Grey Systems: Theory and Application

Companies' quality characteristics vs their performance: A grey relational analysis –

evidence from Romania
Camelia Delcea Emil Scarlat Liviu-Adrian Cotfas
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Camelia Delcea Emil Scarlat Liviu-Adrian Cotfas, (2013),"Companies' quality characteristics vs their
performance", Grey Systems: Theory and Application, Vol. 3 Iss 2 pp. 129 - 141
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Companies’
Companies’ quality quality vs
characteristics vs their performance
performance
129
A grey relational analysis – evidence
from Romania
Camelia Delcea and Emil Scarlat
Department of Economic Cybernetics, The Bucharest University of Economics,
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Bucharest, Romania, and

Liviu-Adrian Cotfas
Department of Economic Informatics and Cybernetics,
The Bucharest University of Economics, Bucharest, Romania

Abstract
Purpose – This paper attempts to identify the strength of the relation between the quality
characteristics of companies that are activating in an economy and their performance.
Design/methodology/approach – In the quality characteristics sphere were included almost all the
elements related to company’s behaviour on a market, in an uncertain environment and in the relations
developed with stockholders. And what theory can better shape this relation than grey systems theory,
a theory of uncertainty and of continual changes? At first, all of these qualitative characteristics that are
reflecting company’s activity have been divided into six categories for a better reality reflection.
A performance indicator was also depicted by taking into consideration each company’s managerial
objectives.
Findings – By applying grey relational analysis (GRA) in a case of eight Romanian firms, the results
were convincing: not only that these characteristics determine firm’s evolution, but, by knowing them
and acting properly on them, firm’s extreme situations (such as insolvency or bankruptcy) can be
avoided.
Practical implications – The method exposed in the paper can be used for any company for
evaluating the linkage between its main characteristics and the way its performance can evolve.
Originality/value – The paper succeeds in identifying the linkage between the characteristics of a
company at a certain point and its performance by using one of the newest developed theories:
grey systems theory.
Keywords Grey systems theory, Company analysis, Performance, Qualitative measure,
Company performance, Quality, Romania
Paper type Research paper

1. Introduction
Since the 1960s, bankruptcy is a subject that has preoccupied scientists who have tried
to solve the problem of firms’ failure. Beaver (1966) defined failure as “the inability of a Grey Systems: Theory and
firm to pay its financial obligations as they mature”. Application
Vol. 3 No. 2, 2013
Company’s performance and market position gained by each company are pp. 129-141
becoming more and more important nowadays when confronted with an uncertain q Emerald Group Publishing Limited
2043-9377
environment and with an increasing number of bankrupt companies. DOI 10.1108/GS-09-2012-0038
 GS Due to these considerations, our aim is to establish the power of the relation between
3,2 some of the qualitative characteristics of companies and their financial performance
and, moreover, to determine which components of those characteristics are the most
influential. Knowing these characteristics and acting on them, through managerial
decisions, each company’s performance can be improved.
To stress the importance of the problem discussed in this paper, we present in the
130 following some evidence regarding the evolution of the number of bankrupt firms in
Romania during the last three years.
Regarding the size of business bankruptcy in Romania, it can be identified that it
has risen during the last period of time. In the first month of the year 2010, more than
2,000 companies are in an insolvency situation, their number being 10 per cent higher
than in December 2009.
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From the activity field point of view, in January, most of the firms which failed in
paying their debts are active in commerce (40 per cent from the total number of failed
firms), in construction and manufacturing (15 per cent) and in real estate transactions
(5 per cent).
In 2009, by comparison with 2008, an increase of 25 per cent in the number of
insolvent firms was recorded, their number reaching 18,421.
Also, more insolvencies were recorded in the last two months of the last year:
2,115 in November and 1,879 in December. Bucharest reached the higher number of
insolvencies in the last year: 2,109 cases.
In 2009, the great majority of the firms entered into insolvency were from the trade
sector: 7,473 companies, representing 41 per cent of the total number of firms; from
the manufacturing industry 3,270 companies (17.75 per cent); and construction:
2,489 (13.5 per cent). A large number of insolvencies were recorded in the real estate
and transaction sector: 1,048 companies and in transport and storage: 1,271 cases.
Due to the numbers presented above, we consider it important to establish which
characteristics, qualitative by their nature, that, in general, are not caught in
accounting documents, are influencing firm’s profitability in order to improve their
profitability and to avoid their insolvency in the future.

