Innovation and digital transformation: How are Philippine MSMEs performing?

Never before has there been much focus on micro, small, and medium enterprises (MSMEs) globally and locally, until this sector was disproportionately affected by the economic shocks resulting from the COVID-19 pandemic.

While their name may connote a diminutive size, Philippine MSMEs make up for it in sheer volume and their sizable effect on the country’s economy.

In fact, according to the recently issued 2018 List of Establishments of the Philippine Statistics Authority (PSA), MSMEs accounted for 99.52% of total businesses in the country ‒ over 998,342 Filipino enterprises delivering goods and services to customers every day.

The need for a digital world

There’s a great deal of truth to the adage ‘never waste a crisis’ ‒ or, in this case, a slowdown. COVID-19 shutdowns have greased the digital runway, and as some new virtual habits become ingrained, the shift to a more digital world for those who can afford its tools and experiences will become even more pronounced. This evolution will further polarize customer segments into those who have digital resources or aptitude, and those who don’t. Innovation and digital transformation on the part of MSMEs are critical to both its growth and resiliency in the midst of uncertainty.

MSMEs as incubators of innovation

When considering the process of innovation, the image typically invoked is that of multinational organizations with extensive R&D departments and large teams of researchers. Despite their comparatively low R&D budgets, however, MSMEs have considerably innovated their processes, which resulted in the increase of the country’s Global Innovation Index (GII). From 73rd in 2018, the Philippines is now 54th among 129 countries, with a score of 36.18. Taking into account the significant total number of Philippine MSMEs compared to large enterprises, the MSME sector’s absolute influence on overall innovation remains substantial.

Digitalization influences innovation and competitiveness

Digitalization and the smart use of information and communication technologies (ICT) are critical determinants of successful innovation, competitiveness as well as growth, and offer several opportunities for MSMEs to strengthen their market position and resilience to demand and supply shocks. As large enterprises increasingly exploit the advantages offered by the digital innovations outlined below, MSMEs must follow suit to avoid being sidelined or excluded from rapidly transforming markets and supply chains.

Innovation does not necessarily imply the invention of new or enhanced products, but encompasses any novel approach to business organization, marketing strategy or product distribution that allows the enterprise to differentiate itself relative to its market competitors.

Process innovations for digital transformation

• Manufacturing and retail firms, for instance, can enhance production efficiency by automating manufacturing and supply chain processes using intelligent machines, or enhancing the flow of data using Radio Frequency Identification Technology (RFID) technology.
• Big data analytics can provide important insights into business processes, and uncover opportunities to cut costs and increase efficiency. This enables firms to reach specific customer segments more effectively and to adapt product characteristics based on their customers’ preferences.
• Business intelligence solutions, such as enterprise resource planning software (ERP), allow firms to enhance the organizational processes within their businesses, and to share information internally and along their supply chain in real time. This allows their employees to execute tasks more efficiently.
• Cloud computing (CC) offers opportunities for MSMEs to access business intelligence solutions without commiting to the upfront software, hardware and personnel investments required for their inhouse implementation.
• Finally, smaller enterprises can increase their visibility and global reach via e-commerce channels, which provide access to a broader consumer base extending far beyond the traditional market boundaries.

Apart from enabling process innovations, investments into a firm’s digital infrastructure can facilitate access to networks and promote the integration of knowledge, allowing MSMEs to communicate, collaborate and share their data with partners and suppliers.

Although a deeper understanding of the opportunities offered by digital transformation is emerging, many MSMEs continue to lack orientation, and fail to prioritize digitization sufficiently.

What is the current state of MSME digitalization?

According to a 2018 study conducted by Bain and Co., only 16% of MSMEs in ASEAN are truly digitalized. All digitalized MSMEs can be categorized into three levels: Basic, Intermediate, and Advanced.

Fifty-six percent (56%) of MSMEs are at Basic level with minimal digital adoption, mostly to facilitate communication and operations.Thirty-four (34%) percent use digital tools more meaningfully to aid sales and marketing. Only 10% are in the Advanced category, with sophisticated digitalization applied in various aspects of their business. Essentially, even among the minority of MSMEs that are digitalized, most do not utilize digital tools to the fullest.

What barriers to innovation and digital transformation do MSMEs face?

Digital transformation is critical for MSMEs to succeed but business owners are faced with various challenges in embracing digital technologies, including financing and understanding the complexities of technology.  

In the competition for digital transformation and business innovation, the biggest disadvantage facing MSMEs is their lack of resources. 

In terms of technologies, since digital transformation is still in its early stage, the industry would need to accumulate more experience with newly emerging technologies.

If an MSME is not open to an innovative culture, new business models and a new information system structure, it may be too conservative or hesitant when it comes to investing in information and communication technologies for its business operations. MSMEs may also face other challenges in digital transformation, including the required manpower, digital innovation in product and service planning, and adaptation to the constantly changing regulations.

How can Philippine MSMEs be more competitive and innovative?

Fostering digital transformation today requires more than adopting new technologies. It means creating environments where businesses can leverage innovation to deliver meaningful change that drives positive business outcomes. With MSMEs at the heart of the economy, they need to be empowered with the right tools to tackle the next steps towards being a sustainable business.

Deliver the right technology

The first step to support MSMEs’ digitalization is to deliver proper information on digital technologies and benefits to MSMEs. In providing up-to-date and varied content, the government's best approach would be to partner with digital platformers. They are in direct contact with many MSMEs and are knowledgeable about the types of MSMEs that have successfully utilized their services in digitalizing businesses operations.

Upgrading to the digital structure

The World Bank’s report released in June 2020 stated that “the current state of internet in the Philippines calls for urgent and substantial improvements for the digital economy to play a key role in the economic recovery”, noting that widely available internet services will support medium-term economic recovery and ensure long-term growth. Reliable internet speed has been recognized as the "prerequisite" of any plans to spur the digital economy.

Provide financial support

Financial support to MSMEs that are considering embracing digital technologies can  encourage them to move forward, but it would be effective if such technologies are properly designed. Financial support would make the subscription fee for digital services less burdensome.

Reinventing the future by going digital

Especially for MSMEs that cater to the end-consumer, the future is arriving more quickly than anyone could have imagined just a few months ago, accelerating digital trends that had already been transforming consumer behavior. The pandemic has expedited the pace of behavioral changes around the world on how people live their lives ‒ how they work, eat, communicate, play and learn. And this extends to consumption patterns, too, in every category, including groceries, services, entertainment, healthcare, and even data.

Businesses need to understand how this new world affects all of their touch points with the customer if they are to actively reinvent their own future and not be at the mercy of external events.