The State of Technology
Background
Current Technology Position
The Firm’s Most Sophisticated Technology
Technology Off-the-Shelf and Not
Cost and Operation of the Technology
Replacing the Technology
Recent Technology Upgrades
Final Comments
Background
The technology employed by a business influences its productivity which in turn influences its competitive position. A healthy competitive position typically yields a successful business, and vice versa. There is, of course, more to productivity and business success than technological prowess. Service, a strong point of many small firms, is illustrative. In fact, if small-businesses competed only on the basis of technology, few would probably exist - except to the extent that they competed exclusively against other relatively technologically poor small businesses. Still, the role technology plays in making small businesses viable competitors should not be underestimated. Thus, this issue of the National Small Business Poll examines the State of Technology in smaller firms.
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Current Technology Position
Small-business owners typically encounter two competitive disadvantages in employing state-of-the-art technologies — an information problem and a resources problem. The first involves the inherent difficulty of accumulating and evaluating information on the most recent technologies given limited staff and technical capabilities. While not all technology is highly sophisticated nor a radical departure from what went before, new models, new versions, let alone radical improvements, demand a substantial investment of intellectual resources (if available to the firm) to discover and then evaluate changes that may eventually prove inappropriate, non-operable, or excessively expensive. Similarly, technologies and technological upgrades are not necessarily expensive. But they can be very expensive and the more they are, the more small-business owners face resource constraints that limit their abilities to employ technology, or employ technology in its latest iteration. The upshot is that the owner’s choice to add, increase, modify or pass on technology is a decision filled with implications for the venture and its ownership.
A majority of small-business owners think that the technology used in their industry is quickly changing. One in four (25%) report their industry’s technology is changing very rapidly and another 36 percent report that it is changing somewhat rapidly (Q#4). Still, 37 percent see more modest changes occurring, including 10 percent who report little, if any, change.
While sample size prohibits a careful examination of industry differences, owner assessments seem to bear out popular impressions. Perceived speed of change appears associated with industry. Though every industry contains individuals who believe technology is changing rapidly, those views appear most pronounced in certain service industries, for example, professional, scientific, and technical services and information and, to a lesser degree, in manufacturing. Similar assessments are least often present in the distribution industries and in other service industries, such as, accommodations and food services, and personal services. Employee-size of firm appears to be unrelated to the perceived speed of change in industry technology.
Despite the recognized change going on around them, small-business owners are hesitant to alter the technologies they use. Few are willing to risk adopting an unproven technology. Thirteen (13) percent attempt to be the first to try new things and another 15 percent try to adopt promising new ideas before others jump on board (Q#5). That means a little over one in four purposefully try to stay technologically ahead of others. In contrast, one-third (33%) use the philosophy that “if the current stuff works, don’t mess with it.” Another 23 percent are a bit more venturesome using new things when they are widely accepted and understood. Fifteen (15) percent adopt the middle position. Though there is a clear relationship between willingness to adopt new technology quickly and sales growth over the last two years, more who are growing take the more reserved approach to adopting new technologies than the more aggressive approach.
Still, small-business owners are confident in their technological capabilities compared to their primary competitors. A significant majority (58%) see themselves technologically abreast of the competition while 36 percent think that they are more advanced than those against whom they compete most vigorously (Q#3). Just 2 percent believe that they are technologically disadvantaged or behind their fiercest rivals. Those who evaluate themselves as more technologically advanced than their primary competitors are, therefore, 18 times more plentiful than those who think the opposite. Those data suggest that the group’s assessment is unrealistically favorable. If that is true, owners of the smallest businesses appear most likely to miscalculate. Since the distribution of assessments does not vary by employee size-of-firm, owners of the smallest must consider themselves as relatively technologically advanced (compared to their competitors) as owners of the largest; yet, they are not. The following paragraphs provide evidence that an inflated opinion of a small firm’s technological capabilities is common.
The survey collected data on the minimum levels of the non-industry specific technologies most broadly used by businesses in the United States - high-speed Internet and business Web sites - to provide objective measures against which to compare the self assessments of technological advantage. Seventy-seven (77) percent of small employers report that their business is connected to the Internet (Q#6). Of that number, 81 percent have high-speed access (Q#6a). Of all small businesses, 62 percent employ high-speed Internet; 36 percent do not. Substantially fewer have interactive Web sites. Fifty-three (53) percent disclose that they have a business Web site (Q#7). Of those with a business Web site, 72 percent claim the site is interactive in the sense that customers can reach the business, place orders, or receive responses through the site (Q#7a). Of all small businesses, fewer than two in five (38%) have an interactive Web site; 61 percent do not.
