Improvement, Audit and CAPA

## **Chapter 5** Internal Audit

*Aijaz Panhwar, Ateeq Rehman Memon, Azhar Naeem, Aftab Kandhro, Syed Zainulibad, Sofia Qaisar and Awais Panhwar*

#### **Abstract**

The internal audit is an efficient, free, and documented procedure for gathering audit evidence and objectively evaluating it to ascertain the extent to which the audit criteria are fulfilled. The internal audit is very effective tool not only to judge the level meeting the needed requirements but also to improve the Quality Management System of the organization and great impact for the improvement of the performance of testing laboratories, inspection, certification agencies, and can play vital role for the strengthening of any organization. Internal Audit is a major way out to read through to gain guarantee that the organization is actually doing what it says is doing. During the internal audits in accordance with any of the required check, an auditor makes sure that the actions taken to meet the quality objectives of the organization are appropriate, and management system is in compliance with the relevant standard/ check. Nowadays, quality is important in business and industrial world as it is actually the value addition. The organization must have a quality system in place to guarantee that the product or service being offered is of a high enough calibers to satisfy the needs of the clients.

**Keywords:** audit, certification, effectiveness, horizontal audit, inspection, internal audit, improvement, testing laboratories, vertical audit

#### **1. Introduction**

Internal audit is a very important step in quality management as well as an aspect for effective improvement tool. ISO 19011 [1] is a standard that details the auditing process for management systems. This is the manual by which the auditors are instructed and expected to be in agreement, but it also serves as a useful manual for conducting internal audits of management systems. According to this standard, an internal audit is one that is carried out by or on behalf of the business to evaluate its management system. In essence, it means that you have a choice between hiring someone from outside and using your own staff to conduct an internal audit. Internal audit has a great impact for improvement of the performance of testing laboratories, inspection, certification agencies, and metrology organization Hamza [2]*.* Different ISO/IEC standards cover almost all aspects of inspection, certification, and laboratory management. A laboratory certification boosts an organization's performance through improved laboratory procedure control, which in turn raises its potential

owing to higher customer satisfaction. Internal auditing is done to evaluate both the organization's overall performance and the effectiveness of its quality management system. The internal audits show adherence to the planned arrangements, such as the implementation and upkeep of the QMS and associated processes. A management system auditor's job is to obtain unbiased proof of performance and conformance in order to assess how well the management system and its processes are operating. Internal audits serve as a method to guarantee that the quality management system is functioning properly by assessing process compliance, evaluating performance, and identifying processes that need improvement. System is still fully operational and ready for external audits. Internal audits, often known as "first-party audits," are carried out by the company in order to assess compliance with a set of requirements that may be derived from standards. Seven key categories should be included on the audit checklist, such as assessing the company's compliance with organizational context, leadership, planning, support, operation, performance evaluation, and improvement. Every 3 years, certification audits are usually carried out. Following certification, the registrar will conduct surveillance audits at regular intervals to make sure the auditee is still adhering to the QMS and ISO requirements. In an internal audit conducted in accordance with ISO 9001, an appointed auditor evaluates the organization's procedures and quality management system in accordance with the criteria set out by the most recent version of the standard. The insufficient use of quality control and control systems inside the organizations are the major reasons that lead to an inaccurate/misleading result.

#### **1.1 Internal audit**

To review the compliance of the system or to analyze/find the gaps in the system, to overcome the weaknesses before external audit, or to compare the achievements of the defined objectives.

#### **1.2 Purpose of internal audit**

The purpose of internal audit is to confirm that the practical implementation complies with the accrediting standard, the management system requirements, and other requirements such as local, state, federal, and international laws, etc. The primary goal of the audit is to generate a judgment about the data in the report as a whole, not to find every possible inconsistency. This translates to the fact that, despite the fact that auditors keep an eye out for any indications of potential material fraud, it is impossible to guarantee that frauds will be found [3].

#### **1.3 Objectives of internal audit**

The objective of an auditor during an audit is to verify compliance, controlling all organizational activities strictly is one of an internal audit's key objectives. Management is responsible for ensuring the accuracy of the company's financial records and the effectiveness of its operations. To ascertain both, conduct an internal audit. Controlling all organizational activities strictly is one of an internal audit's key objectives. Management is responsible for ensuring the accuracy of the company's financial records and the effectiveness of its operations. An internal audit helps to determine both. The internal audit function works from within and serves as a guardian of the integrity and accountability of the organization, examining financial

#### *Internal Audit DOI: http://dx.doi.org/10.5772/intechopen.107220*

reporting, protecting against fraud, error and risk, and providing objective assurance that the company is complying with the regulations and standards it should. The objective of an internal audit is to advance and improve an organization's operational processes. An organization's current Quality Management System (QMS) is evaluated by a quality management system audit to determine whether it complies with organization policies, contractual obligations, and legal requirements.

#### **1.4 External audit**

The most frequent third-party audit is the certification audit carried out by the certifying organizations. The external audit is an audit carried out by a second party or third party on his own behalf or on behalf of another company. The difference between internal and external audit can also be understood in the following way: the findings of an internal audit will only be used within your organization, whereas those of an external audit, or third-party audit, can be used publicly as well. For instance, if an organization chooses to undergo a certification audit and receives a certificate, this certificate is a public document, meaning it will frequently be shown to others.

#### **1.5 Difference between internal audit and external audit**

Internal audit evaluates risks and issues connected to business procedures, whereas external audit focuses on the all activities' records and provides an opinion on the organization's improvement statements. While external auditors typically do a single annual audit, internal auditors conduct audits throughout the year.

#### **1.6 The importance of an audit**

The audit is an important as it provides credibility to a set of statements and gives the stakeholders confidence that the system reports are true and fair. It can also help to improve an organization's internal controls and systems. Internal Audit would pay close attention to any organizational changes that might have an influence on risk management. Organizational ethics, managerial reorganizations, financial requirements, resource limitations, technology/internet/E-business, consolidations/ alliances, and legislative/regulatory imperatives are just a few examples of these adjustments that may occur. Internal audits are necessary if you want assurance that your business is accomplishing its primary objectives. Internal audits will help you get there if you want to save your company time and money and keep everything running smoothly. Internal audits are essential if you want to defend your business against fraud and stop fraudulent behavior.

#### **1.7 Internal audit focus**

A company's risk appetite, risk detection and mitigation techniques, and risk communication and monitoring protocols are all examined through internal audit. One of the primary functions is to guarantee that risks have been adequately defined and evaluated. Internal audit is tasked with independently attesting to the effectiveness of a company's risk management, governance, and internal control systems. The objective of an internal audit is to advance and improve an organization's operational processes. Evaluation of the effectiveness of the organization's quality management

system and overall performance are the objectives of the internal ISO 9001 audit. An organization's present quality management system (QMS) is evaluated to see if it conforms to corporate standards, contractual responsibilities, and legal requirements.

#### **1.8 Types of internal audit**


#### **1.9 Scope of internal audit**

The scope of internal audit within an organization is wide and can include many issues such as operational efficiency, Quality Management System compliance, financial reporting reliability, fraud prevention and investigation, asset protection, and regulatory compliance.

#### **1.10 Stages of internal audit**

Internal audit performs a warranty audit in a five-step process that includes


#### **1.11 Benefits of internal audit**

Audits are used to obtain factual information for management system, unbiased management information, to improve communication and motivation. These audits are further used to identify the areas of risk, opportunities, and need of trainings. This supports to assess performance and equipment status. Internal audits offer management and the board of directors a further benefit by allowing process weaknesses to be found and fixed before external audits. Internal audits have the responsibility

#### *Internal Audit DOI: http://dx.doi.org/10.5772/intechopen.107220*

of independently confirming the efficiency of an organization's risk management, governance, and internal control systems.

#### **1.12 Risk assessment**

There is very important role of internal audit in development or progress of any organization. Risk is the likelihood that a circumstance or course of action will have a negative impact on the entity or activity that is the subject of the audit. The organization can use a risk assessment to prioritize audit projects according to the level of potential risk, determine the nature, timing, and scope of internal audit procedures in direct relation to the level of risk, and develop a plan for carrying out internal audit projects in a risk-based manner. Prior audit findings, the entity's strategic plan, and its financial statements are reviewed as part of the risk assessment process. Department heads and process owners are also interviewed with an emphasis on "what may go wrong" scenarios.

#### **1.13 Role of internal audit**

Internal audits will outline the steps you need to take and how to conduct them if you want to lower risks to your business' operations, finances, cyber security, and other areas of concern. You need routine internal audits if you want to be sure your organization is abiding by the rules, regulations, and standards that are relevant to it and if you also want to save money and time when external auditors check your compliance. After defining management's responsibility for internal controls and how internal audit might contribute to management fulfilling this obligation, let us examine some specific benefits that an internal audit function might provide to an organization and its management. Internal audit provides "reports" to management or the board directly rather than through an outside agency or adversarial body; it also improves the "control environment" of the organization. It increases responsibility within the organization by spotting redundancy in operational and control procedures and making suggestions to boost the efficacy and efficiency of procedures. It serves as an Early Warning System, allowing flaws to be discovered and corrected promptly. As a result, management would have a support system, risk manager, controls specialist, efficiency expert, partner for problemsolving, and safety net. There are so many advantages for businesses that we could write a book about effective internal audits. It suffices to remark that, aside from the expense of hiring an auditor, these highly skilled, accredited specialists are not cheap; there are not really any drawbacks. Additionally, automating allows you to cut expenditures.

#### **2. Methodology**

#### **2.1 Audit techniques**

#### *2.1.1 Horizontal audit*

It is a normal audit from start to end, e.g., clause-by-clause audit; it is also called systematic audit. Mostly audit conducted is horizontal. It also can be said the detailed examination of a specific element in the quality system. In this system auditor can assess that does the quality system meet the requirements in the required standards or as per other requirement documents. It is also compliance between written procedures and praxis [4].

#### *2.1.2 Vertical audit*

A vertical audit is a check of implementation of the quality system. Audit in depth considered in any one clause. In this type an auditor starts with a report (inspection, testing, certification, and calibration) and traces all registration related to this item all the way back to the contract with the customer. It means top to bottom approach. Start with a contract and follow all registration related to the inspection all the way to the inspection report, bottom to top. The vertical audit gives a good overview of the implementation of the management system. Evaluation of the work flow and many requirement elements in the standards/required document at the same time. Vertical audit often reveals systematic weaknesses [4].

#### **2.2 Methods during audit**


#### **2.3 Important steps in planning of the internal audit**

Planning the Audit Schedule; Planning the Process Audit; Conducting the Audit; Reporting on the Audit; and Follow-up on Issues or Improvements Found. Auditing is a science with increasing importance in the last years [5]. Internal auditing is performed by a professional with specific scientific and professional background for technical and non-technical organizations, who is an employee of the audited company [6]. A managerial control activity is important for the evaluation of performance, nonconformities elimination, and ISO standards compliance is the important feature of the audit [7, 8]. As per data most organizations are not interested to be beneficiary from the internal audit process, to improve the system [9]. Alic and Rusjan [7]; Panhwar et al. [4] have discussed that internal audits are an improvement tool.

#### **2.4 Effects of internal audit**

The effects of internal audit help management to keep proper control of the assets, activities, and responsibilities. Internal audit gives confidence to management on the working of its system. There is biggest impact of internal audit on testing, calibration, and medical laboratories. As we know that testing laboratories are very important as per nature of work, these are directly relevant with our life. The huge investment on these laboratories is another aspect. To maintain the temperature is essential requirement, and ambient temperature is basic requirement (23 + −2°C) because temperature for the concerned test in laboratories is very important. Almost comfort environment is considered 25 + −5°C, if temperature is not mentioned in related method. In textile testing laboratories to maintain relative humidity is important; in

#### *Internal Audit DOI: http://dx.doi.org/10.5772/intechopen.107220*

other words, to maintain the temperature, relative humidity, to qualify in Proficiency Testing (PT), are effects of internal audit. Another benefit of proficiency testing is to validation methods, using in the laboratory.

#### **2.5 Internal audit as an improvement**

Additionally, internal audit reviews to lower product flaws and enhance quality controls are also included. Customers will be less likely to complain, productivity will increase, costs will drop, and profitability will rise. Internal auditors help businesses discover important risk issues. This enables the business to recognize present shortcomings and anticipate potential future issues. It also enables a business to pinpoint ineffective procedures and controls and presents a chance for improvement, aids in asset protection and lowers the risk of fraud, increases operational efficiency, and boosts financial stability and integrity, ensuring adherence to legislative requirements and the law. Compliance hazards are a simply type of risk that internal audit analyzes to assess how well the company's risk management procedures are working. Compliance needs to be audited as a management function, usually via internal audit. Internal audit examines recent occurrences, whereas compliance must be involved prior to the creation of a new product, service, or agreement. Internal audit is in charge of the company's overall risk management, whereas compliance is in charge of the three major risks of reputational, regulatory, and legal nature.

### **3. Strengths of internal auditor**

Characteristics leading internal auditors possess


#### **3.1 Levels of quality**

The levels of quality that the authors talk about are:


#### **3.2 Skills and characteristics of an auditor**

It is wish of majority of the people to be an auditor but not everyone can be a good auditor. Auditor should hold good communication and interpersonal skills, intelligent, good listener, good analytical skills with ability to assess the data and determine how it is related to the audit criteria, command over standards, regulations, audit techniques, as well as management skills. Auditor should check the compliance as per objective evidence, audit should be documented if found any irregularity. Audit in depth in any one clause, this audit type is necessary to find out the system errors. Auditor should be open-minded and mature, to communicate well, good listener, possess sound judgment with analytical skills; to understand the knowledge of conducting assessment, be updated regarding the latest relevant polices, have the skill to complete the tasks within time limits. Must be able to distinguish crucial and essential points, be able to perceive situation and can understand the role of individuals within organizations.

#### **3.3 Principals for a good auditor**


#### **3.4 Responsibility of lead auditor**

The Lead auditor has to lead the team members, be able to support and guide the technical experts, can conduct introductory/opening as well as final/closing meeting. Have command on assessment process, planning, and preparing the audit and reports. It is prime responsibility of the lead auditor to assess the management system against required standards, have competence to review technical activities being evaluated by the team. The decision regarding the grading of the non-conformities, decision on time frame for corrective actions, and finally recommendations for grant of Certification lies with the lead auditor. The Lead auditor be able to make learn to his team about to conduct audit within time and manners, to collect the required/necessary information by effective ways, e.g., interview, listening, observation, review of the documents and records. Overall Lead Auditor should be firm in his opinion despite pressure to change the objective evidences and loyal to the policies/rules/

#### *Internal Audit DOI: http://dx.doi.org/10.5772/intechopen.107220*

regulations. There is another prime responsibly of the auditor is to provide comfort environment to his team members as well as auditee during the audit.

#### **3.5 Auditor should avoid**

The internal auditors should not take audit as a hunting of non-conformities, no act the role as police, and no criticize on system or individuals. No sharing of experience and examples of other bodies. The auditor should not show himself as a champion of the expertise or Jack of all trades. Auditor must not pretend that he has understood something that he does not. Auditor should remain neutral, positive, and avoid the dropping out at eleventh hour. During the audit the role of an auditor should be cooperative, never place the examples of auditor's own organization, job, or environment.

#### **3.6 Code of conduct for auditor**

#### *3.6.1 Impartiality*

Evaluate impartiality toward the conformity/inspection/certification, to be assessed, and inform the organization on which behalf audit is being conducted.

#### *3.6.2 Confidentiality*

Keep information about assessed organization strictly confidential.

#### *3.6.3 Loyalty*

Auditor must remain loyal to the organization utilizing the services and must avoid about any consultancy to the auditee.

#### *3.6.4 Positive*

Auditor must keep positive and professional attitude during the audit.

#### **3.7 Questions in internal audit**

The internal auditor should use/ask easy questions but must have control over the question (limit/number of questions). The auditor must avoid questions based on Yes or No, Leading questions on assumption basis, multiple questions, means question upon question without complete listening of first reply, provocative question, and any question without any meaning or meaningless questions. An auditor can ask questions with the help of seven best words such as what, why, When, When, How, Where, and Who, and the last/seventh word is SHOW ME. An auditor should start with general questions, continue into details if necessary. Distinguish between essential and unessential elements. Control the interview so that can collect the needed information. Planned aspects be assessed and auditor be polite and flexible for new solutions, and never think that (auditor) knows the best.

