Journal of Science and Today's World

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1 Scholar Journal Journal of Science and Today's World 014, volume 3, issue 7, pages: Journal home page: ISSN 3-36X ResearchArticle The evaluation of the effect of internal and external factors of company on strategy of product adaption and financial performance of industrial companies of Fars province Ardeshir Salari Master of Financial Management, University of Tehran,Kish,Iran A R T I C L E I N F O Article history: Received 4May 014 Accepted 30 May 014 Published 1June 014 Keywords: Financial performance, Product adaptation strategy, industrial companies *correspondenceshouldbeaddressed To Ardeshir Salari,Master of Financial Management, University of Tehran,Kish,Iran Tell: Fax: +88 ; salar.fm@gmail.com A B S T R A C T Based on the importance of financial performance, financial performance of 300 industrial companies is studied in the past 3 years ( ) and it is investigated how financial performance of company is associated with company factors (export dependence, openness to innovation), industry factors (industry adaptation) and market factors and product adaptation strategy. By field studies and questionnaire and by creating a model, adaptation strategies of company are investigated as an intermediary between internal and external factors and financial performance. The data are analyzed by SPSS and LISREL software and the results are obtained regarding the association between financial performance of company and internal and external factors of company and financial performance of company with adaptation strategy in international markets. Copyright 014 Ardeshir Salariet al. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. Introduction The life continuance of each organization depends upon its dynamic interaction with internal and external environment. Based on this interaction, the recent information and findings of human sciences and techniques are received and lead to some changes in practice and organizational behavior. In this interaction, the organization should achieve the adequate resources and have required adaption with the real requirements of environment.[1] In recent decades, organizational world is changed considerably in various aspects. By these changes, the organizations enter serious competition in quality improvement, increasing flexibility, increasing assurance, developing product lines, emphasis on creativity and etc. Thus, measurement of performance is of great importance as according to management scientists, if we can not manage something, we can not manage it. [5] Many researches are conducted in recent years about the nature and measurement of organizations performance. The results of the studies are valuable as we can perceive the current condition of organizations and investigate future challenges in performance measurement. [3] Today, management theorists emphasize on the importance of performance evaluation models as one of the best development indices of organizations. One of the basic concerns of current organizations is achieving an efficient and flexible evaluation method by which we can investigate all performance dimensions of organization. If we define performance measurement quantization process of efficiency and effectiveness of an activity, one of the analysis methods of financial reports by which we can summarize high volume of existing information in financial reports and investigate various aspects of company activ- 99 P a g e

2 ity is providing financial ratios of financial reports information. Financial ratios indicate the relationship between two or more financial statements being defined as a part of total or percent of it. When a ratio is computed, we can say the number is the result of a math equation and statistical correlation of two or more variables at specific time. The most important aim of ratios in analyses is facilitating and interpreting financial reports that are done by reducing numerous numbers in financial reports and turning them to finite financial ratios. To evaluate financial performance of various companies, we should have evaluation criteria- normally financial. Financial ratios are obtained normally by balance sheet, profit and loss statement and cash flow statement. Some of the financial ratios have similar structure and model. To avoid reevaluation of simialr financial ratios, they are classified into some groups. 1- Review of Literature The evaluation criteria of financial performance of companies Performance measurement criteria based on accounting concepts and economic concepts are divided into accounting and economic. In accounting criteria, company performance is evaluated based on accounting data while in economic criteria, company performance is evaluated based on existing assets profit achievement and potential investment and based on return rate and capital cost rate. Accounting criteria of company performance evaluation are including: Accounting criteria of company performance evaluation are including: Profit, profit growth, Dividend, Cash flows, earnings per share and financial ratios (e.g. market value to book value and Q Tubin ratio) 1 Economic criteria of company performance evaluation are including economic value added, market value added 3, adjusted economic value added 4 [5,6] Accounting criteria 1. ROA ROE P/E1. EVA 3 MVA 4 REVA Accounting criteria are divided into two groups, first group is based on accounting information and the second is based on accounting information and market information [5,16] Criteria based on accounting information It measures company performance by existing historical information in basic financial statements and notes. The criteria include earning, earning per share, profit growth rate, dividend, free cash flows, return on equity 5 and return on assets [5,9] Earning Accounting earning is incomes minus costs. During one fiscal year, the company earns income based on the activities. To produce products and presenting services, the company inflicts costs. At the end of fiscal year, to determine company performance, the relevant incomes and costs are compared to know the profit of company. Thus, profit is a method to evaluate company performance [5,7,11] Earnings per share Earnings per share are net profit after deducting tax divided by the number of stock. Earnings per share are paid as divided to stockholders or the whole is re-invested or a part of it is invested and another part is distributed as earnings among the stockholders. The most important point is that whether earnings per share information only reflect historical information or it reflects also prediction information? APB in statement NO. 15 emphasized on the concept of prediction. Because it believed that the information is useful for investment decisions and the investigation of potential of company to give credits. The cash flow turnover information and other information related to probable profit distribution for investment decisions is most important than earnings per share information. In such cases, it is mostly emphasized on cash earnings per share and total distributing profit based on product than calculation of earnings per share. One of the problems of earning figures including earnings per share is that alone it can not reflect the risk as potential changes in capital costs of a company regarding inflation and financial and trading changes are ignored. Also, considering earnings per share in planning doesn t refer to the importance of dividend policies. The above reasons show that EPS is only one 5 ROE 300 P a g e