2. Companies’ performance measurement

Financial performance has many definitions in literature. If we consider firm as being a
voluntary union of assets with the purpose of obtaining economic advantage, their
performance can be defined as a difference between the value that managers expect to
receive from the production and value created in their business (Chen et al., 2008).
Performance is highly linked to economic growth and closely dependent on the
existence of a competitive environment. As Harris and Ogbonna (2001) stressed, there
are several explanations regarding financial performance. One of these, the approach
from the resources point of view, explains financial performance as coming from inside
and not as being given by the market power. According to this strategy, the role played
by organizational learning and the rapid changes that took place at firm’s level are
underlined, those representing an advantage against their competitors, but, at the same
time, being a factor for obtaining the performance. This “simple” perspective over the
performance represents even one of the explanations regarding the uniqueness of
firm’s on the market.
 Therefore, research that addressed the financial performance has tried to capture Companies’
the quantitative financial indicators. quality vs
Over time, diverse accounting ratios indicators have been used to measure firm’s
performance: ROA and ROE (Dodgson and Rothwell, 1995), net sales per employee performance
(Koch and McGrath, 1996), return on sales (Hitt et al., 2001), average sales growth
or profit margin (Lee et al., 2005), earnings before interest, taxes, depreciation
and amortization (EBITDA) per number of employees. Chen et al. (2008) find it 131
appropriate to use change in sales and market share expansion to measure firm’s
performance.
According to Akgun et al. (2007), the financial performance can be measured
through the following indicators:
.
return on investments or increase in ROI;
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.
market share;
.
sales or sales growth;
.
profitability (per cent) or increase in overall profitability;
.
earnings;
. gross margin (measured as: profitability/total sales); and
.
market value.

The list can be extended by using some of the financial and accounting indicators
presented in the following (Scarlat et al., 2010):
.
financial expenses to liabilities;
.
cost of sales to net sales;
.
financial expenses and normal profit to total assets;
.
financial expenses growth rate to assets;
.
non-operatory expenses growth rate to assets;
.
cost of sales*cost of sales growth ratio;
.
gross income to sales;
. earnings before interest and tax to total assets;
.
return on total asset;
.
net income to total interest;
.
profit margin; and
.
net profit to equity.

The list can go on by including by each particular company their own performance
criteria based on its own managerial objectives.

3. Companies’ quality characteristics

In this paragraph, a discussion related to the quality characteristics that characterizes
company’s activity are identified for the purpose of establishing (using grey systems
theory) which of them are influencing each company’s performance and, in a negative
case, can even lead to bankruptcy.
 GS The majority of the qualitative characteristics presented below are characteristics of
3,2 non-financial performance which, particularly, is a leading indicator for the financial
performance.
There are many research papers in the field of companies’ bankruptcy,
management, operation management, performance of companies, etc. all of these
because firms become central in today’s reality.
132 First of all, as Chen et al. (2008) observe:
[. . .] unlike manufacturing firms, which rely on patented technologies or unique products,
service firms gain their competitive advantage primarily through their ability of combination
to make use of their proprietary knowledge.
So, once with the study of service science, we can refer to the knowledge involved in
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their processes. Now, if we are wondering how knowledge has been able to intervene in
the predominantly industrial economy, we can identify two relevant ways of action: the
development of the areas whose primary output is knowledge and of the areas involved
in transmission and incorporation of knowledge into the output.
Also, some of the changes that took place in the economy can be considered the
result of the fact that the organizations have given greater importance to their
intangible assets, which are often difficult to be measured. Some of these intangible
assets are represented by the investment in research and development, the knowledge
and the talent of the workers, etc.
The new economy is granting a wide interest to so-called “knowledge society”, to
the employee who owns the knowledge, to the intellectual capital and to the learning
organizations. Information society in which humankind is living is defined as a
knowledge society and, at the same time, as a society of organizations (Drucker, 1988,
1992). Meanwhile, with the new economy appears the idea of a new type of
organization, a knowledge-based organization, a service-based organization.
Service companies are nowadays dominating the economic environment as the
OECD research shows. The service sector now accounts for over 70 per cent of OECD
aggregate GDP and employment, and continues to grow. The services sectors with the
highest rate of productivity growth tend to be those that invest more in ITC and have
more highly skilled workforces. Those include industries such as post and
telecommunications, finance and insurance and computer services, all of them being
knowledge-intensive services.
As the figures show, the service sector offers an important contribution to economic
employment and economic growth. One of the key drivers of such development is
represented by innovation.
Innovation is one of the reasons why the importance and the investment in the
research and development field are continually increasing, R&D being the place
where the greatest part of the innovation is born. Each new innovation leads to creating a
space where some other innovations can be created. Starting from these new innovations,
more new spaces of opportunity are created. On a market competition, organizational
performance is positively related to the level of innovation possessed by a firm
(Subramanian and Nilakanta, 1996). Verhees pointed out that the intensity of innovation
is reflected in the form of product modification (Verhees and Meulenberg, 2008).
Over recent years, the analysis of innovation in companies progressed remarkably,
as Den Hertog (2000) shows. Barras (1986, 1990) pointed out that companies are not
 merely passive recipients of manufacturers’ innovations and the emphasis on Companies’
technological innovations was somewhat moderated by the recognition of the quality vs
importance of non-technological elements of innovation in service firms.
Starting from the actors that are involved in the innovations’ initiation (meaning: performance
the clients, the suppliers and the service firm), Den Hertog (2000) identifies five types of
innovation:
(1) supplier-dominated innovation; 133
(2) innovation within services;
(3) client-led innovation;
(4) innovation through services; and
(5) paradigmatic innovation.
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The effects of innovation on companies can be seen in firm’s financial benefits,