Overestimation of technological capability appears most pronounced among the smallest. Note that 87 percent of those with 20 or more employees have high-speed Internet access compared to 58 percent of the smallest. Similarly, 55 percent of the largest compared to 35 percent of the smallest have an interactive Web site. Objective measures, therefore, show larger, small enterprises typically employing higher levels of technology than smaller ones.
Perceptual measures contrasted to more objective ones suggest that a large number of small-business owners are not nearly as technologically advanced as they think they are. Unless their firms, particularly the smallest, compete only against other small businesses that use minimum levels of technology as well (which is to some extent true), it is difficult to reconcile the contrast in objective and perceptual measures in any other manner.
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The Firm’s Most Sophisticated Technology
The survey asked small employers to identify the most sophisticated piece of technology that they use in their business today. Respondents were told that the technology could be a machine, a device of some type, a piece of software or something of that nature. Most of the technologies respondents volunteered are recognizable in generic form to the layman and others are likely recognizable to industry colleagues. Still, owners did not seem to have difficulty identifying their most sophisticated technology.
Almost 200 (of 753) mention a computer (or server) of some type as the most sophisticated technology that they use and about the same number offer software. Software types listed ranged from Cad-cam applications to TurboTax. Diagnostic equipment was common though comparatively few cited telecommunications equipment. Vehicles are likely to be the most sophisticated technology in a large number of firms, but they are rarely cited. A scattering of office equipment, such as fax machines, are also noted. Finally, a number of machines or devices appear on the list a single time, for example, imaging equipment, fingerprint scanner, plastic injector molder, nuclear camera, hydrogen fuel cells, and an embroidery machine.
Just 17 percent report their most sophisticated technology is new on the market (Q#2a). In contrast, 72 percent have an upgraded model or version of it. Eleven (11) percent do not know. However, most with an upgraded model claim to employ the most recent version. Seventy (70) percent of those using an upgraded version believe that they are using the most up-to-date edition of the technology (Q#2d). Twenty-six (26) percent are not. It is not possible to verify these assessments, nor can we determine how out-of-date the technology is among those who do not have the latest versions. Yet, their responses indicate that on balance small-business owners employ current technology, if not across-the-board, at least in an important aspect.
The generic version of the most sophisticated technology used in individual small businesses typically has been around for a few years. For example, just 6 percent report that to the best of their knowledge the most sophisticated technology that they employ has been on the market for less than a year (Q#2b). Thirty-five (35) percent say that it has been on the market for more than 10 years (14% more than 20 years). Nineteen (19) percent do not know. But if those “don’t know” responses are distributed proportionally, the prior two numbers would be 7 percent and 44 percent respectively.
Small-business owners have used the technology in their enterprises for much shorter periods of time than they have been on the market. A large share of the gap between existence on the market and use can be attributed to the natural churn in small businesses. Still, 17 percent have used the basic technology, their most sophisticated, for less than one year (Q#2c). Another 29 percent have used it for more than one year, but less than six. Meanwhile, a large number have used the basic technology for years.
The most sophisticated technology these owners employ is typically also employed by competitors. Twenty-three (23) percent indicate that all competitors have the same technology and another 25 percent indicate most do (Q#2e). Two types of responses are of particular interest, however, and for different reasons. Thirteen (13) percent report that none of their competitors use the technology they do which means, if their assessments are accurate, that they are ahead of the competition. Another 22 percent say just a few competitors have equivalent technology which means an advantage over most competitors. However, another 16 percent do not know. The question is whether those in the latter group do not know because of the difficulty in making the assessment or because they have just not paid attention.
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Technology Off-the-Shelf and Not
Technology can be purchased off-the-shelf, special-ordered, or constructed by the owner(s)/employees. Six percent say that they developed their most sophisticated piece of technology in-house; 92 percent obtained it on the outside (Q#2k). (The survey did not ascertain the distribution of off-the-shelf and special order.) The remainder did not answer.