3 aspect, in other words, only quantity of profit is not important in determining the value of a company and its quality should be considered also. It means that the profit is obtained with how much investment and how much was capital cost.[5,6,13] Earnings growth rate Growth rate is obtained by the multiple coefficient of investment rate by return rate. Thus, it is possible two companies have simialr growth rate while their return rate is different. For example, it is possible a company has return rate 10% and another company with return rate 15%. In order that two above companies have similar profit growth, it is required the first company make more investment as it has lower return rate. The second company due to better return rate with lower investment achieves profit growth rate [6]. Many believe that a company with stable dividend policy and dividing the profit among the stockholders, this shows the success and positive performance of company. Normally, the companies starting division, can not invest their profit. Dividend depends upon investment policy of company. The companies having profitability investment opportunity consider profit as one of financing source (Jahankhani and Zarifard, 1995). Free cash flow Free cash flow is obtained by the difference between net operational profit after tax and net investment in operational assets [5,6,11] It means, FCF= NOPAT-I The return on equity Return on equity is one of the financial ratios obtained by profit division before tax by equity and all the problems of accounting profit, are also about this criterion. Accounting profit is affected by various accounting methods and accounting estimations. In other words, management based on its goals can change accounting profit and return on equity [5]. Return on asset Return on assets rate is one of the financial ratios that is obtained by dividing net profit plus interest cost to the sum of assets. The return on assets is dedicated to production and sale skills of company and is not affected by financial structure of company. Due to using accounting profit in calculation of return on assets, some problems are created in accounting profit and also the problems are considered for this criterion. As assets are shown in balance sheet to net book value, the real value of assets is lower or above their book value. Thus, lower return on assets doesn t mean the assets should be considered in another place. Also, high return on assets rate doesn t mean the company should buy the same assets and achieve high return [5]. Export dependence The features of company are considered as a history of product adaptation strategy and include international experiences and short and long-term goals including export and import fields [15,16] Export dependency is defined as how much a company is dependent upon export activities as an income and profit source [18]. Resources of a company can be tangible or intangible. One of the features of company is dependency degree to export activities of a company as a feature affects product adaptation strategy. This company is mostly based on export activities and if it does the product adaption to the defined differences in external markets, it will be successful [0]. Openness to innovation It is effective as another internal factor on product adaptation strategy and it refers to using new innovation in marketing activities (e.g. Openness of organization to new ideas)[]. Industry adaptation The type of product, the limitations of company abilities and competition lead to the need to change the products to make the customers satisfied.[19] Market similarity Market features influencing product adaptation strategy as cultural, political, legal, economic features and similarity degree in consumers values. 301 P a g e

