Thesis
“Examining: which factors predict in an early stadium if a
company is successful in the future”
University of Amsterdam Amsterdam Business School
Executive Programme in Management Studies – Strategy Track
Quint van Veen 10901884
Date of submission 28-1-2017 Thesis supervisor: J.K. Kraaijenbrink
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Statement of Originality
This document is written by student Quint van Veen who declares to take full responsibility for the contents of this document. I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it. The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.
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Content
Abstract ... 4
1 Introduction ... 5
2 Literature review ... 10
2.1 Literature on assessment criteria ... 11
2.1.1 Strategy frameworks ... 11 2.1.2 Investment criteria ... 16 2.1.3 Conclusion ... 19 2.2 The entrepreneur ... 22 2.3 Financials ... 24 2.4 Strategy ... 26 2.5 Competitors ... 28 2.6 Environment ... 30 3 Method ... 33 3.1 Research design ... 33 3.2 Data ... 36
3.3 Reliability and validity ... 43
4 Results ... 45
5 Discussion ... 65
6 Conclusion ... 70
7 References ... 72
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Abstract
In practice, companies with deteriorated performance has happened many times before in history. Hence, for different parties, it is important to identify this in an early stadium. Deterioration can lead to failure, which often leads to (high) losses or costs for banks and investors. Banks, investors and others have all sorts of criteria to evaluate a company. Unfortunately, these are not always sufficient. The literature on strategy, investments, banks and investors mentioned a lot of factors to predict whether a company will be successful. It is currently not possible to act on these factors, because there are so many. This study aims to bridge this gap and presents a step towards determining which factors are important to predict in an early stadium whether a company is successful. With an exploratory research the key factors will be identified. Based on data collected from 105 companies which is obtained from the Rabobank, the key factors will be tested in a quantitative research. The results of multiple regressions have examined that focus on control, total assets turnover ratio, product offering, signals and social values have a significant positive relation with profit. The multiple regressions also examined that humanistic approach, debt ratio and, manufacturing process have a significant negative relation with profit. The findings of this study can be used by scholars, investors, banks and others when assessing companies. By examining, on the basis of factors that are important to predict success, losses for banks and investors by investing in the wrong companies (might) be prevented.
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1 Introduction
During my work experience at the special asset management department at the Rabobank, I have seen a lot of medium sized companies with deteriorating performance. This deterioration occurred within one to two years. Is this due to market circumstances? The entrepreneur? The business model? Or are there other factors why companies succeed and others fail? In a few cases, such deterioration leads to a surprise for the Rabobank. This happened a few times, I began to wonder how this in general can be predicted. Other banks, investors and companies also have to deal with the negative consequences of failure. A failure often leads to (high) losses or costs for creditors, banks and investors. It is therefore, important for them and the Rabobank to know how they can predict this failure, which can prevent (high) losses. These banks, investors and others have all different ways to check if a company performs well or have all different kind of criteria to evaluate a company. Unfortunately, these are not always sufficient. This research examines what factors are important to predict whether a company is successful. This is accomplished on the basis of the factors from the literature and which investors and banks consider important.
Rabobank
To check if a company performs well, the Rabobank has an annual check for all their customers with funding. This funding will be reviewed twice a year, which is called the yearly revision. The aim of a revision is to see if the loans and credits still fit with the business operations. During a revision, Rabobank looks at the following categories 1) the entrepreneur, 2) financials, 3) strategy, 4)
competitors and 5) the environment. With factors out of these categories they classify the company in a risk category (continuity, need of attention, vulnerable continuity, impending discontinuity, and discontinuity).
Besides the annual revision, it sometimes happens that the Rabobank looks at the performance of a company if they have a funding request. The purpose of this review is to predict in an early stadium
6 whether the company has been successful for the upcoming period. When submitting a funding request, the company must provide a business plan. In assessing the funding request, Rabobank looks at the ambition of the entrepreneur, the (financial) foundation, feasibility and fitness with the future. The quality of the entrepreneur is important regarding the success of the company. In addition the Rabobank also looks at the following aspects: strengths and weaknesses of the
company, market position, competitive advantage, benchmarking and if the plan fits with the future. Furthermore, the financial feasibility is important. All taken into consideration Rabobank decides whether the company gets the requested funding. The next section is about equity investors and describes the differences between banks and the investors. Finally this section shows how investors evaluate a company.
Equity investors
In addition to the Rabobank, there are also (equity) investors who invest in companies that have a funding request. These (equity) investors are venture capitalists and business angels. In practice, it happens, as with banks, that investors are surprised by the deteriorating performance of a company and have to deal with failures. Kirby (2002) emphasize that bankers and equity investors (venture capitalist and business angels) have very different requirements. In addition to bankers, venture capitalists have different perspectives on the business plan (Mason and Stark 2004). Venture capitalists will also be concerned with financial issues but will give considerable emphasis to the entrepreneurial team and market characteristics (Mason and Stark 2004). The approach of business angels will be closer to that of venture capitalists because they are both investing for capital gain (Mason and Stark 2004). Investors have their own list of criteria to assess a company. Although the purpose of these criteria is to predict in an early stadium whether the company is successful for the upcoming period.
7 Vesper (1996) observes that ‘to some degree all… audience will care about central issues such as viability, potential profit, downside risk, likely life cycle time and potential areas for dispute and for improvement. Beyond that, however, different audiences will care about different details.’ In general, these are the investment criteria of equity investors1: profitability, development potential, innovative, (growth) market, location, exit strategy, business model, management, track record and durability. The company is eligible for funding if the business meets the criteria of the investor. An investor invests because he wants to make return on investment where the aim is to retrieve the invested capital. Therefore, an investor only invests in companies that they label “future proof”.
To asses a company for a funding request or other purpose, investors, banks, management, scholars and so forth uses strategy models or frameworks. These strategy models or frameworks contain a lot of different criteria, whereby each party looks at several factors. The management literature is concerned with making integral strategy frameworks, which can be used by a wide audience. The next section is about strategy models and which parties have designed one including for what purpose.
Strategy models
A framework is a simplification of the complex reality in which so many different aspects all influence each other (Tasco2). The frameworks helps management in diagnosing the causes of organizational malaise and in formulating programs for improvement (Waterman et al. 1980). The framework also proves to be an excellent tool for judging doability of strategies (Waterman et al. 1980).
1 Vendis Capital, ABN Amro, Pulsar Network Capital, Brabantse Ontwikkelings Maatschappij, Convent Capital,
Shift Invest, Chemelot Ventures, Ventures One, Active Capital Company, HB Capital, BIC Angel Investments, CVC Capital Partners, Cambridge Angels and AIM Group
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Tasco – The Integrated Organisation Model. Ref: 12710.110 – The Integrated Organisation Model BA. Developed by MDF. www.tasco.org
8 Management models provide the user a framework for analysis and improvement of the
organization and his performance (Rorink et al. 2005). The Business model canvas (Osterwalder et al. 2010), 7s-model McKinsey (Waterman et al. 1980), Integrated Organisation Model (Tasco), Balanced scorecard (Kaplan and Norton 1992), EFQM-model (European Foundation for Quality Management 1999) / INK-model (stichting INK3) and the Strategy Sketch (Kraaijenbrink 2016), are such frameworks for organizational thought and strategy execution.
