Disruptions, Redundancy Strategies and Performance of Small Firms: Evidence from Uganda

Abstract

We study the impact of firm-specific business disruptions on the performance of small emerging market firms and test the effectiveness of building in redundancies to buffer against disruptions. Managerial disruptions result in the absence of the entrepreneur-owner, whereas operational disruptions lead to shortage of critical resources, e.g., inventory or electricity. We propose the use of relational redundancy – i.e., the availability of a trusted and capable person whom the entrepreneur-owner has an existing relationship with, who can manage the business in her absence – to recover from managerial disruptions. We also examine whether resource redundancy – e.g., maintaining safety stock or electricity backup – helps recover from operational disruptions. In the absence of publicly available data, we hand-built a panel dataset by interviewing 646 randomly selected small firms over four time periods in Kampala, Uganda. We find that disruptions are highly prevalent and have a statistically and economically significant effect on firm performance. When a firm faces multiple exogenous and severe disruptions in a six month period, its monthly sales decreases by 13.8% (p = 0.013) and its sales growth decreases by 18.8 percentage points (p = 0.070). Importantly, we find that both managerial and resource redundancies can help firms build resilience against the negative impact of disruptions. In some cases firms with high levels of redundancy are able to completely overcome the negative effect of disruptions on sales and sales growth. We discuss implications for entrepreneurs, policy makers and for large multinationals that buy from or sell to small emerging market firms.

Keywords: business disruptions; redundancy strategies; small firms; firm resilience; emerging markets; natural experiments