4 Hosseini et al., (006) in a study designing the model of IT effect on financial performance items with meta-analysis approach stated: Financial performance as one of the most important items of organizational effectiveness is the concern of many researchers and executers of organizational development plans. IT as one of the most important development tools in recent decades is of great importance in development plans. One of the most important questions of the executers of these plans in private sector is the effect of IT on productivity. In this study, the term productivity is only dedicated to effectiveness and financial performance items. By meta- analysis approach, it is attempted to use effectiveness of IT regarding the studies using various items of IT and various items of financial performance and identify the effective indices. The result is that IT effectiveness is different between various items of financial performance and various indices of IT. [7,10]. Various researches are conducted regarding the investigation of financial performance of companies and ranking is done based on it. According to Jegadish& Titman (1993) regarding purchasing the best (successful) and selling the worst (unsuccessful), it was shown that in a time horizon 3 to 1 months, the companies with high return had better performance compared to the rest of companies (1% each month). Babic&Plazibat (1998) ranked the companies based on multi-criteria analysis. They applied AHP method to determine the criteria weight (efficiency indices) and Prometheee method was used for final ranking. Their aim was presenting a method responding the financial questions of companies each moment. Pitroski (000) applied financial statements to separate successful and unsuccessful companies. The main question of the study: Can we achieve high return by accounting-based fundamental analyses of the companies with high book value to market price? The study showed that the companies that are strong form fundamental signs and have high book value to market price, averagely have high return. He applied F index to separate successful and unsuccessful companies. Some of the fundamental variables in his article are including profit margin, stock return and etc. Cai& Wu (001) conducted a study on financial evaluation. In the first stage, they investigated initial financial evaluation system by hierarchy analysis and by investigating 13 financial indices, investigated them in four groups. In the second stage, by data envelop analysis, a model was presented its output is defined by efficient units. Johnson &Soenen (003) by comparing financial data of 478 companies in , identified effective factors on financial success of companies. Financial success is measured by three methods of Sharp, Alpha of Johnson and EVA. 10 companies were considered and by pairwise comparison model, the companies and measurement indices were compared. The results of the study showed that the companies with high profitability, efficient capital management and high confidence interval to their business are the most successful companies. Ertugrul&Karakasoglu (007) evaluated the performance of cement enterprises in Turkey by fuzzy hierarchy analysis and TOPSIS method. They considered the aim of the study creating a fuzzy model to evaluate enterprises performance by financial ratios. FAHP method was used to determine the weight of criteria by decision makers and then final ranking was done by TOPSIS method. [14,16,0,1,]. methodology The study method is causal and in this method, the relationship and effect of variables are analyzed based on study purpose. This study is descriptive based on study classification and data collection method and it describes the sample features and generalizing the features to study population. The descriptive studies are based on some groups and this study is survey. By survey study, we describe, predict and analyze the relationship between variables. Thus, the study method is descriptive-survey and causal and it is applied in terms of purpose. Study population and study sample The study population is Fars industrial companies To determine sample size, Cochran s formula is used [4,11]. Z n p(1 p) P a g e

5 N: Study population z : Confidence coefficient to the results of the study P: The ratio of attribute in study sample as 0.5. (P-1): The ratio of the lack of attribute in study sample as 0.5. : Estimation precision (maximum acceptable error) and To describe data analysis and study hypotheses test, inference statistics and structural equations modeling were applied. For statistical data analysis, at first the data of questionnaires were extracted and made in the main table and then the data were analyzed by computer and SPSS and LIS- REL software. Chart 1-4 The estimated coefficients model is 0.6%. As the study population is about Fars industrial companies, based on the above formula, the sample is 30 and in this study the questionnaires were distributed via random sampling method. Study hypotheses 1- Financial performance of company is associated with product adaptation strategy in international markets. - Product adaptation strategy is associated with export dependence 3- Financial performance of company is associated with innovation in production. 4- Adaptation strategy of products in markets is associated with openness to innovation in company. 5- Financial performance of company is associated with adaptation of products in industry. 6- Adaptation strategy of products in markets is associated with products adaptation in industry. 7- Financial performance of company is associated with markets similarity 8- Openness to innovation in company is associated with products adaptation in industry. 9- Products adaptation in industry is associated with markets similarity 10- Adaptation strategy of products in markets is associated with markets similarity. -Data analysis Model fitness evaluation To evaluate fitting of the study, some indices as chi-square /degree of freedom df, Root Mean Square Error of Approximation (RMSEA), P-value, CFI indices are used. RMSEA estimation, this is shown as fraction is based on non-central parameter. This index for good model isequal or less than The models with RMSEA of 0.10 or higher have weak fitting (Ibid, 4). Comparative Fit Index (CFI), if this index is greater than 0.1 it is equal to 0.1 and if it is smaller than 0 is zero. Like previous indices, if this fraction is ranging 9% to 95%, it is 303 P a g e

