Main Characteristics That Make A Business Successful

Published Date: 02 Nov 2017

STUDENT NUMBER:683677

The main aim of the final paper is to find the main characteristics that make a business successful during the recession. It mainly focuses on the top firms which are profitable based on balance sheet during recession. In order to achieve that goal it is necessary to use previous literature from surveys. Many researches show us that there are many methods to use to find the main characteristics that make a business successful during the recession. In order to meet the proposal’s objectives it is necessary to choose the most suitable methodology. Some of these methods are the complementary log–log model (cloglog) which is equivalent to the discrete time version of the proportional hazard model (Tsoukas, 2010) , Cox proportional hazard model (Spaliara and Tsoukas ,2012) with time-varying covariates, the structural equation modeling (SAS system's CALIS procedure) (Naidoo,2009) and the discrete duration models (Varuma and Rochab, 2010) but the most popularly known and that we will use is regression model (Charitou,Elfani and Lois,2010) (Clarke, Cull,and Kisunko, 2010) ( Lee,Beamish , Lee and Park ,2008).

Generally regression is a statistical measure trying to define the durability of the relationship between one dependent variable (usually typified as Y) and a series of other changing variables (known as independent variables). There are two basic types of regression. Regression involves the use of the linear classical model which gives directions to the process of regression. The first type is simple regression model implies the process of regressing only two variables where one independent variable to explain and predict the outcome of dependent variable Y. The second type is multiple regression models entail the regression of more than two variables, here we have one dependent variable and more than one independent variables are linear regression and multiple regression (Field,2005) . The general form of each type of regression is:

Simple Regression: Y = a + βX + u

Multiple Regression: Y = a + β1X1 + β2X2 + β3X3 + ... + βtXt + u

Where:

Y= dependent variable (the variable that we are trying to prognosticate)

X= independent variable (the variable that we are using to prognosticate Y)

a= the intercept

b= the slope or coefficient

u= the regression residual

By Legendre in 1805 and Karl Gauss in 1809 with their pioneering work regression analysis entered in the social sciences. The method of least squares was the first form of regression. They want to see the orbits of bodies about the Sun so they practised the method to the problem of determining from astronomical phenomena (Armstrong,2011). Gauss in 1821 with a version of the Gauss-Markov Theory issued more development of the theory of least squares. The term "regression" was invented by Francis Galton in the nineteenth century in order to typify a biological phenomenon. This biological phenomenon was that the heights of offsprings of tall ancestors tend to retrograde down towards a normal average (regression toward the mean). By Udny Yule and Karl Pearson the Galton's work was later liberalized to a more general statistical background while for Galton regression had only biological meaning. The corporate distribution of the response and explanatory variables is considered to be Gaussian in the Yule and Pearson work. This assumption was weakened by R.A. Fisher in his works (1922,1925). Fisher considered that the corporate distribution need not be Gaussian only the conditional distribution of the response variable need to be. In this case, nearly to Gauss's formulation of 1821 is the Fisher's assumption.

As very important advantages of regression, we can note that the assessments of the unknown parameters obtained from linear least squares regression are the ideal. So, the estimates from a broad category of possible parameter estimates under the usual assumptions are used for process modeling. Furthermore, it uses data very efficiently.

Good findings can be available with small data sets and the theory related to linear regression is well-understood and allows for construction of various types of easily-explained statistical intervals for predictions, calibrations, and optimizations. Nevertheless, there are some who criticize this model and find in this some unimportant disadvantages. One of these disadvantages of regression is that the results of regression can be outside of the range [0,1] and it has limitations in the shapes that linear models can receive over elongate ranges. What is more, the extrapolation properties it is extremely sensitive to outliers and will be possibly poor. (Aysegul Iscanoglu, 2005)

In our study we want to use financial and qualitative independent variables in order to try to find the most important of these variables which increase profitability and maintain business success in Greece during recession. In our case that we have a lot of variables we use multiple regression and logistic regression. "Logistic regression is a form of regression which is used when the dependent variable is a binary or dichotomous and the independents are of any type. In any regression analysis, the main feature is to find the expected value of the dependent variable under the known explanatory variables, i.e., E(Y jx), where Y and x denote the dependent and the vector of explanatory variables, respectively". (Aysegul Iscanoglu, 2005)

The data for our model were derived from the database of ICAP, a private organization that gathers and publishes financial data from balance sheets of enterprises of many Greek economies sectors. My analysis will concern the most profitable companies (10-20 companies) based on published balance sheet for the year 2011. The criteria which the businesses are assigned are profits EBITDA defined as profit from operating activities before the influence of financial assets and exceptional revenues- expenses and depreciation. This index constitutes the most authoritative yardstick odds from enterprises in different sectors. (ICAP)

Based on the aforementioned literature and methodology, we will proceed to a regression analysis with as dependent variable success of enterprise (Y=S represents the success of enterprise) and as explanatory variables (X=independents variables), the most important financial criteria which it will be identified by the t-test, in order to estimate which features and in what degree influence the success of the Greece firms (during the recession). A good index is the management of working capital (x1=WC is the working capital of company) leads to increased profitability and decreases volatility, which leads to the reduction in default risk and thus improves the firm’s value (Stephanou Charitou,Elfani and Lois ,2010). Another feature is the exports (x2=Exp represents the level of exports). The companies operating at an international level report significantly better revenues and profits compared to the companies on the domestic market . Globally, 50% of companies that do export reports increase in profits over the past 12 months compared with only 38% of companies that operate only domestically. These are the main findings of the second global survey of Regus a survey that recorded the opinions more than 20,000 senior executives from more than 90 countries around the world. In addition another interest index is the size of the firm (x3=SIZE is the size of the firm). The small and medium-sized firms face greater financial, legal, and corruption obstacles compared to large firms, and that the constraining impact of obstacles on firm growth is inversely related to firm size (Beck,Demirguc-Kunt and Maksimovic 2005). Further excellent criteria are the business liquidity and capital adequacy (x4=GL represents the general liquidity of enterprises). A very good way in order to cover costs of long term losses and expensive loan payments also to avoid borrowing to finance the losses and to manage the stock's levels efficiently and if it is possible to reduce inventories and make savings is to have the companies liquidity. In this case they can manage better the capital structure. (Aminu ,2012). A further indicator is innovation (x5=In represents innovation product or process). The businesses must innovate themselves from their competitors and their products to gain new and greater economic value. Product innovation matters most for the most profitable manufacturing establishments (Youtie and Roper, 2008). A product that best meets the needs and specifications of each customer (e.g. different country, different religions and different customs) has a greater value for the customer is willing to pay more for a differentiated product than a standard product. Also, for development and sustainable competitive advantages they used marketing innovation based on differentiation and cost leadership strategies. (Naidoo, 2009). We will take these entire indexes from published financial data, reports from the companies, official sites of the firms and financial sites. Thus, the form of the model which will be used in our study can be represented as:

S=a+β1WC+β2Exp+β3SIZE+β4GL+β5In

All the analysis that is described above will be performed with the usage of the appropriate software package (E-views, SPSS Excel). The next stage is the analysis and interpretation of the results of the empirical work. We will test the statistical significance of the explanatory variables, and the coefficients will be interpreted (whether these variables affect in a positive or negative way the success). Further, the model will be corrected if tests show that it is necessary to be done, so that our econometric approach to be as reliable as possible.

Concluding the methodology chapter, should be mentioned that in order to enhance the theoretical background of the dissertation, we should be informed further about the latest evolutions on the impacts of financial Crisis in Europe and in particular in Greece. Thus, we should broaden the study at academic level by reading more journals from databases.