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FIRM CAPABILITIES, ENTREPRENEURIAL

COMPETENCY AND PERFORMANCE OF
UGANDAN SMES

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 FIRM CAPABILITIES, ENTREPRENEURIAL
COMPETENCY AND PERFORMANCE OF UGANDAN
SMES

Ernest Abaho1, Aarakit Sylvia2, Joseph M. Ntayi3 and Moses K. Kisubi4

ABSTRACT
This paper is based on a study that examined the relationship between the firms’
capabilities, entrepreneurial competency and performance of Small and Medium
Enterprises (SMEs) in Uganda. The study used stratified random sampling to
derive a sample of 314 SMEs and a cross-sectional research design. Data was
collected using self-administered questionnaires that were filled out by firm
owners and managers as units of enquiry whereas a firm was the unit of analysis.
The study findings indicate that an increase in the level of a firm’s capabilities
through competent management, market linkages and marketing capabilities
leads to enhanced SME performance. As entrepreneurial competences and firm
capabilities predict 30.4 percent of the variance in SME performance, SME
owners and managers, through their entrepreneurial competences, can use firm
capabilities as tools to influence their firms’ operations to enhance their
performance. Future research can be carried out in other geographical places to
verify whether what was observed in Uganda specifically in Jinja district is
applicable to the rest of the world. Similarly, future research can explore other
predictors of SME performance.

Keywords: Entrepreneurial competences, firm capabilities, SMEs, performance

BACKGROUND
A plethora of literature exists on the performance of small and medium sized
enterprises - SMEs (Watson, 2011; Semrau & Werner, 2012; Campbell et al.,
2012). These SMEs play a significant role in economic growth and development
through innovation diffusion, employment and resource productivity (Global
Entrepreneurship Monitor- GEM, 2010; Chittithawom, Islam, Keawchana, &
Yusuf, 2011; Turyahebwa, Sunday, & Ssekajugo, 2013). Through employment

1
Senior Lecturer, Department of entrepreneurship, Makerere University Business School (E-mail:
ernestabaho@gmail.com
2
Lecturer, Makerere University Business School
3
Professor, University of Makerere Business School.
4
Lecturer, Makerere University Business School
Business Management Review pp. 105-125 ISSN 0856-2253; (eISSN 2546-213X) ©June-December
2016 UDBS. All rights of reproduction in any form are reserved
 Abaho, Aarakit, Ntayi, & Kisubi

generation, growth of GDP, innovation, income distribution, resource utilisation

and regional development, SMEs have greatly contributed to socio-economic
development and poverty reduction (Nishantha & Padmasiri, 2010; Ocici, 2007).
To attract the benefits of positive growth to the SME sector, the level of
entrepreneurial activity has to be high.

Uganda has had the record of having the second highest Total Entrepreneurial
Activity (TEA) index of 31.6 among all the global entrepreneurship monitor
countries after Peru and the second highest startups activity (GEM, 2003; Walter
et al., 2004). Although the TEA is high in Uganda, the business mortality rate is
equally high with 50% of the startups shutting down before completing a year in
operation (Walter et al., 2004; OECD, 2009; Nangoli et al., 2013) characterised
by poor performance (Rooks, Szirmai, & Sserwanga, 2009). In fact, Uganda‘s
SMEs have to contend with a big challenge of inappropriate entrepreneurial
competences as evidenced by many of those who enter into business without
awareness about the extent of their entrepreneurial ability and they do not carry
out a market survey to determine the viability of their ventures (Rwakakamba,
Lukwago, & Walugembe, 2014).

Business failure is attributed to limited supervision, lack of business and

management skills, excessive competition, poor saving culture, lack of financial
discipline, failure to pay taxes and lack of commitment to the business, (Nangoli
et al., 2013; Chittithaworn et al., 2011). Such challenges result from limited
capabilities to respond strategically to environmental dynamics (Sanchez, 2011).
Firm capabilities contribute to the resourcefulness of the firm (Ambrosini &
Collier, 2009) because they influence the perception of success and how to
prepare for competiveness. This subsequently leads to increased performance in
various functions. Okpara and Wynn (2007) and Okpara (2011) in their
respective studies affirm Africa‘s strong potential for high performing SMEs
despite the challenges of innovation and firm-related resources remaining a
stumbling block

Despite this high growth potential, Okpara (2011) found that, the performance of
SMEs in Africa is far below the world average as compared to the developed
countries. The study indicated that issues such as lack of finance, poor
management, corruption, lack of infrastructure, and poor accounting are major
obstacles to small business performance. Similarly, Fatima, Mohammed and
Almubarak (2016) point out that lack of access to financial resources,
difficulties in finding qualified labour, work-home conflict and low profit topped
106
the list of factors affecting the performance of women-owned SMEs in Bahrain.
A critical reflection on Okpara (2011) and Fatima et al. (2016) indicates that
these challenges relate to entrepreneurial competencies and firm capabilities. In
other words, SME performance is highly attributable to the entrepreneurial
competences and capabilities that a firm controls. However, the relationship
between entrepreneurial competencies, firm capabilities and performance still
remains complex. The complexity of firm capabilities and firm performance arise
as a result of limited understanding about the linkage between the drivers of
other resources, namely entrepreneurial competences and firm performance.

According to the dynamic capabilities theory (Teece, 2014), firm owners‘ and or
managers‘ entrepreneurial competencies have a strategic role to play in creating
value of firm capabilities to performance. In linking firm capabilities and firm
performance, entrepreneurial competencies such as opportunism, organisational
aptitude, strategic orientation and entrepreneurial networking play a key role
(Man et al., 2002; Mohamad et al., 2011). Entrepreneurial competencies act as a
driving force in the search for opportunities and resources for competitiveness
and growth (Colombo & Grilli, 2005; Vijay & Ajay, 2011).

With regard to the Ugandan context, Rwakakamba et al. (2014) argue that
entrepreneurs in the country start businesses to just exploit what initially looks
like a potentially profitable business opportunity only to realise later that they do
not have what it takes to succeed in that business endeavour. This entrepreneurial
deficiency is due to limited ability in sufficient preparation and self-matching
with businesses that people engage in when it is a key entrepreneurial
competency for start-up. However, some entrepreneurs have performed well and
succeeded with their SMEs in similar circumstances. Thus, although it is possible
to raise questions about the quick failure of SMEs in Uganda, the bigger question
is on the entrepreneurial competency of SME operators and the capabilities of
their firms in fostering competitive performance. As such, this paper investigates
the relationship between entrepreneurial competencies, firm capabilities and
SME performance from a developing country perspective.

THEORETICAL LITERATURE
Provision of the guiding theories of a particular research phenomenon helps to
justify a scientific basis of the study and develop a logical conceptual itinerary
that is both grounded and scientific. This paper is anchored on the Resource
Based View (RBV) and dynamic capabilities theory of a firm. According to the
RBV, firms perform differently because they control different resources and have
 Abaho, Aarakit, Ntayi, & Kisubi

different capabilities (Barney, 1991; Newbert, 2007). Those resources and

capabilities can generate a sustainable competitive advantage and, thus, greater
performance. The RBV of the firm argues that companies equipped with
valuable, rare, inimitable and non-substitutable resources and capabilities can
generate sustainable competitive advantage by implementing strategies that
create value, which is difficult for the competitors to imitate (Barney, 1991).
Thus resources are stocks of tangible and intangible assets semi-permanently tied
to the firm whereas capabilities are complex co-ordinated patterns of skills and
knowledge embedded as organisational routines (Teece et al., 1997).

According to Penrose (1959), resources, competencies and capabilities facilitate

internal growth. After all, organisational resources are key success factors in any
organisation, whether profit-making or not-for-profit. In the same vein, Barney
(1991) argues that resources and capabilities are two mutually dependant factors
because resource acquisition and configuration constitute indicators of a firm‘s
capability. Nevertheless, valuable resource accumulation does not guarantee on
its own a superior firm‘s performance because firms differ in their capabilities of
utilising resources at their disposal to attain superior performance (Sanchez,
2011; Eisenhardt & Martin, 2000; Teece et al., 1997).

