TQM and Corporate Financial Performance

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TQM and Corporate Financial Performance Dr.
Vinod R. Singhal DuPree College of
Management Georgia Institute of
Technology Atlanta, GA, 30332 Ph
404-894-4908 Fax [phone] E-mail
vinod.singhal_at_mgt.gatech.edu May 2003
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What is TQM?

• Foundation for developing and operating a
  management system
• Total customer satisfaction
• Employee involvement and development
• Continuous improvement and learning
• Partnerships with customers and suppliers

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Criticisms of TQM
What paradigm is as dead as a pet rock? Little
Surprise here Its total quality management.
TQM, the approach of eliminating errors that
increase costs and reduce customer satisfaction,
promised more than it could deliver and spawned
mini-bureaucracies charged with putting it into
action. Business Week June 23, 1997
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Criticisms of TQM

• Is TQM yesterdays news or does it still
  shine? (Wall Street Journal)
• Quality Programs Show Shoddy Results (Wall
  Street Journal)
• Totaled Quality Management (Washington Post)
• The Cracks in Quality (The Economist)
• Is TQM Dead? (USA Today)

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Popularity of Management Tools
1993
1999 Tool Rank Usage Rank
Usage Mission/value statements 1 88
1 85 Customer Sat. measurement
2 86 4 74 Total Quality
Management 3 72 14
41 Competitor profiling 4 71
NA NA Pay for performance 5 70
6 76 Source Darrell Rigby
Management Tools and Techniques, published in
California Management Review , Winter 2001
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Satisfaction with TQM

• Average satisfaction rating across 25 tools 3.76
  out of 5
• Average satisfaction rating of TQM
  3.82 out of 5
• Ranking of TQM in terms of satisfaction 11 out of
  25
• of respondents extremely satisfied 21
• of respondents dissatisfied 10
• Defection rate 11
• Defection rank 13 out 25
• Lower number is better
• Source Darrell Rigby Management Tools and
  Techniques, published in California Management
  Review , Winter 2001

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Baldrige Award and Business Press

• Wall Street Journal (1998-2001)
• 25 articles related to the Baldrige Award
• 11 are award announcements
• Others about issues related to the Award
• Not that complimentary of the award process
• No mention of Baldrige Award after March 1999
• Business Week, Fortune, and Forbes (1998-2001)
• - 17 articles with one each in Fortune and
  Forbes
• - Last serious article was December 2000

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Reasons for Criticisms

• Unrealistic expectations and hype
• Sloppy research
• Poor scorekeeping
• Competition among management paradigms

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Defending TQM

• Theory and common sense tells that TQM works
• Anecdote of success stories
• Cannot establish link between TQM and financial
  performance

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Resolving the Controversy About TQM

• How does TQM affect profitability?
• How does TQM affect shareholder value?
• Answer the above using methods and data that are
• - Verifiable
• - Objective
• - Replicable

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Performance Variables

• Growth in operating income
• Growth in sales
• Improvement in efficiency
• Operating return on sales
• Operating return on assets
• Stock price performance (shareholder value)

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Firms With Effective TQM Implementations

• Quality award as "proxy" for effective TQM
  implementation
• Awards recognize firms that have improved
  quality effectively
• Assessment and rating of a firms quality
  practices
• Incentives to award it to firms that have done a
  good job
• Awards are demonstrated evidence of effectiveness
• Quality awards have been a source of controversy

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Partial List of Award Givers
Customers that give Awards Independent Award
Givers Auto Alliance International Inc. Baldrige
Award Chrysler Corp. State Award Ford Motor
Co. Shingo Prize General Motors Corp. Honda of
America Manufacturing Inc. New United Motor
Manufacturing Inc. Nissan Motor Manufacturing
Corp. U.S.A Inc. Toyota Motor Manufacturing U.S.A
Inc. Eastman Kodak Co. GTE Corp. International
Business Machines Minnesota Mining and
Manufacturing NASA Texas Instrument Co. Xerox
Corp.
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EFQM Framework - A Systems Perspective
People Management
Leadership
Customer Results
Processes
Key Perform-ance Results
Policy and Strategy
People Results
Resources and Partnerships
Society Results
Enablers
Results
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Baldrige Framework - A Systems Perspective
2 Strategic Planning
5 Human Resource Focus
7 Business Results
1 Leadership
3 Customer Market Focus
6 Process Management
4 Information and Analysis
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TI Supplier Quality Award Program

