SME Strategy for the e-world

Executive Summary

As part of a business to business mentoring initiative the authors identified the need for SMEs to develop a strategy for the challenges of the e-world. This article provides some detail on the collaborative efforts of the UK government and oil & gas industry against the backdrop of continued cost pressures. SMEs fulfil a crucial role in the supply of goods and services required in this demanding industry sector, but with ongoing commoditisation in procurement they can only remain competitive when new approaches are adopted. A strategic response for SMEs to these business developments is seen in focus on creating value for their customers by the adoption of e-business concepts and knowledge management.

Introduction and Context

The dramatic drop in oil price in 1997 focused the UK oil and gas industry on the urgent need to reduce the cost of their offshore activities resulting in the initiation of an Oil and Gas Industry Task Force (OGITF) in November 1998

This taskforce, consisting of senior representatives from the UK Government and a broad spectrum of the industry including oil companies, suppliers and unions, introduced a wide range of initiatives, culminating in a report "A Template for Change" published in September 1999. The Task Force evolved into PILOT, a group made up of twenty-three key Government representatives and recognised leaders from the industry, which meets on a quarterly basis.

The targets for the UK offshore oil and gas industry as set by the OGITF were:

This is further detailed in diagram 1.



The Department of Trade and Industry (DTI) through its Oil and Gas Industry Development Directorate (OGID) is responsible for assisting companies within the Oil and Gas sector to improve their competitiveness. This is achieved through a variety of initiatives in areas such as supply chain improvement, technology development and sector specific activities. OGID works very closely with the industry and provides the secretariat function for PILOT.

 

The Business to Business Mentoring Initiative

Taking forward one of the recommendations from the Competitiveness Work Group to the Task Force, DTI in collaboration with Shell and BP Amoco have developed an innovative Business to Business Mentoring Initiative for the Oil and Gas sector. The initial OGITF proposal suggested an export oriented initiative but the scope of it has since been extended to all aspects of business strategy. This approach is not only novel in the sense that it is contained in a specific industry sector but also that the mentors will be provided by the leading players in that sector.

The aim of the initiative is to improve and develop business relationships between operators, major contractors, major equipment suppliers and SMEs within the Oil and Gas supply chain. It will provide benefits for all parties. Larger organizations will gain an insight into the challenges and issues facing smaller companies, including the effect of their practices on SMEs. At the same time, it will help SMEs develop a strategic view of future industry needs and a better understanding of why larger organizations behave as they do.

SMEs participating in the Oil and Gas Business to Business Mentoring Initiative all meet the following EU criteria:

Business Mentors and SMEs will work closely together over an 18-month period on ways to better align their business strategies and practices. In particular to enhance:

A vibrant SME sector is seen as crucial to the future health of the offshore sector. It will be largely in these businesses that the new technologies needed to build a competitive and sustainable future for the North Sea will be developed. This initiative is another way for PILOT and DTI to help rejuvenate investment and activity in the UK oil and gas industry.

One of the authors (JS) was selected in the context of the Business to Business mentoring initiative as mentor for a SME, serving most North Sea lead operators and main service contractors. At the start of the engagement a number of objectives were set, with one of them pertaining to the need of a SME specific e-business strategy. This led to the involvement of the other author (HLF) to deepen the understanding of the e-business developments in the oil and gas industry. In the following paragraphs some of that work will be reflected. It forms the outline of aspects that SMEs have to take into account in developing their e-business strategy

Progress on e-business in the oil and gas industry

Towards the end of 1999 and in the early part of 2000 there was a flurry of e-business activities, with e-procurement being in the centre of attention. Most of the larger players in the oil & gas market accepted the rationale for embarking on e-Procurement without too much questioning. Main benefits were seen in the aggregation of spend to leverage supplier contracts and the avoidance of 'maverick' spending. With both having direct impact on the bottom line, such a prospect was too good to forego.

After some initial experiments it became soon apparent that establishing e-procurement required efforts and investments, which would be better spread over a number of buyers. And as a result e-marketplaces such as Traderanger and Petrocosm were started with a number of equity partners from buyer organisations.