The following questions may be raised during the audit:


#### **3.8 Questioning techniques: types of questions**

The internal Auditor may use some or all of the following questioning techniques.

**Hypothetical** Let us suppose that… **I do not understand** Can you explain it again please… **Systematic** OK, you have done this, this and this, what is next …? **Silent** Many people find silence uncomfortable, and will offer information. **Obvious** Ask the obvious question and hear a pin drop! **Unasked** Analyze the evidence out load, the auditee will interrupt with more information. **Inverse** Good for "resentful" auditee; e.g. do you have all the cooperation you need to do your job? Breaks the barriers. **Composition**

OK. So the instruction says a, but you do b…..

#### **3.9 Internal audit procedure**

The inspection/certification/conformity assessment bodies shall have a procedure to ensure that the organizations have structure, time table, responsibilities, auditor's qualification, training of personal and technical requirements for utilization of an internal auditor for the audit. The auditor must be aware of independence of the auditor, reporting requirements and information of the outcome and follow-up activities.

#### **3.10 Training and approval of the auditors**

The selection of internal auditors is also an important aspect of the audit. Before selection and approval of the auditors, it is necessary to evaluate the auditor in terms of education, external and internal trainings especially during recent years. The knowledge and command of the standard include relevant audit techniques. The

#### *Internal Audit DOI: http://dx.doi.org/10.5772/intechopen.107220*

auditors can be selected following the rule "Right person, Right Job, on Right time" from the organization, sister organization, part-time auditor, combination of above; but an auditor should be dedicated, committed, and having command over related standard.

#### **3.11 Internal audit plan**

The proper plan of internal audit is mandatory and according to the requirement of the standard all areas must be included. The plan of internal audit be given as planned activity well in time.

#### **3.12 Internal audit's structure**

Following are the parts of the structure of internal audit. Such as Agenda of the internal audit, opening meeting, check lists, closing meeting, report writing (activity audited, findings, nonconformance, and recommendations for improvements), and follow-up audits.

#### **3.13 Systematic approach plan**

PDCA: Plan, Do, Check, Act.

#### **3.14 Why audit reports**

To find facts during audit of the organization, an informative report should and must be written clear and there must be no ambiguity in findings of internal audit. The raw data sheet is an essential document to report the facts found during the audit and be attached as evidence. Every sentence of the internal audit report should be no ambiguity and use 3 Cs: Clean, Concise, Complete.

#### **3.15 ISO-19011 audit principles**

ISO 19011 [1] is defined as a standard that provides guidelines for auditing management systems. This standard provides guidance on managing the audit program, audit principles, and the evaluation of the person responsible for managing the audit program. There are seven principles that need to be incorporated into an audit program to make auditing an effective tool for your organization and to make the collected data accurate and useful. These principles help you draw relevant, consistent, and useful audit conclusions. All audit members are expected to follow these principles during the audit process.

*Integrity*: The integrity of inner auditors establishes belief and affords the premise for reliability at the judgment. Auditors want to be ethical, honest, and responsible. If you aren't able to audit a procedure, because of a loss of understanding, then you definitely want to stop. Audits want to be completed impartially to cause them to truthful and unbiased. Remember, you are auditing to affirm conformity you are not digging for errors.

*Fair presentation*: Audit findings, audit conclusions, and audit reviews must replicate truthfully, objective, timely, clear, entire, and as it should be the audit sports performed. The audit wishes to file the truth, as it should be and objectively. Any audit statements want to be primarily based totally on verifiable data and now no longer

at the opinion of the auditor. Audit reporting wishes to be timely, clear, and entire in order that the data may be acted upon if necessary. If there's a trouble in a procedure, this wishes to be said virtually all through the audit procedure, now no longer not noted all through the audit and simplest pronounced within side the audit file.

*Professional approach*: Auditors have to exercise due care according with the significance of the mission they carry out and feature the self-assurance for the audit consumer and different involved parties. Making affordable judgments primarily based totally at the significance of the mission is essential. If you are auditing a crucial function, searching deeper and taking extra samples is a great manner of making sure which you test thoroughly.

*Confidentiality*: Internal auditors appreciate the fee and possession of statistics they obtain and do now no longer divulge statistics without suitable authority except there's a criminal or expert responsibility to do so.

*Impartial/Independence*: Auditors must be unbiased of the hobby being audited anywhere practicable and must in all instances act in a way this is loose from bias and war of interest.

*Evidence primarily based totally approach*: Internal auditors observe knowledge, skills, and revel in had to gather the proof and have to have basic evidenced primarily based totally approach. Similar to truthful presentation, the auditor wishes to have verifiable data to lower back up their audit findings and conclusions. These data basically come from facts of the procedure; however, they also can be statements of truth through informed employees or observations of sports. If there's no proof of non-conformity, then non-conformity must now no longer be raised.

*Risk primarily based totally approach*: Considering dangers and possibilities within side the audit is critical to make sure which you recognition on extensive matters. Remember the two sorts of dangers that want to be addressed the dangers that the audit targets will now no longer be met, and the threat that the audit will adversely have an effect on the procedure being audited.

*Culturally sensitive*: Respect for the lifestyle of the auditee is vital for an auditor to efficaciously discover the statistics they want to decide if the deliberate preparations for the procedure are met.

*Collaborative*: Even though audits are completed independently, the general audit is frequently completed as a team, and the auditor will want to collaborate with that team, and the auditee's employees, to get the activity completed.

#### **3.16 Types of non-conformances**

It is responsibility of the assessor's in consultation with the technical assessors (if relevant). International guideline is available [10] on grading of nonconformances exist. The non-conformity may write after completely investigation/ digging of clause.

*Observation*: If there is a minor gap in compliance as per requirement and there is a single instance that does not lead to destruction is given as "Observation" in result of audit.

*Very Serious (Major)*: Systematic and/or extensive problem that may or definitely threaten the results and hence threaten the credibility of Conformity Assessment/Certification is considered as "very Serious" Non-Conformance.

#### *Internal Audit DOI: http://dx.doi.org/10.5772/intechopen.107220*

Very serious non-conformance must be corrected as soon as possible without wastage of time.

*Essential (Minor)*: An essential non-acceptable single incident or a continuous problem (systematic) that must be addressed and corrected in a timely manner but does not have a destruction threat to the system.

*Non-Conformities*: Despite above grading of non-conformities, following are also considered non-conformity, if no follow-up of Management Review Committee (MRC) and violation of own procedures.

*Note*: If assessors are assessing as a team, then many single event non-conformities raised by different assessors/auditors can be combined to a systematic non-conformity. Avoid those non-conformances regarding direct to analyst of do not write name of any analyst in nonconformity. Nonconformity may write after completely investigation/digging of the clause.

#### **3.17 Difference between evaluation, audit, and assessment**

There is no much difference in the evaluation, audit, and assessment activities, but there is a difference between names of performing audit and auditee.

#### *3.17.1 Evaluation*

It is process to evaluation (audit) of an Accreditation body of the member country, the evaluators are nominated/Selected by International Laboratory Accreditation Council (ILAC) from different member countries. Evaluators can evaluate only accreditation bodies. Almost there is one accreditation body in one country, in some cases more than bodies are working simultaneously.

#### *3.17.2 Audit*

It is same process, but name is different called auditor. Auditor can audit only certification and inspection bodies.

#### *3.17.3 Assessment*

This term is used for assessment (audit) of conformity assessment bodies (CAB) such as testing and calibration laboratories.

#### **4. Discussion and conclusion**

Audit/Assessment is important in monitoring the effectiveness of the implementation of the standard or some specific requirements in the organization/laboratory/ inspection/certification body/quality management system. Both external and internal audits yield useful information; however, internal audit is the major and detailed activity having a complete overview of all activities with ample time. Audits are used to identify problems in the organization, in order to improve processes and procedures. An outcome of audit/assessment is lead toward the improvement by finding root causes of problems and taking corrective actions. Internal audits be conducted

on regular basis as per plan that will definitely provide information for continual improvement. Findings of the internal audits may become opportunities for improvement if taken positively. Internal audit is a mandatory activity for all ISO standards. Internal audit is a well-thought-out, world-class format for planning and performing process audits. It can help to ensure that the process implemented is consistent and effective for the required outcome.

### **Author details**

Aijaz Panhwar1 \*, Ateeq Rehman Memon<sup>2</sup> , Azhar Naeem3 , Aftab Kandhro4 , Syed Zainulibad1 , Sofia Qaisar1 and Awais Panhwar<sup>5</sup>

1 PCSIR Laboratories Complex Karachi, Sindh, Pakistan

2 Pakistan National Accreditation Council, Islamabad, Pakistan

3 University of Engineering and Technology Taxila, Punjab, Pakistan

4 M.A. Kazi Institute of Chemistry, University of Sindh, Jamshoro, Sindh, Pakistan

5 Business Administration Department, Iqra University, Gulshan Iqbal Campus Karachi, Sindh, Pakistan

\*Address all correspondence to: aijazap@yahoo.com

© 2022 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/3.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

#### **References**

[1] ISO 19011:2018. Guidelines for Auditing Management System

[2] Hamza LK. Impact of implementing ISO/IEC 17025 and its role in improving performance of laboratories of sudanese standards and metrology organization [M.Sc Thesis in Total Quality Management and Excellence]. Sudan University of Science and Technology; 2015. Available from: http://repository. sustech.edu

[3] Dahlgaard JJ, Kristensen K, Kanji GK. Fundamentals of Total Quality Management: Process Analysis and Improvement. Illustrated ed. Cheltenham: Nelson Thornes Limited; 2002

[4] Panhwar A, Memon AR, Naeem A, Ibad SZ u, Kandhro A, Jalbani N, et al. Responsibilities and qualities of an assessor/auditor as per ISO/IEC standards. International Journal of Current Research. 2020;**12**(02):10223-10226

[5] KPMG. Transforming Internal Audit from its Compliance Role into a Strategic Organizational Tool. London: KPMG; 1999

[6] Negakis C, Tachinakis P. Modern Auditing and Internal Auditing. Athens: Duplication; 2013

[7] Alic M, Rusjan B. Contribution of the ISO 9001 internal audit to business performance. International Journal of Quality and Reliability Management. 2010;**27**(8):916-937

[8] Karapetrovic S, Willborn W. Audit and self-assessment in quality management: Comparison and compatibility. Managerial Audit Journal. 2001;**16**(6):366-377

[9] Devadasan SR, Rajendran M. Quality audits: Their status, prowess and future focus. Managerial Auditing Journal. 2005;**20**(4):364-382

[10] ILAC-G20:2002. Guidelines-on-Grading-of-Non-Conformities

### **Chapter 6**

## Perspective Chapter: Problems of Improving the Quality Management System of a University in the Era of Big Data (Experience of Professional Training of Railway Engineers)

*Zhanna Maslova and Ilona Khitarova*

#### **Abstract**

The application of the analytical approach to quality management in higher education bodies is particularly relevant. The problems of formation, implementation, and practical use of quality management system in higher education have not yet been sufficiently reflected in the studies of foreign and domestic specialists, although there are a large number of publications on the formation and implementation of quality management systems in industrial production conditions. The publication intends to consider the main triad of education quality components: conditions, process, and result of educational activity. The quality of education is presented as a system functionally related to all parameters and a measurable characteristic of the functioning of an educational organization. The quality of such functioning is represented as a degree of implementation of the main goal, which consists of achieving a given (normative) level of students' preparedness and providing the basis for sustainable development. As an illustration to the theoretical provisions, the experience of implementation and certification of quality management system in the leading technical university of Russia is considered, recommendations on the development of strategic and operational management documents in the implementation and practical use of quality management system in the university are given.

**Keywords:** quality management system, higher education, strategic management, operational management, quality objectives, model, education market, Big data, statistics, data sets

#### **1. Introduction**

Global processes taking place in the society are inevitably reflected in the state of education. Economic, social, and environmental challenges in modern society, the

formation of innovative orientation of the economy, integration into the world set new priorities and tasks for the system of higher education, among which the most urgent is the task of ensuring the quality of training specialists. At present, education is in the first place among the factors of human development. The importance of knowledge in the economic development of the countries of the world is increasing rapidly, ahead of the importance of the means of production and natural resources. When calculating the rating of countries according to the Human Capital Index, an important factor is investment in people through quality health care, education, skills, and jobs. The health and education components included in the Index are used in combination, which, judging by the data of empirical studies conducted at the microeconomic level, reflects their contribution to the level of productivity and accumulation of public goods. The quality of education plays a key role. The report states that "the governments of many states allocate a significant share of their budgets to education and health, but often public services fail to form human capital because of their poor quality, as the bureaucratic apparatus proves unable or not motivated to convert sound policies into effective programs" [1].

Thus, to a large extent, the economic success of the state is determined by its educational system and the education of its citizens. This circumstance has led to an awareness in developed countries of the role of education in society, the need for its priority development, and the development of new methods and tools for quality management.

The publication deals with quality management in higher education in the era of Big Data. Big Data is not just a large amount of information. We are talking about unstructured data. It is a huge and chaotic flow of information from different sources, which raises the problem of processing and ordering information. Thanks to data analysis, it is possible to predict the behavior of large groups of people. Big data allows not only to know in advance what representatives of a particular audience will choose, but also to predict how this choice will change over time. Big Data is, on the one hand, a set of technologies, tools, methods, and approaches designed to solve the problem of processing large volumes of data, and on the other hand, it is a volume of data that cannot be processed conventionally, that is, by traditional methods. The strongest factor in expanding the range of applications of Big Data is the Internet.

The usual field of application of Big Data is marketing. By analyzing the data, companies study what principles guide the consumer's choice of product or service. As a result, marketers model the behavior of the potential consumer and launch an appropriate advertising campaign. For education, an important feature of Big Data is the ability to analyze different parameters and modeling.

"Big data has been a popular research problem across different academic disciplines. Although this problem has been treated mainly for advancing and innovating technological development [2], organizations and business communities are continuously exploring different aspects, perspectives and contextual specifics to find or explore benefits and value adding for improving practices" [3]. According to statistics, the introduction and use of analytics and work with big data are not just effective, its use can decide the outcome of competition in the market. In September 2014, Accenture published the results of a major study called "Big Success from Big Data" [4]. Correspondents surveyed 1,000 company directors from seven different industries. Ninety-two percent of respondents expressed satisfaction with the end results of Big Data implementation and its impact on their business, 89% called activity analytics a very important component in setting up business processes. A GE (General Electric) study titled "Industrial Internet Insights Report" [5] was conducted by the company in 2015. Ninety percent of respondents from various industries assured: Big Data is in the

#### *Perspective Chapter: Problems of Improving the Quality Management System of a University… DOI: http://dx.doi.org/10.5772/intechopen.106167*

top 3 leading areas for their businesses. Eighty-four percent of respondents believe the use of analytics has the potential to displace competing businesses from the marketplace within 1–3 years. According to Proficient Market Insights, "the global Industrial Internet of Things (IIoT) market size is projected to reach US\$ 78400 million by 2028, from US\$ 57040 million in 2021, at a CAGR of 4.2% during 2022-2028" [6].

Sources of Big Data in education are, first of all, message streams from social communities, statistics sites. Application of Big Data in higher education is possible primarily in the analysis of documents and modeling of educational processes. Big Data technologies imply working with huge arrays of information. There is no universal method of Big Data processing, but there is a possibility of using various methods, so it is important to use specific tools for specific strategic decisions.

According to the provisions of ISO 9000 standards, the quality management system (QMS) must be thoroughly documented. Documentation makes the system "visible" not only to its developers, but also to users and reviewers. It is only possible to prove that the QMS complies with the established requirements when the system is presented in a documented form. Otherwise, it can be argued that there is no quality system. ISO 9001 establishes the criteria for a quality management system and is the only standard in its series that can be certified to (although it is not a mandatory requirement). It can be used by any organization, regardless of its size and field of activity. Accordingly, this research is based on the analysis of documentation and the method of modeling. In the quality management system the main features of the engineering component of the methodology of organizational design are well traced, in particular, its concepts of the system environment, management, and organizational changes. At industrial enterprises, the introduction and implementation of the process approach are seen as a way to improve the effectiveness of the quality management system.

The problem to be solved in improving the quality management system in the educational organization is the partial elaboration of documents. Part of the QMS documents is stipulated in the standard, another part is implied. Therefore, the structure of the quality management system has a "constant" component defined by the standard and a "variable" component, which depends on the specific organization.

