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PCA-DEA
A PCA-DEA method for method
organizational performance
evaluation based on intellectual
capital and employee loyalty
A case study Received 9 March 2019
Revised 22 June 2019
13 August 2019
Khojasteh Rahimpour and Hadi Shirouyehzad 15 November 2019
Department of Industrial Engineering, Islamic Azad University, Accepted 27 January 2020
Abstract
Purpose – The purpose of this study is to propose a model to evaluate the performance of organizational
units considering intellectual capital (IC) and employee loyalty approach applying principal component
analysis and data envelopment analysis (PCA-DEA) method.
Design/methodology/approach – Organization units are considered as decision-making units, IC
components including human capital (HC), structural capital (SC) and customer capital are inputs and
employee loyalty is output. The principal component analysis was used to converts inputs and outputs into
the independent variables. As a return to scale is variable, a modified envelopment input-oriented BCC model
applied to obtain the efficiency of organization units. Also, all units of organization are ranked. Eventually,
sensitivity analysis performed to show how input variables influence on output variable.
Findings – Operation, design and construction, production planning, internal affairs, quality control and
security were recognized as efficient units. Also, units of operation, internal affairs and quality control ranked
first to third, and the human resource unit earned the last rank. In addition, results of sensitivity analysis on
input variables showed that the order of impact intensity is: customer capital, HC and SC, respectively.
Originality/value – Existence a framework for the development of human resource strategies and
prioritization in the allocation of organizational resources to improve the performance of the organization
considering human resources is vital. Most of the previous studies, just have examined the impact of IC on
different dimensions of organizational performance. Meanwhile, evaluating the performance of IC with
employee loyalty approach, using PCA-DEA simultaneously can evaluate and measure the impact of IC on
the performance of the organization and its units regarding employee loyalty, which has a significant impact
on improving the organization’s level of IC and human resource management.
Journal of Modelling in
Management
Keywords Efficiency, DEA, Human resources, Efficiency analysis © Emerald Publishing Limited
1746-5664
Paper type Research paper DOI 10.1108/JM2-03-2019-0060
JM2 1. Introduction
In the second half of the 1980s, the growth of knowledge and innovation has pushed
companies and academic experts to identify new ways to determine the value of a company
to identify new activities that create value added. In the 1990s, the emergence of resource-
based theory and knowledge-based theory showed that corporate success is not merely
attributable to material resources and intangible resources can differentiate the company
from competitors (Pedrini, 2007).
The importance of knowledge resources has increased rapidly in many fields such as
accounting, economics and strategic management. In parallel with the long-standing
recognition of the prominence of intellectual capital (IC) in determining a firm’s value, there
is also a growing debate on the role of management accounting and control systems within
the setting (Asiaei et al., 2018).
IC has been argued to be the key element of value creation in contemporary economies
and this argument has been widely supported by empirical research studies (Andreeva and
Garanina, 2016). The topic of IC has gained relevant consideration among academics,
practitioners and consultants. It is because, in the current knowledge era, companies
compete relying more on intangible resources such as technologies, innovations in process,
organization employee abilities, creativity, relationships with external partners and industry
networks (Ginesti et al., 2018). IC influences firm performance mainly through interactions,
combinations and mediations. Also, there is a great deal of evidence on the significant
relationship between IC and the firm’s innovation performance (Inkinen, 2015). Evaluation
of IC is a vital phenomenon for various organizations to determine the value of the
organization, to improve the control system and to assist in strategic planning and decision-
making (Arvan et al., 2016).
On the other hand, employee loyalty is a very important issue for organizations because
there is not an easy way to maintain employee loyalty in an organization to retain the
employees. Also, increasing employee loyalty can reduce employee turnover and relocation
rates. Employees can represent an important investment and vital resource for all
organizations because the salaries, bonuses and employees’ benefits can enhance the
employees’ work hard and loyalty to the organization. So, there is a considerable expense for
replacing an employee whether he/she is holding a high position or low position in the
organization, as the employee loyalty is not easily build up in the organization (Yin et al., 2012).
Considering the importance of IC and employee loyalty, the purpose of this study is
proposing a model to evaluate the performance of organizational units considering the IC
and employee loyalty approach applying principal component analysis and data
envelopment analysis (PCA-DEA) method. Also, the ranking of units has been done by
using a method proposed by Makui et al. (2008). In addition, based on the results, the
sensitivity analysis was performed and the results are explained in detail.
In the following sections, the related studies are considered first. Then, in the theoretical
foundations, we will explain the concepts and models used and describe the methodology of
research in the research methodology section. In the next step, using the proposed method,
we analyzed the collected data, and finally, in the discussion and conclusion section, in
addition to providing a complementary description of the results, we will examine the
strengths and weaknesses of the research and make suggestions for future research studies.
2. Literature review
2.1 Intellectual capital
Wang and Chang (2005) investigated the impact of IC elements on business performance, as
well as the relationship among IC elements from a cause-effect perspective. The partial least
squares approach is used to examine the information technology (IT) industry in Taiwan. PCA-DEA
Results show that IC elements directly affect business performance, with the exception of method
human capital (HC). HC indirectly affects performance through the other three elements as
follows: innovation capital (InnC), process capital (PrC) and customer capital. There also
exists a cause-effect relationship among four elements of IC. HC affects InnC and PrC. InnC
affects PrC, which, in turn, influences customer capital. Finally, customer capital contributes
to performance. The cause-effect relationship between leading elements and lagged elements
provides implications for the management of firms in the IT industry.
The purpose of Bontis and Serenko (2009) is to replicate and extend prior research results
within a new financial services sub-sector. A survey instrument based on prior research was
administered to 396 employees from 10 credit unions across Canada. The results showed
that the pattern and value of causal paths change slightly from one context to another. In
addition, the empirical results presented should lead analysts to recognize that measuring
and strategically managing IC may in fact become the most important managerial activity
for driving organizational performance (OP).
Guo et al. (2012) in a research on the IC, and performance of biotech companies,
investigated the impact of IC on the performance of these companies. It provides an
integrated framework to clarify the inter-relationship between compensation scheme, HC
and financial performance of listed biotech firms. The sample studied includes 279 biotech
firms listed in the US market for the period 1994-2005. The results show that the association
between patents and research and development (R&D) expenditure is found to be positive,
although the increase in patents did not significantly improve the accounting performance.