Experience from exchanges in other industries indicated that the volume and range of good and services available (so-called liquidity) hinges on the participation of key suppliers. It turned out that the value proposition for buyers to join an exchange was substantially better than for suppliers. This was only exacerbated by the early success of on-line bidding (auctions). Experiments in all kind of industries had resulted in lower prices of up to 10-15%, mainly coming from supplier's margins (see diagram 2). Consequently numerous exchanges are struggling to come to full fruition due to lack of liquidity.

Price development in on-line bidding session

On the buyer's side, early adopters found out that on screen picking of items from a catalogue is only a small part of the whole procure-to-pay process. There is the need to record the order in the buyer's ERP system, which raises the complex issue of integration with back-office systems. Also, procurement of specialist, non-commodity goods or services could typically not be handled by the e-procurement systems, leaving out a large area where a digitised processes could have resulted in speed-up and efficiency improvement.



The challenges faced by a SME: what are the options?

Participation in exchanges:

With a number of exchanges for any specific industry sector, SMEs delivering products and services to several sectors (e.g. Oil and Gas, Engineering, Chemicals) are faced with the dilemma which exchange to join.

Each forms a considerable effort in preparing catalogue content and pricing information. Although efforts are being undertaken to standardise catalogue formats, efforts to set up and to keep content up-to-date should not be underestimated.

But, on the positive side, joining an exchange potentially opens up a larger market. And having gone through the learning curve might even been seen as a 'seal of approval' for prospective buyers

Product differentiation:

Often the SME products are not commodity goods and can differentiate themselves from their competitors' products by service provision or unique added value based on specific or niche knowledge. Participation in e-bidding or marketing via electronic market places and portals will make it more difficult to demonstrate the features of the product or the supporting back-bone of services and knowledge the SME is offering. In the pre e-business era this unique added value would have been highlighted in sales presentations and in discussions with customers. In the e-world it will be imperative to find an alternative for this crucial requirement for differentiation.

How can this differentiation be achieved? Firstly it is our view that SMEs in the future will not be able to differentiate themselves by marketing or selling a single product or service. The trick will be to market products as part of a set of products and services that create additional value in the customer's process. Such an integrated service provision chain wins customers. It requires that products and services traditionally purchased independently, are now offered in an integrated fashion by a service chain of SMEs. The offerings will be founded on knowledge gathering from all applications of their products or services.

Core to the success of a SME and the service chain it is part of, will be its ability to develop products and services quicker then its competing value chains. SMEs often have their products and services used by many different clients and therefore are in the position to capture this extensive field experience. It is imperative that experience is captured in a structured manner to steer product and service enhancements. Knowledge management techniques and solutions form the basis of a competitive advantage to achieve the crucial differentiation.

Secondly. we might well see the development of new market places run by these 'linked' SMEs. This would shift the playing field for SMEs from participation in marketplaces set-up for commodity good purchasing to niche marketplaces where buyers can see what the value-chain of SMEs is offering in their 'own' portal.

Competition will shift from product focus to value chain offerings. The SME which will remain on its own trying to sell its products via the big market places will have a difficult future. Those SME which exploit the value chain will thrive and will possibly form new portals. Competition will be between portals and be based on the quality of the value chain and the ability to gather knowledge to rapid enhance the value chain capability.

Summary

The following options should be part of a SME's strategy :

  1. Select and concentrate on exchanges that have the largest critical mass.
  2. Pursue the efficiency improvements that can come from e-procurement, in particular around ensuring fast and accurate communications on the goods/services being provided. For example, having full order information on the invoice and accuracy agreed with the customer allows faster invoicing and consequently faster receiving of cash ("first time right invoicing").
  3. Accept lower margins on commodity products but try to offer services around the product that have a great value for the customer. Customer experience with the product or service from a different industry, might have a positive impact on the efficiency or effectiveness of the customer's process. Differentiating from pure commodity offerings could command a premium.
  4. Form alliances with other SMEs to offer integrated products and services, with an emphasis on shared knowledge management around the actual application of the products and services. Ultimately this may lead to the emergence of seller specific, information rich marketplaces or portals.

 

The opinions the authors expressed in this article are personal and do not necessarily reflect their company's view.

Further communications to: hanslefever@enovite.com