1 tqm and corporate financial performance dr. vinod r. singhal dupree college of management georgia...
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TQM and Corporate Financial Performance
Dr. Vinod R. SinghalDuPree College of ManagementGeorgia Institute of Technology
Atlanta, GA, 30332Ph : 404-894-4908Fax : 404-894-6030
E-mail: [email protected]
May 2003
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• Foundation for developing and operating a management system
– Total customer satisfaction
– Employee involvement and development
– Continuous improvement and learning
– Partnerships with customers and suppliers
What is TQM?
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“What paradigm is as dead as a pet rock? Little
Surprise here: It’s 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
Criticisms of TQM
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• “Is TQM yesterday’s 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)
Criticisms of TQM
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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
Popularity of Management Tools
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• 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
Satisfaction with TQM
7
• 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
Baldrige Award and Business Press
8
• Unrealistic expectations and hype
• Sloppy research
• Poor scorekeeping
• Competition among management paradigms
Reasons for Criticisms
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• Theory and common sense tells that TQM works
• Anecdote of success stories
• Cannot establish link between TQM and financial performance
Defending TQM
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• How does TQM affect profitability?
• How does TQM affect shareholder value?
• Answer the above using methods and data that are
- Verifiable- Objective- Replicable
Resolving the Controversy About TQM
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• Growth in operating income
• Growth in sales
• Improvement in efficiency
– Operating return on sales
– Operating return on assets
• Stock price performance (shareholder value)
Performance Variables
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• Quality award as "proxy" for effective TQM implementation
• Awards recognize firms that have improved quality effectively
• Assessment and rating of a firm’s 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
Firms With Effective TQM Implementations
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Customers that give Awards Independent Award GiversAuto Alliance International Inc. Baldrige AwardChrysler Corp. State AwardFord Motor Co. Shingo PrizeGeneral 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 MachinesMinnesota Mining and ManufacturingNASATexas Instrument Co.Xerox Corp.
Partial List of Award Givers
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Leadership
People Managem
ent
Policy and
Strategy
Resources and
Partnerships
Society Results
People Results
Customer Results
Processes
Key
Perform-ance
Results
Enablers Results
EFQM Framework - A Systems Perspective
15
Baldrige Framework - A Systems Perspective
4
Information and Analysis
5
Human Resource
Focus
3
Customer & Market Focus
7
Business Results
7
Business Results
2
Strategic Planning
1
Leadership
6
Process Management
CUSTOMER AND MARKET FOCUSED STRATEGY AND
ACTION PLANS
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• 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
TI Supplier Quality Award Program
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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%
TI Supplier Quality Program
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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
How are Quality Award Winners Determined?
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• Publicly traded quality award winners
• Sample of about 600 winners
– Median equity value $ 400 million
– Median sales $ 632 million
– Median assets $ 516 million
Sample
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6 yearsbefore
1 yearbefore
Year of1st award
4 yearsafter
Implementationperiod
Post-implementation period
1984 1989 1990 1994
Choice of Time Period
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• 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)
Controlling for Economy and Industry Effects
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• No difference in the performance of the award winners and benchmarks
Implementation Period’s Results
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62%
12%
22%
67%
86%
13%
43%
32%
0%6% 7%
37%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
OperatingIncome
Sales Return onSales
Return onAssets
TotalAssets
Employees
Per
cent
Cha
nge
Award WinnersBenchmark Firms
Financial Performance
Comparison of the performance of award winning firms and benchmark firms during the post-implementation period.
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21%
42%
17%
39%
63%
9%
22% 20%
6% 5%9%
18%
0%
10%
20%
30%
40%
50%
60%
70%
OperatingIncome
Sales Return onSales
Return onAssets
TotalAssets
Employees
Per
cent
Cha
nge
Smaller FirmsLarger Firms
Financial Performance
Comparison of the post-implementation period’s benchmark-adjusted performance of smaller and larger award winners.
25
15%
38%
47%
17%10%
65%
22%
14%
4%7%
25%21%
0%
10%
20%
30%
40%
50%
60%
70%
OperatingIncome
Sales Return onSales
Return onAssets
TotalAssets
Employees
Per
cent
Cha
nge
Low Capital IntensityHigh Capital Intensity
Financial Performance
Comparison of the post-implementation period’s benchmark-adjusted performance of lower capital and higher capital intensity award winners.
