas Innovative Machinery India Pvt Ltd (MTI), is a Gwalior, MP-based Indian company
that specializes in Motors, ESCs (Electronic Speed Controllers), and Propellers and offers
propulsion system solutions for UAVs with advanced technology. They also offer drones for
aerial photography, and industrial, agricultural, and commercial use. Our products have a strong
reputation for being of high quality. The Main Vision of this MSME is to provide a cheaper and
safer propulsion system for drones. They have a huge market available in India itself in order to
provide their services. They are currently working on R&D to develop more reliable and high-
efficiency drones.

They also offer different series and services to meet various demands from customers. They
would like to grow up with you--our esteemed customers and gain mutual benefits. Your
valuable comments and ideas would be appreciated. Mahatejas Innovative Machinery India Pvt
Ltd (MTI) was founded by just idea of Mr. Anoop Rathore, He is already in this field since 2012
and till the year 2020 gradually,he realized that we (India) are facing issues in importing drone
components from china, and also it will be a great support to Make in India campaign, a dream
of hour honorable Prime Minister Mr. Narendra Modi Ji, so the birth of Mahatejas innovative
machinery India private limited came in existence to manufacture drone components in India.
For now, we are manufacturing the Drone components such as Brushless motors, Brushless
ESC, Propellers, Drone frames, etc.

\\

1.3 Recent Growth Trends of MTI

MTI has experienced growth within the last year, with significant achievements in terms of
funding, market reach, and seller base. The company achieved a valuation of RS.12.8 million in
Dec 2022. The company has also expanded its spare parts supply to 5 major drone manufacturing
companies in India. After digital technologies, their reach and value have been increased and the
quality of service was increased to retain the existing customers. Due to the same their
sustainability has increased.
1.4 Impact of Digitization on SMEs

The adoption of digitalization in Businesses can greatly affect their sustainability. SMEs can
decrease costs, improve productivity, and expand their market reach by digitizing their
operations and processes. In the instance of MTI, the adoption of digital technology enabled the
company to communicate with its clients through online platforms, resulting in considerable
revenue growth and improved customer satisfaction on the platform. But, digitalization in
Businesses is not without its obstacles. SMEs frequently lack the resources and skills required to
properly implement digital technology. Furthermore, SMEs may have the problem of keeping up
with the quickly expanding technology landscape, which could cause them to slip behind their
competition.

Therefore, it is essential to examine the impact of digitalization competencies on the

sustainability of SMEs. This research paper will explore the factors that contribute to the
successful adoption of digitalization competencies in SMEs and their impact on the sustainability
of the firm.

3. LITERATURE REVIEW
Success of Digital Transformation is assessed in many ways over a period of time. A lot of
research studies were conducted to evaluate the digital transformation of business organizations.
According to some reports, there are six key dimensions to enhance an organization’s ability to
achieve an advantage through digital transformation.

Aida Kamišali´c, Martina Šestak & Tina Beraniˇc. (2020) discussed a six-dimensional strategic
framework to guide organizational digital transformation. These characteristics enable
management to assess the efficiency of the organization over time. Having a clear and consistent
strategic vision, making appropriate investments in digital transformation, fostering an
innovation culture, having adequate intellectual property assets and know-how, having strong
digital capabilities, and effectively utilizing digital technologies are some of the techniques they
discovered in their research. Businesses can achieve effective outcomes in their digital
transformation efforts by enhancing these factors.

Mhlungu et al. (2019) explored the elements that lead to organizational digital transformation. In
addition, they used factor analysis to hypothesize if IT professionals and non-IT professionals
differed in their perspectives on the aforementioned characteristics. They discovered that four
critical components for successful digital transformation programs are customer-centricity,
governance, innovation, and resource acquisition. Businesses can improve their chances of
success in their digital transformation efforts by concentrating on these areas.

Ivančić et al. (2019) investigated ways to reduce the gap in conducting holistic research for the
digital transformation of small and medium enterprises. Their methodology was based on several
focus-group interviews of people from 3 companies in different industries. They concluded in
their research that for digital transformation to be successful, it's not just about adopting new
technologies but also about an organization's ability to adapt to changes and achieve operational
excellence by seamlessly integrating external digital services with its internal IT support. By
prioritizing these factors, businesses can effectively navigate the complexities of digital
transformation and ensure successful outcomes.

Krammer, Strange, R and Lashitew, A (2018) investigated on the variables driving the
acceleration of digital transformation in SMEs during the COVID-19 epidemic were explored.
The goal was to assess the impact of digital tools and training provided to employees for working
in isolated and distant situations for lengthy periods of time. They discovered that SMEs may
achieve digital transformation by strategically focusing on important factors such as people
organization, employee accountability, a proper timeframe for deliverables, regular
communication, and demonstration.