The value of strategy depends not only on the elegance of its conception but fully as much on whether the company proposing the strategy can really execute it (Waterman et al. 1980). These models shared many factors. Although, these models have been developed on the basis of a substantial amount of literature and in collaboration with managers and entrepreneurs, it remains necessary to examine this further and, where necessary, to strengthen and improve (Kraaijenbrink 2016). There should be comparisons conducted with other venture screening exercises to determine the strengths and weaknesses of these approaches (Merrifield 1987; Roure and Keeley 1990). In the following section, the research question is formulated. Then an overview is given of the rest of this report.
Research question
The literature on strategy, investments, banks and investors mentioned a lot of factors to predict whether a company will be successful. Due to this multiplicity of factors, hereby arises the question whether there stand out some factors. Because there are so many factors, it is currently not possible to act on these factors, in terms of early prediction of success. With an exploratory research, the key factors which are in practice most important, when it comes to an early prediction, will be identified. This exploratory research follows the categories (the entrepreneur, financials, strategy, competitors and the environment) which have been used by the Rabobank. This is due to the fact that the data
9 corresponds with these categories. This also means that there cannot be made an overall
assessment, with the result that other important factors may be excluded. On the subject of early prediction of success, little research has been conducted. Besides the interdependence of those factors is little studied.
The central research question in this study is: which factors determine in an early stadium whether a medium sized company in the horticulture business of Rabobank Westland is successful over a period of three years?
In order to answer the research question, the following sub-questions are formulated: 1. Which factors can be found in the literature?
2. Which are testable in terms of available data? 3. Which factors are the best predictors of success?
The sub-questions provide a narrowing of the research. Through the literature review the research will start with a multitude of factors, where the research ends with a smaller set of key factors. Based on the factors found in the literature, a quantitative investigation will take place to test which factors are the best predictors of success. Profit will be used to measure success, because a company
without profit contemplated no continuity.
Overview and method
The report is structured as follows. First there is a literature review (2) which focuses on the criteria for predicting successful new ventures. This chapter starts with a section about (2.1) assessment criteria. This section specifies a description (2.1.1) of six strategy models with its different factors. This is followed by a review (2.1.2) of the investment criteria of investors. To clarify which factors have been collected, an overview (2.1.3) is created. This overview consists of five categories (the
10 entrepreneur, financials, strategy, competitors and the environment) which are based on the
categories used in Rabobank’s revisions. Each category (2.2 – 2.6) consists of a list of factors, with in the end an overview of all factors based on the literature review. Chapter three ‘Method’ describes how the study is conducted (3.1) and the origin of the data (3.2). It also occurs the reliability and validity of this research (3.3). The results (4) section describes the multiple regressions which are carried out to see which of the variables have a causal relation with profit. Finally, the discussion (5) and conclusion (6) where an answer is given to the main question, will be presented. At the very end the references (7) and appendices (8) follow.
2 Literature review
One of the central issues in the academic literature on entrepreneurship focuses on criteria for predicting successful new ventures (Cooper and Gascon 1992). The number of new venture success predictors that have been suggested by academic researchers is substantial (Cooper 1993). If we can determine what factors influence firm performance, this has implications for entrepreneurs, as well as their advisors and investors (Cooper 1993). Traditional financial accounting measures like return on investment and earnings per share can give misleading signals for continuous improvement and innovation activities which today’s competitive environment demands (Kaplan and Norton 2005). The deeper thinking about competitors is a more powerful way to achieve genuine investment success than the financial projections and trend extrapolation that dominate today’s investment analysis (Porter 2008). A business model describes the rationale of how an organization creates, delivers, and captures value (Osterwalder and Pigneur 2010). To support the creation of highly complex ventures that deal with the fragile and volatile technologies, new procedures for creating and testing business models have emerges (Trimi and Berbegal-Mirabent 2012).
The literature review is structured as follows, first there is a review on assessment criteria of the strategy frameworks and investment criteria, to see which factors exist in these models. These models and investment criteria consist a lot of factors. These factors are often wide terms or
11 categories and therefore difficult to measure. The factors which have been found provide the basis and are classified into the categories (the entrepreneur, financials, strategy, competitors and the environment) which are used at the revisions by the Rabobank. The reason for this is the available data is derived from these categories. Based on the literature, the categories are worked out to a list of factors that are important according to the literature. On the basis of the available data, the important factors will be tested. This is described in the method and results.
2.1 Literature on assessment criteria 2.1.1 Strategy frameworks
Strategy models are widely used by companies, management, scholars and so forth, to assess the performance of a company. These strategy models are designed for their own purpose and have a variety of factors. However, they all aim to achieve the same and there is a certain degree of overlap in the factors. Although, it remains necessary to examine these models further and, where necessary, to strengthen and improve (Kraaijenbrink 2016). To get a good impression which factors exist in the models, a literature review will be held. This review consists of six models (EFQM model /
INK-managementmodel, the Business Model Canvas, 7s-model McKinsey, Integrated Organisation Model, Balance Scorecard and the Strategy Sketch) which are widely used and contain different factors.