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39%
7%
22%
42%
56%
1%
30%
20%17%
15%
8%
18%
0%
10%
20%
30%
40%
50%
60%
OperatingIncome
Sales Return onSales
Return onAssets
TotalAssets
Employees
Per
cent
Cha
nge
Focused Firms
Diversified Firms
Financial Performance
Comparison of the post-implementation period’s benchmark-adjusted performance of focused and diversified award winners.
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48%
25%
49%
22%
73%
10%
33%
23%
9%6%
11%
24%
0%
10%
20%
30%
40%
50%
60%
70%
80%
OperatingIncome
Sales Return onSales
Return onAssets
TotalAssets
Employees
Per
cent
Cha
nge
Independent Award Winners
Customer Award Winners
Financial Performance
Comparison of the post-implementation period’s benchmark-adjusted performance of independent award winners and customer award winners.
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• 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?
Stock Price Performance
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January 1, 1994
5-year buy-and-hold return
January 1, 1989 Award Winner
5-year buy-and-hold return
January 1, 1989 January 1, 1994Benchmark
Return = 100%
Return = 75%
Difference = Award winner’s return - Benchmark’s return = 100% - 75% = 25%
January 1, 1990
Date of winning thefirst quality award
Stock Price Performance
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80% 76%70%
88%
114%
0%
25%
50%
75%
100%
125%
AwardWinners
S&P 500 Portfolio ofall Stocks
IndustryPortfolio
ControlSample
Per
cent
Cha
nge
Stock Price Performance
Comparison of the post-implementation period’s stock price performance of award winners and various benchmark portfolios.
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61%
36%
0%
10%
20%
30%
40%
50%
60%
70%
80%
Independent Award Winners Customer Award Winners
Per
cent
Cha
nge
Financial Performance
Comparison of the post-implementation period’s benchmark-adjusted stock price performance of independent award winners and customer award winners...
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12%
25%
21%20%
21%
17%
12%
16%14%
13%
0%
5%
10%
15%
20%
26%
First Year Second Year Third Year Fourth Year Fifth Year
Per
cent
Cha
nge
Award WinnersS&P 500
Financial Performance
Annual comparison of the post-implementation period’s stock price performance of award winners against S&P 500..
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323%325%
685%
841%
362%
248%
425%
110%59%
112%148% 173% 163%
222%
0%
100%
200%
300%
400%
500%
600%
700%
800%
900%
1995 1996 1997 1998 1999 2000 2001
Per
cent
Cha
nge
Baldrige Award Winners
S&P 500
Baldrige Winners Vs. S&P 500
Comparison of the Baldrige Award Winner’s stock price performance against S&P 500 index..
100
120
140
160
180
200
Sep-9
8
Dec-9
8
Mar
-99
Jun-
99
Sep-9
9
Dec-9
9
Mar
-00
Jun-
00
Sep-0
0
Dec-0
0
Mar
-01
Jun-
01
Sep-0
1
Dec-0
1
Q-100S&P 500
$
Fund Comparison: Q-100 and S&P 500
Source: Steven George - Bull or bear? Published in Quality Progress, April 2002
-20
-15
-10
-5
0
5
10
15
20
25
Dec-98 Jun-99 Dec-99 Jun-00 Dec-00 Jun-01 Dec-01
Q-100
S&P 500
%
Quarterly Fund Performance: Q-100 vs. S&P 500
Source: Steven George - Bull or bear? Published in Quality Progress, April 2002
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0
5
10
15
20
25
30
35
40
45
1994 1995 1996 1997 1998 1999
Top 50% ACSI Firms
Bottom 50%
MVA
1.8
8.1
14.7
22.8
33.7
42.5
4.37.6
13.4
22.123.2
12.3
MVA: Market value added in billions of dollars
Customer Satisfaction and Market Value
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•Leadership•Strategic Planning•Customer/Market focus•Information and Analysis•Human Resource Focus•Process Management
• Process Results• Customer results
• Profitability• Sales Growth• Cost reduction
Cause and Affect Relations - Baldrige Model
What and How?
