CHAPTER ONE

1.0                                                                   Introduction

This study is an investigation, on the Management of small and medium enterprises and their performance in Uganda: a case study of Makindye division, Kampala district. Management of small and medium enterprises is conceived in this study as the independent variable, while performance is the dependent variable. This chapter presents the background to the study, the statement of the problem, general objectives, the specific objectives of the study, the research questions, the hypotheses, the scope of the study, the significance, Justification and operational definition of terms and concepts.

1.1 Background of the study

1.1.1 Historical background   (trace performance of SMEs from global level in atleast 3 countries, then in Africa then in Uganda then in Makindye division.   Check many grammatical & spelling errors too)

Small and medium-sized enterprises (SMEs) form the back bone of the private sector, making up approximately 90 per cent of Uganda’s private sector and contribute two-thirds of national income (Kisaame, 2002). SMEs generate employment, add value, bring in foreign exchange and investment, improve labour skills, and have linkages with large organizations (Sarapaivanich, 2003). Therefore sustainable development and employment cannot be achieved without SMEs.

The Small and Medium sized Enterprises (SMEs) sector transcends all the sectoral boundaries in the production, distribution and marketing channel. Recent economic studies in Uganda, have dubbed SMEs as the backbone, key drivers and primary catalysts of economic development (Ariyo, 1999; Ihua, 2005). Estimated at 800,000 in urban and rural areas, the SME sector plays a vital role in the economy especially on job creation, innovation, promotion and subsistence incomes. A study in 2007 revealed that MSMEs account for 90 percent of the private sector and employ over 1.5 million people (Common Wealth Secretariat, 2007). A UBOS report on the Census of Business Establishments 2010/2011 illustrated that 30% of 458,106 enterprises were small and medium enterprises and the sector employed over 1 million people.

The World Bank Doing Business 2012 Report has ranked Uganda number 123 out of 183 countries, a 4-point drop from position 119 in 2011. Doing business 2012 Report sheds light on how easy or difficult it is for an entrepreneur to open and run a small to medium size business when complying with relevant regulations. It measures and tracks changes in regulations affecting ten areas in the life cycle of a business: starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts and resolving insolvency. According to this report Uganda experienced a drop in all criteria but that of registering property, where we had a 28-point rise from 155 in 2011 to 127 in 2012(Uganda Investment Authority Quarterly Report, 2011).

Based on the above performance and given the need to increase quality investments in Uganda, the Uganda Investment Authority staff are benefiting from various training, bench marking for capacity building programmes sponsored by World Bank, United Nations Industrial Development Organization(UNIDO) and the Investment Promotion Technical Assistant Programme (ITAP) funded by the Islamic Development Bank (Uganda Investment Authority Quarterly Report, 2011).

Small and Medium Enterprises (SMEs) in Uganda employ more than 2.5m people, constitute up to 90 percent of the private sector and contribute over 70 per cent to total GDP. It must be noted that the newly launched National Development Plan 2010/11 - 2014/15 strongly emphasizes the fact that the private sector is the engine of growth, employment creation and socio-economic transformation. This, therefore, means that SMEs must be brought at the forefront of policy design and implementation if socio-economic transformation is to be achieved. Issues of value chain development, value addition (agro-processing for agribusiness SMEs), access to markets, etc, must be strongly focused on so that the returns from the SME sector more than double.

1.1.2 Contextual background of the study   (Take readers to the SME in question location history & performance records)

The term SMEs covers a wide range of perceptions and measures, varying from country to country and between the sources reporting SME statistics. Some of the commonly used criterions are the number of employees, total net assets, sales and investment level. However, the most common definitional basis used is employment, but, there is a variation in defining the upper and lower size limit of an SME (Ayyagari, Beck &Demirguc-Kunt, 2003)

SMEs are predominantly owner–managed and sole proprietorship in the norm, and the leasing competences of managers are cited as one of the key factors that influences the performance of SMEs (Tylor, Thorpe, &Down, 2001). In Uganda, efforts have been made to improve the leasing competences of SME Mangers and/ or owners. Enterprise Uganda in collaboration with Uganda Investment Authority, supported by UNDP has facilitated training programs focusing on leasing competence development among SMEs managers and within a year, 3500 SMEs had benefited (Investment Authority, 2008; 2010).

Uganda has a very high rate of private business failure. This is largely due to the lack of entrepreneurial skills, lack of access to high quality and affordable business development services, limited access to finance, lack of adequate technical and management support services and limited access to information on market opportunities.

1.1.3 Conceptual background (definitions of the words in the conceptual framework)

The Ugandan economy has made significant recovery since 1987, and is on the way to sustainable growth and development. This is being made possible by prudent policies that have been consistently pursued for the last 15 years towards economy liberalization and support for the private sector. It is estimated that there are about 1,069,848 micro and small-scale enterprises in Uganda, the majority of which are located in rural areas and on the outskirts of urban areas, producing goods and services consumed not only by the low-income class but also by some sections of the middle class. As in most developing countries, small and medium-scale enterprises form a significant part of the Ugandan economy. Nevertheless, they face a number of problems, including access to finance from formal sources, which is often considered to be the most important problem (MFPED 2008).

