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APPLICATION OF MULTICRITERIA DECISION MAKING THROUGH FINANCIAL, HUMAN RESOURCES AND BUSINESS PROCESS ASPECT IN VERIFICATION OF COMPANIES SUCCESS

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APPLICATION OF MULTICRITERIA DECISION MAKING THROUGH FINANCIAL, HUMAN RESOURCES AND BUSINESS PROCESS ASPECT IN VERIFICATION OF COMPANIES SUCCESS Ivana Tadić University of Split, Faculty of Economics Cvite
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APPLICATION OF MULTICRITERIA DECISION MAKING THROUGH FINANCIAL, HUMAN RESOURCES AND BUSINESS PROCESS ASPECT IN VERIFICATION OF COMPANIES SUCCESS Ivana Tadić University of Split, Faculty of Economics Cvite Fiskovića 5, Split, Croatia Branka Marasović University of Zagreb, Faculty of Economics Trg J. F. Kennedya 6, Zagreb, Croatia Abstract Striving in volatile and competitive business environment, companies have to reveal the ideal path to survive and provide sustainable success, which can be validated using obective and subective criteria. In order to fulfil stakeholders demands, many companies use different types of non financial indicators, characterising them as subective ones. Authors lately argue about the usage of subective criteria and validating them equally as obective ones, approving positive relationship between subective and obective criteria. The main aim of this paper is to research whether the most successful Croatian companies regarding financial ratios show the similar results by other groups of criteria, as human resource management evaluation and evaluation of the business process success. In order to evaluate success of Croatian public companies, those are ranked by three groups of criteria using Simple Additive Weighting Method (SAW) for subective criteria and PROMETHEE II method for obective criteria. Weighted least square (WLS) method was used in order to define weight of each criterion. Key words: Human resource management, Subective criteria, Obective criteria, Organisational performance, Multicriteria decision making 270 1. INTRODUCTION Striving in today s volatile and competitive business environment and additionally confronting with the world s recession, companies have to reveal the ideal path to survive and provide sustainable success. However, the best practise is investment, whereas it can never be understood as cost, but as benefit which will in future create company s overall success and possible competitive advantage. Companies success can be validated using obective (mostly used) criteria as well as using subective criteria. Usage of subective criteria arose from different stakeholders requirements. In order to fulfil stakeholders demands, many companies start to use different types of non financial or subective indicators. Many authors lately argue about the usage of subective criteria and validating them equally as obective ones. At the other hand, considerable number of authors statistically approved positive relationship between subective and obective criteria. The main aim of this paper is to research whether the most successful Croatian companies regarding financial ratios (as obective group of criteria) show the similar results by other groups of criteria, as human resource management evaluation (considering quality of realisation of particular HR practice) and evaluation of the business process success (subective groups of criteria). The research was conducted among Croatian public companies listed on Croatian Stock Exchange Market. All Croatian public companies were contacted in order to get primary source of information using written survey. General managers or human resource managers were contacted in order to give their personal opinion regarding the level of development of human resource management within the company as well as to validate the success of its business process (mostly regarding employees, customers and quality management practices). This information was considered as subective criteria. Further, companies financial indicators (using financial documents) were considered as obective criteria. In order to evaluate success of Croatian public companies those are ranked by three groups of criteria using Simple Additive Weighting Method (SAW) for subective criteria and PROMETHEE II method for obective criteria. Weighted least square (WLS) method was used in order to define weight of each criterion. 2. LITERATURE REVIEW In order to create companies success, companies use different strategies. As to fulfil the purpose of this paper, ust some of the possibilities in creation of the companies success are analysed. Firstly, investments in particular human resources practices are regarded, including its influence on 271 companies success. Additionally, employees, customers as well as quality management practices are explained and researched in more detail Human resources as a source of competitive advantage A firm enoys a competitive advantage when it is implementing a value-creating strategy not simultaneously implemented by large numbers of other firms (Barney, 1991). If a firm s valuable resources are absolutely unique among set of competing and potentially competing firms, those resources will generate at least a competitive advantage and may have the potential of generating a sustained competitive advantage (Barney, 1991). Considering all companies resources, human resources are those that enable company to be considerably distinguished from others regarding their knowledge, skills, abilities or behaviour. Human resource management (HRM) can be described as quite complex social system which is characterised as the unique for each company. More detailed researches of HRM influence on companies performances began years ago. Huselid (1995) was an originator, researching the link between the system of HRM called High Performance Work Practice (HPWP) and firm performances, such as: turnover, productivity and corporate financial performance. Results showed that these practices had an economically and statistically significant impact on all three outcomes. Since then, many other authors have conducted similar researches. Some researches were based on isolated HRM practices or activities while certain researches regarded human resource bundles, more precisely defined as a set of different human resource activities which create mutual synergic effect on dependent variable. One of the popular researches was done by MacDuffie (1995). He researched influence of isolated HRM activities as well as HRM bundles on companies productivity. This research revealed greater influence among internally consistent HR practices (HR bundles) and dependent variable. Similar research was done within US steel production lines where authors researched influence between innovative work practices (incentive pay, teams, flexible ob assignments, employment security and training) and companies productivity. Once again there was noticed larger effect between group of these practices (HR bundle) and companies performance than between isolated practices and dependent variable (Ichinowski, Shaw and Prennushi, 1997). Stavrou and Brewster (2005) used 80 different HR variables (combined within 15 different HR bundles) and business performance (composite measure of profitability, productivity and service quality). The exploration revealed that six bundles had positive and one negative relation to performance. Reichel and Mayrhofer (2006) used 272 72 HR variables (combined within 4 HR bundles) and researched its relationship to subective performance measures (personal opinions about companies performance in accordance to competition) and obective performance measures (productivity, ROI and cash flows). All 4 HR bundles revealed significant relationship with obective measures, while 3 HR bundles revealed also significant relationship with subective performance measures Business process adding value to the company Due to the number of different stakeholders and their demands, companies are forced to evaluate, analyse and improve many items of business process. For the purpose of this paper, the attention is focused on different items relating employees, customers and quality management practices. In previous section great attention was made towards employees, but at first place regarding investments in all aspect of human resource management. This section is dealing employees behaviour, attitudes, satisfaction or commitment. Employees behaviour influence customer satisfaction, which in turn impacts shareholders satisfaction. Further, this is at the same time influencing employees satisfaction in the form of investment in employees development, bonuses, compensation, stock options (Muse et al., 2005). The former authors tested the relationship between organisational commitment to employees (OCE) 1 and performance. These results revealed positive relationship between OCE and company performance (ROA, ROS and return on cash flow). On the other hand, there can be noticed employees commitment to organisation. However, shareholders evaluate a company s performance not by whether a company s employees are happy, but by the corporate financial performance. Also, one may argue that happier employees are more likely to have higher ob satisfaction. A higher ob satisfaction translates into higher productivity whereas shareholder wealth is very likely to be maximized (Chan, Gee and Steiner, 2000). Researched conducted among 100 Best Companies to Work For, showed that the employee-happy companies had higher average performance than their comparable companies. To conclude, there was noticed positive correlation between employee happiness and corporate financial performance (Chan, Gee and Steiner, 2000). Furthermore, employee attitudes can influence customers especially their satisfaction and decision making about certain manufacturer. Employee attitudes (overall employee attitudes, customer orientation, employee empowerment and employee engagement) reported positive effect on customer satisfaction with service, conducted within US grocery stores (Simon et al., 2008). 1 OCE is defined by an organisation's action toward and treatment of its employees. 273 Furthermore, employee attitudes affect customer satisfaction, but simultaneously customer satisfaction yields positive results within sales performance. Firms that are enable to satisfy customers can expect to lose market share to rivals. Beforehand research also revealed positive relationship between customer satisfaction with service and store sales (as company performance), showing a positive and statistically significant effect (Simon et al., 2008). Another research showed that customer-oriented companies 2 have remarkable impacts on performance relative to other aspects. This research showed a linear relationship between customer-orientation and organisational (financial and nonfinancial) performance (Jandaghi et al., 2011). Additional crucial elements in creation of successful business are quality management practices and regular strategies for its application. The survival and prosperity of Japanese manufacturers are achieved through quality management practices, some of them are: total quality management, ust-intime production and total productive maintenance. Paper researching the linkage between Japanese quality management practices and competitive performance showed significant association with every performance measure (Phan, Abdallah and Matsui, 2011). Quality management practices classified by high performance and statistical significance were: small group problem solving, employee suggestions, cross-functional product design, housekeeping and process control. Similarly, within UK manufacturer, respondents were asked to evaluate nonfinancial measures in order of importance and relating certain business/management practices. The respondents considered five measures (out of 19) as critically important. Those measures relate to customer satisfaction and are as follows: on time delivery customers, number of complains from customers, number of customer returns, efficiency and defects (evaluating them on the scale 1-7). Respondents evaluated following measures as the least important, but at the same time as quite important, evaluating them (on the scale 1-7). Those were as follows: rework, employee lateness, staff turnover, employee attitudes and batches (Maskoud, Dugdale and Luther, 2005) Financial performances Financial indicators are still fundamental in determining company s health and prosperity. Those indicators are the oldest (used over the long period of time), the mostly used and the most popular focusing mostly on companies profitability. Financial indicators are easily to obtain because those can be easily located within the most important as well as regular and required financial reports. 2 Customer orientation can be defined as an organisational culture which creates certain behaviour effectively and efficiently to generate more value for buyers (Narver and Slater, 1990). 