increasing customer value and strategic success (Tidd et al., 2001).
Strategic success is depending on the company’s power to provide innovative
services.
An example from the financial services field is provided by Dodgson and Rothwell
(1995) regarding the competitive advantage that make Citibank gain the position of
technology leader in 1939 when the bank was the first one that offered services through
ATM.
Also, Kay (1993) argued that if in the past competitive advantage used to come from
low prices and high quality, nowadays, it increasingly depends on innovative
activities. In his paper, Del Valle (2009) considers the generation of human capital
through training a source of competitive advantage that gives rise to better
performance by means of extraordinary income. He believes that training is:
[. . .] a worthwhile investment for the companies in our sector, since, as it is an activity where
the final client’s contact with the company is through the employee providing service, the
training of said employee is the best standard for measuring the client’s quality perception.
Along with the R&D, customers seem to play an important role in generating ideas, the
expression “customer involvement” being more and more popular. Lundkvist and
Yakhlef (2004) believe that:
[. . .] within the evolving research, customer involvement is cast in an information-processing
mould that tends to reduce it to the mere transfer of the information from where it exists
(customers) to where it is dearly needed (the firm).
From that point of view, they identified five roles that these can play: customer as a
“resource”, “co-producers”, “buyers”, “users” and “products”. The first two are the input
side of the value creation process and they are strictly related to the idea of continuous
innovation. But, involving customers in the process of innovation implies several limits
(e.g. a common language, customers’ motivation) that should be taken into account.
Furthermore, strategic capabilities, defined as the firm’s capacity to deploy internal
resources and integrate external resources that have been coordinated purposely to
achieve a firm’s creation and a desired end state (Chen et al., 2008), have been
considered to affect firm’s performance.
 GS Because the leading indicators that can characterise a company’s activity are many,
3,2 we grouped them into six categories as shown in Table I for the purpose of establishing
which of them are the most influential for the financial performance using grey
systems theory (Akgun et al., 2007; Delcea et al., 2012; Delcea and Scarlat, 2010; Law
and Ngai, 2008; Mărăcine and Delcea, 2009; Tracey et al., 1999).

134 4. Grey relational analysis

It is known that, when we speak about the processes that took place at firms’ level,
usually we are confronted with cases of incomplete information, limited rationality and

Category Items (components)