• Minimum TI Purchase from supplier is 250,000
• Must go through evaluation every year
• Evaluated on 100 points
• Must score 88 points or more to win the award
• To win again must show improvement over previous
  year

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TI Supplier Quality Program

• Category Items Weight
• Product Quality 1 20
• Quality Management 2 10
• Disruptions 1 10
• Delivery 1 10
• Cycle Time 2 10
• Cost -Price 2 20
• Customer satisfaction 6 20

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How are Quality Award Winners Determined?
Chrysler GTE
Texas Ins Xerox Quality 40 24
40 55 On-time 20 24
20 23 Delivery Price 20
13 20 12 Customer 20
37 20
12 Satisfaction
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Sample

• Publicly traded quality award winners
• Sample of about 600 winners
• Median equity value 400 million
• Median sales 632 million
• Median assets 516 million

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Choice of Time Period
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Controlling for Economy and Industry Effects

• For each award winning firm a benchmark firm is
  identified
• Not won a quality award
• Roughly the same industry
• Roughly the same size
• Compute benchmark" adjusted performance as
• Difference change in award winner minus change
  in its benchmark
• 10 20 (Winner) - 10 (Benchmark)

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Implementation Periods Results

• No difference in the performance of the award
  winners and benchmarks

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Financial Performance
Comparison of the performance of award winning
firms and benchmark firms during the
post-implementation period.
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Financial Performance
Comparison of the post-implementation periods
benchmark-adjusted performance of smaller and
larger award winners.
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Financial Performance
Comparison of the post-implementation periods
benchmark-adjusted performance of lower capital
and higher capital intensity award winners.
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Financial Performance
Comparison of the post-implementation periods
benchmark-adjusted performance of focused and
diversified award winners.
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Financial Performance
Comparison of the post-implementation periods
benchmark-adjusted performance of independent
award winners and customer award winners.
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Stock Price Performance

• Does buying stocks of award winners results in
  higher returns?
• How long does it take before positive returns
  are observed from investing in award winners?

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Stock Price Performance
January 1, 1994
January 1, 1989
January 1, 1990
Award Winner
Return 100
5-year buy-and-hold return
January 1, 1994
January 1, 1989
Benchmark
Return 75
5-year buy-and-hold return
Difference Award winners return - Benchmarks
return 100 - 75 25
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Stock Price Performance
Comparison of the post-implementation periods
stock price performance of award winners and
various benchmark portfolios.
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Financial Performance
Comparison of the post-implementation periods
benchmark-adjusted stock price performance of
independent award winners and customer award
winners. . .
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Financial Performance
Annual comparison of the post-implementation
periods stock price performance of award winners
against SP 500. .
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Baldrige Winners Vs. SP 500
Comparison of the Baldrige Award Winners stock
price performance against SP 500 index. .
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Fund Comparison Q-100 and SP 500

Source Steven George - Bull or bear? Published
in Quality Progress, April 2002
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Quarterly Fund Performance Q-100 vs. SP 500

Source Steven George - Bull or bear? Published
in Quality Progress, April 2002
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Customer Satisfaction and Market Value
MVA
42.5
33.7
23.2
22.8
22.1
14.7
13.4
12.3
8.1
7.6
4.3
1.8
MVA Market value added in billions of dollars
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Cause and Affect Relations - Baldrige Model

• Leadership
• Strategic Planning
• Customer/Market focus
• Information and Analysis
• Human Resource Focus
• Process Management
• Process Results
• Customer results
• Profitability
• Sales Growth
• Cost reduction

What and How?
Non-Financial Results
Financial Results
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Evidence from Baldrige-Based Assessments

• Baldrige assessments at various business units
  since 1992
• Data on score in each category
• Data from 200 such assessments

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Categories 1-6 Drives Process Results

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Categories 1-6 Drives Customer Results

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Categories 1-6 Drives Non-Financial results

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Categories 1-6 Drives Financial Results

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Categories 1-6 Drives Business Results

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Evidence from Australian Quality Award Applicants

• Study done by Alexander Hausner of the University
  of Wollongong, Australia
• 22 manufacturing firms that applied for the
  Australian Quality Award
• Based on 10 key performance indicators tracked
  over 7 years
• High evaluation scoring organizations are much
  more likely to belong to best performing
  organizations
• An increase in the evaluation score is
  associated with improvements in key performance
  indicators