274 Moreover, any comparison (to competitor or within the industry) is easily accomplished due to their balance As mentioned before the usage of nonfinancial indicators arose lately due to the increase of stakeholders demands. Those indicators have certain benefits. Firstly, those are related to companies strategy, success of company in many circumstances depends on intangible assets (measured through nonfinancial indicators) and financial indicators can not comprehend all sorts of business contribution Subective vs. obective indicators Although, prior topic was concentrated on polemics between the use of financial and nonfinancial indicators, this topic will be arguing about the usage of obective vs. subective performance indicators. Great maority of nonfinancial indicators are subective ones, made on respondents personal opinions. Certain authors (Stavrou and Brewster, 2005) excerpt the importance of equal usage of obective and subective measures. Subective measures are more oriented in determining the entire company s performance, while obective measures are concentrated on single financial indicators (mostly: productivity, profitability, ROA etc). Evaluation of the obective indicators requires from respondents to determine single indicator relative to their main competitors or standards, while obective evaluation requires absolute evaluation of each indicator. The advantage of subective criteria can be noticed in the fact that the collection of subective criteria is cheaper in comparison to obective ones. Additionally, sometimes obective indicators that are alternative to subective ones do not exist. Stavrou and Brewster (2005) argument that subective and obective indicators used as alternative measures, show stronger link (such as comparison of subective and obective measures of productivity as well as profit) than comparison of subective measures of productivity and profit or comparison of obective measures of productivity and profit. 3. RESEARCH METHODOLOGY AND DATA The following topic is describing used methodology, sample of the research and variables Methodology For the purpose of the empirical part of the paper, there has been provided primary as well as secondary type of the research. Primary research included written survey distributed to all Croatian 275 public companies listed on Croatian Stock Exchange Market. It was designated to the human resource managers (or general managers if company does not have organized Human Resource Department), investigating their subective opinions on the level of development and quality of realisation of particular HR practices within their company. Additionally, they were asked to evaluate development of the entire business process (mostly regarding employees, customers and quality management practices). Respondents were evaluating particular items using 1-5 Likert scale (1-negative grade; 5- excellent grade). Secondary research included collection of financial data from companies that have participated in the first round of the research. Data were subtracted from the companies balance sheets and income statements, all transparent on the Zagreb Stock Exchange Market. Furthermore, in order to provide all necessary ranking PROMETHEE II method and Simple Additive Weighting Method (SAW) have been conducted as appropriate methods to treat the multicriteria problem of the following type: 1 2 Max f a, f a,..., f a : a K (1) n where K is a finite set of possible actions (here enterprises), and f are n criteria to be maximized. Simple Additive Weighting Method (SAW) was applied in order to rank actions by group of subective criteria. For every a K, let us consider the following function: where n F( a) w f ( a), (2) 1 w are weights associated with each criteria and f a is an evaluation of this action. In this paper we use weighted least square (WLS) method for determination of weights of the criteria (Babic, 2011) and f a obtain values 1-5 (1-negative grade; 5-excellent grade). According to SAW, higher value of the function F the better is the action. PROMETHEE II method was applied in order to rank actions by group of obective criteria. For each action, f a is an evaluation of action a (here financial ratio of the enterprise). When we compare two actions ab, K we must be able to express the result of this comparison in terms of preference. We, therefore, consider a preference function P: K K 0,1 representing the intensity of action a with regard to action b. In practice, this preference function will be a function of the difference between the two evaluations d f a f b, and it is monotonically increasing. Six possible types (for details see Brans. J.P. and Mareschal, B. (1989)) of this preference function are proposed to the 276 decision maker. The effective choice is made interactively by the decision maker and the analyst according to their feeling of the intensities of preference. In each case zero, one or two parameters have to be fixed: q is a threshold defining an indifference area; p is a threshold defining a strict preference area; s is a parameter the value of which lies between p and q. Now, we can define a preference index: ab, n 1 wp n 1 w ab,, (3) where w are weights associated with each criteria. Finally, for every a K, let us consider the two following outranking flows: leaving flow: entering flow: (4) a a, b bk (5) a b, a bk The leaving flow is the measure of the outranking character of a (how a dominates all the other actions of K). Symmetrically, the entering flow gives the outranked character of a (how a is dominated by all the other actions). The action is better if the leaving flow is higher, and the entering flow lower. The PROMETHEE I gives a partial preorder of the set of actions in which some actions are comparable, some others are not. When the decision maker is requesting a complete ranking, the net outranking flow may be considered: a a a (6) and the higher the net flow the better is the action. All the actions of K are now completely ranked (PROMETHEE II). 277 3.2. Sample of the research The survey was distributed (in 2009 by post mail) to 232 companies with the response rate of 32.76%. After subtracting financial and insurance companies from the sample, due to the specificities of their business as well as different structure of their asset and value of their financial indicators, total number of companies within the sample was Variables In order to create first group of criteria (subective criteria regarding quality of realisation of particular HR practice) respondents were asked to evaluate 9 different HR practices 3 including 4 different activities within each practice. In order to create second group of criteria (subective criteria regarding quality of realisation of the entire business process) three different categories were evaluated 4. As third group of criteria (obective ones) the following were used: ROS, ROA, CR, QR, DR and FS RESULTS After providing PROMETHEE II and Simple Additive Weighting Method (SAW), the following ranking for 69 Croatian companies was obtained (table 1). The predisposition was that the best Croatian companies ranked by first criteria, would generated the greatest results including the other two groups of criteria. The first column (HR) represents the ranking according to human resource management evaluation (considering 9 groups of different human resource practices and 4 d
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