Firms require access to resources to build capabilities which enhance their

performance (Barney & Hesterly, 2008). For example, knowledge-based
resources such as innovation capability, marketing capabilities and different
production capabilities are vital firm resources (Calantone et al., 2002; Rangone,
1999). Therefore, the theory of dynamic capabilities (Helfat & Peteraf, 2003;
Teece et al., 1997) has been introduced as an extension of RBV to incorporate a
processual dimension to enable a better understanding of how firms gain and
maintain superior performance over time. The scientific role of the RBV in this
study is to test the level and nature of resourcefulness of the Uganda SMEs as
well as examine its relevance in explaining performance of Ugandan SMEs.

Dynamic capabilities theory

As indicated earlier, the dynamic capabilities theory builds on the RBV. It is an
entrepreneurial approach that emphasises the importance of business processes,
both inside the firm and also in linking the firm to the external environment
(Teece, 2014). Thus, the question of whether Uganda‘s SMEs are dynamic in
mobilising and utilising their resources is imperative because it reflects their
entrepreneurial competencies. Entrepreneurial competencies drive resource
capabilities, especially about how they deal with other human resources.
108
Capability refers to the capacity to utilise resources to perform a task or an
activity, against the opposition of circumstance (Teece, 2014). From the strategic
view, a firm‘s capability refers to the actions, processes, systems and
relationships that the company can carry out with its own resources (Sanchez,
2011). It also includes factors that contribute to the firm‘s awareness of strategic
opportunities and/or threats and its ability to implement strategies (Barney &
Arikan, 2001). A firm‘s capability focuses on strategy perception and
implementation, which is consistent with the role of firm resources and
capabilities in strategy (He, Mahoney, & Wang, 2007). It also looks at the
efficiency of companies in solving problems and their ability to use and apply
knowledge (Weinstein & Azoulay, 1999).

Firm performance
A firm‘s performance refers to how well or poorly it is fairs relative to the set
objectives. In this regard, Sanchez (2011) argues that businesses should set clear
objectives, target growth and compete in both the short and long run to perform
well and achieve success. Failure to create such links results into failure of many
small firms during their first years of operation or causes struggle in their
survival. Several measures of a firm‘s performance have been advanced
(Barringer et al., 2005; Chen et al., 2007). However, the selection of suitable
measures ought to be in the light of the firm‘s strategic intentions to suit the
competitive environment in which it operates and the kind of business it is
engaged in (Hvolby & Thrstenson, 2000).

The firm‘s performance can be conceptualised as multidimensional by including

both tangible and intangible goals. Whereas some researchers such as Barney et
al. (1996) have used accounting measures to assess firm performance such as
growth in revenues and profitability, others (see, for example, Watson, 2011)
have used measures based on failure and marginal survival because small firms
tend to have a higher risk of failure and poor performance within their early years
of operation than larger ones. Thus, a balance between financial and non-
financial measures provides a more accurate measure of the overall performance
of a firm because not all aspects of organisation‘s activity can be expressed in
monetary terms.

This study measures the firm‘s performance using both financial and non-
financial measures. Financial measures include sales growth, profitability and
market share which are adopted from Eikelenboom, (2005) and Mithas et al.
(2011) whereas non-financial measures include customer acquisition and
retention as adopted from Pont and Shaw (2003).
 Abaho, Aarakit, Ntayi, & Kisubi

FIRM CAPABILITIES AND FIRM PERFORMANCE

Several empirical studies show that there is a significant relationship between a
firm‘s capabilities and its performance (Sanchez, 2011; Barney & Arikan, 2001:
Zahra et al., 2006; Vijay & Ajay, 2011: Weinstein and Azoulay, 1999;
Eikelenboom, 2005). Tuan and Yoshi (2010) studied 102 industries in Vietnam
and found that firms‘ capabilities are sources of competitive advantage in terms
of sales and market share growth. If managers or owners evoke changes in their
organisational capabilities (Eikelenboom, 2005) such as marketing, market
linking and management capabilities (Desarbo et al., 2007), there will be a
change in organisational attributes than potentially can lead to improved worker
well-being, worker behaviour, efficiency that in the end leads to higher customer
acquisition and profitability (Eikelenboom, 2005).