#### **2. QMS in the system of higher education in Russia**

In modern education system, quality is understood as compliance with the standards. The requirements and recommendations of international ISO 9000 Series of Quality Standards are widely used as a basis for the formation and implementation of quality management systems (QMS). The international standards of ISO 9000 series include requirements and recommendations that provide methods for monitoring, measuring, analyzing, and improving all QMS processes. The implementation and subsequent continuous improvement of the QMS require not only understanding and vision of its development prospects, but also the use of objective methods of measurement (including statistical) to assess the effectiveness and efficiency of both the QMS of the university as a whole and its individual processes. The potential stakeholders in the ISO standards are consumers, society, suppliers, owners (shareholders), and personnel of the organization, which corresponds to the quality management principles formulated in the ISO 9000 Standards.

Problems of formation, implementation, certification, and practical use of QMS, its subsystems and mechanisms in universities, have not yet found a sufficiently

complete reflection in the studies of foreign and domestic experts. Most publications are devoted to the problems of quality in the QMS of industrial production organizations.

Ph. Crosby, one of the well-known experts in the field of quality, studying the issues of value assessment of quality, expressed the famous aphorism: "Quality is still free" [7]. It follows that the manufacturer does not have to pay for quality, but for its presence, which must be the subject of constant monitoring and analysis. E. Deming wrote: "The consumer is the most important link in the production line. Quality must be aimed at satisfying his needs, present and future" [8]. Eventually transformed into the process of satisfying the needs of existing and potential customers, at the current stage of business development quality is naturally formalized in the principles of Total Quality Management – TQM and acts in its new understanding as a measure of balancing the expectations of all stakeholders. There is a difficulty in direct application of TQM principles in the formation of QMS of higher education institution.

Currently, educational organizations use the following basic principles of the wellknown system of total quality management (TQM) [9]:


The participation of university units in the implementation of macro processes of quality management system is as follows (**Figure 1**):

The university receives information, capital, human resources, and materials from the environment. These components are called inputs. In the transformation process, the educational institution processes these inputs, converting them into products or services, which are outputs of the organization that it brings out into the environment.

*Perspective Chapter: Problems of Improving the Quality Management System of a University… DOI: http://dx.doi.org/10.5772/intechopen.106167*

#### **Figure 1.**

*Macro processes of quality management system at the university.*

In Russian higher education, the participation of management in the development of quality management system should be emphasized. The rector of the university decides on the expediency of the preparation, implementation, and subsequent certification of the quality management system. The rector appoints a quality management representative, who will be the project manager of the quality management system preparation for certification. The quality management representative, top management, and consultants jointly determine the list of subdivisions involved in the work, and by the Rector's order, form the Quality Council, which includes (ex officio) the heads of administration all departments involved in the preparation of the quality management system departments involved in preparing the quality management system for certification. The Quality Council is chaired by the Rector.

#### **3. The problem of assessing the quality of education**

One of the main tasks of higher education is to ensure the quality of specialists. The problem of the quality of education has always existed. Now it has become extremely acute not only in Russia, but all over the world. At the same time, there are no clear criteria for the concept of "quality of education."

The education system in the Russian Federation is considered as a service that meets the educational needs of the population. In accordance with the Russian Federation Law "On Education" (Article 2), "education is a single purposeful process of education and training, which is a socially important benefit and is implemented in the interests of the individual, family, society and the state, as well as the totality of the acquired knowledge, abilities, skills, values, activity experience and competence of a certain volume and complexity for the purposes of the intellectual, spiritual, moral, creative, physical and/or professional development of an individual, meeting his educational needs, and, as a result, the quality of education" [10]. In Russian higher education, the quality of specialists training is connected mainly with the implementation of State Educational Standards of higher professional education,

state regulation of higher education institutions. An educational standard is a set of mandatory requirements for higher education.

Educational programs of a particular cycle of subjects determine the content of education of the corresponding level and orientation and are divided into two major groups by their intended purpose: general education and professional. Basic educational programs are designed to ensure the achievement of such a level, which corresponds to the state educational standard. State Educational Standards of higher professional education determine the educational minimum content of the main educational programs, the maximum educational load of students, the requirements for the level of training of graduates. These standards are established by the state authorities (management) and act as a basis for objective assessment of the level of education and qualification of graduates, regardless of the form of education. Orientation of some universities only on State Educational Standards of higher professional education as a guarantee of quality assurance has two drawbacks: the false idea that quality can be achieved by inspection; neglecting the needs of the educational market (standards do not keep pace with changes in employers' requirements).

In the State Educational Standards, the model of training specialists is personally oriented. The quality of the result of training programs is determined by two blocks of parameters that characterize the knowledge accumulated in a particular academic area and acquired competencies, including the personal development of students (critical thinking, general development).

The education system objectively operates on the following markets: the segment of the market of educational services, providing satisfaction of the needs of citizens in education and training; the segment of the labor market, providing satisfaction of the needs of employers and professionals; the segment of the market of intellectual goods, providing satisfaction of consumers (customers) in new knowledge, technologies, and knowledge-intensive products. The results of the activity of higher education institutions are manifested in several types, namely: services of educational character; scientific and technical products; integrated products based on scientific and technical products and educational services; educational and methodological developments.

#### **3.1 Approaches to assessing the quality of educational services**

There are two approaches to assessing the quality of educational services. Assessment of consumer properties of services (quality as value) is determined by active involvement of all stakeholders (students, faculty, corporate partners, etc.) in quality assurance processes at all levels of its management (the USA, Germany, Taiwan, Philippines). At the same time, quality control and assessment are either the priority of state structures or government-funded structures (Germany, the United Kingdom), or are based on internal process of control and self-regulation and external, expert quality assessment (the USA, Taiwan, the Philippines) [11].

The second approach is characterized by a wide range of powers of the state in ensuring the quality of educational services. The composition and quality of educational programs are determined and regulated by the state. The control and evaluation of education quality are centralized (France, Russia, Kazakhstan). In accordance with this, the quality of education in the context of the quality of the result of the educational process is considered as "compliance of the level of knowledge of students and graduates to the standards," on the one hand, and the needs of the market, on the other hand. The parity of state and market interests in the field of quality is provided

#### *Perspective Chapter: Problems of Improving the Quality Management System of a University… DOI: http://dx.doi.org/10.5772/intechopen.106167*

by the state standards through the system of elective courses, the composition and content of which are determined by the university independently.

The system of higher education in Russia has a more developed external quality assessment, focused on standards and performance indicators. The main elements of this system are standardization and procedures for licensing, attestation, and accreditation, as well as a comprehensive assessment of educational institutions as a whole and individual specialties based on the rating system. All of these procedures involve an internal review. One of the undesirable consequences of external control in education is the tendency to block information that lowers the grade. This leads to the loss of credibility of the entire system of management information.

The starting point of quality management system formation is to build a "model" of a university graduate as a set of certain personal professional qualities, the development of which should be aimed at the educational process: its content, teaching methods, forms of organization, methods of monitoring and evaluation of students' knowledge. The quality management system in higher education institution as a whole consists of the quality management of each type of university activities (educational, scientific, educational-methodological, educational, administrative-economic, etc.).

The analysis of different models of quality management systems has shown that the technological solutions of quality management in an educational organization should be focused on:


#### **3.2 Development of quality systems in higher education organizations**

There are two main ways to create quality systems in higher education institutions. The first is the development of a unique model of quality management system on the example of a particular institution, partly universal and applicable to other organizations. The second way is the use of universal principles of modern quality management systems used in different spheres of human activity. The third way is the integrated process of building a unique quality management system in education using TQM principles and the requirements of international ISO standards.

The top management should bring to the attention of the staff the following provision: in order to manage the quality of the process, it is necessary to be able to measure its effectiveness and efficiency. In addition, the management of the university should ensure that the management representative prepares a report on the functioning of the QMS and the need to improve it. This report should be used as input for management's analysis. It usually includes the following information [12]: the status of actions based on previous management reviews; changes in external and internal factors; information on the QMS performance and results, including various trends (customer satisfaction; feedback from stakeholders; extent to which quality objectives have been achieved; nonconformance and corrective actions; monitoring and measurement results; audit results; external supplier results); adequacy of resources; effectiveness of actions taken in relation to risks and opportunities; opportunities for improvement.

Methods should be developed to measure (evaluate) the performance of each process. Senior management should ensure that the results of analysis are used to assess:


The quality of the results of the activity of higher educational institutions (HEIs) should be provided through quality management of the main working processes of HEIs. It is reasonable to distinguish three groups of processes: basic processes, management processes, and supporting processes. Taking into account these requirements, it is possible to recommend to distinguish the formation of educational program of professional education and organization of educational process among the main processes of educational activity of university. Each of the abovementioned processes should include subprocesses, which should take into account the general requirements for the formation and organization of educational process, as well as the specifics of the university. In turn, these processes can also be decomposed.

Quality management processes at universities (HEIs) should include, first of all, those processes that are regulated by mandatory procedures in accordance with ISO 9001:2015 "Quality management system. Requirements" [12]. These include: QMS

*Perspective Chapter: Problems of Improving the Quality Management System of a University… DOI: http://dx.doi.org/10.5772/intechopen.106167*

**Figure 2.** *Quality management processes at universities that should be under analysis.*

documentation management, quality data management (records), internal audit, management of nonconforming products, corrective and preventive actions. In addition, it is also necessary to provide for a number of other processes, such as development and updating of quality policy and objectives, quality planning, quality analysis by management, etc. (**Figure 2**).

It is claimed in some research that all of the dimensions of e-services quality have had an impact on student satisfaction for ease of use [3].

To characterize the quality of education, certain indicators are introduced, which can be divided into three enlarged groups: indicators of investment in education, indicators of the quality of processes, and indicators of the quality of results. The indicators of the first group include information on financial, material, and technical, personnel, information and methodological support, etc. The indicators of the second group—process quality indicators—are identified on the basis of information

In order to be able to use the information obtained in the process of improving the quality of education, it is necessary to combine all the indicators that characterize the educational system "at the input," "in the process," and "at the output," to establish the nature of the observed relationships and then, based on the analysis done, to outline a strategy to improve the quality of the output results.

There are indicators of the third group, they include the results of the assessment of the quality of training and value orientation of students, as well as information about their career development after the completion of a certain educational stage.

To assess the effectiveness of the educational institution, the indicators affecting the learning outcomes can be divided into:

• indicators of the capacity of the organization or the area of activity under study; static indicators of performance and effectiveness achieved to date.

Processing of the results of education quality assessment can be carried out using special statistical methods of regression and correlation analysis, specific techniques recommended by ISO 9000 Series of Quality Standards. The method of multilevel models is also used to assess the effectiveness and efficiency of the organization or a separate direction.

After determining the indicators that characterize the quality of the educational process, it is necessary to design the process of quality analysis (monitoring, information processing, and evaluation). The process of self-analysis and self-assessment is extremely useful, which is not so simple and requires considerable expense. It is extremely important to conduct self-analysis of an educational organization and be able to compare its results with the opinion of independent external experts.

The organization must identify the processes required for the quality management system and establish the sequence of these processes and their interaction.

With the introduction of big data analysis in the quality management system of universities, it is effective to consider the concepts of "risks" and "opportunities" as two independent and independent indicators. In this case, it is characteristic to tie "risks" to unfavorable events, and "opportunities" to favorable ones. The indicator "opportunities" should be considered separately from the indicator "risks."

The system of Hazard Analysis and Critical Control Points (HACCP) provides for the application of risk assessments using a combination of two indicators, the first of which is called "probabilities of hazard realization" and the second – "severity of consequences from the realization of the hazard" [13].

By analogy with HACCP, it is proposed to use the following approach: when assessing the indicator "possibility" (P) using a combination of two indicators:


*Perspective Chapter: Problems of Improving the Quality Management System of a University… DOI: http://dx.doi.org/10.5772/intechopen.106167*

**Figure 3.**

*Sphere of opportunity distribution.*

the indicator "possibility" (improvement) is represented by a point (vector) on the plane with coordinates PI and SI. Possibility = F(PI, SI), where PI – point estimate of "probability of potential improvement"; SI – point estimate of "significance of positive consequences of the expected improvement"; F – designation of the function, which puts a point on **Figure 3** in accordance with the coordinates of PI and SI.

In the figure, the boundary of the desired values of the indicator "possibility" is plotted with the coordinates of PI and SI. Going to or beyond this boundary means that the situation is promising for the project to use the available opportunity of improvement. There are cases if a point lies in the area of low values of the indicator "possibility" or if a point lies in the area of high (desirable) values of this indicator. If a point lies on the border, it is also corresponding to high (desirable) values of the "possibility" indicator. The two-dimensional evaluation of the "possibility" indicator seems to be the most convenient and universal. Interpretation of this indicator ("possibility") as a set of two indicators of PI and SI allows to enter the following definition: indicator of "possibility" of improvement is "probability of realization of potential improvement" (PI) taking into account "significance of positive consequences of supposed improvement (SI)."

#### **4. Conclusion**

The use of big data seems obvious and inevitable: "the industry 4.0 revolution was entirely based on the new technologies, mainly in computer and information technologies. With the introduction and the use of Internet of things, cloud services, big data, artificial intelligence, various algorithms result in integrated systems providing excellent customer service for the organization activities" [14]. However, the analysis and application of processing results require resources and should be built into the quality management system of the university.

In all educational systems, foreign and national, the object of education quality assessment is the quality of educational services, which is traditionally evaluated by the results, which are understood as learning outcomes (experience accumulated in the learning process). The content of the concept "quality" is largely determined by the system of quality assurance and control adopted in the sphere of education in this or that state and, primarily, by the government's powers in solving these problems.

The HEI quality management system can be built in accordance with the requirements and recommendations of international ISO 9000 Series of Quality Standards, the principles of Total Quality Management (TQM), or based on the model of the European Foundation for Quality Management (EFQM).

Universities need to find their own methods, techniques, procedures of selfassessment, and self-analysis of activities, to create associations of single-profile educational organizations and enterprises—consumers of specialists for an adequate and effective quality audit. In modern conditions practically every HEI is interested in creating a system that would constantly monitor, evaluate, forecast, plan, and manage all the processes in the HEI. The need for this system is justified, and its reasonable application will allow the institution to successfully compete in the labor market and educational services.

One of the main difficulties that exist today for the implementation of big data in university management practices is the difficulty of translating data sets into simple indicators. The expensiveness of the use of big data is obvious, while the efficiency is recognized insofar as we are living in the era of another technological revolution. In addition, the processing of big data requires software and specialists. In practice, universities engage professional marketers and market specialists to solve their problems. It is necessary to provide a mechanism for translating big data into a few simple indicators that reflect management efficiency.

The use of big data in higher education is necessary. First of all, it is the analysis of attendance at the university website and university profiles in social networks. This analysis involves serious analytics and statistical processing that will never be of deep interest to middle and upper management because of its complexity. This is another reason for converting the data into simple metrics. Big data analysis should be implemented, first of all, in monitoring the results of educational services.

To sum up, the mission, vision, goals, development strategy, and quality policy of the HEI together form an important strategic management tool, which expresses the spirit of the organization, states what the organization stands for, what its purpose is, what its goals are, where it is going, how it is going to achieve all this, and what important points everyone has to focus on. They shape the collective ambition of the organization, have an important influence on the connection of employees and employees to the organization and to the quality of their work. A successfully articulated collective ambition reveals to people how their activities contribute to the common cause, how they work together to achieve goals that contribute to a higher quality of performance in the organization.

After developing strategic plans, determining critical success factors and performance metrics, defining policies, and setting quality goals for the organization, there appear: the strategic plan of the organization as a whole; operational plans for the departments (services) of the organization; specific quality improvement projects. After approval of these strategic and operational plans, they proceed to implement them. The specific actions are usually defined in operational plans for the various business functions, usually developed over a period of time for various business functions, usually developed for a period of up to one year. The central issues of such operational plans are:


*Perspective Chapter: Problems of Improving the Quality Management System of a University… DOI: http://dx.doi.org/10.5772/intechopen.106167*


Only after the answering the above questions it will be possible to begin to achieve the goals set by implementing the strategic and operational plans of the organization. These questions are useful in that they capture those areas of activity where the use of big data is appropriate.

#### **Conflict of interest**

All authors declare that they have no conflicts of interest.