The quality of HC, measured by several factors, is expected to play a positive role in
technology innovations and financial performance.
The purpose of Vishnu and Kumar Gupta (2014) is to study the relationship between IC
and performance of pharmaceutical firms in India. The secondary objective is to propose
and test modified models of value added intellectual coefficient (VAIC) method. Data on 22
large pharmaceutical firms collected for empirical investigation. Return on assets and return
on sales are performance variables. IC and its components, HC, structural capital (SC) and
relational capital (RC), are predictor variables. Three extended and modified VAIC models
are proposed. Multiple regression techniques are applied to pooled data to draw inferences.
Results show instances of a positive relationship between IC and performance variables. RC,
the new variable, does not demonstrate a statistically significant relationship with
performance variables.
The purpose of Asiaei and Jusoh (2015) is to empirically explore IC from a
multidimensional perspective and its relationship with OP within Iranian public listed
companies. Survey data from chief financial officers in 128 companies within the Tehran
stock exchange were collected and analyzed using partial least squares regressions. The
findings suggest that organizational culture plays a significant role in developing HC and
SC while trust is a major determinant of all the IC components, namely, human, structural,
relational and social capital. The results also confirm that the investment in human,
structural and RC could potentially bring about OP improvement in Iranian public listed
companies.
Dženopoljac et al. (2016) examined the degree to which IC and its key components affect
the financial performance of selected ICT companies compared to effects on physical and
financial capital. The analysis included 13,989 Serbian ICT companies during 2009-2013.
VAIC was used to measure the level of IC contribution to value creation. Measures of
financial performance used in the study were returned on equity, return on assets return on
invested capital, profitability and asset turnover. Results indicate that when using firm size
JM2 and leverage as control variables, only capital used efficiency has a significant effect on
financial performance. Finally, the research confirms that there were no significant
differences in financial performance among different ICT subsectors.
Scafarto et al. (2016) investigated the relationship between IC, categorized in terms of four
sub-constructs, namely, HC, RC, InnC and PrC with business performance in the
agribusiness industry. Based on a sample of international agribusiness companies observed
over a five-year period, this paper uses correlation and multiple regression analysis to test
for the existence of a positive relationship between each IC component and conventional
business performance metrics. The empirical results support the hypothesis that RC and
PrC have a positive impact on corporate performance. Counter to the expectations, InnC by
itself is negatively associated with performance. Results also failed to confirm the
hypothesis that HC directly and positively affects performance. However, HC positively
moderates the relation between InnC and performance, which suggests that firms that
heavily invest in HC are better placed to gain returns from their R&D investments.
Paper of Andreeva and Garanina (2016) provided empirical insight into the relationship
between three main elements of IC (human, relational and structural) and OP in the
particular context of Russian manufacturing companies. The sample comprises 240 Russian
manufacturing companies. The data are collected by survey using the scales already
validated in the international context. The authors use a two-step analysis, factor and
regression analyses, to answer the research questions. The findings demonstrate that
structural and HCs positively influence OP, explaining a quarter of its variation, while RC
does not.
Liu (2017) examined the effect of IC attributed to the overall performance relationships of
cultural and creative organizations (CCOs). Based on 434 Taiwanese CCOs and integrating
the concepts of the upper social network and IC theories, the findings argue that
interrelationships exist among types of IC. Further, social capital plays a critical mediating
role in the relationships between IC and CCO performance. Furthermore, business ties play
positive moderating roles and environmental uncertainty has negative impacts on social
capital and CCO performance.
Khalique et al. (2018) tested and validated the integrated IC model by examining the
relationship between IC and OP of small and medium-sized enterprises (SMEs) operating in
the electrical and electronics manufacturing sectors in Malaysia. Data was collected through
a validated survey instrument administered on a sample of 237 respondents from targeted
SMEs. Cronbach’s alpha and confirmatory factor analysis were used to examine the
reliability and validity of the research instrument. Structural equation modeling (SEM) was
used to test the proposed research hypotheses. The results demonstrate that HC, customer
capital, SC, social capital, technological capital and spiritual capital are crucial components
of IC and all have linked to OP.
Bontis et al. (2018) provided empirical evidence of the relationship between IC and
economic performance, with a focus on social cooperative enterprises (SCEs) that work in
non-profit sectors. A survey was developed and administered in Italy. A final sample of 151
SCEs participated in the study. Data were collected on IC measures, social enterprise
activities and economic and mission-based performance outcomes. Two hypotheses that
proposed a positive association between IC sub-components (i.e. HC, SC and RC) and the
economic and mission-based performance of SCEs were tested. The findings highlight that
HC contributes to explain economic performance, which is positively affected by the
presence of graduate employees and value added per employee. However, economic
performance is negatively affected by the yearly training per employee. In addition, human
and RC, contribute to explain mission-based performance, which is positively affected by
yearly training, the value added per employee and the quality of relationships with PCA-DEA
customers. However, mission-based performance is negatively affected by the relationships’ method
quality with the reference territorial community. Therefore, RC would seem to affect only
mission-based performance, and HC influences both dimensions of corporate performance.
SC does not affect social cooperatives’ performance.
Sardo et al. (2018) analyzed the effect of IC on small and medium-sized hotel financial
performance for the period between 2007 and 2015. Using a sample of 934 Portuguese small
and medium-sized hotels, they adopted the GMM system (1998) estimator, to analyze
dynamic panel data. The findings suggested that IC components, i.e. HC, SC and RC provide
a positive impact on hotel financial performance. HC and RC seemed to be key elements for
the success of hotels, is the basis of service quality in the hotel’s sector. Furthermore, the
results showed that HC and SC are capitalized by the establishment and maintenance of
long-term relationships with key stakeholders. These findings indicated that the interaction
between IC components enhances the hotel’s financial performance. Herein, it is highlighted
the importance of IC in small and medium-sized hotel financial performance.