Ghobakhloo and Iranmanesh, (2021) proposed a framework of guidelines for SMEs to

successfully undergo digital transformation under Industry 4.0 They conducted a systematic
literature review and further implemented Structural Equation Modelling to extract the
relationships between different factors that determine the success of the organization upon digital
transformation. They identified that SMEs' success in digital transformation efforts depends on
several key determinants. External support for digital transformation is a critical first step, and
operational technology readiness is one of the most challenging determinants to achieve.

Hai (2021) in their research has shown that MSMEs can be rewarded from three key general
requirements - Information Technology, HR, and strategic orientation- to inculcate them into a
digital transformation. The researchers estimated a concept plan for entrepreneurs in SMEs to
undertake digital transformation. The research also highlights certain perceptions of people
related to different IT challenges in the industry. Despite this, digital transformation has been
shown to have a positive impact on the overall business outcomes of SMEs.

3.1 Financial Performance and Digital Transformation

Existing research find that digital transformation has an impact on corporate financial
performance (Mubarak et al., 2019). Enterprise digital transformation has a positive effect on
enterprise performance (Li et al., 2021). The advantages of digital transformation are most
visible in larger organizations, government-owned entities, well-established businesses, and
service-based businesses. Enterprises can use digital technology to improve and streamline their
traditional procedures, strengthen their production and sales capacities, and reap benefits such as
greater efficiency, cost savings, and higher quality outcomes.

3.2 Digital Skills

Yan Yin Lee and Mohammad Falahat (2019) It was discovered that SMEs can achieve digital
transformation by effectively working on some of the key aspects such as organizing people,
responsibility among employees, the right timeframe for deliverables, routinely communicating,
and demonstrating the consistency and proper foundation for future ideas. Companies can
include a more flexible work culture thanks to digital technologies and abilities. It also includes
the flexibility to work remotely and more flexible work hours.

3.3 Digital Payments

Brodeur et al. (2022), hypothesized through extensive alliteration review that collaboration plays
a crucial role throughout the different stages of SMEs' digital transformation projects, from
adjusting business needs to creating project portfolios, selecting technology solutions, and even
in the later stages of the project. Electronic payments make it seamless for SMEs to accept
online/digital payments, thus creating a digital trail of transactions. This also helps the banks and
other credit lenders, to lend money to SMEs. With a great improvement in digital payments
infrastructure and enabling of real-time payments through technologies such as UPI, the
operational efficiency of the SMEs also increase.

3.4 Increased customer accessibility

Internet availability and commerce through electronic medium facilitates businesses’ ability to
increase their customer base, reach new clients and markets at comparatively lower costs than
before, and thus pave way for business continuity. Companies have realized the importance of
interacting and connecting with customers, and a digital enterprise is capable of taking complete
advantage of its digital presence, to spread the word about its business.
 Table 1.0 Recent Studies on Adoption of Digitalization by SMEs

Author Study Focus Key factors affecting performance

Aida The broadcasting company, thinking ahead, an imaginative attitude,

Kamišali´c, Accommodation provider, Outlet company, expertise, and exclusive knowledge, digital
Martina Medication company resources, strategic coherence, and
Šestak& technological know-how
Tina
Beraniˇc

Ivančić et Three businesses operating in different Agility in digital transformation and

al. (2019) industries and experiencing different integration of technology
degrees of digital transformation.

Yan Yin Lee and Education Preparation, organisational incentives that

Mohammad are related, Constant communication,
Falahat supplying equipment, empowering
instructors, fostering commitment, and
setting goals for time plans

Ghobakhloo Small and medium enterprises Eleven progressive variables, including:

and digital business partner advancement,
Iranmanesh cybersecurity aptitude, ability to lead
(2021) change, assessment of digital transformation
preparedness, and digitalization consulting
services. technology and digital skills,
Information and digital technology
readiness, management's preparedness for
digital transformation, a manufacturing
digital transformation strategy, and resource
readiness for operations technology.

Brodeur et A pair of production-focused SMEs In the fields of business and technology, the
al. (2022) idea that alliances are crucial during various
phases of digital process improvement
projects is widely accepted.

Hai (2021) SMEs The digital transformation of SMEs is

positively impacted by three key resources:
information technology, human capital, and
strategic management.
4. METHODOLOGY

4.1 Data Collection

Research Design: In the current study we have conducted exploratory research and collected
data with a proper instrument by interviewing the concerned people of the organization.