Increasingly, there is evidence that a firm‘s dynamic capabilities significantly

affect firm performance. In this regard, a firm‘s ability to integrate knowledge
from external sources is positively related to productivity and helps firms to
avoid path dependencies imposed by their operational competencies (Ambrosini
& Collier, 2009; Collis, 1994). The availability of firm capabilities can either
facilitate or constrain firm activity (Zahra et al., 2006). This implies that a firm
that can apply its overall capability to launch a greater level of competitive
actions on average achieves a better position in the market. Resources and
capabilities accumulated and developed by the firm serve as its driving force in
engaging in various activities (Vijay and Ajay, 2011). Therefore, lack of
activities may indicate inefficient use of a firm‘s resources and capabilities. In
the absence of agency problems such as managerial self-dealing or avoidance,
managers are expected to utilise fully the firm‘s resources and capabilities to
engage in economically-viable and competitive activities (He et al., 2007).

Capabilities help firms to develop the capacity to change routines and integrate
them into their operations through innovation and change orientation (Zahra et
al., 2006; Andersén, 2011). If resources or capabilities required for perceiving
and implementing a strategic action are not readily accessible to the firm, then
the firm may delay or even abandon its implementation of the action planned
(Barney & Arikan, 2001). This is consistent with Weinstein and Azoulay (1999)
who argue that different firms control different resources which accounts for
differences in their performances. Teece et al. (1997) in a seminal contribution
110
argue that dynamic capabilities enable organisations to integrate, build and
reconfigure their resources and competencies to maintain performance in the face
of the changing business environment.

Collis (1994) classifies capabilities in terms of order whereby lower order

capabilities mean ordinary capabilities and high order capabilities imply
dynamic capabilities. Collis (1994) asserts that ordinary capabilities enable
organisations to perform functional activities such as logistics, marketing and
manufacturing among others whereas dynamic capabilities deal with change.
Ordinary capabilities are used to maintain the status quo and will earn a firm a
living by producing and selling the same product in the same scale and to the
same customers over time (Helfat et al., 2007; Winter, 2003). Teece (2007)
acknowledges that ordinary capabilities help sustain a firm‘s technical fitness by
engendering day-to-day operational efficiency whereas dynamic capabilities help
sustain a firm‘s evolutionary fitness by enabling creation, extension and
modification of the resource base, thereby creating long-term competitiveness.

The implication of these facts is that consensus is emerging about the distinction
between ordinary and dynamic capabilities. This implies that dynamic
capabilities create value indirectly by changing ordinary capabilities (Eisenhardt
& Martin 2002; Helfat et al., 2007). Therefore, conceptual investigations on
dynamic capabilities agree that firms with resources can rapidly deplete their
endowments and be eliminated if they lack dynamic capabilities (Zott, 2003).

Whereas the dynamic view of capabilities is particularly important in

international markets (Griffith & Harvey, 2001; Prange & Verdier, 2011; Teece,
2007), where firms are completely exposed to opportunities and threats
associated with rapid changes in customers, technology and competitors, it is
essential for SMEs to nurture a firm‘s capabilities in general because
environmental changes affect both local and international firms. The ordinary
capabilities help SMEs to do things right, whereas dynamic capabilities focus on
doing the right things. This has been evident in Chinese multinationals. More
evidence thus has to be observed in more than 10,000 organisations across 20
countries that most SMEs are derailed by weak capabilities (Bloom et al., 2013).
It is, therefore, hypothesised that

H1: There is a significant and positive relationship between firm capabilities and
SME performance.
 Abaho, Aarakit, Ntayi, & Kisubi