When small employers did obtain the technology outside the firm, they often modified it. Twenty-six (26) percent of those who did not build the technology internally, modified what they brought (Q#2l). Most (72%) altered it modestly while 19 percent altered it substantially (Q#2l1). It is not clear if the modification occurred using in-house people or whether someone was brought in from the outside to do the job. Still, about one in 10 either built or substantially modified the most sophisticated technology that they now employ.
A majority purchase rather than lease the technology. Sixty-five (65) percent say that they own it; 29 percent report they lease it, with the remainder not responding (Q#2m).
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Cost and Operation of the Technology
The per unit cost of a technology and the amount of time it takes for the firm’s most skilled employee to operate the technology effectively are two reasonable proxies for its sophistication. Should costs be higher and employees require more time to become proficient in its operation, the technological sophistication is likely to be greater. Assuming this logic is correct, the data suggest most small businesses have relatively limited technological capabilities. For example, one in four small employers (26%) report that if they were to buy the most recent version of their most sophisticated technology today, the approximate per unit cost would be less than $1,000 (Q#2g). One can purchase a very nice computer for less than $1,000, or a single piece of reasonably common software, or perhaps a small inter-office telephone system. That is about the limit. The plurality (36%) estimate their replacement cost at between $1,000 and $5,000. This, too, purchases limited capability. Still, 11 percent of the smallest and 30 percent of the largest report the value of theirs is $25,000 or more.
These unit costs are potentially understated because many lease their technology. Some confusion may, therefore, have resulted between purchase price of new technology and its residual value in a leasing arrangement. In addition, costs reflect the dominance of computers and computer software, in contrast to computer-driven machinery, equipment, or vehicles, let alone other technologies. Computers effectively represent the relatively inexpensive brain compared to the relatively more expensive muscle that is part of computer-driven equipment/machinery.
The employee skills proxy presents a similar perspective. The skills necessary to use the technology proficiently will typically be acquired by the business’s most skilled person in less than one month’s time. One-third (32%) report proficiency in less than one week (Q#2h). Another 28 percent say the learning curve reaches proficiency between one week and one month. Still, another 28 percent need more than one month. Since many employees qualifying for the estimate will already have had some training or experience on a similar technology, the time frames are more compressed than if the individual would have been totally unfamiliar with the technology. That, and the fact the question refers to the most skilled person, means the estimates are low for the average person having little or no background.
A comparatively large proportion of the workforce appears to use a firm’s most sophisticated technology. While just one employee uses it in 20 percent of small businesses, single users are confined almost exclusively to the very smallest (Q#2i). However, it appears that all or nearly all employees use it in a substantial number of firms. Frequent use is not strange given that computers and computer software are so often the technology cited as the most sophisticated.
A substantial majority employ few copies of their most sophisticated technology. Forty-one (41) percent have only one, though those employing fewer than 10 people are about 10 percentage points more likely to do so than larger employers (Q#2f). Fifteen (15) percent employ two and another 10 percent employ three. Just 7 percent say they have 10 or more copies of the technology; most of those are concentrated in firms employing more than 20 people.
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Replacing the Technology
Most believe that their most sophisticated technology has a limited shelf-life and there will be a need to update reasonably soon. Eighteen (18) percent report that they need to replace this piece of technology yet this year (Q#2j). Another 48 percent calculate that theirs will last another one to five years while 23 percent calculate theirs will last even longer. Of those who think theirs will last longer than five years, 10 percent think the most sophisticated technology they use will last indefinitely. Eleven (11) percent do not know. Since owners may have employed this piece of technology for several years already, these figures do not indicate how quickly small-business owners turn it over. Still, it appears that regular upgrading is common.
The primary reason that small employers will replace their current most sophisticated technology is because they want an upgrade; they want a more advanced version (63%) (Q#2j1). Just 24 percent say that they will replace theirs because it is just physically wearing out. One likely cause for the reasons in the distribution for replacement to be skewed is the relative importance of software. Software does not wear out for all intents and purposes; it becomes obsolete. If one therefore, separates hardware, including physical equipment, from software and focuses on the former, physical deterioration becomes almost as important a reason to change as the desire for something new.