Types of Data and Data Collection: We directly contacted the SME and surveyed the firm and
collected the required data. We assessed their annual reports and surveyed the firm based on the
papers.

4.2

Hypothesis Statements

Based on the literature review conducted, the following factors were selected for a comparative
analysis of both pre and post-digitalization stages in the selected SMEs.

Hypothesis (H1): Digitalization has a significant impact on the Sales of the selected SME.

Hypothesis (H2): Digitalization has a significant impact on the Operating Profit of the SME.

Hypothesis (H3): Digitalization has a significant impact on the Customer Retention of the SME.

Hypothesis (H4): Digitalization has a significant impact on the number of employees/staff of the
SME.

Hypothesis (H5): Digitalization has a significant impact on the yield loss of the SME.

4.3 Paired T- Test

The Common statistical method for determining if there is an observably significant difference in
the mean values between two closely related sets of data is the paired/dependent sample t-test. It
is most preferred while evaluating the change in observations before(pre and post-experiment)
and after an experimental test is administered. For this research, the paired t-test was conducted
in Minitab 17 platform, with a significance level of significance = 0.05. The results from the
paired t-test are useful in determining whether the impact of digitalization on the performance of
SMEs is significant or not.

5. PERFORMANCE OF MTI POST DIGITALIZATION

MTI is the first SME in India who produce drone spare parts (Motors, Propellers, etc). Till date
in India, all the drone manufacturing companies import spare parts from either China or Taiwan.
They started adopting digitalization to improve its performance and provide a better experience
to its customers. The company has implemented various technologies such as web tools, and data
analytics to enhance its operations and provide personalized services. As a result of its
digitalization efforts, MTI has seen significant improvements in its performance.

1. Improved customer engagement: MTI has been able to leverage digital channels to
reach a wider audience through social media. The company uses social media platforms
to promote its products and offer personalized recommendations to companies based on
their required sizes and power of motors.

2. Increased efficiency: With the help of digital tools, MTI has been able to automate
several processes, including order processing, inventory management, and customer
support. This has helped the company to improve its operational efficiency and reduce
costs.

3. Effective customer experience: MTI has implemented digital tools to personalize the
customer experience, provide instant customer support, place orders online, and the
ability to track orders in real-time. This has helped the company to build stronger
relationships with its businesses and improve retention rates.

4. Rapid growth: MTI’s digitalization efforts have helped the company to scale its
operations and expand its reach. The company has reported significant growth in its
customer base and revenue, with plans to expand to new markets in the future.
 5. Improved supply chain: MTI has implemented digital tools to manage its supply chain
more effectively, including real-time tracking of inventory levels, automatic
replenishment of stock, and optimization of delivery routes. This has helped the company
to reduce inventory costs and improve delivery times, leading to higher customer
satisfaction.

6. Greater agility: By adopting digitalization, they have become more agile and responsive
to changes in the market. The company is able to quickly launch new products, test new
marketing strategies, and adapt to changing customer preferences.

7. Increased efficiency of payments: MTI has implemented digital payment systems,

making it easier for customers to make transactions and for the company to manage
payments. This has helped to reduce the time and effort required for financial
management and improve overall financial stability.

8. Partnerships: MTI has leveraged digital platforms to establish partnerships with other
companies and increase its capital to increase production. For example, the company has
incubated with many institutions and they partnered with VCs for funding by providing
them equity.

5.1 Pre and Post-Digitalization comparison

6. BARRIERS OVERCAME BY SMEs

SMEs have faced various challenges during digitalization. These are some of the few
barriers.
 ● Lack of awareness: SMEs may not be aware of the potential benefits of digitalization or

how to effectively implement digital technologies in their businesses.

● Lack of resources: SMEs often have limited financial and human resources to invest in

digital technologies and related training.

● Lack of expertise: SMEs may not have the in-house expertise to implement and manage

digital technologies effectively. This could include technical expertise or knowledge of

digital marketing and e-commerce.

● Cybersecurity concerns: SMEs may be more vulnerable to cyber-attacks, as they may

not have the same level of resources or expertise to protect themselves against digital
threats.

● Connectivity issues: In some areas, SMEs may face challenges with internet

connectivity, making it difficult to access and use digital tools effectively.

● Resistance to change: Some SMEs may be resistant to change and prefer to stick with

traditional methods of doing business. Adopting digitalization may require a significant

cultural shift in the organization.

● Cost of implementation: The cost of implementing digital technologies can be a

significant barrier for SMEs, particularly if they are not sure if the investment will yield a
positive return.

Overall, SMEs face several challenges in adopting digitalization, but the benefits of doing so can
be significant, including increased efficiency, cost savings, and improved competitiveness.

7. CONCLUSION
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