Ginesti et al. (2018) analyzed the impact of IC on the reputation and performance of
Italian companies. They used a unique data set of 452 non-listed companies that obtained a
reputational assessment from the Italian Competition Authority (ICA). To test the
hypotheses, they implemented several regression analyses. Results support the argument
that human capital efficiency (HCE) is a key driver of corporate reputation. Findings also
reveal that companies, which obtained reputational rating under ICA scrutiny, show a
positive relationship between IC elements and various measures of financial performance.
The main contribution of Nawaz (2019) is to report on the impact of IC on the financial
performance of Islamic banks operating in the UK. Two distinct measures, return on
average assets and return on average equity are used to measure the financial performance.
The paper also controls for the number of employees and bank size. Results based on the
regression analysis suggest that IC efficiency followed by the VAIC relates positively to
the financial performance of Islamic banks in the UK. The analysis further suggests that
bank size and number of employees equally contribute to banks’ achieving higher financial
performance. Additionally, the paper further ghettoizes sub-components of IC, namely,
capital used, HC and SC to analyze the discrete impact of these IC constituents on financial
performance. The analysis of the sub-components suggests a positive relationship between
physical and financial capital used efficiency, HCE and performance.
2.3 Integrating data envelopment analysis with intellectual capital and employee loyalty
Shirouyehzad et al. (2012) applied data envelopment analysis (DEA) to introduce a practical
model for evaluating employee productivity. Data on the inputs and outputs are derived
from the questionnaires and the analysis of the employees’ job nature and their personal
information. The results of the DEA model for 55 employees showed that 10 employees have
the highest efficiency of all the employees in the sample. These efficient employees work in
the administrative, production and technical departments. Employees who earn a high
salary in comparison with others do not necessarily have higher job satisfaction.
The purpose of Yi-Ching Chen et al. (2012) is to determine whether personal assets or
organizational investments from an IC perspective have an influence on employee
commitment in the Taiwanese cultural creative industries. They have used a cross-level
design to conduct a questionnaire survey. The research variables covered two levels as
follows: individual level (personal HC and organizational commitment); and organizational
level (organizational IC). The authors contacted 39 SMEs in Taiwan’s cultural creative
industries, requesting their participation in the study, and 27 managers and 86 employees in
27 cultural creative firms provided research information. The research results indicate that
both personal HC and organizational IC were antecedents of organizational commitment.
For personal HC, employees with higher levels of education are less committed to
organizations. Tenured employees were found to be more committed to organizations.
However, the authors did not find a significantly positive effect of personal age on
commitment. In regard to organizational IC, the stocks of HC and social capital increased
organizational commitment. Interestingly, organizational capital reduced organizational
commitment for employees in cultural creative industries.
JM2 Lu (2012) used a two-stage DEA to evaluate the cost and teaching and research
efficiencies of public universities in Taiwan. Additionally, the paper also uses a truncated-
regression to discuss whether IC affects the operating efficiency of universities. The results
demonstrate that the universities are much better at handling cost efficiencies than teaching
and research efficiencies. The regression analysis indicates that IC does play an important
role in influencing teaching and research efficiency. Finally, the conceptual roadmap to
performance improvement strategies, which helps the manager and/or authorities to
improve their operating efficiencies, also is presented.
Chang et al. (2013) applied DEA to construct an efficiency evaluation model for the
Taiwanese digital content industry based on the perspective of the IC. The empirical results
suggest that the scale of digital content companies does play an important role in
influencing the operating efficiency. The firms have a small amount of capital can still attain
optimal efficiency, from the perspective of IC. In addition, human resource capital and
customer capital are the most significant influential factors that deserve digital content
firms’ attention. It is suggested that enterprises in the digital content industries should focus
more on managing their IC.
Lu et al. (2014) applied the dynamic slack-based measure (DSBM) model to evaluate the
performance of 34 Chinese life insurance companies for the period 2006-2010. Their study
also examines the relationship between IC and performance using the truncated regression
approach. Findings indicate that over the period of the study, the mean efficiency scores of
life insurers are relatively stable. Under the DSBM model, the results indicate that the range
of average efficiency remained between 0.905 and 0.973 during this period. In contrast, the
mean efficiency scores obtained using the BCC model decreased monotonically from 2006 to
2009 but increased in 2010. In fact, the mean efficiency scores obtained using the BCC model,
are consistently lower than those obtained using the DSBM model. The standard deviations
under the DSBM model are generally lower than those under the BCC model. The results of
operating efficiency scores show that approximately 38 per cent of the life insurers with
local capital sources need to reduce their inputs if they were to become efficient, whereas
about 67 per cent of the foreign life insurers are found to be inefficient. Besides, regression
analysis reveals that ICs are significantly positively associated with firm operating
efficiency.
Lu et al. (2014) developed a network DEA production process to evaluate the R&D
efficiency and economic efficiency of the national innovation system (NIS) in 30 countries.
The results show that R&D performance is better than the economic performance,
indicating that most countries have good R&D capabilities but have failed to create
economic value through their R&D capabilities. In terms of the R&D efficiency stage, 24
countries are deemed efficient. Among the regions, the average R&D performance of
countries in Oceania and Asia are the best. Meanwhile, with respect to the economic
efficiency stage, 17 countries are found to be efficient. The regional average performance of
the American NIS is the best, followed by Asia, Oceania and Europe. Next, the study
examines the effect of IC on the NIS performance through truncated regression. Findings
indicate that IC does play an important role in affecting the NIS performance.
Nitkiewicz et al. (2014) applied DEA for the purpose of evaluating regional IC across 60
Polish regions. The analysis aimed at documenting the efficiency of chosen components of
IC across Polish regions. The efficiency scores obtained show significant differences
between Polish regions in terms of IC use. The statistical data for each region were collected
for the years 2004, 2008 and 2011. Results find support for such regional variability with
some Polish voivodeships performing extremely well while others clearly underperformed
with respect to their efficiency in transforming IC into positive regional development PCA-DEA
outcomes. method
Ma et al. (2014) made an empirical analysis of creative HC technical efficiency of 31
provincial districts in China from 2003 to 2010 by using a three-stage DEA method and got
three main conclusions. First, through the measurement and comparison of the technical
efficiency level of creative HC among different districts, the current level of comprehensive
technical efficiency among different districts in China is relatively high but has not reached
the optimal level and still has room to improve. Secondly, according to the measurement
and comparison of the technical efficiency level of creative HC among different provinces
and cities, the comprehensive technical efficiency level of all provinces and cities has not
reached the optimal level and needs to be improved. Thirdly, the analysis of environment
variables effects on the technical efficiency shows that promotion of the technical efficiency
of creative HC is most significantly affected by the economic growth, the development of
skill training, and the enlargement of the scale of universities, while the optimization of
healthy environment and the acceleration of population migration also make a partial
contribution to the improvement of the technical efficiency.