Non-Financial Results
Financial Results
38
• Baldrige assessments at various business units since 1992
• Data on % score in each category
• Data from 200 such assessments
Evidence from Baldrige-Based Assessments
39
Categories 1-6 Drives Process Results
Process Results = -4 + 0.8 * (Categories 1-6)
R-Sqaure = 48%
Categories 1-6
1009080706050403020100
Pro
cess R
esults
100
90
80
70
60
50
40
30
20
10
0
40
Categories 1-6 Drives Customer Results
Customer Results = 10 + 0.8 * (categories 1-6)
R-square = 27%
Categories 1-6
1009080706050403020100
Custo
mer
results
100
90
80
70
60
50
40
30
20
10
0
41
Categories 1-6 Drives Non-Financial results
Non-Financial Results = -2 + 1.2 * (Categories 1-6)
R-square = 59%
Categories 1-6
1009080706050403020100
Non-F
inancia
l R
esults
100
90
80
70
60
50
40
30
20
10
0
42
Categories 1-6 Drives Financial Results
Financial Results = 30 + 0.1 * (Categories 1-6)
R-Square = 10%
Categories 1-6
1009080706050403020100
Fin
ancia
l R
esults
100
90
80
70
60
50
40
30
20
10
0
43
Categories 1-6 Drives Business Results
Business Results = 10 + 0.7 * (Categories 1-6)
R-square = 42%
Categories 1-6
1009080706050403020100
Busin
ess R
esults
100
90
80
70
60
50
40
30
20
10
0
44
• 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
Evidence from Australian Quality Award Applicants
45
Evidence from Australian Quality Award Applicants
AUSTRALIAN BUSINESS EXCELLENCE AWARDS SCORESCorrelated With
BUSINESS PERFORMANCE IMPROVEMENTS
R = 0.79
-20%
-10%
0%
10%
20%
30%
200 300 400 500 600 700
Australian Business Excellence Awards Evaluation ScoreAve
rage
KP
I Im
prov
emen
t (A
nnua
l)
Source: Alexander Hausner – University of Wollongong, Australia
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5.1
1.1
1.2
1.3
2.1
2.2
3.1
3.2
4.1
4.2
4.3
4.4
4.6
5.2
5.3
6.16.2
6.3
4.5
6.4
7.1
0.4
0.45
0.5
0.55
0.6
0.65
0.7
0.75
0.8
0.6 0.65 0.7 0.75 0.8 0.85 0.9 0.95 1
5.1
1.1
1.2
1.3
2.1
2.2
3.1
3.2
4.1
4.2
4.3
4.4
4.6
5.2
5.3
6.16.2
6.3
4.5
6.4
7.1
0.4
0.45
0.5
0.55
0.6
0.65
0.7
0.75
0.8
0.6 0.65 0.7 0.75 0.8 0.85 0.9 0.95 1
Relation to Org’s KPIs
Relation to AQA Score
Strong
Weak
StrongWeak
Relation of different categories with Performance
Source: Alexander Hausner – University of Wollongong, Australia
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5.1
1.1
1.2
1.3
2.1
2.2
3.1
3.2
4.1
4.2
4.3
4.4
4.6
5.2
5.3
6.16.2
6.3
4.5
6.4
7.1
0.4
0.45
0.5
0.55
0.6
0.65
0.7
0.75
0.8
0.6 0.65 0.7 0.75 0.8 0.85 0.9 0.95 1
5.1
1.1
1.2
1.3
2.1
2.2
3.1
3.2
4.1
4.2
4.3
4.4
4.6
5.2
5.3
6.16.2
6.3
4.5
6.4
7.1
0.4
0.45
0.5
0.55
0.6
0.65
0.7
0.75
0.8
0.6 0.65 0.7 0.75 0.8 0.85 0.9 0.95 1
6.4 Measures of Quality
3.2 Data analysis and use
7.1 Organisational Performance
Relation to Org’s KPIs
Relation to AQA Score
Strong
Weak
StrongWeak
Relation of different categories with Performance
Source: Alexander Hausner – University of Wollongong, Australia
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• Tracking self assessment scores and linking these to
business unit performance scores
How can you link TQM to performance?
49
• Tracking self assessment scores and linking these to
business unit performance scores
• