The effects of firm capabilities on the success of manufacturing smes: the case of the wood and metal sub-sector in Eritrea

The general objective of this study was to examine the effects of firm capabilities on the success of SMEs operating in the wood and metal manufacturing sector in Eritrea. The study also examined whether firm strategies mediate the relationship between organisational capabilities and firm success on the one hand and the relationship between owner-manager attributes and firm success on the other. This study used a combination of qualitative and quantitative research methods. First, the case studies were conducted on 4 wood and metal manufacturing SMEs to explore the firms’ capabilities. Cross-case analysis was used to analyse the qualitative data. This was followed by the survey which examined how organisational capabilities influence firm success. A total of 287 wood and metal manufacturing SMEs in Eritrea were surveyed. Structural Equation Modelling was used to analyse the quantitative data through Analysis of Moments Structures. The findings indicate that owner-managers’ industry-specific experience, innovativeness and personal relations have a significant relationship with firm success, while owner-managers’ age and formal education have an insignificant relationship with firm success. Although employees’ technical skills positively relate to firm success, the relationship was statistically insignificant largely because of the limited participation of employees in designing and developing the products. The results also indicate that both differentiation and cost leadership strategies significantly mediate the relationship between organisational capabilities and firm success. Further, the results show that both differentiation strategy and cost leadership strategy do not mediate the relationship between owner-manager attributes and firm success. The study contributes to the strategic management debate on what determines firm success by identifying and testing the effects of specific dimensions of organisational capabilities and owner-manager attributes on the success of the SMEs. Contrary to the common view in strategy literature which assumes that a firm makes a choice between cost leadership and differentiation strategies, the study demonstrates the application of both cost leadership and differentiation strategies at a time by focusing on quality, product variety, and lower transaction and manufacturing costs. Lastly, this study generates insights that can guide policy makers to promote innovativeness, and relational capabilities, which may enhance SMEs’ ability to develop effective strategy. Future studies can examine the relationship between organisational capabilities and firm success in contexts other than manufacturing firms.