#### **Appendices and nomenclature**


*Six Sigma and Quality Management*

#### **Author details**

Zhanna Maslova\* and Ilona Khitarova Emperor Alexander I St.-Petersburg State Transport University, Saint Petersburg, Russia

\*Address all correspondence to: maslovajeanna@mail.ru

© 2022 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/3.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

*Perspective Chapter: Problems of Improving the Quality Management System of a University… DOI: http://dx.doi.org/10.5772/intechopen.106167*

#### **References**

[1] Human Capital Index. 2022. Available from: https://gtmarket.ru/ratings/ human-capital-index [Accessed: May 10, 2022]

[2] Wang L, Sy A, Liu L, Piech C. Learning to represent student knowledge on programming exercises using deep learning. In: Proceedings of the 10th International Conference on Educational Data Mining; Wuhan, China. 2017. pp. 324-329

[3] Miah SJ, Miah M, Shen J. Editorial note: Learning management systems and big data technologies for higher education. Education and Information Technology. 2020;**25**:725-730

[4] Big Success from Big Data. 2014. Available from: https://www.accenture. com/us-en/\_acnmedia/accenture/ conversion-assets/dotcom/documents/ global/pdf/industries\_14/accenture-bigdata-pov.pdf [Accessed: May 11, 2022]

[5] Industrial Internet Insights Report for 2015. 2015. Available from: https://www. smartindustry.com/whitepapers/2015/ industrial-internet-insights-reportfor-2015/ [Accessed: May 24, 2022]

[6] Proficient Market Insights. 2022. Available from: https:// www.globenewswire.com/newsrelease/2022/05/17/2444966/0/en/ Industrial-Internet-of-Things-IIoT-Market-2022-to-Showing-Impressive-Growth-by-at-a-CAGR-of-4-2-No-ofpages-117-Industry-Trends-Share-Size-Top-Key-Players-Analysis-and-Forecast-Res.html [Accessed: May 12, 2022]

[7] Crosby PB. Quality is Free: Mentor Books. New York: Philip B. Crosby; 1979. p. 309

[8] Deming WE. Out of the Crisis. Cambridge: Cambridge University Press; 1986

[9] Závadský J, Závadská J. Quality managers and their future technological expectations related to Industry 4.0. Total Quality Management Business Excellent. 2018;**2018**:717-741

[10] Federal Law of 29.12.2012 N 273-FZ (ed. from 16.04.2022) "On Education in the Russian Federation". 2022. Available from: http://www.consultant.ru/ document/cons\_doc\_LAW\_140174/b819c 620a8c698de35861ad4c9d9696ee0c3ee7a/ [Accessed: May 20, 2022]

[11] Miah SJ, Solomonides I, Gammack J. A design-based research approach for developing data-focused business curricula. Education and Information Technology. 2020;**25**:553-581

[12] State Standard ISO 9001-2015. Quality Management System. Requirements. М. Standardinform. 2015

[13] US Food and Drug Administration. Hazard Analysis Critical Control Point (HACCP). 2022. Available from: https:// www.fda.gov/food/guidance-regulationfood-and-dietary-supplements/hazardanalysis-critical-control-point-haccp [Accessed: June 6, 2022]

[14] Ge M, Dohnal V. Quality management in big data. Informatics. 2018;**5**:19

#### **Chapter 7**

## Perspective Chapter: Accelerated Change for the Good (ACG™) Facilitator – A Transformational Approach to Perform Continuous Improvement (CI)

*Andrew Wowczuk, Yurij Wowczuk, Zenovy Wowczuk and Borys Wowczuk*

*"Long-term commitment to new learning and new philosophy is required of any management that seeks transformation. The timid and the fainthearted, and the people that expect quick results, are doomed to disappointment."*

*—W. Edwards Deming, Author of Out of the Crisis (1986).*

#### **Abstract**

This chapter introduces an updated Kaizen-based concept of facilitation through a uniquely guided organizational approach and certification program. The Accelerated Change for the Good (ACG) Facilitator program was developed exclusively by the Civil-Military Innovation Institute (CMI2). The contents of the program follow best practices in Lean and Six Sigma methods using DMAIC (Define, Measure, Analyze, Improve, and Control) problem-solving techniques and stress modern facilitation skills. From an implementation perspective, ACG accelerates an organization's initiation of continuous improvement (CI) by overcoming the constraints of traditional Lean/Six Sigma deployments. The ACG framework has been structured into an interactive 30 h of contact time using various blended knowledge transfer techniques. To obtain certification, a student must complete all workshop activities, pass a 50-question web-based quiz, and submit written evidence of leading or participating in a live event by applying the tools and techniques provided. The submittal of an event requires documentation by an exclusive workbook provided in the workshop. The program has been approved as a micro-credential activity at SUNY Maritime College and will be rolled out to several other academic institutions in the next 24 months. CMI2 has customized the program to meet client needs and has delivered the contents using both classroom and virtual platforms (e.g., Zoom, MS Teams) with a diversified cross-functional mix of participants. The research initially conducted during the formative stages of this framework consisted of a review of the lean

management, continuous improvement, and operational excellence literature with a particular view toward defined and tested models (e.g., Toyota Production System, Danaher Business System). Particular emphasis was placed on methods that were applicable for a variety of industries and organizational/business structures, and that emphasized sustainability, human capital development, and focus on innovation.

**Keywords:** kaizen, Lean/Six Sigma, continuous improvement, ACG, process improvement, quality engineering, team dynamics, business process improvement, team dynamics

#### **1. Introduction**

ACG is an acronym for "Accelerated Change for the Good, which replaces the Japanese term Kaizen. Kaizen translates to "good change," "change for the better," or "improvement." This methodology is a replacement for traditional Lean/Six Sigma methods. **Figure 1** shows terms typically used in ACG [1].

ACG promotes an attitude where incremental changes, accomplished a set timeframe, creating a major impact to the organization over time. It requires organizational buy-in and typically includes stakeholders and sometimes even customers [2]. As a methodology, ACG improves specific processes and systems in a company or organization by involving both management and frontline employees to initiate simple changes, knowing that many minor improvements can yield significant results. Emphasis on non-capital (CAPEX) expenditures exploiting all the resources available in existing organization is priority [3].

The notion of incremental change as a management improvement tool can be traced back to post-World War II, when economic reform consequently took over US, Japan, and trading partners. In Japan, the Toyota Motor Corporation implemented the Creative Idea Suggestion System in 1951, which resulted in changes and innovations that spawned higher product quality and worker productivity, contributing to the company's development.

In 1955, Japanese executives started visiting the United States as one of the initiatives of the Japan Productivity Center to benefit from American Innovation and know-how. Integrating the American way of doing business with a humanized approach pushed Japanese companies into worldwide competitiveness. During the 1980's, management consultant Masaaki Imai worked with Taiichi Ohno to spread the message of the Toyota Production System (TPS), a result of several years of continuous improvements.

**Figure 1.** *Typical words describing ACG.*

*Perspective Chapter: Accelerated Change for the Good (ACG™) Facilitator… DOI: http://dx.doi.org/10.5772/intechopen.106262*


#### **Table 1.**

*The DMAIC process: Problem-solving in five phases found in Lean/Six Sigma.*

Considered the Father of Incremental Change, Masaaki Imai globally introduced a new systematic management methodology in *Kaizen: The Key to Japan's Competitive Success (1986)*. Today, organizations across different industries adopt incremental change as a part of their core values and practice continuous improvement on a daily basis with best practices and tools from Lean/Six Sigma. Problem-solving is guided by DMAIC (Define Measure, Improve and Control) as shown in **Table 1**.

"Kaizen is an everyday improvement—every day is a challenge to find a better way of doing things. It needs tremendous self-discipline and commitment."— *Masaaki Imai, Founder of Kaizen Institute*.

#### **2. Core principles and key elements required for successful ACG implementation**

One of the goals of ACG certification is to accelerate the knowledge transfer processes in CI by making ACG facilitators the in-house champions for methodology acceptance. Traditional Lean/Six Sigma certification bypasses the applied learning of new techniques and does not tie methodology transfer with project execution. The Implementation of CI in the workplace can be difficult or nearly impossible because management usually expects immediate dramatic results. Therefore, many Lean/Six Sigma initiatives have not shown benefits tangible, sustained. Companies often miss out on improved safety performance, optimized business processes, and enhanced employee engagement due to an exclusive focus on breakthrough performance.

• Maximize Employee Involvement and Empowerment in CI with Emphasis on "Value Add"

Ensure there is an understanding of how "value" is determined in the organization. Encouraging workers to keep adding value to the products and services will boost morale. It also gives everyone ownership of continuous improvement.

Process and Value stream mapping (VSM) are utilized as a process improvement tool. The ACG framework shows explicitly how the DMAIC problem-solving methodology should align with process improvement for impact in any type of business environment or function [4].

ACG implements from the perspective of the employee executing individual job responsibilities—it is the employee that knows their job more definitively than anyone. Managers and leaders should create an environment where people feel empowered to contribute so that suggestions for improvement can come from all levels and ranks. Create a continuous learning environment where best practices are applied during ACG events [5].

• Management responsibility

One of the most common reasons CI implementations fail is the lack of support and, more importantly, action from the organization's management and leaders. Imai states, "The top management of the company has the most important role in implementing this kaizen approach, and then every manager, then it goes down to rank-and-file employees." When top management demonstrates its long-term commitment to continuous improvement, managers inevitably follow through on ACG initiatives and workers personally develop an ACG mindset.

• Practice employee empowerment

Leaders should create an environment where people feel empowered to contribute so that suggestions for improvement can come from all levels. Encouraging workers to keep adding value to the organization boosts morale and gives everyone ownership of continuous improvement efforts, which contributes to the successful implementation of ACG.

• ACG events are performed at the workplace with frequently scheduled Gemba walks

Achieving operational efficiency begins where the actual task happens, not from a conference room. A Gemba Walk—derived from the term gemba or gembutsu, which means "the actual place where the work is performed"—is usually done by managers to learn or review exactly how a specific process works and gain insights from workers about its improvement. A Gemba Walk Checklist is provided with the workshop material and guides the observers in asking relevant questions to determine the root cause of problems and the next steps. Every employee should be required to participate in a least two ACG events as part of their annual performance review. An ACG event is typically 2–5 days long, and all action items are completed within a month following the completion of an event [6–9].

• 5S + 2S

One of the most significant barriers to continuous improvement is clinging to old practices or assuming new methods will fail. The 5S principles (sort, set, order, shine, standardize, and sustain) aim to enhance workplace efficiency by constantly looking for ways to eliminate waste and improve local housekeeping. The initiation of 5S is usually the start of organizational involvement in Lean practices [10].

Organizations should refrain from thinking that just because something worked before means, it will continue to work. Status and progress in 5S + 2S should be

*Perspective Chapter: Accelerated Change for the Good (ACG™) Facilitator… DOI: http://dx.doi.org/10.5772/intechopen.106262*

measured in a standardized metric visible at the Gemba. The original 5S in lean is now supplemented by two additional S—safety and security, emphasizing the setup of preventive controls and protection for safe work operations. A 5S + 2S program are initiated as part of continuous improvement.

"Progress cannot be generated when we are satisfied with existing situations."— *Taiichi Ohno, Father of the TPS—the basis of lean manufacturing*

#### **3. Workshop delivery and the certification process**

The workshop knowledge transfer consists of an interactive presentation and a specialized workbook guiding facilitator activities [11]. The pages are annotated and work standalone learning material in a live ACG event. Workshop execution and documentation is accomplished by completion of the facilitator workbook.

Workshop facilitators also act as mentors and coaches to the participants as they execute their first project.

The workshop can be delivered in a live classroom environment or by distance learning using a virtual platform. The live classroom version is designed for 30 h over three days with approximately 5 h of homework/self-study. For the proctored virtual version, the workshop is delivered in 10 one-and-a-half-hour sessions using the content outline shown on the last page. Both versions will be preceded by a 1-h kick-off session using a virtual platform providing examples of past projects and a unique method of project evaluation.

The delivery of a workshop and certification can be customized to the requirements of the participants and typically takes the following format:


#### **4. ACG facilitator workshop contents/syllabus**

This workshop/event includes following 22 sections with over 320 PowerPoint slides and a facilitator workbook. Supplemental material is provided through access in a Dropbox file maintained by workshop facilitators. New material is added as it becomes available. Five versions have been delivered to date.

#### **4.1 Define current state (define phase of DMAIC)**

• Potential focus areas for ACG start with a detailed review of the current state process(es). The concept of creating a SIPOC is introduced.

Learning Outcome: The Student will be able to define a ACG project. Document current state. Complete a process map and project charter demonstrating business benefits to the organization and define how the project relates to strategic planning.

#### **4.2 Using 5 W ad 1 M**

• A problem statement to be used in a project charter is constructed with 5 Ws (What, Why, When, Where, and Who) and 1 M (a related measurement).

Learning Outcome: This technique is introduced in the kick-off session and serves as a way to draft and validate ideas for potential projects.

#### **4.3 Data collection**

• The importance to capturing the current performance with the right data is explained. An introduction is provided to Measurement System Analysis (MSA).

Learning Outcome: ACG practitioners learn how to characterize different types data and use the results to guide for decision making.

#### **4.4 Descriptive statistics**

• ACG practitioners see the value of characterizing data beyond just calculating an average.

Learning Outcome: Excel methods are introduced to calculate the range of descriptive parameters for both sample and population data.

#### **4.5 ACG explanations**

ACG Event purpose and execution – elimination of waste by removing Non-Value Adding activities resulting in standardized systems, improved efficiency of processes, higher quality, faster delivery, and cost savings.

#### **4.6 ACG history**

• Learn the history of ACG.

Learning Outcome: Understand the history of ACG as it developed from Toyota Kaizen events and how American companies and civil institutions have adapted it.

#### **4.7 Future state**

• To get to the future state, you undertake a focused effort that looks at each element of the current state and how to make it better.

• ACG uses the DMAIC (Define, Measure, Analyze, Improve, and Control) as a Lean operating model.

Learning Outcome: Basic understanding of future-state and the ACG experience. Understand DMAIC phased problem-solving.

#### **4.8 Value stream and process mapping**

• Following an explanation of value, the concept of viewing all aspects of an organization as a value stream is introduced.

Learning Outcome: Workshop participants understand how to create and interpret an organization's value stream.

#### **4.9 ACG versus other improvement methodologies**

• Lean, Six Sigma, and ACG are all continuous improvement methodologies. They vary in application but all help with providing the framework for improvement of processes.

Learning Outcome: Understand the difference between a ACG project and other improvement methodologies.

#### **4.10 ACG characteristics**

• ACG is an intensive burst of business process improvement.

Learning Outcome: Understand the characteristics of a ACG project and how it is structured.

#### **4.11 Lean principles**


Learning Outcome: Understand that ACG events build on lean principles. Learn those principles.

#### **4.12 Lean process management**

• When you start to undertake Lean reviews within an organization, you could integrate it into the corporate strategy and long-term vision for the business. Likewise corporate strategies and strategic plans should include CI initiatives as a primary lever to achieve desired results.

Learning Outcome: Understand the process of lean management using balanced scorecard reports.

#### **4.13 Lean industries (control phase)**

• Although Lean principles were developed for manufacturing, it is now recognized within a whole range of business sectors.

Learning Outcome: Learn how different industries use Lean principles.

#### **4.14 Lean analysis tools and measurements**


Learning Outcome: General overview of the tools used during an ACG project, including Critical Path Analysis, TIMWOOD, Kanban, JIT, Push & Pull, 5S, Cause & Effect, Poka Yoke.

#### **4.15 ACG events (ACG project)**

• ACG Events are relatively simple in format and can be used to make significant improvements when continually applied within your organization.

Learning Outcome: Understand the major components and subcomponents of a ACG Event.

#### **4.16 Forming an ACG event team**

• An ACG event should always have an executive team member participate to display organizational support and alignment with the strategic goals.

Learning Outcome: Understand the key members who should be on an ACG project and how they are selected. Understand current practices on defining CI functions and roles.

#### **4.17 Event kickoff**

The event kickoff is the opportunity to build the energy for the event. Learning outcome:


Learning Outcome: Recording Current-state.

#### **4.18 Effective facilitation**

• The role and responsibility of an event or meeting facilitator is explained with examples. How to recognize and alleviate misbehavior is explained. Team dynamics are defined.