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Competitive capabilities
Product innovativeness
Knowledge sharing and learning Knowledge sharing and learning to enhance employee capabilities
Product services offerings
Business process improvement Process standards raised periodically
Organizational reputation
Table I.
Quality characteristics
in firm’s activity
Price offered (competitive prices or prices as low or lower than
its competitors)
Quality of products (firm’s ability to compete based on quality)
Product line breadth
Order fill rate (frequency of customer backorders is low)
Order cycle time
Order/shipment information (accurate shipping/delivery dates)
Frequency of delivery
Intensity of organizational innovation
Predominance of innovative activities in all activity types
On-going learning leads to improved work practices and processes
Existence of internal spreading of knowledge through verbal and
non-verbal communications
Managerial commitment
Knowledge transfer and integration
Emotional capability (dynamics of: display freedom, experiencing,
reconciliation, identification)
Firm responds well to changing customer preferences
Firm alters product and/or service offerings to meet client needs
Firm’s ability to offer accompanying services along
with its products
Generating new business through customer referrals
Market share of core product
Firm has work processes to facilitate coordination of activities
Its process standards raised periodically
New work processes are easier to be used then the earlier ones
Firm’s overall competitive position is strong in its business sector
Firm’s sales growth rate is as high as possible or higher than that
of its competitors
Customers perceive that they receive their money’s worth for
purchasing your products and/or services
Company’s profitability is good relative to the overall performance
of your business sector
Firm’s customer retention rate is as high as or higher than that of
its competitors
Customer referrals
Market performance (sales gains and market share growth)
 even with situations of uncertainty or limited knowledge. As for the limited knowledge, Companies’
we shall say that it is widely spread in the problems regarding the firms’ bankruptcy, quality vs
mostly because of some aspects related to cognitive ability, knowledge level, time and
other varieties of factors (Liu and Lin, 2005). performance
Grey knowledge, as it will be extended in this paper, is referring to the limited
knowledge that exists at firms’ level, in some cases due to loss of information. The
name of “grey” derives from the nature of the subject under investigation (Liu et al., 135
2012). In control theory, colour indicates the degree of clarity of information. One of the
classic examples is the “black box”. Objects were called black if their internal structure
and relations between them were completely unknown to those who investigated them.
In the case of information, we use “black” to express all unknown information and
“white” to express all known, complete, information. Grey systems are considered to be
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a mix of information, partly known and partly unknown, a combination of black and
white, which means, in fact, “grey” (Fang et al., 2010).
In reality, people are confronted with systems that are not totally understood by
them. These systems are often not “white”, but “grey”.
In many theories, like decision theory, when we are trying to solve a certain
problem, we are working with oversimplified approaches of the involved systems,
which are in fact grey simplified systems, meaning white systems.
As Fang et al. (2010) said: “compared with other uncertain mathematical theories
(probability and statistics, fuzzy math, and so forth), grey systems theory has its own
unique research objective, research field, and research methods”. By extension, it can
be said that in the process of handling the limited knowledge, or by extension, limited
rationality, the grey systems theory could provide wealth theory and other certain
methodologies.
Also, grey systems theory can overcome some of the deficiencies of other traditional
statistical methodologies used over time such as: principal component analysis,
variance analysis, factor analysis or regression analysis. Grey systems theory has
shown that, unlike other theories, it can offer good results when applied to qualitative
variables. From this point of view, we are going to use in the following the grey
relational analysis (GRA) for determining the relations between firm’s qualitative
variables and its financial performance.
The steps implied by GRA are presented in the following (Feng et al., 2009):
(1) Calculating the behaviour sequence of the system characteristics and the
sequence of the related factors:
X i ¼ ðxi ð1Þ; xi ð2Þ; . . . ; xi ðnÞÞ; i ¼ 0; 1; 2; . . . ; m:

(2) Determining the initial values of each sequence:

0 xi 0 0 0
Xi ¼ ¼ ðxi ð1Þ; xi ð2Þ; . . . ; xi ðnÞÞ:
xi ð1Þ

(3) Getting the difference sequence:

0


0

Di ðkÞ ¼
x0 ðkÞ 2 xi ðkÞ

Di ¼ ðDi ð1Þ; Di ð2Þ; . . . ; Di ðnÞÞ:
 GS (4) Establishing the largest difference and the smallest difference of the two poles:
3,2 M ¼ max max Di ðkÞ;
i k

m ¼ min min Di ðkÞ:

i k

136 (5) Determining the grey relational coefficient:

m þ 1M
r 0i ðkÞ ¼ ; 1 [ ð0; 1Þ; k ¼ 1; 2; . . . ; m:
Di ðkÞ þ 1M
(6) Getting grey relational grade:
1X n
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r 0i ¼ r 0i ðkÞ:
n k¼1