The EFQM Model / INK-managementmodel4
The European Foundation for Quality Management (EFQM) has developed this model to structure and review the quality management of an organization. The INK-managementmodel is designed through “instituut voor Nederlandse Kwaliteit” as a self-evaluation model for the firm and depends on the coherence and growth of all factors. This model is based on the EFQM Model, therefore only a review of the EFQM Model will present. Self-assessment, benchmarking, external review and quality awards are essential elements (Nabitz et al. 2000). The EFQM approach is an integral approach and was originally developed by multi-national corporations. It focuses on organizational development
12 and continuous improvement (Klazinga 1996). The essence of the approach is: the performance has to meet the expectations, needs and demands of the stakeholders (European Foundation for Quality Management 1999). It allows organizations to understand the cause, effect and relationship between what their organization does and the results it achieves. The model consists of enablers and results (European Foundation for Quality Management 1999). The enablers are things an organization needs to develop and implement in their strategy. The results are things an organization achieves, in line with their strategic goals. The EFQM model consists of the following list of criteria:
1. Leadership 2. Strategy 3. People
4. Partnerships and resources 5. Processes, products and services
The Business Model Canvas
This is a strategic framework for developing new or existing business models that show the logic of how a company intends to make money (Osterwalder and Pigneur 2010). A conceptual instrument that helps make right decisions at the right time for business model development (Trimi and Berbegal 2012). In a simplified scheme, it contains the objects, concepts and their relationships, expressing the logic underlying the business.The Business Model Canvas contains nine basic building blocks (see list below) that show the logic of how a company intends to make money. These blocks cover the four main areas of a business: customers, offer, infrastructure, and financial viability (Osterwalder and Pigneur 2010). The business model is like a blueprint for a strategy to be implemented through organizational structures, processes, and systems (Osterwalder and Pigneur 2010). It assists
managers or entrepreneurs in aligning their activities by illustrating potential trade-offs. The Business Model Canvas consists of the following list of criteria:
13 2. Key activities 3. Key resources 4. Value propositions 5. Customer relationships 6. Customer segments 7. Channels 8. Cost structure 9. Revenue streams 7s-model McKinsey
The 7s-model is designed to measure the quality of the performance of the company. The 7s factors are divided into three hard factors and four soft factors (listed below). When the factors are aligned, the company is organized; when they are not, the company has yet to be really organized even if its structure looks right (Waterman 1980). It is the “fittedness” among the S’s that turns a good strategic idea into a lean, mean program for corporate success (Waterman 1980). The 7s-model posits that organizations are successful when they achieve an integrated harmony among three “hard” S’s and four “soft” S’s (Kaplan 2005). The 7s-model consists of the following list of criteria:
1. Strategy 2. Structure 3. Systems 4. Shared values 5. Skills 6. Style 7. Staff
14 Integrated Organisation Model 5
This model can be applied to describe, to analyze and to diagnose organizations (Harrison et al. 1998). The integrated organisation model is an integrated model to emphasize the interrelationships of the different elements of the organisation. This model consists of five external and six internal factors (listed below), which are all connected to each other and ideally in balance. The external factors describes the environment of the organisation and the internal factors describes the internal organizational choices. The Integrated Organisation Model consists of the following list of criteria:
1. Mission 2. Output 3. Input 4. General environment 5. Specific environment 6. Strategy 7. Structure 8. Systems 9. Staff 10. Style of management 11. Culture Balanced Scorecard
The Balanced Scorecard is designed as strategic management system with a mix of financial and non-financial factors. It allows managers to look at the business from four important perspectives (Kaplan and Norton 2005). At the other hand the Balanced Scorecard minimizes information overload by limiting the number of measures used. Kaplan and Norton (2005) states that the Balanced Scorecard meets several managerial needs: 1) brings together in a single report the disparate elements of a
5
Tasco – The Integrated Organisation Model. Ref: 12710.110 – The Integrated Organisation Model BA. Developed by MDF. www.tasco.org.
15 company’s competitive agenda and 2) lets them see whether improvement in one area may have been achieved at the expense of another. By combining the four important perspectives of the Balanced Scorecard it will help managers understand the many interrelationships of the business. The Balanced Scorecard consists of the following list of criteria:
1. Financial perspective
2. Internal business perspective 3. Customer perspective
4. Innovation and learning perspective
Strategy Sketch
Kraaijenbrink (2016) states that it is essential to unravel the concept of strategy in its main elements (see list below). This elements together, on a single sheet in a coherent and systematic way, form the Strategy Sketch (Kraaijenbrink 2015). Creativity, interaction and value creation are central to the model. The Strategy Sketch can be used to outline the current or the desired strategy of a company (Kraaijenbrink 2016). The Strategy Sketch consists of the following list of criteria:
1. Resources and competences 2. Partners
3. Customer and needs 4. Competitors
5. Value proposition 6. Revenue model 7. Risks and costs 8. Values and goals 9. Organizational climate 10. Trends and uncertainties
16 2.1.2 Investment criteria
Investment criteria are widely used by investors (venture capitalists and business angels) to evaluate the performance of a company. Investors use these models to check if they want to invest in a company. The investment criteria are included in this study to have a more complete picture of all the factors which could be important to assess a company. Bankers and equity investors have very different requirements (Kirby 2002). Although, there is a certain degree of overlap in the factors of banks, strategy frameworks and investors.
Equity investors are specifically interested in high potential ventures that offer the opportunity for a high return on investment to compensate for the inherent risk in the business (Riding, 2008). Most business ventures with high growth potential require significant amounts of external funding for working capital, fixed asset acquisition, and technology development (van Osnabrugge 2000). This cash is often obtained through risk capital investments from business angel investors or venture capitalists (Kelly and Hay 2003). Venture capitalists are more likely to look for ‘home runs’(Mason and Harrison 2002b), while business angels’ look is more interested in making a reasonable return on investment in a venture where they are able to directly contribute to venture growth (Mason and Harrison 2002b; Wetzel 1981). Equity investors such as angel investors and venture capitalists (VCs) use various criteria when determining whether or not to invest in a new venture (Mitteness et al. 2012). These investment criteria involve aspects of the opportunity as well as criteria related to the entrepreneur (e.g., MacMillan et al. 1987; Sudek 2006; Tyebjee and Bruno 1984; Van Osnabrugge 1998).
Van Osnabrugge (2000) suggests that the most important difference between business angels and venture capitalists that influences the investment decision is the fundamental agency difference between them. Venture capitalists are professional fund managers who must justify their selection and rejection decisions to their investors, while business angels invest their own money and do not
17 need to justify their decisions to anyone (Maxwell 2011). Business angels assumes that making an investment in an early stage venture is the start of a long-term relationship with the entrepreneur (Bruton et al. 2000; Smith et al. 2010), while venture capitalists view the entrepreneur as replaceable if things don’t work out.
When business angels first become aware of an investment opportunity their first question is to consider how well it ‘fits’ with their own personal investment criteria (Smith et al. 2010). Their aim at this point in the decision-making process is simply to assess whether the proposal has sufficient merit to justify the investment of time to undertake a detailed assessment. The purpose of the initial screen is to filter out ‘no hopers’ in order to focus their time on those opportunities that appear to have potential. The market and the entrepreneur are the key considerations at this stage (Mason and Harrison 1996). The importance of people factors becomes critical (Riding et al. 1995), with investors emphasizing management abilities, an understanding of what is required to be successful, a strong work ethic, integrity, honesty, openness and personal chemistry (Haines et al 2003; Mason and Stark 2004). Business angels give greater emphasis to these issues than venture capital fund managers (Mason and Stark 2004).
Mason and Stark (2004) argues that the most consistent finding from studies of venture capitalist and fund manager decision-making is the importance that is placed on the ability of management. This includes management skill, quality of management, characteristics of the management team and the management team’s track record. Other criteria which venture capitalists and fund managers report that they take into account when assessing a new venture proposal are the characteristics of the market/industry, environmental threats to the business, the level of competition and the degree of product differentiation (Shepherd and Zacharakis 1999). One investment criteria receiving increasing attention is entrepreneurial passion. Although
18 entrepreneurial passion can have cognitive and behavioral manifestations (Chen et al. 2009), passion itself is an intense positive affective feeling (Cardon et al. 2009c).