#### **4.19 The language of lean**

• Value Stream—This describes the activities that provide the customer with value in delivering their product.

Learning Outcome: Understand a Value Stream & Value Stream Mapping.

#### **4.20 Three forms of waste**

• In Lean you have three types of waste: Mura, Muri, Muda

Learning Outcome: Understand Musa, Muri, Muda.

#### **4.21 The eight elements of waste**

• The eight classic wastes introduce) include overproduction, inventory, defects, over-processing, waiting, motion, transportation. In the US an eight waste is added—untapped creativity.

Learning Outcome: Understand the 7 + 1 elements of waste.

#### **4.22 Performing root cause analysis**

• Once wastes are determined you can begin looking into the root causes of problems of the process.

Learning Outcome: Understand Root Cause Analysis.

#### **4.23 Prioritizing improvements (improve phase)**

• The team may develop a multitude of possible solutions to resolve problems or a multitude of solutions for just a single problem so it may be advantageous for the team to utilize some sort of prioritization or scoring matrix.

Learning Outcome: Understand how to prioritize the improvements and using a matrix diagram.

**Figure 2** shows the contents of the main agenda for a workshop-based workshop.

#### **5. In summary**

The ACG framework can dramatically improve the efficiency and standardization of your company's workflows, processes, and procedures. Following the format and methods provided in the ACG workshop can make a significant impact on employee

#### **Figure 2.** *Typical classroom-based agenda.*

engagement and culture, and workflow improvements. ACG is a way to transform the way your business works if everyone is committed to making positive changes at all company levels. Certification follows a successful project submission. An advanced version of the ACG workshop is planned for 2023.

It is not necessity to change. Survival is not mandatory. —W.E. Deming.

#### **Author details**

Andrew Wowczuk\*, Yurij Wowczuk, Zenovy Wowczuk and Borys Wowczuk Civil-Military Innovation Institute (CMI2), USA

\*Address all correspondence to: awowczuk@cmi2.org

© 2022 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/3.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

*Perspective Chapter: Accelerated Change for the Good (ACG™) Facilitator… DOI: http://dx.doi.org/10.5772/intechopen.106262*

#### **References**

[1] Imai M. Kaizen: The Key to Japan's Competitive Success. New York: McGraw-Hill/Irwin; 1986. ISBN 0-07- 554332-X

[2] Dinero D. Training Within Industry: The Foundation of. New York: Productivity Press; 2005. ISBN 1-56327- 307-1

[3] Maurer R. The Spirit of Kaizen: Creating Lasting Excellence One Small Step at a Time. 1st ed. New York: McGraw-Hill; 2012. ISBN 978- 0071796170

[4] Bodek N. How to Do Kaizen: A New Path to Innovation—Empowering Everyone to be a Problem Solver. Vancouver, WA, USA: PCS Press; 2010. ISBN 978-0-9712436-7-5

[5] Graban M, Joe S. Healthcare Kaizen: Engaging Front-Line Staff in Sustainable Continuous Improvements. 1st ed. New York: Productivity Press; 2012. ISBN 978-1439872963

[6] Emiliani B, Stec D, Grasso L, Stodder J. Better Thinking, Better Results: Case Study and Analysis of an Enterprise-Wide Lean Transformation. 2nd ed. Kensington, CT, USA: The CLBM, LLC; 2007. ISBN 978-0- 9722591-2-5

[7] Hanebuth D. Rethinking Kaizen: An empirical approach to the employee perspective. In: Felfe J, editor. Organizational Development and Leadership. Vol. 11. Frankfurt A. M.: Peter Lang; 2002. pp. 59-85. ISBN 978-3- 631-38624-8

[8] Masaaki I. Gemba Kaizen: A Commonsense, Low-Cost Approach to Management. 1st ed. McGraw-Hill; 1997. ISBN 0-07-031446-2

[9] Kobayashi I. 20 Keys to Workplace Improvement. Portland, OR, USA: Productivity Inc.; 1995. ISBN 1-56327- 109-5

[10] Scotchmer A. 5S Kaizen in 90 Minutes. USA: Management Books 2000 Ltd.; 2008. ISBN 978-1-85252-547-7

[11] Karen M, Mike O. The Kaizen Event Planner. New York: CRC PRESS. ISBN 978-1-56327-351-3

#### **Chapter 8**

## Impact of Corporate Investment on Business Performance: The Case of Slovenian Firms for the Period 2000–2017

*Vladimir Bukvič and Metka Tekavčič*

#### **Abstract**

This paper, which is derived from comprehensive research based on the microeconomic theory of investment and the theoretical approach to measuring the financial performance of firms, presents a conceptual model to define, assess, and measure the impact of corporate investment on business performance. In terms of investment, the focus falls only on tangible fixed assets, whereas business performance is defined solely as performance measured by the relevant financial indicators. Several research hypotheses are tested on an extensive sample of Slovenian firms. A statistically significant correlation between investment and financial performance indicators is found for the period 2000–2017. This correlation is particularly strong with net sales revenues, added value, and operating cash flow (EBITDA). Since the global financial crisis occurring at the break of the last decade is also included in the designated period, the creditless growth of investment together with the simultaneous deleveraging that took place after the financial crisis is explored and compared with the growth of selected financial performance indicators.

**Keywords:** corporate strategic investment, tangible fixed assets, dynamics of investment, rating and indebtedness, financial performance

#### **1. Introduction**

The purpose of this research is to determine how corporate investment influences the business performance of firms. This also can be considered as our research question. We explore this issue in the case of Slovenian firms, specifically, how successful they were with their investments in the period from 2010 to 2017. The reason why this topic has been chosen as a research subject lies in the fact that in spite of the relatively high capex being spent in firms in the last decade, quite a few of these firms have not performed well for many years. How many of them did not perform well is also the subject of our research, with investments achieving neither a satisfactory return on equity, ROE, nor the planned adequate cash flow.

We might venture to claim that the investment projects should have been justified by investment programs, or that a better business performance should have been

foreseen, expressed either by higher net sales revenues, higher earnings before interests and taxes plus depreciation and amortization, EBITDA, a higher net profit, a higher ROE, a higher return on assets, ROA, or a higher positive cash flow, CF, etc. If we suppose that at the time when the investment decision was made, the investment projects as such had been assessed as profitable and economically justified, that is, economically sound, well set up, and promising for the investors, then the question might be raised, did these investment projects turn out to be as efficient as anticipated or as they should have been, or to put it another way, did these investments improve the business performance of the firms. Similarly, the investment project implementation with respect to what had been planned is also questioned, for example regarding the suitability of its technology and equipment, the planned investment budget, its sufficient and reasonable financial resources, reliable market projections, agile management, qualified labor force, etc. There is also doubt about achieving the required rate of return on investment projects and other relevant financial ratios by which business performance is measured and which are expected to be met by various stakeholders, mainly owners and creditors. Surely, not everything listed above is valid for all the firms. Among them, there are some who have improved their business performance due to their investments.

The research problem in our study can be addressed operationally in the following way. We base our research on resources as key drivers by which successful investment project implementation and the sustainable and profitable growth of a firm should be assured. As strong evidence for such a statement, we rely on the theoretical standpoints and comprehensions of various authors, and from the perspective of the operationality we set up a simple conceptual and measurement model, which links investments in tangible fixed assets and the business performance of the firms, expressed by a number of relevant financial indicators and ratios. From this model, a *basic research thesis* is erected: *corporate investments in tangible fixed assets have a positive impact on business performance*.

The existing research has mainly considered the effects of individual investments and their performance, and very rare the researchers have studied how investments do influence the business performance of the firms. Our research is grounded on a holistic view of the impact of investments on the business performance of firms, which can be accounted for as a novelty in this field. The potential contribution of our paper is to highlight the impact of Slovenian firms' investments on their business performance in a rather long time span, including the big financial crisis as well, which can be also considered as a novelty in the area of corporate investment activity.

Based on the literature review, the authors develop a simple conceptual and measurement model to study the performance of the firms deriving from their investment. They establish a set of financial indicators and ratios, relating mainly to increase in sales, productivity, profitability, and cash flow, and find their correlation with the investment in tangible fixed assets. They try to find out if these correlations are statistically significant and how strong they are. Some of this research is quite similar to what some researchers have already done using the data for their national industries. Their scientific contribution in this field is an integral approach, a set of two groups of financial measures of the business performance and establishing or confirming their relevance to assess the effect of investments on business performance. Such a concept—corporate investments generally influence firms' performance—has not been used before, and it is empirically tested on a rather big sample of Slovenian firms.

#### *Impact of Corporate Investment on Business Performance: The Case of Slovenian Firms… DOI: http://dx.doi.org/10.5772/intechopen.104994*

On top of that, the authors also study the behavior of the firms as investors, and they show how the firms as investors were able to exploit investment opportunities, what their prevailing motives to invest were, how often and when they invested (investment dynamics), what their investment growth in the longer study period was, what efficiency of their investment implementation was, and last but not least what economic effects they achieved by their investments. Such a complex and allembracing analysis of the investment activity of the firms in the real economic sector in a longer period of time (after the last big financial crisis) at the national level has not been carried out recently either.

The relevance of this research can be pinpointed by the fact that investment activity is crucial for the firms'sustainable growth and their long-lasting performance, and that the interest of the managers should be increased by the appropriate recovery of their consciousness and education in the sense that they consider all the resources that define and influence their investment ability differently than they do currently. Investment ability manifests in investment implementation and business performance. For this reason, it is very important that firms do not pay attention only to the pre-investment period when they make investment decisions, but also to the implementation of their investment and to the post-investment period, when they have to accompany and measure the financial results of their investments to find out how successful and efficient their investment was. It is especially relevant to know what financial indicators and ratios the investment influence. All this is the authors' important contribution to the existing body of literature.

In the theoretical part of our research, the concepts and basic issues related to corporate strategic investments and their impact on business performance are presented. The scientific method of description and scientific methods of classification, comparison, analysis, and synthesis are used. A central issue in implementing this investigation is to find out whether there exists a correlation between investments in tangible fixed assets and the financial performance of firms. We do not deal with the total factor productivity (TFP). It is not an investigation to obtain any relevant measures of TFP.<sup>1</sup>

The empirical part of our research is based on the use of several research methods. As a basic method of our empirical research work, the statistical method of primary data analysis is used. Preliminary data were obtained by a questionnaire sent to Slovenian large and medium-sized enterprises (SMEs), classified from A to J according to the SKD 2008, V2 classification. Only the firms in the non-financial sector were observed. The financial data for the firms that responded to the questionnaire were collected from the GVIN (BISNODE—D&B) database. For testing the hypotheses, the chi-square test, t-statistics, and linear regression were used.

As already mentioned above, before testing our research hypotheses, the investment activities of the firms from our sample in the study period are presented from various aspects and illustrated graphically. Some results of this kind of research based on a sample of Slovenian firms are quite surprising.

At the end of this paper, we summarize the main findings of our research, in the first place the results of testing our research hypotheses. Limitations are also exposed, as are guidelines for further research work in the field of studying business performance due to investments.

<sup>1</sup> There is a bulk of literature focusing on the estimation of productivity [1–3].

#### **2. Theoretical and conceptual background, and research hypotheses**

In the theoretical framework of our research, first, a literature review is highlighted supporting the relevance of the research question. Thus, business performance related to corporate investments is presented and addresses our research hypothesis. Second, strategic corporate investments are defined with the emphasis on the dynamics of investment and its funding. Third, a conceptual and measurement model of investment impact on business performance is set up.

#### **2.1 A literature review from the perspective of the relevance of the research question**

The author of this paper tends to show in a systematic and critical manner how the existing literature deals with the relationship between investments and a firm's performance, how it measures the effects of the investments on business performance, and to what conclusions the researchers have come so far studying this issue. Only on this basis one can better understand what the contribution of this paper stated above is like, how this paper is attached to the findings of the existing research work, what in essence this paper adds to the existing body of literature, and last but not least, why this research question is relevant.

For many years, a number of authors, such as Schultes [4], have studied the numerous factors that influence the performance of investments, and quite a few academicians and experts, for example, Grazzi et al. [5], have followed similar topics in the field of business, especially as they relate to investments in fixed assets (tangible and intangible), and studied the measurement of their efficiency from the point of view of business performance. A relatively strong interest in this field has emerged especially with regard to strategic investments and their role in strategic planning. They are considered as a key driver of a firm's growth and progress [6].

Assessment of the impact of corporate investments was not a relevant research topic in the past, mainly due to a lack of data on investments. One of the first steps in this field was made by Doms and Dunne [7] who investigated corporate investments of American firms. The other researchers followed their case and they have found similar results: the years of investment inactivity or only of repairs and maintenance of tangible fixed assets followed the years of intensive investment activity in the firms and in the whole industry. Carlson and Laseen [8] showed that models of non-convex cost of adjustment offer a more suitable frame for better understanding of investment decisions and they reject those models that assume regular capital accumulation samples.

Although a lot of research has been done assessing the impact of various factors on investment project performance [9, 10], there are only a few empirical studies aimed at investigating the correlation between individual investment project performance and the firms' financial performance. We should mention the research work done by Pollack and Adler [11]. They assert that there is a positive relationship between these two kinds of performance, which sounds logical and can be supported by project management theory. In some cases, the size of investment projects, innovation, and technological uncertainty, investment projects are not supposed to generate only profits, but they should also bring about strategic organizational benefits, such as product diversification to increase market share, the creation of new technical competences, the installation of new production lines, and the acquisition of new markets [12]. Ekrot et al. [13]

*Impact of Corporate Investment on Business Performance: The Case of Slovenian Firms… DOI: http://dx.doi.org/10.5772/intechopen.104994*

advocate the thesis that a firm's performance and efficiency, strongly based on project management organization, depend to a great extent on the performance of each individual project. Serrador and Turner [14] have found that the efficiency of investment projects measured by time, budget frame, and scope correlates significantly with a broader range of qualitative performance indicators, for instance, customer satisfaction, and general firm performance, the latter being expressed by financial ratios, which is also the subject of our research.

Some literature exists that studies the relationship between the increase of the firms' wealth based on investment and their business performance as revealed by productivity and growth rate [15–19], by employment growth [20], by sales growth [21], or by other production factors [18, 22].

Models advocating the "learning by doing" principle argue that there is a certain time needed for workers to learn how to use new technology. For this reason, their productivity following the investment will very likely be U-shaped. This means that it decreases at the very beginning and then starts to increase, eventually reaching a higher level. The majority of empirical researchers [15, 17, 19, 22] provide evidence that the effect of investment on productivity growth is negative in the short run. Researchers who study long-term effects do not support a positive relationship between investment and productivity growth either. This causes quite an enigma from both the theoretical and the empirical aspects. Why invest in fixed assets if these investments do not generate benefits? The above-mentioned authors have studied this relationship in greater detail using a more sophisticated approach and providing evidence in the case of Italian and French firms that investments *de facto* improve the firms' performance. Meanwhile, Power [15] has not found any evidence of a positive correlation between productivity and high recent investment spikes. Still, on the other hand, Huggett and Ospina [17] have found that productivity in fact decreased right after the implementation of a big investment. Bessen [16] has come to the conclusion that the productivity in newly built production plants increases over time, which he ascribes to the process of learning by doing. Power [15] has revealed a positive correlation between labor productivity and the age of production plants. Shima [19] has even observed a negative relationship between technical efficiency and the age of equipment. Kapelko et al. [23] have studied a sample of Spanish firms and they have come up with an interesting finding, namely that investment spikes cause productivity to decrease in the first year after an investment (cf. Ospina), that the relationship between technical changes and investment spikes is U-shaped, and that the effects of investment spikes on the dynamics of productivity changes differ depending on the size of the firm.

Based on a different econometric approach, Nilsen et al. [15] have found a positive and significant effect of investment implemented in the same year on labor productivity. It is interesting, though, that these effects disappeared throughout the following years. Their study also revealed that the group of firms with a bigger investment spike in at least 1 year of the sample period demonstrated a significantly higher productivity level than the group of firms with no bigger investments. Similarly, Grazzi et al. [5] have found a positive relationship between investment spikes and the firm's sales growth. Having studied this particular relationship in the case of Italian and French firms, they realized that if the firms had at least one bigger investment in the study period, they increased their sales volume and profitability as well. The effect of the investment was strongest right after its implementation, in the period of the first year of its operation, afterwards, it decreased.