5. Case study on Romanian companies

In order to identify which of the quality characteristics are influencing companies’
financial health or performance, the GRA was applied to the indicators collected at
firm’s level. For this purpose, eight Romanian companies were analysed. These firms
are representing sectors as: banks (one firm), commerce (two firms), construction
(two firms) and tourism (three firms).
The performance indicator selected was net profit and the qualitative
characteristics taken into account are the ones presented in Section 3:
.
competitive capabilities (noted Q1);
. product innovativeness (Q2);
.
knowledge sharing and learning (Q3);
.
product services offerings (Q4);
.
business process improvement (Q5); and
.
organizational reputation (Q6).
After applying the GRA for all the considered companies, the results were shown
in Figure 1.
The space distribution of the results is shown in Figure 2.
Taking into account the values of the GRA grade identified for each company, it
was found that some of the most important qualitative characteristics that are affecting
companies’ performance are organizational reputation and the development of
competitive capabilities. On the other hand, the qualitative characteristic with less
influence was found to be product service offerings (Figure 3).
Based on these findings, each company manager is encouraged to find the methods
and ways for acting properly on them with the purpose of increasing each firm’s
profitability and to avoid as much as possible its bankruptcy.

6. Concluding remarks and future work

Companies’ performance and bankruptcy were in the spotlight for more than 60 years
and now, more than ever, are subjects of numerous scientific research studies. One of
the reasons is represented by the increasing number of firms that went bankrupt in the
 Companies’
quality vs
performance

137
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Figure 1.
Grey relational
analysis results

Figure 2.
Grey relational analysis
space distribution

previous years. In 2009 alone in Romania, their number rose by 25 per cent (compared
with 2008). This was the starting point in conducting this study.
Also, in the research were included only the qualitative aspects that characterize a
company’s activity. This was contrasting with the great majority of current studies
which are still focussing on quantitative variables, taken from accounting documents,
and are omitting the not so obvious leading factors, the qualitative ones.
The study was conducted on eight Romanian companies and the results were eloquent:
not only that the grey relative analysis used established that there is a relation between
these characteristics and firm’s performance, but even that this link is a powerful one.
Knowing this and acting properly on the most powerful leading characteristics, firm’s
financial health can be improved and their performance can be raised.
 GS
3,2

138
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Figure 3.
The total values obtained
for the considered
characteristics

The research can be extended to the whole national economy for identifying the key
characteristics that can assure that a firm, one entered in a market, can survive and can
be profitable or, on the contrary, can be applied in particular by each manager to
his/her company for obtaining a great performance in the future.

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Further reading
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About the authors

Camelia Delcea graduated from the Faculty of Economic Cybernetics, Statistics and Informatics
within the Bucharest Academy of Economics and holds a PhD in economics given by the same
university. Her researcher activity is in the area of modelling and forecasting of firm’s “diseases”
using the concepts and methods offered by multi-agent systems and has included more than
30 articles, two international paper awards (“Excellent Paper Award” – IEEE GSIS 2009 and
“Best Paper Award” – Emerald Group Publishing Limited 2011) and a full scholarship for the
entire PhD program supported by the European Structural Funds (project POSDRU/6/1.5/S/11).
Camelia Delcea is the corresponding author and can be contacted at: camelia.delcea@yahoo.com
Emil Scarlat is Professor of Economic Cybernetics, Economic Dynamics and Complex
Adaptive Systems within the Department of Economic Cybernetics in the Bucharest Academy
 of Economics. His scientific activity is materialized in over 100 articles and scientific papers and Companies’
27 books in the field of: economic dynamics, economic cybernetics for micro and macro systems,
nonlinear dynamics and agent-based modelling of economic systems, theory of organized quality vs
complexity and, lately, virtual organizations. He is a member of the Editorial Advisory Board for performance
Economic Computation and Economic Cybernetics Studies and Research and Associate Editor of
Grey Systems: Theory and Application.
Liviu-Adrian Cotfas is an Assistant Lecturer within the Department of Economic Informatics
at the Bucharest Academy of Economics and Senior Software Developer at TotalSoft SA. He 141
graduated from the Faculty of Economic Cybernetics, Statistics and Informatics in 2008 and
holds a PhD degree in Business Computer Studies. He was involved in several complex projects,
including a project that has received the Best of Swiss Silverlight – Gold Award from Microsoft
in 2010. His main interest fields are: location-based services, recommender systems, geographic
information systems, evolutionary algorithms and web technologies.
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