MacMillan et al. (1985) conclude that the quality of the entrepreneur ultimately determines the investment decision, notably a thorough familiarity with the industry/market, leadership capability and the ability to evaluate and handle risks. Muzyka et al. (1996) also conclude that management team considerations dominate the investment decision. However, other studies – while confirming the importance of the entrepreneurial team – suggest that other factors are also significant in the venture capitalists and fund manager’s investment decision (Fried and Hisrich 1994; Manigart et al 1997; Sweeting 1991). Product characteristics (proprietary features, competitive advantage, potential to achieve strong market position), market characteristics (significant growth, limited competition) and returns (potential for high returns, clear exit opportunity). Based on his research, Stedler et al. (2003) concluded a list of investment criteria of Business angels, which consists of the business plan, the entrepreneur, product or service, market or sales, financials, investment, examination, time to conclusion and the number of negotiation sessions before conclusion.
In general, the investment criteria of equity investors6 are: 1. Level of competition 2. Profitability 3. Environmental threats 4. Development potential 5. Innovative 6. (Growth) market/industry 7. Location 6
Vendis Capital, ABN Amro, Pulsar Network Capital, Brabantse Ontwikkelings Maatschappij, Convent Capital, Shift Invest, Chemelot Ventures, Ventures One, Active Capital Company, HB Capital, BIC Angel Investments, CVC Capital Partners, Cambridge Angels and AIM Group
19 8. Exit strategy 9. Business model 10. Management 11. Track record 12. Durability 2.1.3 Conclusion
On the basis of factors from the strategy frameworks and investment criteria there is an overview made (table 1). This overview also indicates how the identified factors correspond to the five categories. As stated earlier, the categories of the Rabobank are used because of the available data. On the basis of the contents of the factors is examined in which category these applies. Below is a list of the categories with the matching factors.
1. To the category “the entrepreneur” all factors are added which relates to characteristics of an entrepreneur. The leadership factor of the EFQM-Model (European Foundation for Quality Management 1999) refers to ‘a leader who shapes the future and makes it happen, acting as role models for its values and ethics and inspiring trust at all times. They are flexible, enabling the organisation to anticipate and react in a timely manner to ensure the on-going success of the organisation’. The style factor of the 7s-model (Waterman 1980) refers to ‘Tangible evidence of what management considers important by the way it collectively spends time and attention and uses symbolic behavior. It is not what management says is important; it is the way management behaves’. The style of
management factor of the Integrated Organisation Model (Tasco) refers to ‘the characteristic pattern of behavior of the management’. The management criteria of investors refers to ‘a skilled entrepreneur’.
2. To the category “financials” all factors are added which relates to the financials of the company. The business results factor of the EFQM-model (European Foundation for Quality
20 Management 1999) refers to ‘excellent organizations achieve and sustain outstanding results that meet or exceed the needs and expectations of their business stakeholders’. The cost structure and revenue streams factors of the Business Model Canvas (Osterwalder and Pigneur 2010) refer to ‘all costs incurred to operate a business model and the cash a company generates from each customer segment’. The input factor of the Integrated Organisation Model (Tasco) refers to ‘how is the organisation financed, liquidity problems, capital structure etc.’ The financial perspective factor of the Balance Scorecard (Kaplan and Norton 2005) refers to ‘profitability, growth and shareholder value’. Revenue model and Risk and costs factors of the Strategy sketch (Kraaijenbrink 2016) refer to ‘revenue model and financial, social and other risks’. Profitability of the investment criteria refers to ‘the profitability of the company’.
3. To the category “strategy” all factors are added which relates to the strategy of the company. The strategy factor of the EFQM-Model (European Foundation for Quality
Management 1999) refers to ‘an excellent organisation implements their mission and vision by developing and deploying a stakeholder focused strategy’. The strategy factor of the 7s-Model (Waterman 1980) refers to ‘a coherent set of actions aimed at gaining a sustainable advantage over competition, improving position vis-à-vis customers, or allocating resources’. The strategy factor of the Integrated Organisation Model (Tasco) refers to ‘the way the mission is translated into concrete objectives and approaches’. The business model criteria of the investors refers to ‘the business model strategy of the firm’.
4. To the category “competitors” all factors are added which relates to the competition of the company. The specific environment factor of the Integrated Organisation Model (Tasco) refers to ‘are there any competitors in the environment and what is the relation between the organisation and its competitors?’ The competitor factor of the Strategy Sketch
21 competition factor of the investment criteria refers to ‘the level of competition in the
market’.
5. To the category “the environment” all factors are added which relates to the environment of the company. The society results factor of the EFQM-Model (European Foundation for Quality Management 1999) refers to ‘achieve and sustain outstanding results that meet or exceed the needs and expectations of relevant stakeholders within society. The general environment factors of the Integrated Organisation Model (Tasco) refer to ‘the complex set of political, economic, technical, social and cultural factors that influences this (type of) organisation’. The Trends and uncertainties factor of the Strategy Sketch (Kraaijenbrink 2016) refers to ‘political, economic, demographical and technological factors which influences the organisation’. The (growth) market/industry factor of the investors refers to ‘the industry environment’.
Table (1) shows that these categories do not cover all the factors, which may also be important (see limitations). However, the research is made narrower by these categories. In addition, the categories are a good basis in order to achieve a list of factors from the literature. As seen above, the categories are wide, which makes it difficult to measure. Therefore, it is examined on the basis of a literature review on which factors these categories exist, to measure them properly. The next chapters (2.2 – 2.6) describe the literature review of the five categories.
22 2.2 The entrepreneur
In the literature, there are several definitions of entrepreneurs. In this paper, I will use the following definition: “a person who organizes and manages any enterprise, especially a business, usually with considerable initiative and risk”. Entrepreneurs have a special ability to acquire general skills, which they apply to their own business (Lazear 2002). Grude et al (2002) states that CEOs play an
important role in the performance of their organizations.
The simplest kind of entrepreneurship is self-employment (Blanchflower and Oswald 1998). Previous research (Sexton and Bowman 1985) has indicated that the entrepreneur has the following
characteristics: moderate risk-taking propensity (Sexton and Bowman 1983, 1984a, 1984b), the ability to tolerate ambiguity (Sexton and Bowman 1984a, 1984b), an internal locus of control, high need for: autonomy, dominance, independence, and self-esteem and a low need for conformity and support. Another study (Djankov et al. 2008) reported that psychologists have long hypothesized
23 about the personal traits associated with entrepreneurs – such as a need for achievement
(McClelland, 1961), belief in the effect of personal effort on outcomes (McGhee and Crandall, 1968; Lao, 1970), self-confidence (Liles, 1974), and focus on control (Evans and Leighton, 1989).