#### **2.2 Corporate strategic investments, the dynamics of investment, and its funding**

Investments are expenses designed for increasing or maintaining the stack of capital. We deal only with net investments designating a real capital increase. Meanwhile, following the statistical definition, an investment is everything that cannot be consumed, and following the general definition, an investment is every expense designed for increasing income in the future [24]. While investment expenses or capex can be aligned into several categories, the subject of this research is long-term corporate investments comprising corporate expenses for durable goods (equipment, premises).

Whenever we analyze corporate investments, the following questions are raised: How much capital do the firms want to use, at what given costs, and what return of capital and product level should be considered? What defines the desired stack of capital, that is, that stack of capital the firms want to possess in the long run? Clearly, firms cannot adjust their stack of capital to the level needed in their production right away. They need a certain period of time. We speak of an adjustment rate at which the firms adjust themselves from the existing stack of capital to its desired level. The adjustment rate defines the investment rate. Thus, investments express an adjustment rate of the economy to its desired level [24]. Technological modernization of production processes, such as robotization in firms, is an example of such an adjustment on the micro level. Today, we are witnessing the 4th industrial revolution, where cyberphysical systems, the internet of things, IoT, artificial intelligence, AI, and fastgrowing production efficacy methods are broadly applied in the corporate industrial sector and elsewhere.

When Weissenrieder [6] asked himself what investments create value, he sorted investments into two groups, namely strategic and non-strategic investments. Strategic investments are those that pursue the goal "to create new value for the owners and to ensure the firm's growth." Non-strategic investments are those that maintain and save the value made by strategic investments. Strategic investments, such as investments in new product development or investment in acquiring new markets, are followed by more non-strategic investments. A strategic investment can be an investment in tangible fixed assets, which is the subject of our research, or in intangible fixed assets. It is irrelevant whether we talk about capex or not. Everything that counts as a cash expense in a firm is closely tied to new value creation and can be, according to Weissenrieder [6], defined as a strategic investment.

In relation to capital adjustment in firms, there are several studies [7, 25–27] that have found that firms adjust their production factors, such as capital, in a lumpy fashion.

A team of researchers [5] supports the thesis that decision-making dealing with rather big investment projects and their temporal dimension is linked with the managers' expectations about future business opportunities, and with investment cycles. From the perspective of investment dynamics, Gourrio and Kashyap [28] provide evidence that the majority of the aggregate investment changes are explained by the changes in the number of firms being in the phase of comprehensive investments and having so-called investment spikes. Similarly, just as in macroeconomics, where we are interested in how to explain changes in aggregate investments and how these changes affect economic growth, we would also like to understand heterogeneous behavior at the micro level.

Sometimes firms renounce their investment, sometimes they are captured by a real wave of investment. Caballero [29] asserts that accounting for such lumpy

*Impact of Corporate Investment on Business Performance: The Case of Slovenian Firms… DOI: http://dx.doi.org/10.5772/intechopen.104994*

investments is critical because it has an impact on the formation of the dynamic behavior of aggregate investments. Gourrio and Kashyap [28] have supported this thesis with their research of American and Chilean firms. They called the waves of investments investment spikes. The investment growth rates are mainly due to the firms' investment spikes.

As the size of corporate investments depends on the available financial resources, besides own funds also borrowings, there arises the following issue: In the first decade of this century, the dynamic growth of corporate investments has been supported mainly by debt.

At the onset of the financial crisis, the delayed opening of the economy and the late arrival of international financial markets led to interaction among the financial accelerator channel, the liquidity channel, the banking credit extension channel, and the capital surge. A drastic reversal of foreign capital flows, triggered by banks from the most developed EU countries, caused a contagion of illiquidity, which drastically affected all the countries in the region. It led to bankruptcies and liquidations of firms [30].

After the great financial crisis at the break of the first decade, investment growth slowed down, firms were obliged primarily to deleverage, and at the very beginning, commercial banks stopped crediting the firms (credit crunch). Later after the financial crisis, the criteria and conditions for acquiring credits and loans became very strict. Thus, after the year 2010, we can observe an economic creditless recovery. This phenomenon is known as the Phoenix Miracle [31]. For this reason, we have established another hypothesis and tested it on the case of Slovenian firms, that is: *The rating, defining, and monitoring of firms by commercial banks is closely tied to the firms' indebtedness, which can point us to an important source of corporate investment funding, and which strongly influences corporate investment activities.*

**Figure 1.** *Conceptual and measurement model of investment impact on business performance. Source: Author.*

The rating of firms shows to a certain extent the credit capability of firms, but ultimately not whether they are able to exploit investment opportunities on the market and ensure themselves sustainable growth and development.

#### **2.3 Conceptual and measurement model**

**Figure 1** presents the conceptual and measurement model relating to the hypothesis that investment in tangible fixed assets as an independent variable directly influences financial performance as a dependent variable, expressed by some most commonly used financial indicators and financial ratios.

The business performance of a firm, defined in our conceptual and measurement model as a dependent variable, can be measured and assessed by a wide range of financial indicators. In our research, the following financial indicators are used: Net sales revenues, Added value, EBITDA, and Net profit or net loss. Furthermore, the following financial ratios are used: Profit margin, ROA, EBITDA/Assets, ROE, Net profit or net loss per employee, Added value per employee, Sales revenues/Operating costs (thriftiness), and Net sale revenues per employee. Both groups, financial indicators and financial ratios, derive from the accounting databases of the firms in our sample.

#### **3. Research methodology**

#### **3.1 Questionnaire design**

The questionnaire was designed according to the relevant guidelines [32, 33]. Respondents chose among pre-defined possible answers. The closed questions design was preferred since it makes the alignment of answers easier and more reliable, hence facilitating statistical analysis.

The questionnaire consisted of two sections. The first section consisted of key questions inquiring about the opinions of respondents (mainly financial managers and CEOs), about the investment activity in their firms. The questions in this section were split into two subsections. The first one deals with the investment activity in their firms and is relevant for this paper. The second subsection deals with the investment ability. As this research is rather comprehensive and complex, the investment ability is a subject of another paper.<sup>2</sup> Anyhow, the questionnaire as a whole is enclosed in this paper.

The second section of the questionnaire gathered general data on the respondents, such as their position in the firm and age, as well as general data on their firms, for example, the firm's year of incorporation, size, average number of employees, and technical staff.

The first draft of the questionnaire was pilot tested on a convenience sample of 20 financial managers and CEOs. The final version was designed with minor amendments.

The questionnaire analysis relating to the investment activity of the firms in the study period is presented in Section 4.1 of this paper.

<sup>2</sup> See a paper "Impact of companies' investment ability on their performance" [34].

*Impact of Corporate Investment on Business Performance: The Case of Slovenian Firms… DOI: http://dx.doi.org/10.5772/intechopen.104994*

#### **3.2 Data collection and sample**

The primary data were collected in the period from January to April 2017 by means of the questionnaire being distributed to 1142 Slovenian large and medium-sized enterprises, sorted from A to J according to the Slovenian Standard Classification of Activities (SKD) 2008, V2. The segmentation into large and medium-sized firms was based on the Slovenian Companies Act (Paragraph 55, ZGD-1-NPB14). In total, 293 questionnaires were completed (of which 91.14% were useable). Thus, we have received 267 valid questionnaires (with a respondent rate of 23.40%). The sample consists of large firms (29.21%) and medium-sized firms (70.79%). Firms from all Slovenian statistical regions [12] were included in the sample. In terms of their legal and organizational status, the majority of the firms in the sample were limited liability companies (74.54%) and stock companies (21.35%). Almost 72% of the firms in the sample fall in the age span between 11 and 30 years, which means that the majority of the firms in our sample are mature from the perspective of their life cycle.

The financial data of the firms that sent back the questionnaires were acquired for the period 2010–2017 from the GVIN database, generated from the annual reports of the firms.

#### **3.3 Data analysis**

The causal links in our proposed conceptual model have been tested by bivariate analysis. This is a statistical method used to analyze the relationship between two variables. It enables us to draw conclusions from the sample and generalize them to the entire population. It means that we are able to infer the behavior of the population as a whole based on the results of the sample analysis. This has been carried out by setting up hypotheses, which can be either confirmed or rejected by statistical inference.

By means of the SPSS 25 software platform, we have calculated Pearson's and Spearman's correlation coefficients.

Contingent tables (Crosstabs) have also been used to study links between variables or constructs in our conceptual model and thereby test our research hypotheses. Additionally, we wanted to test the link between two nominal variables. Crosstabs are multidimensional frequency distributions, which generally enable one to infer about the link between two variables.

Values of dependent variables Y, which are in our case financial performance indicators, that is, Net sale revenues, Added value, EBITDA, and Net profit or Net loss, need to be expressed by the independent variable X, in our case by investments in tangible fixed assets, in the form of linear connection:

$$Y = \mathfrak{a} + \beta \mathfrak{X} + \varepsilon \tag{1}$$

Our research sample can be written as:

$$
\mathfrak{y} = \hat{\mathfrak{a}} + \hat{\mathfrak{k}}\mathfrak{x} \tag{2}
$$

The regression line is a line with the equation *y* ¼ *a* þ *βx*, which best fits the data in the plane (x1, y1), (x2, y2), … , (xn, yn) (it is determined by the least-squares method) and serves as a mathematical model used to estimate the expected value of the variable Y by a given value of the variable X.

The validity of the linear model can be tested by a variance analysis based on size by the model explained variance for an alternative hypothesis:

$$H\_1: \mathbb{R}^2 \neq \mathbf{0} \text{ (linear model is appropriate)}\tag{3}$$

The reliability of the calculated parameters of the regression line can be tested by the t-test:

$$H\_1: \beta \neq \mathbf{0} \ (a \neq \mathbf{0}). \tag{4}$$

Let us also state, that explanatory variables in the context of regression are sometimes referred to as endogenous. Thus, ordinary least squares (OLS) can produce biased and inconsistent estimates. In our statistical analysis, we have not included any instrumental variables to avoid biased estimates, which can be considered as one of the limitations of our research.

By testing the hypotheses, we have to arrange the time series of the chosen variables first, for we have conducted a time series analysis. The investment in tangible fixed assets was calculated as the difference between two sets of data for the consecutive years, that is, as a difference between two book values of the tangible fixed assets in year t + 1 and year t. If the book value of the tangible fixed assets in year t + 1 was higher than the book value of the tangible fixed assets in year t, the following conclusion can be made: a firm has increased the book value of its tangible fixed assets, a firm has invested. If the book value in year t + 1 was lower than that in previous year t, a firm has depreciated its tangible fixed assets more than it has invested.

An increase in the book value of fixed assets could be also influenced by a revaluation of the fixed assets. We have not accounted for this issue because the requisite data, that is, revaluation reserves data were not available. For this reason, our calculations might not be quite accurate, but there was no inflation worth mentioning; in fact, in the last years of our study period, there was even deflation. However, we can assume that the firms did not revaluate their tangible fixed assets, or if they did so (of course only a few of them), this might not have caused a serious problem, it can imply only a negligible error in our analysis. However, this issue can be considered as a certain limitation of our research.

Further, we have to calculate for each year of the study period relevant financial indicators or financial ratios for each firm in our sample. To get relevant indicators and ratios for the whole sample, we have scaled them with the net sales revenues of the firms. Similarly, we have done such a scaling with the investment in tangible fixed assets. To get the investment in tangible fixed assets for the whole sample, we have scaled them with the total assets of the firms. Thus, we have avoided possible heteroscedasticity problems in our regression analysis.

#### **4. Empirical results**

#### **4.1 An outline of Slovenian firms' investment activity in the period 2010–2017 viewed from various aspects**

#### *4.1.1 Exploitation of investment opportunities*

Our research embraces in its 8-year period also the last 2 years of the great financial crisis and economic recession, that is, the years 2010 and 2011. Therefore, it is logical

*Impact of Corporate Investment on Business Performance: The Case of Slovenian Firms… DOI: http://dx.doi.org/10.5772/intechopen.104994*

that almost 15% of the firms in our sample responded that they were primarily constrained to deleverage due to the credits and loans acquired in the past. This means that the firms have not or have only partially taken advantage of those business opportunities on the market that required some investments to be made.

Almost 23% of the firms in our sample responded that they did not have sufficient funds to invest, and more than 8% of the firms did not manage to acquire borrowing funds. This also implies that a certain number of firms did not borrow money for new investments in that period because they already had high financial leverage, that is, an inadequate capital structure, or simply that they could not get new credits and loans due to the credit crunch.

More than 45% of the firms in our sample responded that, in the 8-year period, they totally exploited those business opportunities in the market that required some investments. This means that these firms increased their business if we exclude those who only modernized their production process (automation and robotization). As already mentioned, the period after the financial crisis was characterized by a credit crunch. Therefore, we can identify creditless economic growth, which was typical for Slovenia in the period from 2013 up until the end of 2015 [35]. Creditless growth is a special (marginal) form of financial leverage decrease. We even witnessed this decrease later, after the recovery of the Slovenian banking sector, with episodes of the economy recovering without a simultaneous or precursive credit growth recovery. This phenomenon has been perceived in the case of exits from crises by Calvo et al. [31]. The genesis of these crises was closely tied to the unexpected blockade of capital inflow into developing countries. The same authors, as well as others [36], found similar patterns at the time of exits from crises with different geneses, including in developed countries. This phenomenon of creditless growth is called the Phoenix Miracle.

We have checked if such a recovery without credits also took place in the case of our sample firms. **Figure 2** shows that investments in tangible fixed assets increased in parallel with bank credits and loans from the beginning of the previous decade up to the great crisis in 2009. This implies that bank credits and loans were a generator and

#### **Figure 2.**

*Increase of tangible fixed assets, net sales revenues, and added value versus decrease of financial liabilities (credits and loans) after the last recession. Source: Author (AJPES database for the period 2002–2017).*

accelerator of investment growth.<sup>3</sup> After the great financial crisis and the global recession, investments in the greater part of the firms from our sample stagnated (investments took place in the amount of depreciation, or better said, the firms implemented only replacement investments). Investments started to grow again after 2014, while the post-crisis bank credits and loans apparently decreased up to 2016. The economic recovery of the firms in our sample was accompanied by either a decrease or negative growth in bank credits and loans.

#### *4.1.2 Main themes to invest*

The firms in our sample were mostly motivated to invest by technological progress (a need to modernize their technological processes), new opportunities on the market, and an increase in their customers' demand. These three motives or main themes represent more than two-fifths of all the given incentives and impulses to increase investments in the past 8-year period.

#### *4.1.3 Dynamics of investment*

More than one-half of the firms in our sample invested in the past 8-year period evenly, that is, without bigger investment spikes. This finding relates to more or less big and medium-sized firms. However, approximately one-fourth of all the firms in our sample invested in a concentrated manner, with an investment spike in 1 or 2 years at the end of the 8-year period. Investment activity was a little bit more pronounced in medium-sized firms in our sample. This can be explained by the fact that those firms that incurred excessive debt after the last financial crisis directed their accumulation into deleveraging and less so into purchasing new fixed assets. We can refer to the financial accelerator and support the above-given statements with findings from the study conducted by Bole et al. [37]. They advocate the thesis that the financial accelerator changes not only in individual phases of the business cycle (boom, bust, recovery) but also with various kinds of investments, including investment in the real economic sector, furthermore in various industries and regions, and last but not least even with respect to the solvency of commodity producers.

Besides data acquired by means of the questionnaire, we also acquired financial data from the AJPES database. Among other things, we looked for the book value of fixed assets of the firms in our sample for each year in the study period 2010–2017. Thus, we found out whether, firstly, their book value increased or decreased in the last 8 years, secondly, what was their average rate of growth or drop, and thirdly, by what kind of dynamics their value changed, that is, evenly or in a concentrated manner at the beginning, end, or in the middle of the studied period.

**Table 1** shows the number and structure of the firms that increased or decreased the book value of their fixed assets (2017/2010). The average growth rates of their increase and decrease, respectively, are shown as well. The latter has been calculated as a geometric mean of chain indices through individual years for each firm in our sample, and for all of the firms together as well.

<sup>3</sup> In the SPSS 25 software platform, we carried out a linear regression between investments as a dependent variable and bank credits and loans as an independent variable. The value of R<sup>2</sup> is 0.842, which means that bank credits and loans can explain the 84.2% variation in investments. For these data, the F statistic is F = 74,49, which is statistically significant at p < 0.001 level.