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Recent Technology Upgrades
Productive capacity can be upgraded either by upgrading existing technology (including processes) or adding to it. Forty-five (45) percent of small employers report that they used new or significantly improved, processes, equipment or software in their businesses during the prior year (Q#1). Of this number, 61 percent indicate that they introduced more than a single major change in productive capacity (Q#1a). The result is 28 percent of the total population saying that they upgraded in more than one way.
Employee-size of firm is related to change and frequency of change, but not as tightly as might have been anticipated. Forty-three (43) percent of the smallest upgraded as did 55 percent of the largest. In addition, the smallest upgraded more than once in 26 percent of cases compared to 38 percent among the largest. A recurrent theme is the significant core of very small enterprises that bring in new things beside the substantial body of larger ones that appear to be doing little in this regard.
The upgrade (or most important upgrade among those with more than one) is most frequently computer software. Half (51%) report that a piece of software represents their principal enhancement in the last year (Q#1b). Another 34 percent indicate the change was equipment of some type. (The survey did not distinguish between computer hardware and equipment of other kinds.) Just 13 percent cite a process as their most important advance.
In most instances, the upgrade (or most important upgrade) does not involve the latest technology available. Sixty-nine (69) percent report that the change was new to the business (not to the market) while 29 percent say that theirs was new to the market (Q#1c). Thus, if most of these technologies were not well-tested by others in the market, they give that appearance and match the earlier description of conditions under which small-business owners upgrade.
Technology upgrades allow businesses to improve their relative competitive position. Thirty (30) percent believe that the change (most important change) they made moved them ahead of the competition (Q#1d). Another 48 percent think their upgrade(s) kept them abreast of the competition and 18 percent saw it catching them up. These assessments are only from the 42 percent who improved their productive capacity in the last year. They do not include assessments from those who failed to upgrade. Since virtually all small-business owners believe they are as technologically advanced or more advanced than their competitors, several of those who failed to substantially upgrade their productive capacity in the last year also feel confident in their technological capacity.
Small-business owners obtain their ideas for the (most significant) upgrade from a variety of sources. Just 15 percent developed the idea themselves (Q#1e); the idea was theirs. Meanwhile, over 60 percent found the idea elsewhere. Of that number, 23 percentage points copied it directly, but 39 percentage points upgraded or modified what they found elsewhere. It cannot be ascertained if these upgrades of modifications are modest or substantial. Twenty-four (24) percent do not know where theirs originated.
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Final Comments
Computers and computer software dominate the most sophisticated technology that the largest group of small businesses employs today. To a large extent, therefore, the state of technology in small business is really the state of computerization. Even small business owners who identify items like vehicles or telecommunications as their most sophisticated technology indirectly also cite computers considering the importance of computers to their operation. Since relatively few of the identified technologies do not incorporate computer technology in one form or another and since some computer technology is free standing while some is incorporated into larger equipment/machines, comparisons across technologies prove particularly difficult.
Still, difficult comparisons cannot obscure a few important points. First, a large proportion of employees in most businesses use the firm’s most sophisticated technology. In few instances does the technology appear to be the occupational property of a few people. Broad use implies, the technology is an integral part of the firm’s operation. Second, per unit costs of these technologies are modest. That means more copies can be obtained without financially stressing a firm. However, it implies that the technologies are either stand alone, i.e., not driving a larger machine, reasonably mundane, or both. Third, while many businesses upgrade annually or, at least, periodically, the technologies they add or upgrade appear to be well-known. A few enterprises do create their own and another small group substantially modify/customize what they obtain. Most of what small-business owners procure, however, appears to be off-the-shelf.
Industry appears more important to the employment of technology than size-of-business. Competition is the likely reason for this situation. One tends to compete against others in the industry more than others of like size. Still, at least as measured by the most common office technologies, smaller, small firms are likely less technologically advanced than larger, small enterprises.
While almost half indicate that they have upgraded their technological capacities in the last year, over half have not, including almost half of the largest smalls, and many in the industries most rapidly changing. Yet, virtually all believe that they are at least technologically abreast of their primary competition. That will be true in some cases, but it is not plausible for all. Technology is, of course, not the only factor on which small businesses compete. But unless small-business owners who do not upgrade, but believe they are technologically abreast, have a very large competitive edge in non-technological factors, they could experience notable difficulties.