More recent research (Bhide 2000) suggests that tolerance of ambiguity and decisiveness are the critical features of successful entrepreneurs. Later on Wood and Vilkinas (2007) identified six characteristics that successful CEO’s need to possess: 1) humanistic approach 2) achievement orientation 3) a positive outlook 4) a sense of integrity 5) inclusiveness and 6) learning and self-awareness.
As such, these authors conclude an entrepreneur has to be in the possession of specific characteristics. Based on the literature, the following list of criteria will used in this research:
1. Does the entrepreneur take moderate risk? 2. Is the entrepreneur dominant?
3. Is the entrepreneur independent?
4. Does the entrepreneur have self-confidence? 5. Does the entrepreneur have self-awareness? 6. Does the entrepreneur have focus on control? 7. Does the entrepreneur have tolerance of ambiguity? 8. Does the entrepreneur have decisiveness? 9. Does the entrepreneur have a humanistic approach? 10. Is the entrepreneur performance oriented?
11. Does the entrepreneur have a positive outlook? 12. Does the entrepreneur have a sense of integrity? 13. Is the entrepreneur inclusive?
24 2.3 Financials
Financial ratios are commonly used as evaluation criteria for companies (Walter and Robert 1988). Financial ratios are intensively used by several interest groups for all kinds of purposes (Barnes, 1987). Evaluating firm performance using financial ratios has been a traditional yet powerful tool for decision-makers, including business analysts, creditors, investors, and financial managers (Delen et al. 2013). Using these financial ratios, comparisons can be made across companies within an industry, between industries, or within a firm itself (Delen et al. 2013).
Financial ratios are also used for the purpose of predicting future performance. They are used as inputs for empirical studies or are used to develop models to predict financial distress or failures (Altman 1968, Beaver 1966). In fact a vast majority of the recent studies focused on analyzing and potentially predicting bankruptcy as a means to identify characteristics (in term of financial ratios) of good or bad-performing firms and their potential values (Kumar and Ravi 2007).
In accounting, financial ratios on a balance sheet or income statement can be initially classified into four categories: solvency, profitability, asset and debt turnover, and return on investment (Wang and Lee 2007, Delen et al. 2013). The financial ratios that fall within these four categories are shown in table 2 (Wang and Lee 2007). Solvency is the ability of a company to meet its long-term financial obligations. Profitability ratios examine the profit-generating ability of a firm based on sales, equity, and assets. Asset utilization or turnover ratios measure how successfully the company generates revenues through utilizing assets, collecting receivables, and selling its inventories (Delen et al. 2013). Return on investment is a performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments.
25
As such, these authors conclude that financial ratios are commonly used as evaluation criteria. Based on the categories: solvency, profitability, assets and debt turnover in table 2 (Wang and Lee 2007), the following list of criteria will be used in this research:
1. Current ratio 2. Debt ratio. 3. Equity/debt ratio. 4. Equity ratio.
5. Total assets turnover. 6. Total liabilities turnover.
26 2.4 Strategy
A company’s strategy is management’s action plan for running the business and conducting operations (Chetty 2010). The formulation of a strategy represents a managerial commitment to pursue a particular set of actions (Markides 2004) in growing the business, attracting and satisfying customers, competing successfully, conducting operations, and improving the company’s financial and market performance.
Strategy is essential to superior performance, which, after all, is the primary goal of any enterprise (Porter 1996). The performance of business organizations is affected by their strategies and operations in market and non-market environments (Baron 2000). Strategy is a coherent set of actions aimed at gaining a sustainable advantage over competition, improving position vis-à-vis customers, or allocating resources (Waterman 1980).
Later on Johnson et al. (2008) defines that strategy is the direction and scope of an organisation over the long term, which achieves advantage in a changing environment through its configuration of resources and competences with the aim of fulfilling stakeholder expectations. But the essence of strategy is in the activities- choosing to perform activities differently or to perform different activities than rivals. Otherwise, a strategy is nothing more than a marketing slogan that will not withstand competition (Porter 1996).
Firms that outperform their competitors apparently have a competitive advantage, and much of the research in strategy is aimed at developing theories about competitive advantage. Competitive strategy is about being different. It means deliberately choosing a different set of activities to deliver a unique mix of value (Porter 1996).
Porter (1980; 1985) states that the positioning of a company is important. He proposed three different ‘generic’ strategies by which an organisation could achieve competitive advantage: ‘overall
27 cost leadership’, ‘differentiation’ and ‘focus’. Cost leadership is that a firm sets out to become the low cost producer in its industry. Differentiation strategy is that a firm seeks to be unique in its industry along some dimensions that are widely valued by buyers. The generic strategy of focus rests on the choice of a narrow competitive scope within an industry. The basic idea is that these
strategies can be used to secure favorable positions within the industry: positions in which the firm in question is better protected from the five forces than its competitors (Stoelhorst 2008). Positioning will be used as a criteria to see if the company chooses a clear direction. The generic strategies are used to check whether it is a clear positioning.
The resource-based view suggests that firms obtain sustained competitive advantage by
implementing strategies that exploit their internal strengths, through responding to environmental opportunities, while neutralizing external threats and avoiding internal weaknesses (Barney 1991). Sustained competitive advantage can be achieved by resources which are valuable, rare, imperfectly imitable and non-substitutable (Barney 1991; Peteraf 1993; Wernerfelt 1984).
Kraaijenbrink (2015) states that there is one obvious reason why you want to assess your strategy: to know whether it is good enough. It is generally a good idea to do a couple of checks to find out whether the strategy fulfills the basic criteria. Kraaijenbrink (2015) states that there is an endless number of criteria to assess a strategy, but the following nine are particularly useful: coherence, efficiency, effectiveness, uniqueness, flexibility, robustness, scalability, responsibility and pros en cons. Grant (1996) underlined that efficiency and flexibility are important criteria for strategies. He also stressed that the scope is an important criteria.
Bhide (1996) states that entrepreneurs should periodically put their strategies to the following four tests: 1) is the strategy well defined? The strategy must provide a clear direction for the company. 2) Can the strategy generate sufficient profits and growth? Will the formulated strategy the company to
28 be profitable and to grow to a desirable size. 3) Is the strategy sustainable? Can serve the strategy the enterprise over the long term. And 4) are the goals for growth too conservative or too
aggressive? The entrepreneur should determine whether the plans for its growth are appropriate.
As such, these authors conclude that a strategy is important for a company. Based on the literature, the following list of criteria will be used in this research:
1. Does the company have a clear positioning? 2. Does the firm have resources which are valuable? 3. Does the firm have resources which are rare?
4. Does the firm have resources which are imperfectly imitable? 5. Does the firm have resources which are non-substitutable? 6. Is there coherence in the strategy?
7. Are all elements of the company used up to their maximum potential (efficiency)? 8. Does the strategy work (effectiveness)?