*Impact of Corporate Investment on Business Performance: The Case of Slovenian Firms… DOI: http://dx.doi.org/10.5772/intechopen.104994*


#### **Table 1.**

*Number and structure of the firms according to book value of their tangible fixed assets in the study period 2010– 2017.*

It can also be seen that 150 firms (a little less than three-fifths of the total) in our research sample had a positive investment growth (16%) in the past 8-year period, furthermore that 105 firms (two fifths) evidenced a negative investment growth (8%) in the same period, and, last but not least, that approximately 5% of the firms in the sample had zero investment growth. In the period 2010–2017, the average investment growth for all the firms in the research sample was 6% per year. This means that almost three-fifths of the firms invested more in that period than they depreciated their tangible fixed assets.

#### *4.1.4 Efficiency of investment implementation*

Almost four-fifths of the firms responded that they realized their investments in tangible fixed assets successfully at the time (only investments bigger than EUR 100,000 were taken into account). A little bit less than one-half of the firms reported that they implemented their investment projects within the scheduled financial budget, and almost two-fifths of the firms asserted that they stuck with the physical scale of their investments.

Considering the first three answers, indicating that the firms finished their biggest investments in tangible fixed assets on schedule (or even sooner), in the planned physical volume, and within their financial budget, we get into the cross-section of a very small number of firms (less than 1% of all the firms in our sample). If we consider the combinations of only two kinds of answers, we get very low percentages as well (a maximum of 7%). This supports the thesis that quite a few of the firms did not implement their investment projects successfully, which can imply their insufficient investment ability.

Whether the size of a firm has any impact on investment project implementation has been tested by the chi-square test χ<sup>2</sup> . The test has shown that there is no statistically significant correlation between these two variables (Pearson's chi-square = 0.686, p = 0.421). The size of the firms in our sample does not influence investment project implementation neither in terms of financial budget nor time schedule.

#### *4.1.5 Achievement of the planned economic effects of the realized investment projects*

**Figure 3** shows what real economic effects compared to goals the firms realized with their investments in the 8-year period.

It can also be seen that more than two-thirds of the firms in our sample responded that they realized the economic effects of their investments in the range of 91–100% in comparison to what they had planned (a little bit less than one-half of the firms in the sample), or even exceeded it (one-fifth of the firms in the sample). This means that the investments of big and medium-sized Slovenian firms in tangible fixed assets should contribute considerably to business performance improvement. One-fifth of the firms in the sample estimated the economic efficiency of the implemented investment projects in a range of 71 to 90% in comparison to what they had planned, and less than one-tenth of the firms in the sample are critical of the results achieved (in the range of up to 70%; 2% below 51%). From this review, the conclusion can be drawn that the output of investments in tangible fixed assets was at a level of a little over two-thirds (68.17%).

In this case, we have also carried out the chi-square test χ<sup>2</sup> to test the hypothesis whether the size of firms influences the achievement of the economic effects of their realized investments. The test has revealed that there is no correlation between these two observed variables.

#### **4.2 Hypotheses testing**

#### *4.2.1 Testing of the hypothesis: the rating of firms influences their borrowing as a relevant factor of the firms' investment activity*

The investment activities of firms are mainly restrained by financial restrictions, which to some extent exclude the possibility to exploit opportunities for growth. According to Fazzari et al. [38], Kaplan and Zingales [39], Dasgupta et al. [40], Gatchev et al. [41], Ostergaard et al. [42] and Drobetz et al. [43], the restrictions

#### **Figure 3.**

*Achievement of the economic effects of the investments implemented. Source: Investment ability of the companies, questionnaire 2018.*

#### *Impact of Corporate Investment on Business Performance: The Case of Slovenian Firms… DOI: http://dx.doi.org/10.5772/intechopen.104994*

derive from market imperfections, especially from information asymmetry and wrong choice, all being dependent on the firms' ratings. The latter is crucial for acquiring borrowing funds, that is, bank credits and loans. Due to these restrictions, firms cannot access the borrowing funds for their investments as economically justified by positive net present value (one of the dynamic investment criteria). For this reason, their investments can be funded only by their own funds. Therefore, the volatility of proper funds can be demonstrated through the volatility of their investments, although the elasticity of investments increases relative to operating cash flow. On the other hand, well-performing firms are not financially restricted, their investments are independent of short-term oscillations in business performance, and elasticity is zero or very low [35]. Fazzari et al. [38] claim that when operating cash flow increases, the firms with restricted access to funds and with good investment opportunities use this cash flow to fund their investments.

**Table 2** shows the ratings of firms from our sample. Besides the qualitative data (the classification of firms into rating categories based on answers from the questionnaire), we also used the NFD/EBITDA ratio as an approximate estimate for the rating of the firms, calculated from the data acquired for each year from the AJPES database. The NFD/EBITDA ratio explains relatively well the current capability of a firm to generate cash flow for repaying its debt, which has been supported by other authors who used this ratio as well [35]. In the financial crisis, the firms decreased their debt due to their own motives and reasons. The consequences of the customers' and suppliers' push, which increased the insolvency of business partners, cannot be overlooked either. In such a situation, the greater part of cash flow is assigned to lowering indebtedness. Consequently, the sensitivity of investments to operating cash flow is lower than usual.

For the last year of the study period (2017), we tried to check whether there is any correlation between these two sets of data. To find out, in the case of our sample of big and medium-sized firms, how the NFD/EBITDA ratio reflects the capability of a firm to generate cash flow for debt repayment and thus also the investment ability of the firm [34], all the firms were sorted into three segments according to their indebtedness. In the first segment, there are firms with an NFD/EBITDA ratio less or equal (≤2). At the beginning of our study period (in 2010), there were 109 such firms (40.8%), and at the end of the study period (2017), there were 164 such firms (61.4%). These firms were able to repay their financial debt within the time span of 2 years, which means that the banks were ready to lend them new credits and loans. As a matter of fact, we put into the first segment all those firms that were net creditors


#### **Table 2.**

*Number of firms in terms of rating and indebtedness measured by the NFD/EBITDA ratio.*

with negative net debt. These were the firms whose cash balance exceeded financial liabilities. In 2010, there were 42 such firms (15.7%), and in 2017 there were 77 such firms (28.8%). In the second segment, we put firms that were more indebted, having higher financial leverage. Their indebtedness ranged from 2- to 5-times EBITDA. In 2010, there were 72 such firms (27%), and in 2017 there were 65 such firms (24.3%). In the third segment, we put firms with very high financial leverage, having a NFD/ EBITDA ratio higher than 5. In 2010, there were 71 such firms (26.6%), and in 2017 there were 37 such firms (13.9%). The firms with a negative EBIDTA, that is, a negative operating cash flow, were excluded from our analysis. There were only a few.

For the last year of the study period (2017), we carried out the chi-square test. For each variable we set two categories, "good rating" and "bad rating", and "appropriate" and "inappropriate" indebtedness. Pearson's chi-square test, χ<sup>2</sup> , examines if there is any correlation between two nominal variables, in our case between the rating of the firms and their financial leverage (indebtedness). The Crosstabs procedure generates a contingent table, the results of the chi-square test, its characteristics, and the significance value. The results are presented in **Tables 3** and **4**.

Pearson's chi-square test examines if the two perceived variables are independent. If the significance value is small enough (Sig. < 0.05), then we reject the hypothesis


*Each subscript letter (a, b) denotes a subset of indebtedness categories whose column proportions do not differ significantly from each other at the 0.05 level.*

*Source: Questionnaire and AJPES database for 2017.*

#### **Table 3.**

*Relationship between the rating of the firms and their indebtedness measured by the NFD/EBITDA ratio. (rating\*indebtedness crosstabulation).*

*Impact of Corporate Investment on Business Performance: The Case of Slovenian Firms… DOI: http://dx.doi.org/10.5772/intechopen.104994*


*Source: Questionnaire and AJPES database for 2017.*

*a 0 cells (0.0%) have an expected count of less than 5. The minimum expected count is 17.70.<sup>b</sup> Computed only for a 2 2 table.*

#### **Table 4.**

*Chi-Square test for the rating of the firms and their indebtedness.*

that variables are independent, and we can trust that the variables are somehow correlated [44]. The value of chi-square statistics, shown together with the degrees of freedom and the significance value, is 42.341, which is within the round-off error. This value is strongly significant (p < 0.001), which shows that the rating of firms has a strong impact on whether the indebtedness of firms is appropriate or inappropriate, or the other way around, that the indebtedness of firms has a strong impact on whether the rating of the firms is good or bad.The very distinctive result shows that there is a correlation between rating and indebtedness irrespective of whether the latter is appropriate or inappropriate. In other words, in our sample of answers, there is a distinctive difference (i.e., between the portion of firms having a good rating and the portion of firms having a bad rating) in the case of two kinds of indebtedness. By means of the z-test, we have found that well-rated firms are significantly less indebted, and inversely, that poorly-rated firms are significantly more indebted and have higher financial leverage. This important finding can be considered from another perspective as well, that is, in percentage: more than 60% of the firms with a good rating (A and B) are appropriately indebted, and more than 85% of the firms with a bad rating (C, D, and E) are inappropriately indebted. The following conclusion can be drawn: the indebtedness of a firm significantly influences the rating, that is, the rating of a firm is good if a firm is appropriately (less) indebted and hence has low financial leverage.

Similarly, we have calculated the correlation between these two kinds of data, shown in **Table 2**. It can be seen that there were 151 firms in 2017 whose financial managers reported the rating A (at least their commercial banks rated them like this) according to the financial data from the AJPES database, and these firms had an NFD/ EBITDA ratio of less than or equal 2. Such a result is logical. It is also logical that a firm with the rating E was in the category with the highest NFD/EBITDA ratio, with high financial leverage. However, it is not logical that at the same time 16 firms were rated A while being very much indebted, or that a firm with the rating C is in the first category, with low financial leverage.

We have calculated Spearman's correlation coefficient, r. Both sets of data have got an appropriate rank, rating A being assigned the highest rank, that is, 5, and rating E the lowest rank, that is, 1. The least indebted firms, that is, the firms having an NFD/ EBITDA ratio of less than 2, are given rank 3, medium indebted firms rank 2, and the most indebted firms rank 1. The results are shown in **Table 5**.


*b Unless otherwise noted, bootstrap results are based on 1000 bootstrap samples.*

Source: Questionnaire and AJPES database for 2017.

#### **Table 5.**

*Spearman's correlation coefficient for two variables, the rating of the firm and the NFD/EBITDA ratio.*

#### *4.2.2 Testing of the hypothesis: Increase of investment in tangible fixed assets influences some financial indicators and ratios*

Let us further test the hypothesis stating that an increase of investment in tangible fixed assets significantly influences some financial performance indicators, such as Added value per employee, Profit margin, ROE, ROA, Net sales revenues per employee, Net profit per employee, EBITDA to Assets, and Net sales revenues to Costs of goods sold. For this analysis, we used a longer time series of financial data for the firms in our sample, encompassing the 18-year period from 2000 to 2017.

As already mentioned, the analysis is based on financial data from the AJPES database, and its chart of accounts derived from the general ledger of firms. Account No. 0010102 presents the net book value of tangible fixed assets. This value constantly changes over time, within an individual year, and over the years. This value changes due to depreciation and the sale-off of assets (disinvestment). Both of these reduce this value on said account. On the other hand, this value also changes due to the purchase of new assets (including those acquired by financial lease). As already explained, for the purpose of our analysis, revaluation, which could have influenced the net book value of assets, was ignored. As inflation during our study period was low (in some years there was even deflation), we assumed that it had no important impact on the aforementioned value. If the difference between the purchasing value of new tangible fixed assets and the depreciated value of the existing fixed assets or the value reduced by disinvestments is positive, we get net investments in tangible fixed assets. If we consider these net book values of tangible fixed assets throughout a longer period of time, we can find out from the differences (or from calculated chain indexes) whether the firms in our sample invested or disinvested. The difference

*Impact of Corporate Investment on Business Performance: The Case of Slovenian Firms… DOI: http://dx.doi.org/10.5772/intechopen.104994*

between the two annual balances (at the end of each calendar year, as of December 31, Year X) of the net book values of tangible fixed assets TFAt – TFAt-1 (Account No. 0010102) represents the net investment in tangible fixed assets in year t.

As we quite considerably prolonged our study period, and to assure comparability of the data through time, all values were properly corrected by deflators or inflators of the individual year (SURS—recalculation of the financial data in time series due to inflation for the period 2000–2017).

We computed the average values for each of the above-presented variables for each individual year for the entire sample of 267 firms.

Chain indexes have been computed for each firm included in the sample and on their basis the average growth rate for each variable. The geometric mean has been computed as follows:

$$\left(\prod\_{i=1}^{n} a\_i\right)^{\frac{1}{n}} = \sqrt[n]{a\_1 a\_2 a\_3 \dots a\_n} \tag{5}$$

For carrying out linear regression, investment in tangible fixed assets was taken as an independent variable, while several financial indicators, such as Net sales revenues, Added value, EBITDA, Net profit, ROA, and others, were accounted for as dependent variables for each year of the computed average values.

Impact of the increase of investment in tangible fixed assets on Net sales revenues. Linear regression for the first pair of dependent variables, that is, for tangible fixed assets and Net sales revenues is calculated and presented in **Tables 6**–**9**.

R2 is 0.673, which means that investment in tangible fixed assets represents more than two-thirds of the variation in Net sales revenues. In other words, if we try to explain why firms increase the sale of their products/services and commodities/materials, we can look at the variation in Net sales revenues. There is a great number of factors that can explain this variation. In 67%, though, this variation can be explained by our model as comprising only investments in tangible fixed assets. Certainly, there are also other factors, other variables that influence the increase in sales.



*Model summary.*


*<sup>a</sup> Dependent variable: net sales revenues.*

*<sup>b</sup> Predictors: (constant), tangible fixed assets.*


1.505 0.027 0.338 0.012 0.894 2.193

*<sup>a</sup> Unless otherwise noted, bootstrap results are based on 1000 bootstrap samples.* Source: *Questionnaire and AJPES database for 2017.*

#### **Table 9.**

*Bootstrap for coefficients.*

Tangible fixed assets

The ANOVA tells us whether the model, overall, results in a significantly good degree of prediction of the outcome variable. The sums of squares and the degrees of freedom are calculated. From these two values, the average sums of squares (the mean squares) can be calculated by dividing the sums of squares by the associated degrees of freedom. The most important part of this calculation is the F-ratio and the associated significance value of that F-ratio. For these data, F is 30.93, which is significant at p < 0.001 (because the value in the column labeled Sig. is less than 0.001). This result tells us that there is a less than 0.1% chance that an F-ratio this large would happen if the null hypothesis were true. Therefore, we can conclude that our regression model overall predicts Net sales revenues significantly well. Such a result is quite logical and expected.

Calculation of linear regression for the investments in tangible fixed assets and Net sales revenues.

Other factors that can influence the bigger volume of sales (although they are not considered in our research) can be the increase in sales prices, the increase in productivity, export incentives or customs relieves, business process rationalization and improvement, organizational changes, etc.

As previously mentioned, the ANOVA shows whether our model predicts the outcome variable well enough. However, it does not show the contributions of individual variables, except in our model where only one independent variable exists, and we can infer that this variable is a good predictor.

The regression calculation provides estimates of the model parameters (the beta values) and the significance of these values. From this calculation, we can conclude that b0 is EUR 23.6 million, which can be interpreted as follows: when no money is spent on investment in tangible fixed assets (when X = 0), the model predicts that all firms in our sample will decrease their Net sales revenues in the amount of EUR 23.6 million. We can also read off the value of b1 from the regression calculation. It is 1.505.

#### *Impact of Corporate Investment on Business Performance: The Case of Slovenian Firms… DOI: http://dx.doi.org/10.5772/intechopen.104994*

Although this value constitutes the slope of the regression line, it is more useful to think of it as representing the change in the outcome associated with a unit change in the predictor. Therefore, if our predictor variable is increased by one unit (if the investment in tangible fixed assets is increased by EUR 100), then our model predicts that EUR 150.5 of extra Net sales revenues will be generated, which can be considered a good result with respect to the fact that an increase in investment contributes more than two thirds to the increase in Net sales revenues.

