Quality pays – Total Quality Management (TQM)
North American companies in the late 1980’s and early 1990’s got the marketing equivalent of a kick in the face from Japanese companies bringing in consumer products that were low priced AND high quality. U.S. companies sought to learn how Japanese did the TQM stuff, as it was clear quality pays. Funnily, the Japanese learned it from an American, Edwards Demming!
Besides the impact Demming had on quality in Japan, there is the impact of Six Sigma on Motorola and then General Electric (GE) profits.
In 1988, Motorola Corp. became one of the first companies to receive the Malcolm Baldrige National Quality Award. The award strives to identify those firms that are worthy role models for other businesses. One of Motorola’s innovations that attracted a great deal of attention was its Six Sigma program.
What did it take to turn a large company with six autonomous and competitive sectors, each accustomed to driving its own business and initiatives, into one collaborative team sharing the same goal?
Motorola’s Digital Six Sigma initiative had the objective of driving overall profitability. The program brought together leaders from each of the company’s business units to share best practices, improve profitability, and achieve
US$3 billion in cost reduction within three years. Quality pays!
ISO 9000 Certification Case Studies
“The ISO 9000 series of quality management systems standards, introduced in 1986, have been adopted at over 560,000 locations worldwide. Anecdotal evidence suggests that firms can achieve internal benefits such as quality or productivity improvements, or that certification can help firms maintain or increase their market share, or both. Others argue that the standard is too generic to cause performance improvement, but can be seen as a signal of good management.
A study tracked the financial performance from 1987 to 1997 of all publicly traded ISO 9000 certified manufacturing firms in the US with SIC codes 2000-3999, and tested whether ISO 9000 certification leads to productivity improvements, market benefits, and improved financial performance. They employed event study methods, matching each certified firm to a control group of one or more non-certified firms in the same industry with similar pre-certification size and/or return on assets.
The study found that a firm’s decision to seek their first ISO 9000 certification was indeed followed by significant abnormal improvements in financial performance, though the exact timing and magnitude of this effect depended on the specification of the control group. Three years after certification, the certified firms displayed strongly significant abnormal performance across all control group specifications. Quality Pays!
The degree to which the precise results vary across control group specifications indicates that event studies should always include extensive sensitivity analysis, for instance matching by size and performance separately and jointly, using both single firms and portfolios as controls.”
ref . The Financial Impact of ISO 9000 Certification: An Empirical Analysis. C.J. Corbett, M.J. Montes-Sancho, D.A. Kirsch. Management Science. 51(7): 1046-1059. July 2005.
ISO 9001 yields financial rewards for registered companies.
“The financial performance of companies registered to ISO 9001 improved, when compared to companies that have not pursued conformity to the standard”, according to researchers from UCLA, the University of Maryland, and the Universidad Carlos II in Madrid. Researchers analysed the impact of ISO 9001 conformity on publicly traded firms and found a direct correlation with a firm¹s return on assets (RIA).
“We were shocked by the magnitude of the effects.” said David Kirsch of the University of Maryland. While the performance of firms that attained ISO 9001 registration improved, firms that didn¹t seek registration experienced deterioration in return on assets, productivity, and sales.
The researchers combined databases on registrations with financial information provided to the SEC from 1998 to 1997 to yield a group of 7,598 public firms that received one or more ISO 9001 certificates prior to 1998. Researchers analysed the two years prior to a company¹s registration because it normally takes about 18 months to implement ISO 9001.
The return on assets rate of chemical companies registered to ISO 9001 remained steady at 17.9% for the two years prior to certification. In contrast, the ROA for non-registered firms dropped during the same period. Two years prior to registration the difference between the two groups was a 5% increase in ROA. But three years after becoming registered, those companies improved their ROA by 12%. The researchers made a direct correlation between ISO 9001 registration and improved performance because the control groups started with the same ROA prior to the registration decision.
“Something changed specifically at the registered firms in the year prior to the actual registration,” researchers said. “In all analyses we conducted, we found significant improvements in ROA.
From that perspective, we can answer the original question of Does it pay to seek ISO 9001 certification? With a resounding YES!“
ref: RAB News & Notes, Spring 2003, Volume 8 Number 2.