ENTREPRENEURIAL COMPETENCIES
Competency refers to behaviours that one demonstrates to meet the minimum
performance standards (Phelon & Sharpley, 2012). Sanchez (2011) defines
competencies as characteristics, which enhance an individual‘s performance or
effectiveness at work. On the other hand, entrepreneurial competencies are
specific competencies relevant for the implementation of successful ventures
(Mitchelmore & Rowley, 2010). On the whole, there are different categories of
entrepreneurial competencies. Bartlett and Ghoshal (1997) identify three
categories—attitudes and personal characteristics, knowledge, experience and
skills. On the other hand, Man et al. (2002) identified six entrepreneurial
competencies, namely opportunism, organising competencies, strategic
orientation, relationship management, commitment to strategy and
conceptualisation ability. Entrepreneurial competencies are important when it
comes to business performance and an understanding of the nature and role of
such competencies can have important implications for practice (Mohamad et al.,
2011).

Several empirical studies attest to the fact that entrepreneurial competencies

influence the performance of SMEs. For example, ,Sanchez (2011) who studied
small firms which had just started in Spain, and Muhamad et al. (2011) who
studied home-stay entrepreneurs in Malaysia, both established that
entrepreneurial competencies have a positive impact on a firm‘s performance.
Enterprises with managers, who have high levels of entrepreneurial
competencies, tend to scan and manage the environment in which they operate to
find new opportunities and consolidate their competitive positions (Sanchez,
2011). Thus, performance occurs when a person‘s capability or talent is
consistent with the needs of the job demands and the organisational environment.

According to Mohamad et al. (2011) a person with the ability to create new
combinations of production, organise and reorganise social and economic
mechanisms, willingness to take risks and ready to exploit market opportunities
operates a business more successfully than one who lacks these characteristics.
Therefore, entrepreneurial competencies are associated with the firm‘s
performance and competitiveness (Man et al., 2002), business growth and
success (Colombo & Grilli, 2005). Acquiring and leveraging entrepreneurial
competencies is crucial for achievement-oriented entrepreneurs. In SMEs, the
critical resources are likely to be held by individual entrepreneurs that are
reflected in their skills, knowledge, abilities, experience and education (Vijay &
Ajay, 2011).
112
Being the key decision-makers, entrepreneurs have high influence on the
formation of business strategy (Barney & Arikan, 2001) and are responsible for
setting the roadmap for their firms to move towards the set goals (He et al.,
2007).The lack of separation between ownership and control in small firms
makes business owners to be responsible for setting the direction and
development of their firms (Vijay & Ajay, 2011). Various studies have
confirmed that the person who forms a venture is ultimately responsible for its
success or failure due to lack of a separation between control and ownership
(Vijay & Ajay, 2011). This thus leads to the hypothesis that
H2: There is a positive and significant relationship between entrepreneurial
competencies and SME performance.

METHODOLOGY
The study employed a quantitative and cross-sectional research design. It
acknowledges that there is a high level of informality in Uganda‘s SME Sector as
only 47% of all the SMEs operates formally (Private Sector Development
Strategy, 2016). In consequence, there was a strong limitation when it came to
coming up with a reliable sampling frame. As such, the study had to rely on
statistics from the Municipal Council‘s register of SMEs. The Krejcie and
Morgan (1970) table was used to generate proportionately a sample of 314 SMEs
from three subsectors, namely Trade, Hotel and Restaurant and manufacturing in
Uganda. In all, 249 firms were in trade, 23 in hotel and restaurants and 41 in
manufacturing. Stratified sampling was used to select the firms whereas simple
random sampling procedure was used to pick the final respondents in each of the
sectors. The unit of inquiry was the firm owners or managers in cases where the
owners were unreachable. Data was collected using self-administered
questionnaires and analysed using descriptive statistics, correlations to establish
relationships between the study variables and regression to establish the level of
influence of entrepreneurial competencies and firm capabilities on SME
performance.