9. Is the strategy flexible? 10. Is the strategy scalable?
11. Does the strategy comply with ethical and moral standards (responsibility)? 12. Has the strategy a scope?
13. Does the strategy lead to profits?
2.5 Competitors
Organizations depend on the environment for resources and for the justification of their continued existence (Pfeffer and Salancik, 1978). Market competition creates turbulence, stress, risk and uncertainty for organizations. It demands that organizations mount appropriate responses to the threats and opportunities in the competitive environment (Khandwalla, 1972, 1973; Burchell et al., 1980; Haas, 1987; Bromwich and Bhimani, 1994). Industry structure can determine the basis and
29 intensity of the competition (Grant, 1998) and a firm’s financial performance (Sandberg, 1986), firm specific resources, and capabilities also influence its ability to achieve market success and attain superior performance.
The belief that competition improves company performance is widespread and it does have some theoretical foundation (Nickell, 1996; Schmidt, 1996; Aghion and Howitt, 1996). In a benign
environment with few competitors and undiscerning customers, a company can be lazy and still very profitable, but it will never improve. In a volatile environment with many competitors, demanding customers, and top-quality suppliers, a company must become extremely competitive and
entrepreneurial just to survive (Birkinshaw et al. 2005). It is thus almost axiomatic in the field of strategy that competitive factors and market capacity will have a strong impact on new venture decision making and success (Zahra et al. 2002).
Because the environment is complex and volatile, long-term competitiveness requires organizations to constantly be open to signals regarding current and future conditions of the environment, and to apply this knowledge to change their own behavior and positioning in its markets in a timely way (Huse et al. 2005). Competitive position, determined not only by market share but also by
manufacturing process, distribution approach, product offering and the like, frequently overwhelms differences in operating effectiveness to determine which competitors are most successful (South 1981). An understanding of the firm’s competitive landscape and the intensity of the competition often directs the development and subsequent use of these resources and capabilities (Grant, 1998). In order to achieve and maintain competitive advantages, organizations need to adapt quickly to their market environment (DeGeus, 1988; Senge, 1990; Day, 1991).
Recent theoretical studies in economics suggest that competition encompasses several dimensions, including product substitutability, market size, and entry costs, given the level of concentration (Raith
30 2003). In addition, the price cost margin (PCM) is widely used as a measure of competition (Boone 2008). An increase in market size or a decrease in the setup cost both lead to the entry of new firms (Raith 2003).
As such, these authors conclude that competition have influence on firm performance. Based on the literature, the following list of criteria will be used in this research:
1. Lack of threats in the environment?
2. Are there opportunities in the environment? 3. Is there an increase in market share?
4. Are there entry costs to enter the market?
5. Is the company constantly being open to signals regarding conditions of the environment? 6. Does the company adapt quickly to environment?
7. Have competitors a better manufacturing processes? 8. Have competitors a better distribution approach? 9. Have competitors a better product offering? 10. Are the competitors operating more effectively? 11. Are there substitutes in the market?
12. Are there competitors with a better price cost margin?
2.6 Environment
The business environment is changing faster than ever before (Achrol 1991; Hamel and Prahalad 1994; Kotter 1996; Glass 1996; Loewen 1997; Conner 1998). Organizations shape their environments by influencing their industries or collaborating with each other, thereby gaining some control over some part of their environments. The environment is thus not completely determined by external forces, but can also be influenced by the firm (Anderson et al. 1994, cited in Ford 1997). Firms co-exist and co-evolve with their environments and therefore are able to influence the environment to a greater extent than previously thought (Brooks and Weatherston 1997).
31 Change in the business environment occurring in two major dimensions, complexity and turbulence (Dess et al. 1990, cited in Robbins 1990; Huber 1991, cited in Achrol 1991). Complexity is defined as the measure of heterogeneity or diversity in environmental, sub-factors such as customers, suppliers, socio-politics and technology (Teopaco 1993; Lane and Maxfield 1996; Chae and Hill 1997;
Chakravarthy 1997). Turbulence is defined as dynamism in the environment, involving rapid, unexpected change in the environmental sub-dimensions (Conner 1998; Vorhies 1998).
Management literature has defined the business environment as social, technological, economic, and political influences or conditions which have a potential or real impact upon the organization (Kefalas 1980). Some classify the business environment into two major categories (Kefalas 1980): the internal environment and the external environment. Some concentrate on the nature of the environmental forces and desire to know whether they represent a problem; a threat; or an opportunity. Others are interested in the volatility of the environmental forces and attempt to classify them (in accordance with the rate of change) into stable; dynamic; and turbulent environments.
The environment can be conceptualized as having several sectors that exist in two layers (Bourgeois 1980; Dill 1958). The layer closest to the organization is the task environment which includes sectors that have direct transactions with the organization. The outer layer is called the general environment and refers to sectors that affect organizations indirectly. The general environment often includes social, demographic and economic sectors (Daft et al. 1998).
An organization also must be alert to changes in the general environment (Fahey and Narayanan 1986). Factors in the general environment influence all the industries within it and include social factors (e.g., demographics, life styles, social values of society), economic factors (e.g., economic development, interest rates), political factors (e.g., political processes, regulatory institutions), and technological factors (e.g., technological processes or advances, new products, processes,
32 materials) (Frishammar 2005). Different organizations are affected by different numbers of
environmental factors (Wang 2012).Organization attempting to ignore environmental factors or that refuses to respond to such factors create trouble for themselves and placing themselves at a
competitive disadvantage (Wang 2012).
As such, these authors conclude environmental factors have influence on firm performance. Based on the literature, the following list of criteria will be used in this research:
1. Are there specific demographics? 2. Is there a specific life style?
3. What are the social values of society? 4. Is there economic development? 5. Are there high or low interest rates? 6. Are there political processes? 7. Are there regulatory institutions?
8. Are there technological processes or advances? 9. Are there developed new products in the market? 10. Are there new materials?
Overview
In the previous section the five categories are elaborated into factors. These factors are based on the literature and are shown below in the overview (table 3). On the basis of these factors, the research has been further elaborated. What follows in this research is the method, which examines the research design, the origin of the data and the availability of the collected data. Further the section describes the reliability and validity. The chapter thereafter describes the results, where after the discussion and conclusion follows.
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3 Method
3.1 Research design
To answer the research question introduced, quantitative research is chosen in order to make a judgment on the basis of data on the relationship between the factors and profit. Based on this quantitative research numerical conclusions can be made over the relations. Besides, on the basis of this quantitative research, conclusions can be made on a specific target group. The data which is used in this study is gathered through databases of Rabobank Westland. This data is used because it was accessible and it is longitudinal. The data is collected over several years (2013, 2014 and 2015). Because the data is longitudinal, relationships can be tested between variables over the several years. To examine these relationships multiple regressions are performed. The following is the elaboration of the research design.