Kweh et al. (2015) applied a two-stage approach to examine IC efficiency and its
determinants. In Stage 1, they evaluated the IC efficiency of 25 Malaysian software
companies by using the DEA approach. The findings show that 80 per cent of the software
companies are inefficient in transforming IC into tangible and intangible values. In other
words, five companies are relatively efficient, based on both the CCR and BCC models. Also,
findings show that the sample companies have to first improve their technical efficiency,
and subsequently, scale efficiency. They also provided some information on how much and
in which types of IC an inefficient software company needs to improve. In Stage 2, they run
ordinary least squares and Tobit regression analyses to examine determinants of IC
efficiency. Sales growth appears to have a significantly positive influence on IC efficiency.
Chao et al. (2015) applied the dynamic network slack-based measure DEA model to
measure the efficiency of Taiwanese banks during the period 2005-2011. In their research,
the banking production process is defined as having three intermediate characteristics as
follows: capability, efficiency and profitability. The first (capability) stage measures bank
capability for cultivating IC. The second (efficiency) stage measures bank efficiency in using
IC to create loans and investments. Using the loans and investments created from the second
stage, the third (profitability) stage measures bank ability to create a revenue through such
means as interest income, fee income and other investment-related income. Using the
DNSBM, they performed an integrated analysis of the overall efficiency of the banks, the
efficiency of the three intermediate production stages, and the dynamic changes in this
efficiency across time. They used a sample of 27 banks operating in Taiwan during 2005-
2011. Each bank is treated as one decision-making unit (DMU). Input and output data were
collected from the Taiwan Economic Journal Data Bank, the annual financial statements of
the company, and their annual reports. According to the results of the DEA approach, Banks
1, 14 and 17 were on average the most efficient ones during the period 2005-2011. Those
three banks were also the most efficient divisions for the three production stages.
Rahimpour et al. (2016) evaluated the function of organizational units based on the IC and
organizational commitment with the use of DEA. The data collecting tool is a questionnaire.
They evaluated the efficiency of 18 units of a company in Iran. The results show that the
units of operation, warehouse, design and manufacturing, quality assurance and education,
production planning and laboratory were recognized as efficient DMUs.
Veltri et al. (2016) focused on the measurement of a relevant component of the HC, the
managerial ability. They used the “two stage SFA-DEA” approach, in which both stochastic
JM2 frontier approach (SFA) and DEA are used to estimate the efficiency scores firms adopt to
derive a measure of MA. Italian banks have been chosen as the sample to investigate and
implement the model. They have calculated efficiency scores for two states as follows:
variable return to scale (VRS) and constant return to scale (CRS). In the case of VRS, there is
an increase of estimated efficiencies but trends remain substantially unchanged. In the case
of disaggregating for legal category, Popolari Banks perform better than Ltds and MCBs
and that the latter register the worst results. In addition, the largest banks achieve higher
levels and that with decreasing size also the estimated values decrease. These results
confirm the existence of a strong heterogeneity within the Italian banking system.
Tavakoli et al. (2016) presented a hybrid ANP and DEA method for ranking
organizational units, as well as prioritizing the organization’s HC management criteria. The
data was gathered through a related questionnaire based on HC management and
organizational commitment. To show the application of the proposed method, Foolad
Technic International Engineering Company was chosen as a case study. This company has
27 organizational units that they have specialized duties. The results of this evaluation
showed that oil and gas process engineering unit was only considered to be efficient and the
weight of each input and output was also determined. In the next step, the decision-making
supermatrix was formed using the criteria weight ratio and the units’ efficiency ratio and
also the data obtained from the questionnaire. Then, with the use of the ANP method, the
units were ranked and in the end, the oil and gas process engineering unit was recognized as
the best unit. Finally, the drivers of HC management were ranked and leadership practices,
HC management and learning capacity were prioritized as the most important drivers,
respectively.
Garg (2016) evaluated the intangible efficiency of the Indian banking system using the
VAIC with the help of DEA. In addition, stepwise regression analysis is used to select
important features (or factors) from a given data set, which affects intangible efficiency.
They evaluated the efficiency of 37 banks in 2012. The results show that 10 banks (27 per
cent) are relatively efficient and 27 banks (73 per cent) are relatively inefficient.
Salehi and Arayesh (2017) evaluated the performance of the automotive industry’s IC
firms, listed in the Tehran stock exchange using DEA. The results indicate that among 32
companies’ auto industry, 5 companies are efficient and 23 companies are inefficient. In
addition, findings show that there is a significant positive relationship between IC efficiency
and profitability of companies in the automobile industry.
Tavakoli et al. (2017) proposed a method for performance evaluation and ranking of 27
organizational units in a case study in Iran, using fuzzy DEA. At first, the performance of
organizational units evaluated using fuzzy DEA and then using sensitivity analysis, the
most effective criteria on the efficiency of organizational units were determined. The results
of applying the proposed technique on Foolad Technic Company showed that the units of
gas and oil process engineering and information resources were efficient, and it suggests
that these two units have a higher level of HC management among other units of this
company. Also, sensitivity analysis of HC management drivers showed that the removal of
human workforce optimization criteria created the most difference in the efficiency value of
the organizational units and these criteria have the most impact on the organizational units’
efficiency. Then, the unit ranking was paid with the approach of HC management, and it
was done with the use of fuzzy logic and the worst and the best efficiencies. The results of
ranking the organizational units showed that the gas and oil process engineering unit won
the first place with the highest mean in the worst and in the best state.