For measurement of variables, entrepreneurial competencies were measured

using Man et al.‘s (2002) and Vijay and Ajay‘s (2011) opportunism, organising,
networking, relationship, commitment, executing and innovative thinking. Firm
capabilities were measured using items adapted from Desarbo et al. (2007) that
included marketing, market linking and management capabilities. SME
performance was measured using both financial and non financial measures.
Financial measures included sales growth, profitability and market share which
 Abaho, Aarakit, Ntayi, & Kisubi

were adopted from Eikelenboom (2005) and Mithas et al. (2011) whereas non-
financial measures included customer acquisition and retention, which were
adopted from Pont and Shaw (2003). All the variables had Cronbach Alpha
coefficients and CVI values above the minimum acceptance standards of 0.6 and
0.7 as recommended by Nunnally (1978) and Heir et al. (2010), respectively,
hence affirming that the research instrument used to collect data was appropriate
and could yield similar results all the time.

FINDINGS

This section begins with sample characteristics of the SMEs in Uganda followed
by correlation results to present the relationships between the study variables.
The section ends with regression results that show the extent of the influence of
the firm‘s capabilities and entrepreneurial competency on SME performance.

Table 1: Sample Characteristics

Business ownership Count Percent

Sole Proprietorship 201 78.2
Partnership 46 17.9
Limited Liability 10 3.9
Total 257 100.0
Business age
Less than 5 years 43 16.7
5-10 years 138 53.7
Over 10 years 76 29.6
Total 257 100.0
Number of employee
5-49 employees 233 90.7
50-99 employees 24 9.3
Total 257 100.0
Nature of business
Trade 192 74.7
Manufacturing 42 16.3
Hotel and restaurant 23 8.9
Total 257 100.0
Asset value
Below 12 millions 13 5.1
12-360 millions 184 71.6
Over 360 millions 60 23.3
Total 257 100.0
114
Results in Table 1 show that the majority of businesses are Sole Proprietorships
(78.2%), followed by partnerships (17.9%) and finally by limited liability
companies (3.9%). In other words, most business owners in Jinja would rather
start a business alone than teaming up with others to do so. For business age,
most of the businesses (53.7%) had been in operation for 5-10 years, 29.6
percent of the businesses had existed for more than 10 years whereas a few
businesses (16.7%) have existed for less than five years. These results indicate
that most of the business owners/managers had been able to sustain their
businesses for more than five years. In terms of workforce, the majority of the
SMEs (90.7%) employed 5-49 employees whereas, 9.3 percent of the SMEs
employed 50-99 employees.

For annual sales volume, most SMEs (71.6%) had made sales of between 12
million to 360 million Uganda shillings (approximately USD. 3500 to USD.
105,000) at the time of the study whereas 23.3% had made more 360 million and
the least of the businesses (5.1%) had annual sales of below 12 million. Also,
76.7 percent of the SMEs‘ annual sales volumes were below 360 millions. These
results indicate that most of the SMEs (76.7%) had an annual sales turnover of
below 360 million in Jinja, implying that they were still small in nature. For total
assets, findings show that the biggest percentage of businesses (59.1%) owned
asset value of between 12 and 360 millions, 37.0 percent own assets of over 360
million whereas only 3.9 percent of the SMEs had accumulated assets of below
12 millions.

Table 2: Correlation results

1 2 3 4 5 6 7 8 9
Opportunism-1 1.00
Commitment to .53* 1.00
business-2 *
Organising skills-3 .39* .36* 1.0
* * 0
Ability to execute .35* .36* .40 1.0
tasks-4 * * ** 0
Innovative .37* .35* .37 .32 1.00
Thinking-5 * * ** **
Networking .13* .07 .09 .14 .31* 1.0
abilities-6 * * 0
Relationship .20* .25* .28 .27 .36* .59 1.0
Building-7 * * ** ** * ** 0
Entrepreneurial .56* .53* .52 .52 .69* .69 .77 1.0
Competencies-8 * * ** ** * ** ** 0
 Abaho, Aarakit, Ntayi, & Kisubi