Sample
The population includes companies of the special asset management- and commerce department. Special asset management implies that companies have increased supervision, there is a higher risk of failure and they underperform (most of the time). Commerce department implies that companies have a positive outlook with normal performance. This population was chosen to obtain, as complete as possible, reflection of all companies in horticulture. This also increased the generalizability of the
34 results to all companies in horticulture. The companies are all located in the horticulture and are established in het Westland. This is an area with an amalgamation of municipalities which is the largest horticulture area of the Netherlands. The companies are active in cultivate fruit and
vegetables. The total population consists of seven hundred and thirty nine companies. The criterion for the Rabobank to measure up to a medium sized company, is an achieved turnover between five and thirty million euro.
Sample size
There are a lot of rules of thumb floating about how many cases of data for each predictor is needed in a model. In fact, Field (2013), states that the expected R for random data is k/(N-1). The dataset contains 30 variables (k) and 105 cases of data (N), R = 30/(105-1) = 0.29. This is a medium effect size according to Cohen’s (1988) criteria. For random data we want to expect R to be zero, which implies no effect. For this purpose it is important to have a large sample size (N). According to this formula it would be better that the whole population (30/(739-1)=0.04) is used. Green (1991) rules of thumb for minimum acceptable size to test the individual predictors within the model are 104 + k. According to this rule of thumb the sample size have to be (104+30 =) 134 companies. Because of time
constraints and accessibility it is not possible to collect data of all the companies, at best effort there is data collected of 105 companies.
Sampling technique
To select companies in the population a systematic random sampling technique is used. At random there were 105 (N) companies selected of the sampling frame. This is done in the
following way 1) the first company on the list of clients of each account manager is selected, 2) next, with an interval of eight, the companies are selected until there is a list of seven companies per account manager. With this list, the data set is created.
35 Measures
After checking in SPSS for missing values and outliers, some normality checks are performed. According to the skewness and kurtosis calculation the data is not normally distributed. This is also supported by the Kolmogorov-Smirnov (p>0.05) and the Shapiro-Wilk (p>0.05) test. Glass et al. (1972) commented that the payoff of normalizing transformations in terms of more valid probability statements is low, and they are seldom considered to be worth the effort. The data is therefore not normalized.
The data consists of numerical and categorical data. To use the categorical data in a regression, dummy variables are made. To see which variables have a causal relationship with profit (dependent variable), multiple regressions have been executed. Per year for each category (entrepreneur, financials, strategy, competitors and environment) a multiple regression is performed. This is performed in the following manner for each of the five categories:
1. Factors 2013 -> profit 2014 2. Factors 2014 -> profit 2015 3. Factors 2013 -> profit 2015
After the outcome of the first multiple regression per category, the significant variables are implemented in a new regression and checked whether they are still significant and have a causal relationship with profit. The interaction effect is also examined. All factors which have a correlation (>0.5) are checked with the process macro of Hayes7. The process macro showed that there were no significant (p<0.05) interaction effects among the variables. The next chapter concerns the collected data and is specified for each category.
36 3.2 Data
The multiple source data set that is collected from the Rabobank, is longitudinal and covers the years 2013, 2014 and 2015. This raw data, which is of qualitative and quantitative nature, is yearly
collected by the account manager. The qualitative data consists of reports which are prepared by the account manager and the finance specialist. They obtaining their value judgment based on their conversations with – and their knowledge about - the customer. These reports consist information about the entrepreneur, financials, strategy, competitors and environment. These data is quantified, a description of this process is shown below. The quantitative data in the reports is part of annual reports, which are received from the customer. These annual reports are prepared by an accountant and are used to determine the risk profile of the company. It was not possible to collect data of all the factors which are stated in table 3, due to the use of secondary (Rabobank) data. Table (4) below gives an overview of the data which is collected and which data was not possible to collect (shaded in red). Hereafter follows an overview of the measured factors in this study and the origin of the data.
Entrepreneur
The data about the entrepreneur is collected out of the yearly revision or funding report and the data system of the Rabobank. The report contains a part about the qualities of the entrepreneur. Some qualities are difficult to give a gradation, because the entrepreneur is in the possession of a quality,
37 or not. The data system contains financial information and non-financial information about the entrepreneur.
1. Moderate risk. The following scores are used: 0 (=no risk taking) and 1 (=moderate risk taking), because there is no gradation used in the report or available from Rabobank. An example from a report: “the entrepreneur takes risk by starting with a whole new crop”. This example reflects a risk taking entrepreneur.
2. Independent. The following scores are used: 0 (=not independent) and 1 (=independent), because there is no gradation used in the report or available from Rabobank. An example from a report: “the entrepreneur operates independently of its management team, what not always beneficial is for the mutual communication”. This example reflects an independent entrepreneur.
3. Self-confidence. The following scores are used: 0 (=not self-confidence) and 1
(=self-confidence), because there is no gradation used in the report or available from Rabobank. An example from a report: “the entrepreneur has enough confidence in his cultivation
techniques knowledge”. This example reflects self-confidence of the entrepreneur. 4. Self-awareness. The following scores are used: 0 (=not self-aware) and 1 (=self-aware),
because there is no gradation used in the report or available from Rabobank. An example from a report: “the entrepreneur acknowledges that its financial abilities are not enough, so he appointed a financial controller”. This example reflects self-awareness of the
entrepreneur.
5. Focus on control. The following scores are used: 1 (excellent), 3 (good), 6 (sufficient), 8 (inadequate) and 10 (bad). This is a gradation determined by the Rabobank. In the system where the revision and funding requests are processed, the finance specialist has to answer “non-financial” questions about the entrepreneur. On the basis of these “non-financial” questions, the entrepreneur receives a score which includes the risk rating of the company. The answers are based on the entrepreneurs assessment, by the finance specialist.
38 6. Decisiveness. The following scores are used 0 (=not decisive) and 1 (=decisiveness), because
there is no gradation used in the report or available from Rabobank. An example from a report: “when the entrepreneur saw its revenue declining, he intervened immediately by placing greater emphasis on sales”. This example reflects decisiveness.
7. Humanistic approach. The following scores are used: 1 (excellent), 3 (good), 6 (sufficient), 8 (inadequate) and 10 (bad). This is a gradation determined by the Rabobank. In the system where the revision and funding requests are processed, the finance specialist has to answer “non-financial” questions about the entrepreneur. On the basis of these “non-financial” questions the entrepreneur receives a score, which includes the risk rating of the company. The answers are based on the entrepreneurs assessment, by the finance specialist.
8. Performance oriented. The following scores are used: 1 (excellent), 3 (good), 6 (sufficient), 8 (inadequate) and 10 (bad). This is a gradation determined by the Rabobank. In the system where the revision and funding requests are processed, the finance specialist has to answer “non-financial” questions about the entrepreneur. On the basis of these “non-financial” questions the entrepreneur receives a score, which includes the risk rating of the company. The answers are based on the entrepreneurs assessment, by the finance specialist.