Pachura et al. (2018) have used DEA to evaluate IC in the Polish and Slovak NUTS 2
regions. The analysis aims to present the efficiency of the chosen components of regional IC.
To verify the models, data on the Polish and Slovak regions are used for a dynamic PCA-DEA
comparison of their IC performance in 2011. They have evaluated 20 different regions, which method
five regions were fully efficient. In addition, the efficiency scores obtained show that the
regions are significantly diverse in terms of their use of IC.
The purpose of Venugopal et al. (2018) is to value the performance efficiency of IC on
financial performance indicators of Titan Company Limited. Data required for analysis were
collected from the annual reports of the company for a period of 20 years. The study uses a
DEA model and results of the efficiency analysis reveal that of the 20 years studied, only
6 years (2007, 2011, 2012, 2013, 2015 and 2016) were found to be the best performing years in
terms of harnessing the goodness of IC. Some years were very close to the perfect efficiency
score of one but the rest of the years showed very poor utilization of IC to impact financial
performance.
In a research carried out by Tavakoli and Shirouyehzad (2013) the performance of the
Foolad Technique International Engineering Co units was assessed with the approach of HC
management using the PCA-DEA method and then the effective units ranked using super
efficiency method and TOPSIS. Performance evaluation results showed 11 organizational
units including systems, telecommunication, R&D, gas and oil process engineering,
estimation and contractor, general plan and road engineering, logistic, information resource,
project accounting, business management and energy and facilities mechanics are
considered efficient with optimum efficiency value. Ranking results displayed that in super
efficiency method two units of R&D and logistics are ranked first and second; however,
based on TOPSIS method two units of information resource and gas and oil process
engineering has been selected as the first and second units in the ranking.
There are some research studies in the literature that used dynamic DEA for
performance evaluation during a particular timeframe as well.
Wu et al. (2006) taking a sample of 39 Taiwanese companies, adopted DEA and the
Malmquist productivity index (MPI) to evaluate the impact of IC on competitive advantage.
Using the DEA method and the MPI, the study examined the relative efficiency of these IC
companies as of 2002 and evaluated the shift of efficiency from 1999 to 2002. Results of DEA
depict that 20 companies had a pure technical efficiency score (PTEVRS) of 1.00, and
therefore, are efficient. In total, 18 companies had a PTEVRS between 0.80 and 1.00 and one
company had a PTEVRS between 0.60 and 0.80. The results of MPI show that the efficiency
changes of these 39 companies are positively correlated with a shift in technology (0.888)
and catching-up efficiency (0.400) from 1999 to 2002. However, the efficiency change is
negatively correlated with relative efficiency in 1999 (0.556). This negative correlation
indicates that between 1999 and 2002, firms who have achieved significant improvements in
efficiency were those with poor relative efficiency in 1999.
In a paper by Costa (2012) adopted DEA and MPI to explore the relationship between IC
management and the firm performance, evaluating the efficiency and productivity of the IC.
The data analyzed were collected through interviews of executives and managers of the
Italian luxury yacht sector and they refer to 17 companies in the years 2005 and 2008. The
results of DEA model show that only eight companies are efficient. In addition, the ranking
shows that DMU12 is a benchmark for nine inefficient enterprises, and therefore, considered
as the best DMU and ranked first. The application of MPI shows that less than half of the
companies of the sample improved their efficiency in the period of time considered and the
comparison with the DEA results allow to deepen the conclusions on IC management.
In a research carried out by Ahmed and Krishnasamy (2013), the nature and extent of
productivity changes of ASEAN countries, namely, Malaysia, Indonesia, Philippines,
Thailand and Singapore are analyzed over the period 1993-2006. The Malmquist total factor
JM2 productivity (TFP) index calculated within the framework of DEA is next decomposed into
three constituent elements accounting for different sources of productivity growth, which
are technological progress, efficiency change and the effects of economies of scale. The
analysis is carried out for the sample with and without the HC variable to isolate the impact
of HC investment on TFP growth in these countries. Results indicate that when HC is
included in the model, Malaysia and Singapore reported an increase in TFP and this growth
in productivity is derived from both technical efficiency gain and technological progress.
The model without HC shows that there is a TFP reduction in Malaysia, Philippines and
Thailand, whereas Indonesia and Singapore recorded growth in TFP. This suggests that HC
investment plays a pivotal role in driving TFP growth in Malaysia.
Chen et al. (2014) investigated changes in productivity of general insurance firms in
Malaysia for the period from 2008 to 2011. Moreover, they examined the impact of IC on
changes in productivity. In Stage 1, they applied the MPI of DEA and the MPI with a
bootstrapping approach to evaluate changes in productivity. In Stage 2, they examined the
impact of IC on changes in productivity through OLS and Tobit regressions. They studied
16 firms identified on the website of the Central Bank of Malaysia for the period from 2008 to
2011 because of data availability. They observed that the mean productivity increased by
20.4 per cent over the period. On average, the growth in productivity appears to be driven by
technological improvement rather than improvement in efficiency. Additionally, 15 out of
the 16 general insurance firms have MPI scores that are greater than one, suggesting that
many general insurers experienced growth in productivity in the sample period. Looking at
the sources of inefficiencies, they found that the growth in productivity was because of
technological improvement and that was offset by regress in efficiency for most of the
sample firms. Among the sample firms, Kurnia Insurans (Malaysia) Berhad had the highest
changes in productivity at 112 per cent per year on average, approximately 98 per cent of
which was attributable to technological improvements. Under the regression analysis, both
OLS and Tobit regression results reveal that IC, namely, VAIC and its individual
components (VAHC, SCVA and VACA), is positively and significantly related to changes in
productivity.
Long Kweh et al. (2014) used a dynamic DEA model called the DSBM model to estimate
the operating efficiency of 32 Chinese non-life insurance firms. Using a panel data set for
the period from 2006 to 2010, the authors run ordinary least squares regressions to find the
relationship between IC and efficiency performance. The DEA findings show that over
the 5-year period, the operating efficiency scores of the Chinese non-life insurers in the
sample ranged from 0.816 to 0.855. Regression results show that HC, SC and RC are
significantly and positively related to operating efficiency. Moreover, the authors found that
Chinese non-life insurers with local capital sources are more efficient than those with a
foreign capital source.