Firm Capabilities-9 .25* .26* .27 .26 .50* .38 .44 .57 1.0
* * ** ** * ** ** ** 0
SME Performance- .16* .16* .21 .27 .40* .30 .40 .46 .52
10 * * ** ** * ** ** ** **
**. Correlation is significant at the 0.01 level (2-tailed), *. Correlation is
significant at the 0.05 level (2-tailed).
As Table 2 illustrates, Entrepreneurial Competencies and SME performance were
positively and significantly related (r = .460**, p<.01). This implies that when an
SME owner has the competencies of taking up opportunities and dealing with
challenges in a timely manner, the business is more likely to attain a higher
volume of sales. Entrepreneurial competencies such as Innovative Thinking (r =
.409**, p<.01) and Relationship Building (r = .405**, p<.01) have the strongest
correlation with SME performance compared to other components of
Entrepreneurial Competencies such as opportunism (r = .168**, p<.01) and
commitment (r = .167**, p<.01).

It was also established that there is a relationship between a firm‘s capabilities

and SME performance (r = .520**, p<.01). These results indicate that when a
firm has attractive pricing and advertising programmes, there is a high likelihood
of improved sales, profitability and market share. We also found a significant
positive relationship between entrepreneurial competencies and a firm‘s
capabilities (r = .570**, p<.01). This was also true for the relationships between
the dimensions of entrepreneurial competencies; opportunity (r = .251**, p<.01)
commitment (r = .262**, p<.01), organising (r = .273**, p<.01) executing (r =
.263**, p<.01) innovative thinking (r = .507**, p<.01) networking (r = .383**,
p<.01) and relationship building (r = .442**, p<.01). This signifies that when
managers/enterprise owners possess entrepreneurial competencies, a firm‘s
capabilities benefits from positive change.

Regression results
The regression analysis model was used to explore the predictive effect of
Entrepreneurial Competencies and Firm‘s Capabilities on SME performance.
Table 3 shows that Entrepreneurial Competencies and a firm‘s Capabilities have
the capacity to predict 30.4 percent of the variance in SME performance
(Adjusted R Square = .304). This implies that a change in entrepreneurial
competencies and a firm‘s capabilities causes a 30.4 percent change in SME
sales, profits and market share, assuming other factors remain constant. The most
significant predictor of a firm‘s performance was the firm‘s capabilities (Beta=
.382, t= 5.985, Sig. <.01) followed by entrepreneurial competencies (Beta= .241,
t= 3.777, Sig. <.01).
116
Table 3: Regression Model
Unstandardised Standardise Collinearit
Coefficients d y Statistics
Coefficients
B Std. Beta T Sig VIF
Erro .
r
(Constant) .433 .396 1.09 .27
4 5
Entrepreneuri .434 .115 .241 3.77 .00 1.491
al 7 0
Competencie
s
Firm .479 .080 .382 5.98 .00 1.491
Capabilities 5 0
Dependent Variable: SME Performance
R .556
R Square .309
Adjusted R .304
Square
R Square .309
Change
F Statistic 56.67
4
Sig. .000

DISCUSSION, CONCLUSION AND RECOMMENDATIONS

Regression results reveal that a firm‘s capabilities significantly predicts a firm‘s
performance which indicates that a change in a firm‘s capabilities in terms of
innovativeness, marketing capabilities, production capabilities causes a positive
change in SMEs rate of customer acquisition, customer retention, sales, market
share and profitability. These findings are in agreement with Sanchez (2011) who
found a significant positive relationship between a firm‘s capabilities and its
performance. Indeed, with consistent firm innovativeness, and a strong marketing
force, SMEs can easily grow their sales. Crucial at this point is to have these
firms recruiting smart and professional staff in marketing activities to be able to
sell the value preposition generated through innovative products. This implies
that for opportunism and commitment, the business environment should be
supportive. It also implies that with high levels of effective innovation, SMEs in
Uganda can improve their performance.
 Abaho, Aarakit, Ntayi, & Kisubi