Hashim (1999) discovered that the recurring problems of SMEs included poor management, lack of capital and credit facilities; shortage of skilled workers and raw materials; inadequate infrastructure; lack of managerial, marketing and technical expertise; and limited applications of new technology. In addition, external environmental factors, such as fast changing technology, competition, economics, socio-cultural and international factors also have a significant effect on the success and failure of SMEs. Increased competition, dimension growth, continuous improvement and also significant development in information technologies are all reasons why performance measurement systems (PMS) in SMEs should be designed in an applicable manner. Therefore, although the need of an appropriate PMS to measure SMEs performance is apparent, different problems cause firms to experience difficulty in implementing such systems.

Access to finance tops the list of constraints faced by SMEs everywhere. Because of the high transaction costs and inability of SMEs to provide collateral banks require, SMEs find themselves starved for funds at all stages of their development ranging from start-up to expansion and growth (Beyene,2002). In Uganda, it is leasing that has bridged the current financing gap experienced by SMEs by providing commercial and industrial equipment as it focuses on the lessee’s ability to generate cash flow from the business operations to service the lease repayments rather than on the balance sheet or past credit history (Kisaame, 2007; International Finance Corporation(IFC), 2007).

Ugandan Definition and Role of SMEs in the Economic Growth and Regeneration

The majority of businesses within Uganda fall within the SME categorization. The definition of SME globally is subject of much debate as the size and the respective turnover of the SME vary significantly depending on the sector they operate in. For the purposes of the this report (Improving SME Access to Public Procurement Market Final Report prepared for Republic of Uganda’s Public Procurement and Disposal of Assets Authority (PPDA) March 2011: Commonwealth secretariat 2011) using the Uganda SME Policy Document which is currently in draft. There is need for government to agree a definitive definition of an SME.

Small firms are acknowledged as key contributors to the economic and regeneration plans for the most marginalized communities and rural areas. Business start-ups create wealth and employment opportunities locally, promote reinvestment in other goods and services offered locally and stimulate wider prosperity within the country. Uganda’s SME’s are recognized as vital drivers of growth and innovation. (Improving SME Access to Public Procurement Market Final Report prepared for Republic of Uganda’s Public Procurement and Disposal of Assets Authority (PPDA) March 2011: Commonwealth secretariat 2011)

CUT FROM INTRODUCTIONThere are a number of distinctive features concerning the nature of economic research onsmall and medium-sized enterprises. The bulk of research has predominantly beenundertaken in the context of US and UK firms and has sometimes entailed comparisons withother European economies (Storey, 1995).To improve the internal efficiency and business performance of small and medium-sized enterprises, a number of training initiatives have been introduced in the United Kingdom over the last decade. This has been based on the provision that training can be a powerful agent of change, facilitating and enabling a company to grow, expand and develop its capabilities and so enhance profitability.

Industry Canada defines a small business as one with fewer than 100 employees (if the business is a goods-producing one) or fewer than 50 employees (if the business is service-based), and a medium-sized business as one with fewer than 500 employees.

The Indian micro- and small-enterprises (MSEs) sector plays a pivotal role in the country's industrial economy. It is estimated that in value, the sector accounts for about 45 percent of manufacturing output and about 40 percent of total exports. In recent years, the MSE sector has consistently registered a higher growth rate than the overall industrial sector. The major advantage of the MSE sector is its employment potential at a low capital cost. According to available statistics (4^th Census of MSME Sector), the sector employs an estimated 59.7 million people in 26.1 million enterprises; labor intensity in the MSE sector is estimated to be nearly four times that of large enterprises.

In Kenya, the term is SME (for "small, medium and micro enterprises"); elsewhere in Africa, MSME stands for "micro, small and medium enterprises". In Somalia, the term is SMME (for "small, medium and micro enterprises"); elsewhere in Africa, MSME stands for "micro, small and medium enterprises" depending on themaximum number of employees and maximumrevenue it generates. The Central Bank of Nigeria defines small and medium enterprises in Nigeria according to asset base and number of staff employed. The criteria are an asset base between N5 million and N500 million, and a staff strength between 11 and 300 employees.

1.2 Problem statement

Hashim (1999) discovered that the recurring problems of SMEs included poor management, lack of capital and credit facilities; shortage of skilled workers and raw materials; inadequate infrastructure; lack of managerial skill in marketing and technical expertise; and limited applications of new technology.Poor management and accounting practices have hampered the ability of smaller enterprises to raise finance(Liedholm, MacPherson and Chuta, 1994).

Lack of effective management during their early stages is also a major cause of business failure for small businesses. Owners tend to manage these businesses themselves as a measure of reducing operational costs (Tushabomwe, 2006).