Kweh et al. (2014) used dynamic DEA to evaluate the operating performance of 36 life
insurance companies in Taiwan and China from 2004 to 2008, including 17 in Taiwan and 19
in China. In addition, their study adopted panel data regression, which uses the cross-section
and time-series approaches to investigate the impact of IC on operating performance. The
results indicated that the overall performance of life insurance companies in China was
better than that of life insurance companies in Taiwan. Furthermore, in both countries, the
performance of life insurance companies with local capital was better than that of companies
with foreign capital. Moreover, those companies with relative efficiency scores of 1 for 5
consecutive years or with constantly rising scores during the sample period accounted for 24
per cent of the companies in Taiwan and 37 per cent in China. In other words, 76 and 63 per
cent of the companies in Taiwan and China, respectively, did not have scores of 1 for 5
consecutive years or constantly rising scores during the sample period. Thus, they need to PCA-DEA
allocate resources more effectively and reduce the amount of wasted resources to maintain method
long-term operations. The results also showed that HC and SC had impacts on the operating
performance of life insurance companies.
In a paper by Alhassan and Asare (2016) the MPI is used to estimate the productivity
growth of 18 banks in Ghana from 2003 to 2011 while the VAIC is used to measure bank IC
performance. The panel-corrected standard errors estimation technique is used to estimate a
panel regression model with MPI as the dependent variable. Bank market concentration and
bank size are controlled for in the regression analysis. The authors find productivity growth
to be largely driven by efficiency changes compared to technological changes. The results
from the regression analysis indicate that VAIC has a positive effect on the productivity of
banks in Ghana. The authors also find HCE and capital used efficiency as the components of
VAIC that drive productivity growth in the banking industry. Bank size and industry
concentration are also identified as significant drivers of productivity in the market.
Nourani et al. (2018) used a dynamic network DEA model to estimate the IC efficiency at
three levels for 31 Malaysian insurers over the period of 2005-2012. The results show that SC
is the business blind spot for the IC efficiency of Malaysian insurance firms. In regards to
ownership, this study found distinct results pertaining to dissimilar characteristics of
foreign and domestic insurers. For example, domestic insurers surpass foreign insurers in
HCE but fall behind in physical capital efficiency (PCE) and structural capital efficiency
(SCE). Likewise, foreigners perform better in overall IC efficiency. Moreover, the yearly
results show that domestic insurers experience more declining trends in their IC efficiency
compared to foreign insurers. The decline is more noteworthy after the implementation of
liberalization policies in 2009, particularly in PCE and SCE. In general, therefore, it seems
that domestic insurers should emphasize staff training because HCE would gradually result
in better PCE and SCE, which would ultimately contribute to the overall firm’s performance.
Teplova and Sokolova (2019) proposed an original approach to constructing an index of
efficiency of foreign direct investment (FDI) transformation into steady economic and
innovation growth. With the nonparametric DEA method and Malmquist index, they
identified countries at the efficiency frontier by the quality of FDI management. They
investigated countries on the sample of 31 developed and developing economies. The results
show that there is a mutual influence between the FDI inflow and global competitiveness
index, index of economic freedom and the worldwide governance indicators (the highest
significance value is for the regulatory quality). China and Germany steadily dominate
along the economic growth path in 2005, 2010 and 2015, the USA, along the IC growth path.
During the period considered, the highest increase of the FDI management efficiency is
demonstrated by Germany and the Czech Republic. In Russia the efficient transformation of
the FDI inflow into steady economic and IC growth is not achieved. In 2015, Russia is
characterized by the minimum value of efficiency along the steady economic growth path on
the sample of countries considered. Besides, the change in efficiency along the IC growth
path (the Malmquist index) is highly influenced by government effectiveness.
Above mentioned reviews show that although on each of the concepts of IC, employee
loyalty and DEA, and even combining some of these factors with each other, various and
independent studies have been carried out by researchers; a study on the effect of IC on
employee loyalty using PCA-DEA was not observed. In fact, in most of the previous studies,
researchers just have examined the impact of IC on different dimensions of OP. Meanwhile,
evaluating the performance of IC in organizations with employee loyalty approach and
using PCA-DEA simultaneously can evaluate and measure the impact of IC on the
performance of the organization and its units in terms of employee loyalty, which has a
JM2 significant impact on improving the organization’s level of IC management and human
resource management. Additionally, in this study, the standard questionnaire was not used
to measure employee loyalty and according to studies and research studies, a researcher-
made questionnaire was prepared and used. Besides, in this study, the performance of
organizational units, and influential factors of IC are ranked based on the intensity of
impact. Regarding the necessity of existence, a framework for the development of human
resource strategies and prioritization in the allocation of organizational financial and non-
financial resources to improve the performance of the organization in the field of human
resource and to fill the research gap, the purpose of this study is proposing a model to
evaluate the performance of organizational units considering IC and employee loyalty
approach applying PCA-DEA method.
3. Theoretical foundations
3.1 Intellectual capital
IC is a knowledge that transforms raw materials and makes them more valuable and
includes the talent of the employee, the value of proprietary knowledge and processes, and
the value of relationships with customers and suppliers (Stewart and Ruckdeschel, 1998). IC
consists of three components of HC, SC and customer capital. The main component of IC is
HC, and two other capitals are subordinate to it so that without HC, their growth and
development is limited. The simplest definition of HC implies the intensity of the knowledge
of the workforce (Habib et al., 2010). HC is one of the most important resources in any
organization to improve its effectiveness and efficiency to create a competitive advantage
(Nielsen et al., 2006). According to Martin, successful companies often help themselves by
maintaining strong, experienced and active human resource in group work (Azad and
Mohajeri, 2002). The SC is the knowledge that at the end of each day, remains in the
organization, belongs to the entire organization, can be re-created and shared with others
(Mouritsen et al., 2001). SC is related to the mechanism and structure of a business unit and
can help employees in optimal intellectual performance, and thus, the organization will be
able to improve its performance (Chen et al., 2005). Customer capital or communication
involves outsourcing dependencies such as customer loyalty, good reputation and company
relationships with its suppliers. This is defined by the value of a customer receiving from
the transaction with the organization (Warner and Kotter, 2002). This capital defines the
formal and informal relationships of an organization with external stakeholders and their
perceptions about the organization and determines the exchange of information between the
organization and them (Shafia et al., 2009).
s.t.