9. Learn. The following scores are used: 0 (=not learning) and 1 (=learn), because there is no gradation used in the report. An example from a report: “Since the entrepreneur is under the supervision of special asset management, he has a steep learning curve to change processes in his company”. This example reflects a learning entrepreneur.
Financials
The data over the financials is collected out of the annual reports which are prepared by the accountant. The financial data has been incorporate in the financial data system of the Rabobank. Financial reports are extracted from this system, which are used as input for the formulas of the ratios. The following formulas are used:
39 1. Current ratio = current assets / current liabilities.
2. Debt ratio = total liabilities / total assets. 3. Debt to equity ratio = debt / equity. 4. Equity ratio = equity / total assets.
5. Total assets turnover = turnover / total assets. 6. Total liabilities turnover = turnover / total liabilities. 7. Net profit = profit after tax payment.
Strategy
The data about the strategy is collected out of the yearly revision or funding report and from the data system of the Rabobank. Customer reports are extracted from this system, which contain information about strategy.
1. Positioning. The following scores are used: 0 (=no positioning) and 1 (=positioning), because there is no gradation used in the report or available from Rabobank. An example from a report: “the company is distinctive in product innovation and supplies on the top segment in Europe. The company provides standard range (which is qualitative high end) product and in-house developed “specialties” (which they are unique at). This example reflects positioning in the market.
2. Efficiency. The following scores are used: 0 (=no efficiency) and 1 (=efficiency), because there is no gradation used in the report or available from Rabobank. An example from a report: “Company X is an excellent performing Phalaenopsis grower with a strategy that has gradually shifted from product- to cost leadership”. This example reflects an efficient strategy, due to the lowest amount of input (cost leadership) the company creates the greatest amount of output (excellent performing).
3. Flexibility. The following scores are used: 1 (=good), 3 (=above average), 5 (=average), 7 (=below average) and 9 (=bad). This is a gradation determined by the Rabobank. In the
40 system where the revision and funding requests are processed, the finance specialist has to answer “non-financial” questions about the strategy of the company. On the basis of these “non-financial” questions the company receives a score, which includes the risk rating of the company. The answers are based on the entrepreneurs assessment, by the finance specialist. 4. Scalability. The following scores are used: 0 (=not scalable) and 1 (=scalable), because there is
no gradation used in the report or available from Rabobank. An example from a report: “In our opinion, the strategy of the company will lead to scalability. The business model is designed so that the company can grow when needed, and may shrink even when the market is bad”. This example reflects the scalability of the company’s strategy.
5. Profits. Bhide (1996) states that it is important that the strategy must lead to profits. In order to test this proposition, this strategy factor belongs to this category. The following scores are used: 0 (=no profits) and 1 (=profits), because there is no gradation used in the report or available from Rabobank. When the company is profitable, the score 0 will be assigned and vice versa.
Competitors
The data over the competitors is collected out of the data system of the Rabobank. Customer reports are extracted from this system, which contain information about competitors.
1. Market share. The following scores are used: 1 (=market leader), 3 (=relatively large player), 5 (=one of the similar players) and 7 (=small player). This is a gradation determined by the Rabobank. In the system where the revision and funding requests are processed, the finance specialist has to answer “non-financial” questions about the market and competitors. On the basis of these “non-financial” questions the company receives a score, which includes the risk rating of the company. The answers are based on the entrepreneurs assessment, by the finance specialist.
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2. Entry costs. The following scores are used: 1 (=low), 3 (=middle), 5 (=high) and 0 (=unknown).
This is a gradation determined by the Rabobank. In the system where the revision and funding requests are processed, the finance specialist has to answer “non-financial”
questions about the market and competitors. On the basis of these “non-financial” questions the company receives a score, which includes the risk rating of the company. The answers are based on the entrepreneurs assessment, by the finance specialist.
3. Signals. The following scores are used: 1 (excellent), 3 (good), 6 (sufficient), 8 (inadequate) and 10 (bad). This is a gradation determined by the Rabobank. In the system where the revision and funding requests are processed, the finance specialist has to answer “non-financial” questions about the market and competitors. On the basis of these “non-“non-financial” questions the company receives a score, which includes the risk rating of the company. The answers are based on the entrepreneurs assessment, by the finance specialist.
4. Manufacturing process. The following scores are used: 1 (excellent), 3 (good), 6 (sufficient), 8 (inadequate) and 10 (bad). This is a gradation determined by the Rabobank. In the system where the revision and funding requests are processed, the finance specialist has to answer financial” questions about the market and competitors. On the basis of these “non-financial” questions the company receives a score, which includes the risk rating of the company. The answers are based on the entrepreneurs assessment, by the finance specialist. 5. Product offering. The following scores are used: 1 (excellent), 3 (good), 6 (sufficient), 8
(inadequate) and 10 (bad). This is a gradation determined by the Rabobank. In the system where the revision and funding requests are processed, the finance specialist has to answer financial” questions about the market and competitors. On the basis of these “non-financial” questions the company receives a score, which includes the risk rating of the company. The answers are based on the entrepreneurs assessment, by the finance specialist. 6. Operating effectively. The following scores are used: 0 = (unknown), 1 (=better than similar
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comparable companies). This is a gradation determined by the Rabobank. In the system where the revision and funding requests are processed, the finance specialist has to answer financial” questions about the market and competitors. On the basis of these “non-financial” questions the company receives a score, which includes the risk rating of the company. The answers are based on the entrepreneurs assessment, by the finance specialist.
7. Price cost margin. Boone (2008) states that price cost margin is widely used as a measure of competition. Therefore, this factor is classified in this category. The following scores are used: 1 (excellent), 3 (good), 6 (sufficient), 8 (inadequate) and 10 (bad). This is a gradation determined by the Rabobank. In the system where the revision and funding requests are processed, the finance specialist has to answer “non-financial” questions about the market and competitors. On the basis of these “non-financial” questions the company receives a score, which includes the risk rating of the company. The answers are based on the entrepreneurs assessment, by the finance specialist.
Environment
The data about the environment is collected out of the data system of the Rabobank. Customer reports are extracted from this system, which contains information about the environment.
1. Social values. The following scores are used: 0 (=no social values) and 1 (=social values), because there is no gradation used in the report or available from Rabobank. An example from a report: “CSR is sufficient (Class B). The company is Global Gap and QS certified and meets stringent food safety requirements. Company is a recognized training company for young people in the agricultural sector (Aequor certified). Measures are saving maximum energy affected”. This example reflects the social values of a company.
2. Economic development. Fahey and Narayanan (1986) states that organizations must be alert to changes in the general environment. Factors in the general environment influence all the industries within it and include economic development. One company can cope better with