Given the need to increase quality investments in Uganda, the Uganda Investment Authority staff are benefiting from various trainings, bench marking for capacity building programmes sponsored by World Bank, United Nations Industrial Development Organization (UNIDO) and the Investment Promotion Technical Assistant Programme (ITAP) funded by the Islamic Development Bank (Uganda Investment Authority Quarterly Report, 2011).

Many Uganda Small and Medium size enterprises consistently suffer from a considerable high failure rate that is largely attributed to a number of external and internal factors that have been typically noted. External factors include declining markets, uncompetitive goods/services, and financing issues. Internal factors include management weaknesses, including weak management of liquidities and financial planning, errors in sales, marketing and sales administration as well as organisational issues and weak management of information systems and information technology (Ibrahim and Soufani, 2002). With this consideration, the researcher seeks to ascertain the effect of the managerial skills on the performance of Uganda’s Small and Medium size enterprises.

 1.3    General objective

 The study will aim to ascertain the effect of management skills on the SME performance.

1.4    Specific objectives (changed objectives & questions slightly)

1. Assess the effect of entrepreneurialskills on the SME profitability.
2. Find out how human resource management affects the SME’s quality of goods.
3. Determine the relationship between financial accounting skills andSME’s assets.
4. Establish relationship between marketing skills and their customer loyalty.

1.5    Research questions  (changed objectives & questions slightly)

1.      What is the relationship betweenentrepreneurial skills affect the SME profitability?

2.      Howdo human resource managementskills affect the SME’s quality of goods?

3.      What is the relationship between financial accounting skills andSME’s assets?

4.      How do marketing skills affect SME’s customer loyalty?

1.6 Justification of the study (supervisor wanted sources)

In studies done by Liedholm and Mead (1993), they note that the number of small enterprises was increasing annually with a birth rate of about 20% per year. They did note however, that the death rate was also high. They found that the majority of the small enterprises did not grow at all.The key reasons have been identified and include lack of access to finance, poor managerial skills, lack of market information, an appropriate technology, poor pricing methods, and lack of government support. It is true that these reasons contribute greatly to the poor performance.

Entrepreneurship is central to the success of any business activity and we cannot assume that all small business people are entrepreneurs. Another cause I attribute this poor performance to is the national culture of the people. Hofstede (1992) in his work identifies cultural dimensions which explain many behaviours of people in different countries. He talks of power distance, individualism versus collectivism, masculinity versus femininity and uncertainty avoidance.

Sewannyana (1997) and Mutazindwa (1997) establish that while in some of the small enterprises they studied entrepreneurial behaviour and culture is prevalent, the performance of the enterprise is poor. Not many studies are available locally about the performance of small enterprises in developed countries but we do not expect them to face similar problems as those in developing countries or most specifically Uganda.

(http://www.evancarmichael.com/African-Accounts/1639/30-The-Growth-of-Small-Enterprises--the-Problem-Entrepreneurship-and-Small-Business-Enterprise-Growth-in-Uganda.html)

Good management skills are the foundation of organizational success regardless of their size. The research will stimulate and increase the interest in management skills and knowledge of SME entrepreneurs so as to ensure that viable firms continue competitively improving their operations. This research report will provide an opportunity to bridge this gap.

1.7 Scope of the study

1.7.1 Conceptual scope

The study will be limited to investigate on the Management of small and medium enterprises and their performance in Uganda, it will scrutinize the effect of business management skills on the SME performance. In particular the study assess the relationship between collateral/security and SME’s access to credit, investigate the factors that affects the small and medium. enterprises’ ability to compete, the study will also establish relationship between business regulation policies/national legislation and the success/survival of small and medium scale enterprise.

1.7.2 Periodical scope (change it to Time Scope & include source)

The study will be conducted for a five year period before 2013(2008 to 2012). This period was chosen so as to enable new knowledge to be gained in relation to the more recent socio-economic trends, policies and regulations relating to Uganda’s SME management and their performance.

1.7.3 Geographical scope

The studywill be conducted in Makindye division in Kampala district. Makindye division in Kampala district is chosen because of its location annex to the capital city of Uganda. A lot support is received in this region as a result of its proximity to Uganda’s busiest central trading district with fast growing investment opportunities.

1.8 Significance of the study

The significance of the study is to contribute to the existing body of knowledge on the subject. It is also meant to help policy makers to address the issues of management and performance of small businesses. In particular, this study will help entrepreneurs to realise the challenges they face in the small and medium enterprises' sector and it is also hoped that this study will also make some recommendations to overcome those challenges. The study will also aid the efforts of other scholars and libraries.

The findings of the study could help the private sector to lobby for Asset financing policies the make SMEs to thrive in developing countries like Uganda.

The study will enable the promoters of SMEs to sensitize management and entrepreneurship skill in a way that will help firms to perform well thus reducing the failure rate.

The findings of the study will bring to light the relevance of development competences in achievement of organizational goals at an SME level and will act as a feedback to all existing providers of SME strengthening initiatives such as Enterprise Uganda and Private Sector Foundation that have been involved in training SME Managers in an attempt to improve their competences.

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