X
m
vi xij ¼ 1 ði ¼ 1; 2; . . . ; mÞ (2)
i¼1
X
s X
m
ur yrj vi xij þ w 0 ð j ¼ 1; 2; . . . ; nÞ (3)
r¼1 i¼0
Ur « ðr ¼ 1; 2; . . . ; sÞ (4)
Vi « ði ¼ 1; 2; . . . ; mÞ (5)
Modified envelopment input-oriented BCC model is as follow:
!
Xm X s
þ
Max Z ¼ u « Si þ sr (6)
i¼1 r¼1
s.t
X
n
l j xij þ Si ¼ u xip ði ¼ 1; 2; . . . ; mÞ (7)
j¼1
X
n
l j yij Srþ ¼ yrp ði ¼ 1; 2; . . . ; mÞ;
j¼1
ðr ¼ 1; 2; . . . ; sÞ (8)
X
n
lj ¼ 1 (9)
j¼1
lj 0 ð j ¼ 1; 2; . . . ; nÞ (10)
Srþ ; Si ; l j 0 ði ¼ 1; 2; . . . ; mÞ ;
ðr ¼ 1; 2; . . . ; sÞ
ð j ¼ 1; 2; . . . ; nÞ (11)
(Banker et al., 1984).
It should be noted that each of the two forms used for the solution, there will be no difference
in the final results. In other words, in both of the above forms, efficient DMUs are efficient
and inefficient DMUs are inefficient yet.
3.5 Principal component analysis and data envelopment analysis method PCA-DEA
PCA is probably the most popular multivariate statistical technique, and it is used by almost method
all disciplines. It is also likely to be the oldest multivariate technique. In fact, its origin can be
traced back to Pearson (1901) or even Cauchy (1829) or Jordan (1874) and more. However, its
modern instantiation was formalized by Hotelling (1933), who also coined the term principal
component (PC). PCA analyzes a data table representing observations described by several
dependent variables, which are, in general, inter-correlated. Its goal is to extract the
important information from the data table and to express this information as a set of new
orthogonal variables called PCs. PCA also represents the pattern of similarity of the
observations and the variables by displaying them as points in maps (Abdi and Williams,
2010).
The idea of combining DEA and PCA methodologies was developed independently by
Ueda and Hoshiai (1997) and Adler and Golany (2001, 2002). In these papers, it is suggested
that the variables can be divided into groups, based on their logical composition with
respect to the production process, and then replaced with PCs representing each group
separately. Alternatively, PCA could be applied to the complete set of variables (inputs and/
or outputs individually) to improve the discriminatory power of DEA by reducing the data
to a few uncorrelated PCs, which generally describe 80-90 per cent of the variance of the
data. If most of the population variance can be attributed to the first few components, then
they can replace the original variables without much loss of information (Adler and
Yazhemsky, 2009). It is worthwhile to mention that the PCA-DEA formulation is exactly
equivalent to the original DEA model when the PCs explain 100 per cent of the correlation in
the original input and output matrices (Adler and Golany, 2007).
PCA is intended to be a dimensionality reduction technique to ease complexity in
multivariate data analyses. Assume that there are n decision-making units (DMUj, j =
1, . . ., n), each using m inputs (I = 1, . . ., m) to produce s outputs (r = 1, . . ., s). In the PCA-
DEA model, PCA is applied to replace the original m inputs and s outputs with a smaller
group of PCs that explain the variance structure of a matrix of data through linear
combinations of variables. If most of the population variance can be attributed to the first
few components, then those PCs can replace the original variables with minimal loss of
information. The PCs (PC1, PC2, . . ., PCp) are the uncorrelated linear combinations of input
and output variables ranked by their variances in descending order. The PCA used here is
based on correlation rather than covariance, as the variables used in DEA are often
quantified in different units of measurement. The PC scores for the input variables are
computed using equations (12) and (13):
X
n
VarðPCi Þ ¼ max; lji2 ¼ 1 (13)
j¼1
Formulas for the PC scores for the output variables are analogous.
In other words, the first objective of PCA is to identify a new set of variables such that
each new variable called a PC is a linear combination of the original variables. Second, the
first new variable PC accounts for the maximum variance in the sample data. Third, the new
variables (PCs) are uncorrelated. PCA is performed by identifying the Eigen-structure of the
covariance or the singular value decomposition of the original data. Clearly, if we use less
JM2 than full information, we lose some of the explanatory powers of the data, but we improve
the discriminatory power of the model (Põldaru and Roots, 2014).
s.t
Xm
vx
i¼1 i ip
¼1 (a.2)
X
s X
m
ur yrj vi xij # 0 ð j ¼ 1; 2; . . . ; nÞ (a.3)
r¼1 i¼0
Ur « ðr ¼ 1; 2; . . . ; sÞ (a.4)
Vi « ði ¼ 1; 2; . . . ; mÞ (a.5)
Then, using the u CCR obtained from model (a), the model (b) will be solved to calculate the
common weight values of u and v for each input and output.
n
X
Min dj þ djþ (b.1)
j¼1
s.t
X
s X
m
ur yrj vi ϴ*j xij # 0 ð j ¼ 1; 2; . . . ; nÞ (b.2)
r¼1 i¼1
X
s X
m
ur yrj vi ϴ*j xij þ dj djþ ¼ 0 ð j ¼ 1; 2; . . . ; nÞ (b.3)
r¼1 i¼1
X
s X
m
ur þ vi ¼ 1 (b.4)
r¼1 i¼1
By solving model (b), the common weight values of u and v for all DMUs will be obtained.
Finally, using the equation (13), the efficiency value for DMUj (j = 1, 2, . . ., n) will be calculated.
