Digital transformation of SMEs

This blog is part of a CORE project blog series. We look at effective matchmaking between SNV’s SME clients and digital solution providers, to enable SMEs to tap into opportunities presented by the developments in the digitalization space. The previous blog in the series, published in May 2021, explored the constraints faced by SMEs in going digital. This blog explores how “Digital Transformation of SMEs” benefits the SMEs.

The case for digital transformation of SMEs – the need of the hour!

A 2019 report from Alliance for a Green Revolution in Africa (AGRA) – The Hidden Middle - finds that millions of SMEs source directly from millions more smallholder farmers across Sub-Saharan Africa. These SMEs are involved in distribution, processing, procurement, and logistics of agricultural commodities and create employment for millions in agri-food systems. Their activity is driving a “quiet revolution” across African agriculture, connecting smallholder farmers to commercial markets at an unprecedented rate.

However, SMEs in the agriculture sector today must cope with a rapidly changing socio-economic environment and tackle a broad variety of external shocks and stresses such as climate change and, more recently, the COVID-19 pandemic. Several COVID-19 impact studies show that although the impacts of the pandemic affect both larger and smaller firms, the effect on SMEs is especially severe, particularly because of the higher levels of vulnerability and lower resilience related to the size of these firms.

To cope with this dynamic environment, food systems, and SMEs in particular, need to build resilience within all their business operations to survive, respond and grow.

Digital transformation can pave the way for addressing some of the constraints faced by SMEs in adapting to the rapid changes in the socio-economic environment they operate in. It can help enable them to compete with large-scale agribusinesses.

Benefits of going digital for SMEs

Some of the core benefits that digital transformation can bring to SMEs involved in agri-food systems in Africa include:

Building resilience to external shocks – Several sources indicate that investments in digitalization can be a game-changer for building resilience in SMEs against external shocks. Digitalization can increase SMEs’ forecasting abilities, streamline their operations, strengthen their network with suppliers as well as consumers, and reduce transaction costs - all elements that can be crucial for SMEs to adapt to their external shocks and stresses.

Increased savings and efficiencies - Digital transformation simplifies and consolidates routine processes and operations for SMEs, allowing them to increase efficiencies in their business operations and significantly save on costs. This is especially needed during COVID-19 induced restrictions on movements of people (SME staff) and goods.

Traceability – Across the globe, consumers are seeking greater transparency and easy access to data about the origin and supply chain of their foods, otherwise known as traceability. By going digital, SMEs involved in supplying agriculture produce to local and international markets would be able to digitally map their farmers, their certification details, and manage their supply chains more efficiently.

Logistics - SMEs can reduce manual customs and trade processes and increase their efficiencies in movement of goods within the country and across countries by digitalizing their supply chains. For instance, SMEs looking into intra-Africa trade through the proposed Africa Continental Free Trade Area (AfCFTA) will be able to easily integrate their platforms with that of AfCTA and trade beyond country borders, and even make use of digital logistics providers such as Kobo360 for increasing transport efficiencies.

Increase competitiveness, agility & innovation – Digital transformation can enable SMEs to remain competitive, agile, and innovative. It can aid them to compete with larger enterprises and grow. For instance, during COVID times, SMEs can provide digital advisory services to their farmers - targeted to the farmer’s specific plot, crop type, and point in the crop cycle - to improve their yields, enabling them to offer quality services at scale.

Data-driven insights to improve stakeholder engagement and experience - SMEs can collect and analyze critical information from stakeholders through tools such as data analytics, feedback collection, and marketing automation. Leveraging such technology provides SMEs data-driven insights that allow them to better understand their suppliers (in most cases smallholder farmers) and customers (other agribusinesses, exporters, consumers), and adjust their offerings and services accordingly. Intelligent use of the accumulated data allows SMEs to address pain points experienced by their stakeholders – especially in the face of COVID-19 induced rules and regulations – and position themselves to improve their service delivery.

Increased liquidity and access to finance – SMEs in the agriculture sector usually fall under the “missing middle” while looking for capital, hampering their growth. Much of SME financing either comes from informal avenues (on account of the businesses not being able to showcase track records due to poor documentation practices) which are highly risky and inconsistent, or from traditional financial institutions which have heavy collateral requirements and undertake balance-sheet based credit assessments. Further, COVID-19 has had a profound impact on SME access to finance, in particular, the sudden drop in revenues created acute liquidity shortages, threatening the survival of many viable businesses. Digital transformation of SMEs can enhance operational efficiencies, improve record management, use digital wallets to pay suppliers and employees safely, and increase profitability, ultimately helping SMEs free up capital within the firm and possibly attract more financing.

Next blog

While the possible benefits of digital solutions are big, going digital is not easy for most SMEs and disappointments are frequent. There needs to be targeted efforts around SME digital needs assessment and digital readiness, choosing and investing in the right digital solution and solution provider, among others. Look out for our next blog, which will deal with this topic.