Let us look in this calculation at the values for t. The t-test tells us whether the value of b is different from zero (0). The statistical tool SPSS 25 provides the exact probability of the perceived value of t occurring if the value of b in the population were zero. If this observed significance is less than 0.05, then the result reflects a genuine effect. In our case, this holds entirely. For one t value, the probability equals 0.032, for the other t value, the probability equals 0.000. Thus, we can claim that the probability of these t values occurring if the values of b in the population were zero is less than 0.001. Therefore, the values of b are significantly different from zero. In the case of the b for investment in tangible fixed assets, this result supports the thesis that investment in tangible fixed assets makes a significant contribution (p < 0.001) to predicting the increase in Net sales revenues.

In the same calculation, the bootstrap confidence interval suggests that the population of b values for tangible fixed assets is likely to fall between 0.894 and 2.193, and because this interval does not include zero (0), we would conclude that there is a genuine positive relationship between investment in tangible fixed assets and Net sales revenues. Also, the significance associated with this confidence interval is p = 0.012, which is significant. **Figure 4** shows the distribution of correlation coefficients between these two variables for all the firms in our sample.

Linear regression has also been calculated for the other pairs of dependent variables. We were always interested in the impact of the independent variable, that is, investment in tangible fixed assets on financial indicators. Regarding Added value, this impact is medium strong (R2 = 0.531; b1 = 0.461; Sig.: 0.001). In the case of b for investment in tangible fixed assets, this result means that investment in tangible fixed assets significantly contributes (p = 0.001) to predicting the increase of Added value. An increase of tangible fixed assets by EUR 1000 generates EUR 461 of Added value.

#### **Figure 4.**

*Distribution of correlation coefficients for two variables, Investment in tangible fixed assets and net sales revenues, for all the sample firms in the period 2000–2017.*

#### **Figure 5.**

*Movement of added value for the 30 biggest sample firms in the period 2000–2017.*

#### *4.2.2.1 Impact of the increase of investment in tangible fixed assets on Added value*

As this financial performance indicator is very important for the firms' benchmarking, the dynamics of Added value for the firms in our sample in the period 2000–2017 are shown in **Figure 5**. From this chart, a change in the relationship between the Added value of the 30 biggest firms in the sample and the Added value of the remaining firms in the sample over the 18-year period can be seen as well. Each year, except in the year of the last biggest financial crisis and global economic recession (2009), the 30 biggest firms in the sample taken together generated more Added value than the rest of the firms in the sample. Afterward, the scissors started to open gradually.

**Figure 6** shows, for all the firms in our research sample, a course of two performance indicators, that is, productivity expressed by Net sales revenues per employee and Added value per employee. The data are presented for the period 2000–2017. It can be seen how the financial crisis and economic recession hurt our sample firms. After the crisis, Added value per employee increased faster than Net sales revenues per employee, although the firms did not yet reach their prior levels.

**Figure 6.** *Movement of productivity for the sample firms in the period 2000–2017.*

*Impact of Corporate Investment on Business Performance: The Case of Slovenian Firms… DOI: http://dx.doi.org/10.5772/intechopen.104994*

#### *4.2.2.2 Impact of the increase of investment in tangible fixed assets on financial performance ratios*

Impact of the independent variable, that is, investment in tangible fixed assets, on the financial indicator EBITDA is weak (R2 = 0.305; b1 = 0.145; Sig.: 0.02). In the case of b for investment in tangible fixed assets, the result suggests that investment contributes significantly (p = 0.02) to the prediction of EBITDA increase. The increase of investment in fixed assets by EUR 1000 generates an operating cash flow in the amount of EUR 145. This relates to one year. However, the investment generates operating cash flow for its entire life span, which lasts several years, depending on the type of tangible fixed asset. By all means, this is not high profitability, though, if we compare it to the profitability of common riskier financial investments.

Let us consider the question of how investment in tangible fixed assets influences Net profit. In the case of this particular financial indicator, the predicting value of the regression coefficient b becomes totally vague (R2 = 0.025). As a matter of fact, in the period 2000–2017, there was no profitability of investments implemented in tangible fixed assets by the firms in our sample and measured by Net profit. Taking into account interests, we get an answer as to why Net profit is relatively weak or even negative (loss). As already explained, the firms substantially increased their indebtedness due to investments before the financial crisis in 2008. This implied high rates of interest paid to creditors, which lowered their Net profit a great deal.

As there is a strong positive correlation between investment in tangible fixed assets and Net sales revenues (their impact amounts to more than two thirds), we could draw the conclusion that even an increase of Net sales revenues due to investments positively influences select financial performance ratios, such as ROA, ROE, EBITDA/ Assets, and Sales revenues/Operating costs.

Consequently, we could expect an increase in ROA (return on assets). Good exploitation of the production assets should imply a higher ROA. The question can be raised whether the tangible fixed assets were well used (does the production run in fewer than three or four shifts?), and last but not least, whether the firms in our sample met all the customers' needs. Linear regression shows a statistically significant but relatively weak correlation between ROA and Net sales revenues (R2 = 0.236; Sig.: 0.048).

#### **Figure 7.**

*Movement of profitability ratios and sales revenues/operating costs ratio for the sample firms in the period 2000– 2017. Source: AJPES database of the sample firms for the period 2000–2017.*

Similar findings about a weak correlation between the compared variables have been revealed with other financial performance ratios, specifically ROE, EBITDA/ Assets, and Net sales revenues/Operating costs. For all of them, linear regression with Net sales revenues has been calculated. The course of the relevant ratios for the firms in our sample for the period 2000–2017 is presented in **Figure 7**. The blue curve presenting ROE is strongly accentuated. This ratio was high in 2007 (0.35), before the financial crisis, then it kept decreasing up to 2010. The owners' capital of the firms in our sample reached average annual profitability of 10% no sooner than in 2017.

#### *4.2.2.3 Trend of the increase of investment in Slovenian firms compared to the course of select financial indicators in the period 2000–2017*

**Figure 8** presents the trend of nominal average values of some of the most relevant financial indicators, including financial costs (interests), for the population of our sample firms in the period 2000–2017. It is understood that this 18-year time span also includes a period denoted by a financial crisis and global economic recession, which endured from 2008 to 2012. The dynamic growth of financial indicators, for instance, Net sales revenues, Added value, and Net profit, stopped in 2009 (of Net profit already in 2008). The inertia of the growing trend of the increase of investments in tangible fixed assets, however, lasted up until the end of 2009 (finishing the implementation of investments made before the crisis). In 2010, there is a considerable decrease in the book value of tangible fixed assets (touching bottom) as the book value of these assets decreased by 6% and remained at this level until 2015. A year later, the average book value of such assets increased by 3%, although it did not yet reach its pre-crisis level. On the other hand, after a considerable drop in 2009, Net sales revenues started to increase slightly, even during the crisis. Similar findings have been revealed for Added value. The crisis had the biggest impact on Net profit, which started to decrease considerably in 2008. It grew a little bit in the next 2 years but

#### **Figure 8.**

*Impact of investment in tangible fixed assets on select financial ratios for the sample firms in the period 2000– 2017.*

*Impact of Corporate Investment on Business Performance: The Case of Slovenian Firms… DOI: http://dx.doi.org/10.5772/intechopen.104994*

remained at half its 2007 value until 2013. From 2008 to 2013, the total financial costs (interest) for our sample firms were in fact higher than their total Net profit.

#### *4.2.2.4 The changing of financial costs (interest) due to the indebtedness of firms and its impact on profit margin*

While estimating investment profitability, all the stakeholders who provided funds for the investments must be taken into account. As this includes financial institutions, the interests on credits and loans constitute returns generated by investment projects. These returns do not pertain to the firms or their owners, though, they are returns produced only by the investments.

For this reason, we are also interested in how Financial costs (interests) changed in the study period – the relevant data are available for the sample firms for the period 2005–2017 – due to the financial leverage, and what is the linear regression between the NFD/EBITDA ratio and Financial costs. **Figure 9** shows three curves of NFD/ EBITDA ratio distribution for three temporal cross-sections (cuts), that is, for 2007 (before the financial crisis), 2010 (during the financial crisis), and 2017 (after the financial crisis). It can be observed that the red curve representing a normal NFD/ EBITDA ratio distribution for the sample firms for 2010 is asymmetric to the right (the same goes for the other two curves), more flattened (the other two curves are more squeezed, with higher peaks), more elongated (stretched) to the right, and generally lies above the other two curves. This means that in the year of the last biggest financial crisis, absolutely more firms had a higher NFD/EBITDA ratio (more EBITDA was needed to cover net financial debt). On the curve, this is visible to the right from value 0. The left side of the curve from value 0, which lies underneath the other two curves, implies a similar conclusion. Those firms in our sample that were not indebted—meaning that their NFD/EBITDA ratio was negative—had more cash and cash equivalents or a lower EBITDA or both at the time of crisis. Thus, more firms had an NFD/EBITDA ratio equal to 2 in 2007 and 2017 than in the years of the crisis.

As Net profit is the main source for repaying debt, we were also interested in the relationship between the indebtedness of our sample firms and their profit margin throughout the study period. This is shown in **Figure 10**. The profit margin started to improve right after the financial crisis and economic recession, and it reached 5% in 2017. The firms with higher financial leverage generated financial resources for repaying their debt. This thesis can be supported by the finding that the firms in our sample started to decrease their indebtedness in the same period. The NFD/EBITDA

**Figure 9.**

*Distribution of NFD/EBITDA ratios for the sample firms for the years 2007, 2010, and 2017.*

#### **Figure 10.**

*Movement of indebtedness (NFD/EBITDA ratio) and profit margin of the sample firms in the period 2000–2017. Source: AJPES database of the sample firms for the years 2000, 2007, 2010 and 2017.*

**Figure 11.**

*Estimate of the conceptual model of the impact of investment in tangible fixed assets on business performance for Slovenian firms. Source: Author.*

ratio—which was almost 2 in the year 2010—reached 1.20 in 2017. As already mentioned, this is a weighted average ratio of all 267 firms, calculated by means of the weights of the Net sales revenues of each firm.

Following our findings and statistical analyses, our conceptual model can be adjusted so that only those financial indicators are included where there exists a statistically strong and medium-strong correlation with investment in tangible fixed assets. From **Figure 11**, looking at the correlation coefficients, it can be understood that the correlation is strong with Net sales revenues, Added value, and EBITDA, and less so with Net profit. However, only very weak correlations exist between investment in tangible fixed assets and financial performance ratios. Therefore, we skipped them in **Figure 11**.

#### **5. Conclusion, limitation, and future directions**

This study is based on the micro theory of investment and theoretical approaches to measuring firms' financial performance. It relies on a simple conceptual model consisting of only two constructs, investment in tangible fixed assets on one side and financial performance on the other. By means of this model, we try to find out and assess how much investment in tangible fixed assets improves the business performance of firms, expressed and measured by the relevant financial indicators and financial ratios.

Let us first summarize the general findings from the empirical part of the research, based on the answers of the financial managers responding to the questionnaire. A little bit less than half of the sample firms exploited the investment opportunities in the study period 2010–2017 in their entirety. The other firms exploited their investment opportunities partly, while some firms exploited none of them since they were primarily obliged to deleverage or did not have enough funds at their disposal, neither their own nor borrowed. They could not access borrowing funds due to either the credit crunch or their excessively high financial leverage.

The prevailing motives of the firms to invest were a need to modernize technology processes, to exploit new opportunities on the market, and to meet the growing demands of customers (new increasing orders).

In the investigated 8-year period, more than one-half of the firms under study invested evenly, without bigger investment spikes, whereas approximately one-fourth of the firms invested in a concentrated manner, with an investment spike in 1 or 2 years toward the end of this period.

A little bit less than three-fifths of the firms evidenced a positive investment growth (16%), while two-fifths of them reported a negative growth (8%). All the firms in our research sample evidenced an average annual investment growth rate in intangible fixed assets of 6%.

In terms of investment implementation efficiency, almost four-fifths of the firms realized their investment in tangible fixed assets successfully, meaning on time, with a little bit less than one-half of the firms performing their investment within the scheduled financial budget, and almost two-fifths in the planned physical scale, that is, without additional works and assets. If all the aspects of efficiency are taken into account simultaneously, quite a few of the studied firms were not efficient enough throughout the realization of their investment projects. In this, the size of the firm did not play a special role.

From the point of view of achieving economic effects, investments in tangible fixed assets are supposed to contribute a great deal to the firms' business performance improvement, which partly agrees with the findings of our conceptual model.

To verify our conceptual model and test our research hypotheses, we analyzed a temporal series of financial data extending back to the year 2000. In this way, we captured a period of intensive investment in the first decade of this century until the occurrence of the great financial crisis in 2008.

The results of our research carried out on big and medium-sized Slovenian firms for the period 2000–2017 partly support our hypotheses set up in the introduction. Investment in tangible fixed assets positively influences the financial performance of firms, as expressed by financial indicators and financial ratios. Statistically significant (Sig., p < 0.000), there exists a strong correlation between investment in tangible fixed assets and Net sales revenues (R<sup>2</sup> = 0.673), which has already been confirmed by studies undertaken by Licandro et al. (2001) and Grazzi et al. [5]. However, there is also a quite strong statistically significant (Sig., p < 0.001) correlation between investment in tangible fixed assets and Added value (R2 = 0.531), which has not yet been substantiated in the literature. Statistically significant is also the correlation between investment in tangible fixed assets and the operating cash flow (EBITDA); it can be designated as a medium-strong correlation (R2 = 0.305). This particular

relationship has not been studied yet or is at least not observed in the literature. Last but not least, there is a statistically significant correlation between investment in tangible fixed assets and Net profit (Sig., p < 0.02), which has been previously supported by Grazzi et al. [5]. However, in our case, this correlation is negligible (R2 = 0.025).

Our research has not revealed any significant correlation between investment in tangible fixed assets and the selected financial ratios we originally included in our conceptual model. There is no correlation found between investment in tangible fixed assets and financial ratios, specifically Added value/Employee, Profit margin, ROE, ROA, Net sales revenues/Employee, Net income/Employee, EBITDA/Assets, and Business revenues/Operating costs.

We are aware of the limitations of the present study, in terms of the relatively small sample size and company size, and the endogeneity of the variables included in our linear model. Our sample includes a relatively high number of large and mediumsized firms. If the survey had been conducted internationally, it would have included a greater number of large firms, where the impact of strategic investments is more pronounced. Endogeneity refers to situations in which an explanatory variable is correlated with the error term. By using an instrumental variable in a linear model more consistent estimates may be obtained.

Another limitation of our research is a lack of data referring to the revaluation reserves in the balance sheet of the firms in our sample, which might be considered as a certain deficiency in the calculations of the financial ratios.

The third limitation refers to the methodological part. Instead of conducting time series analysis, we use geometrical means, which caused a certain reduction of the observations in our model. Consequently, the results could be more accurate.

In the future, we also plan to introduce certain methodological improvements in the questionnaire, which will include a number of other determinants from sources found in the field of investment activity, and performance indicators, including nonfinancial ones. The relevant literature furthermore led us to consider the directions of causality in the model. Since our research is based on a cross-sectional database, we cannot prove causation but can only confirm the assumed paths. The direction of causality could be determined only by a longitudinal study, which represents an important opportunity for further research.


#### **A. Questionnaire**

*Impact of Corporate Investment on Business Performance: The Case of Slovenian Firms… DOI: http://dx.doi.org/10.5772/intechopen.104994*


#### *Six Sigma and Quality Management*


*Impact of Corporate Investment on Business Performance: The Case of Slovenian Firms… DOI: http://dx.doi.org/10.5772/intechopen.104994*


#### *Six Sigma and Quality Management*


*Impact of Corporate Investment on Business Performance: The Case of Slovenian Firms… DOI: http://dx.doi.org/10.5772/intechopen.104994*


#### **JEL:**

C12; D25

*Six Sigma and Quality Management*

#### **Author details**

Vladimir Bukvič<sup>1</sup> \* and Metka Tekavčič<sup>2</sup>

1 GEA College Faculty of Entrepreneurship, Ljubljana, Slovenia

2 School of Economics and Business, University of Ljubljana, Ljubljana, Slovenia

\*Address all correspondence to: vladimir.bukvic.ce@gmail.com

© 2022 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/3.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

*Impact of Corporate Investment on Business Performance: The Case of Slovenian Firms… DOI: http://dx.doi.org/10.5772/intechopen.104994*

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Section 4