Ps
u*r yrj
u ¼ Pr¼1m *
(14)
i¼1 vi xij
If using efficiency (u *, v *) the efficiency value is equal to 1, then DMUj can be called efficient.
It should also be noted that if DMUj considered as an efficient DMU using equation (13), then
in the model (a) it will also be efficient.
4. Methodology
This research evaluates the performance of organizational units with the IC and employee
loyalty approach using the PCA-DEA method. In fact, regarding the correlation between the
input components with each other, as well as the output of the model, PCA was used to
convert inputs and outputs into the independent variables. After this step, as the results of
calculations illustrate that return to scale is variable, a modified envelopment input-oriented
BCC model has applied to obtain the efficiency of organization units. Then, a model
proposed by Makui et al. (2008) has been used to rank all units of the organization.
Eventually, a sensitivity analysis has been presented to show how the input variables
influence on output variable. The steps of this research are as follows:
Step 1 – selecting input and output variables: The related past research studies are
considered. Based on the literature review and regarding expert opinions, input and
output variables are determined.
Step 2 – selecting the appropriate DEA model: After recognizing and determining
input and output variables, the required data from the factory under study are
collected. As mentioned in Section 3.4, to select the appropriate DEA model,
return to scale should be considered. We consider it at this stage.
Step 3 – converting data collected: Given the fact that there is a correlation between the
input components with each other, as well as the output of the model the PCA method
has been applied to convert the inputs and outputs into independent variables.
Step 4 – calculating efficiency values: Applying a modified envelopment input-
oriented BCC model, the efficiencies of all units are calculated.
Step 5 – ranking: all units are ranked using a model proposed by Makui et al. (2008).
Step 6 – sensitivity analysis: To make further information about how input and
output variables influence efficiencies, a sensitivity analysis has provided.
Selecting
appropriate
DEA model
Converting
data
collected
Calculating
efficiency
values
Ranking
Figure 1. Sensitivity
analysis
Steps of research
It should be noted that in the company under study, about 50 people were identified as
managers or supervisors. Only 47 persons were available and the questionnaire was
distributed among all of them. A total of 38 questionnaires were completed and collected,
which was the basis for this research.
this purpose, MINITAB 16 software has been applied. Table III showed the values of
converted independent variables using the PCA method.
In Table III, some values obtained by the PCA method are negative. Given that the input
and output data must be nonnegative to solve problems with the DEA method, these data
should be converted into positive data. To do this, we transform the values into positive data
using equation (c.1) (Pastor, 1996).
Variables
Unit HC SC Customer capital Employee loyalty
Independent positive values of each of the input and output variables are presented in
Table IV.
5.6 Ranking
Using a model proposed by Makui et al. (2008) units of the organization have been ranked.
The results are mentioned in Table VI.
As can be seen, the operation unit has the highest rank among the units. Also, internal
affairs and security have reached second and third place, respectively. In addition, human
resources had the poorest performance among the whole organization units and ranked 18.
Variables
Unit HC SC Customer capital Employee loyalty
Table V.
benchmarks
Efficiency values and
Benchmarks
DMU name Efficiency value Inputs Output
In this model, the influence intensity of the input variables, are including customer capital,
HC and SC, respectively. Therefore, managers of inefficient units to improve their unit
efficiency should focus on customer capital. The results of these calculations are shown in
Table VII.
Unit Efficiency value Unit ranking Unit Efficiency value Unit ranking
operation unit. In other words, with a drop of 0.544 in the SC, the production unit will be an
efficient unit regarding the operation unit (as a benchmark). There is no difference, which
alternative has been selected as a benchmark because both of them (production planning
unit or operation unit) will lead to efficiency for the production unit. With a similar
procedure, all un-efficient units could improve their efficiency regarding their determined
benchmarks.
The ranking of all organizational units illustrated that units of operation, internal affairs
and quality control are located in the first to third places and the human resource unit
earned the last rank. Also, applying sensitivity analysis on input variables, IC components
were prioritized in terms of the impact intensity on efficiencies of units. The results showed
that the impact intensity of these components is customer capital, HC and SC, respectively.
Therefore, attention to this point in the development of human resource strategies and
prioritization in the allocation of organization financial and non-financial resources to
improve the performance of the organization in the field of human resources plays a
significant role.
The strong point of this research is that although on each of the concepts of IC,
employee loyalty and DEA, and even the combination of some of these factors with
each other, various and independent studies have been carried out by researchers, but
by studying previous works a research on the effect of IC on employee loyalty using
PCA-DEA method was not observed. Meanwhile, evaluating the performance of IC in
organizations regarding employee loyalty approach and using DEA simultaneously,
can evaluate and measure the impact of IC on the performance of the organization and
its units in terms of employee loyalty, and has a significant impact on improving the PCA-DEA
organization level of IC, and human resource management. Also, in this research, the method
organizational units are ranked. Besides, influential factors of IC have been ranked
according to the impact severity on efficiencies.
The followings could be investigated for future research studies:
Considering other factors in addition to IC as input variables of the model.
Using the proposed model in other organizations and industries such as service
industries.
Using fuzzy data in the design of questionnaires.
Using other methods to collect information such as an interview.
Using other ranking models.
Using two-stage DEA or window DEA.
Using opinions of industry experts in analyzing the results.
Using researcher-made questionnaires for measuring IC in an organization so that
the nature of the unit completing the questionnaire is taken into account.
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JM2 Appendix 1. IC measures questionnaire
Dear Respondent,
The current questionnaire is designed to measure the intellectual capital of your organization. You should judge how
much each sentence applies to you.
Thanks in advance for the time and attention you make in answering this questionnaire.
Personal Information (Please write your first and last name here): ………………………………….
1 2 3 4 5
Completely
Completely
No opinion
Disagree
disagree
Question description
Agree
agree
Row
Dear Respondent,
The current questionnaire is designed to determine the level of employee loyalty in your company. You should judge
how much each sentence applies to you.
Thanks in advance for the time and attention you make in answering this questionnaire.
Personal Information (Please write your first and last name here): ………………………………….
1 2 3 4 5
Completely
Completely
No opinion
Disagree
disagree
Question description
Agree
agree
Row
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