Economically, valuable innovation is built on how well it is marketed to cultivate

a business sense. Thus, entrepreneurial competencies such as strong ability in
relationship building and entrepreneurial networking can improve a firm‘s
performance to create new markets and innovatively meet new market needs. It
is also appreciated that Uganda does not have a high technology infrastructure in
the SME sector (GEM, 2013). This means that a firm‘s capabilities must be
supported by entrepreneurial competencies to be able to marshal resources to
enable the innovation and marketing functions corroborate towards attracting
more customers, effective and efficient use of the meagre resources for market
dominance. Thus, from the perspective of entrepreneurial competencies, SMEs
need to maximise the usage of entrepreneurial networking to be able to access
good and economical clients such as government and large corporates. This feat
is crucial in the financial performance function of any business. The same
entrepreneurial competencies are important in lobbying for the SMEs
transformation from a lower grading (Small to Medium and subsequently large).
This will stave off the unfavourable effects of starting strong but declining very
fast as reported by the GEM (2013, p. 12) that ―While the factor-driven
economies have the highest TEA rates, the early-stage entrepreneurs in these
economies also have the highest proportion of necessity-driven motives‖. The
implication is that after the necessity has been fulfilled, SME entrepreneurs in
Uganda tend to relax and neglect the business.

If managers or owners of Uganda SMEs take into account changes in their

organisational capabilities such as marketing, market linking and management
capabilities, they can exploit these changed organisational attributes to engender
improved worker well-being, worker behaviour, efficiency that in the end
translates into higher customer acquisition and profitability. The results are also
in agreement with Mithas et al. (2011) who concluded that tangible and
intangible assets and resources (capabilities) serve as a ‗vehicle‘ for strategy
implementation which enables firms to earn above normal returns. From the
context of resources, Uganda‘s SMEs can strengthen their resource capabilities
by taking advantage of new financial resource opportunities such as the recent
Chattels Act of Uganda, 2014, which allows SMEs to borrow and securitise their
movable assets with the financial institutions. Like the firm capability theory
stipulates, Uganda‘s SMEs need to have dynamism in constantly looking for
opportunities of staying ahead of their competition. In this regard, SMEs must
start creating strategic alliances within and outside their sectors for backward and
forward linkages. This can create erudite avenues for product innovations,
bonded markets and areas for continuous business process improvement.
118
From the RBV and dynamic capabilities perspective, the results support the
assumption that competitiveness and performance of a firm is driven by
innovation, resources, marketing and commitment towards the set strategies and
grow both financially and in other non-financial aspects. This result can best be
achieved if SMEs embrace the spirit of dynamic capabilities that can boost them
beyond just surviving to growing more competitively to propel their
entrepreneurial intentions. It is also essential to note that Uganda is a political
economy and this requires SME operators to manage both their internal and
external business relationships more strategically to remain politically relevant
and maintain their strategic intents and values.

As we conclude, firms‘ capabilities vary from sector to sector and, perhaps,

different economies. What we find in Uganda however is that for an SME to
prosper and become more competitive, it needs to have a strong innovation
capacity, good marketing team and sufficient resources. We further conclude that
a firm‘s capabilities alone are not enough to propel an SME to lofty business
heights without competitive entrepreneurial competencies. For the future, further
research can consider looking at other antecedents of SME performance since
this study has only been able to explain 30.4% of the variance in SME
performance.

In the view point of policy and private sector development, the Uganda
government and other homogenous economies, there is need to improve the
communication strategies of new policies related to SME development. Notable
ones include the recent Public Private Partnership Act, 2015, which focuses on
improving the environment of doing business between the government and the
private sector. In this regard, the government needs to educate SME operators
about how they can benefit from these developments. This can be through
training, one-to-one interaction with the entrepreneurs and developing a
framework that makes these regulations and policies more applicable to the
business needs of the business community. We also strongly suggest that the
government and other development partners can develop a competency
framework for the SME sector for purposes of quality assurance in the business
processes. Doing so would enable the players to keep rating their businesses and
themselves against those qualities. The ultimate goal is to develop best practices
for each sector.
 Abaho, Aarakit, Ntayi, & Kisubi

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