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Evidence from Australian Quality Award Applicants
Source Alexander Hausner University of
Wollongong, Australia
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Relation of different categories with Performance
Strong
Relation to Orgs KPIs
Weak
Relation to AQA Score
Strong
Weak
Source Alexander Hausner University of
Wollongong, Australia
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Relation of different categories with Performance
6.4 Measures of Quality
Strong
3.2 Data analysis and use
Relation to Orgs KPIs
7.1 Organisational Performance
Weak
Relation to AQA Score
Strong
Weak
Source Alexander Hausner University of
Wollongong, Australia
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How can you link TQM to performance?

• Tracking self assessment scores and linking these
  to business unit performance scores

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How can you link TQM to performance?

• Tracking self assessment scores and linking these
  to business unit performance scores
• Tracking benefits and costs at a project level

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GE Six Sigma Payback (1998 Annual Report)

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How can you link TQM to performance?

• Tracking benefits and costs at a project level
• Tracking self assessment scores and linking these
  to business unit performance scores
• Developing a cost of poor quality system

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Computing the Cost of Poor Quality

• Internal Failure Costs
• Scrap
• Rework
• Disposition costs
• Downtime costs
• External Failure Cost
• Handling returned material
• Warranty cost
• Dealing with complaints
• Litigation cost
• Costs incurred by customers

• Appraisal Cost
• Inspection
• Testing
• Quality audits
• Initial cost and maintenance of test equipment
• Prevention Cost
• Quality planning
• Process planning
• Process controls
• Process/product redesign
• Training

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Hidden Cost of Poor Quality

• Opportunity cost of extra resources used to
  produce defectives
• Poor customer loyalty
• Poor word of mouth/ bad publicity
• Loss of goodwill/sales

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Cost of Quality at a Business Unit at Texas
Instruments
Prevention/Appraisal Internal/External
Failure Total
Note Cost of Quality is expressed as a
percentage of revenue
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Cost of Quality at Union Pacific Railroad
Note Cost of Quality is expressed as a
percentage of revenue
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Cost of Quality Performance at Union Pacific
Internal/External Failure Cost
Prevention Appraisal Costs
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How can you link TQM to performance?

• Tracking benefits and costs at a project level
• Tracking self assessment scores and linking these
  to business unit performance
• Developing a cost of poor quality system
• Developing quantitative relationships between
  leading indicators of process, employee, and
  customer performance, and financial performance

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Estimating relationships at Sears

• Employee satisfaction survey
• Customer satisfaction survey
• Financials ROA, OM, Revenue
• Detailed statistical analysis of all three types
  of data provided causal links

Service
Employee Attitudes
Employee Behavior
CustomerImpression
Financials
CustomerRetention
Source Rucci, Kirn and Quinn The
Employee-customer profit chain at Sears, Harvard
Business Review, January-February 1998
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Estimating relationships at IBM Rochester
Productivity (P)
Satisfaction with Manager
Employee Satisfaction (ES)
Customer Satisfaction (CS)
Job Satisfaction
Market Share
Satisfaction with Right Skills
Cost of Quality (Q)
Productivity revenue per employee Cost of
Quality - hardware warranty cost
Source Steve Hosington and Earl Naumann The
Loyalty Elephant, Quality Progress -February 2003
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Estimating relationships at IBM Rochester
Cost of Quality (Q)
Productivity revenue per employee Cost of
Quality - hardware warranty cost
Source Steve Hosington and Earl Naumann The
Loyalty Elephant, Quality Progress -February 2003
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Estimating relationships at IBM Rochester

Source Steve Hosington and Earl Naumann The
Loyalty Elephant, Quality Progress -February 2003
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Estimating relationships at Johnson Control
Source Steve Hosington and Earl Naumann The
Loyalty Elephant, Quality Progress -February 2003
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Summary of Findings

• TQM pays-off handsomely
• Be realistic
• Be patient
• TQM is not a guarantee for success

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Implications

• Dont give up on TQM
• Embrace and adopt TQM
• Conduct self-assessments
• Compete for state, national, and other TQM awards
• Create a TQM income statement, compute return on
  TQM

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Final Thoughts What is TQM?

• Not a tool or technique
• Not a program
• Not a replacement for corporate strategy
• It is a source of competitive advantage