6 acceptable but some researchers use cutting point 0.80 (ibid, 41). Among fitting indices, RMSEA is a good index and CFI is the best index. Fitting indices range 0, 1. The coefficients higher than 0.90 are acceptable. As it is discretionary like P=0.05 (ibid, 43). and The computed value for RMSEA is and for CFI=0.93 df the study..49 and this shows the acceptable model of The presented indices and its comparison with good value for a fitting model show good fitting of model. The important point in model fitting is that while structural model fitting supports the model, it doesn t prove that the model is the only valid model. Chart -4 T-statistics coefficients model - Discussions and Results This section investigates significance of the numbers of model, regarding significance, we should say at confidence interval 0.95 or error 0.05 we test the hypotheses, for t-test, the significance numbers are greater than and It means that if in t-test a value is ranging and -1.96, it is not significant. In the following model (chart -4), the values of t-test are significant and we can investigate the causal relations (measurement indices with latent variable) and effects (latent variables with each other) based on the items mentioned in the following charts and the model is in good position in terms of fitting. Based on Table -4 and model at standard estimation (Chart 1-4), we investigate the study hypotheses. Hypothesis 1 test Adaptation strategy of product is associated with financial performance of company in international markets. The result of hypothesis test 1 is investigated based on the information of chart 4-1, 4-. The path coefficient of endogenous latent variable coefficient of product adaptation strategy on endogenous variable of financial performance , with value t is.51 at the error level 0.05 with confidence interval 0.95 is significant. Thus, null hypothesis regarding the lack of coefficient is rejected (Hypothesis 1 support). Hypothesis test Export dependence is associated with product adaptation strategy. The result of hypothesis test is investigated based on the information of chart 4-1, 4-. The path coefficient of exogenous latent variable coefficient of export dependence on endogenous variable of product adaption 1 0.0, with value t is.35 at the error level 0.05 with confidence interval 0.95 is significant. Thus, null hypothesis regarding the lack of coefficient is rejected (Hypothesis support). Hypothesis 3 test Openness to innovation is associated with financial performance The result of hypothesis test 3 is investigated based on the information of chart 4-1, 4-. The path coefficient of endogenous latent variable coefficient of openness to innovation on endogenous variable of financial performance 0.93, with value t is 3.14 at the error level 0.05 with confidence interval 0.95 is significant. Thus, null hypothesis regarding the lack of coefficient is rejected (Hypothesis 3 support). Hypothesis 4 test Openness to innovation in company is associated with adaptation strategy of products in markets. The result of hypothesis test 4 is investigated based on the information of chart 4-1, 4-. The path coefficient of exoge- 304 P a g e

7 nous latent variable coefficient of openness to innovation on endogenous variable of adaptation strategy 3 0.4, with value t is 1.65 at the error level 0.05 with confidence interval 0.95 is not significant. Thus, null hypothesis regarding the lack of coefficient is supported (Hypothesis 4rejected). Hypothesis 5 test Products adaption in industry is associated with financial performance of company. The result of hypothesis test 5 is investigated based on the information of chart 4-1, 4-. The path coefficient of endogenous latent variable coefficient of products adaption in industry on endogenous variable of financial performance , with value t is -.78 at the error level 0.05 with confidence interval 0.95 is significant. Thus, null hypothesis regarding the lack of coefficient is rejected (Hypothesis 5support). Hypothesis 6 test Products adaptation in industry is associated with adaptation strategy of products in markets. The result of hypothesis test 6 is investigated based on the information of chart 4-1, 4-. The path coefficient of exogenous latent variable coefficient of products adaption in industry on endogenous variable of products tion 5 0.4, with value t is 1.3 at the error level 0.05 with confidence interval 0.95 is not significant. Thus, null hypothesis regarding the lack of coefficient is supported (Hypothesis 6rejection). Hypothesis 7 test Markets similarity is associated with financial performance of company. The result of hypothesis test 7 is investigated based on the information of chart 4-1, 4-. The path coefficient of exogenous latent variable coefficient of markets similarity in industry on endogenous variable of financial performance 0.5, with value t is 1.61 at the error level 0.05 with confidence interval 0.95 is not significant. Thus, null hypothesis regarding the lack of coefficient is supported (Hypothesis 7 rejection). Hypothesis 8 test Products adaptation in industry is associated with openness to innovation in company. The result of hypothesis test 8 is investigated based on the information of chart 4-1, 4-. The path coefficient of endogenous latent variable coefficient of products adaptation in industry on endogenous variable of openness to innovation , with value t is 7.36 at the error level 0.05 with confidence interval 0.95 is significant. Thus, null hypothesis regarding the lack of coefficient is rejected (Hypothesis 8support). Hypothesis 9 test Markets similarity is associated with products adaption in industry. The result of hypothesis test 9 is investigated based on the information of chart 4-1, 4-. The path coefficient of exogenous latent variable coefficient of markets similarity in industry on endogenous variable of products adaption , with value t is at the error level 0.05 with confidence interval 0.95 is significant. Thus, null hypothesis regarding the lack of coefficient is rejected (Hypothesis 9 support) Hypothesis 10 test Markets similarity is associated with adaptation strategy of products in markets The result of hypothesis test 10 is investigated based on the information of chart 4-1, 4-. The path coefficient of exogenous latent variable coefficient of entrepreneurial inclination on endogenous variable of market orientation in small and average manufacturing companies , with value t is at the error level 0.05 with confidence interval 0.95 is significant. Thus, null hypothesis regarding the lack of coefficient is rejected (Hypothesis 10 support). The important point regarding the results are that study process is not finished forever and the findings of any study is pilot and it is possible that in researches, it is proved the results are not correct. References [1] Akhtar, S, 011, Tehran s Global Marketing, NegaheDanesh,. [] Aram, A, 1970, Marketing and Knowing Market, Tehran, Tehran University Press. 305 P a g e

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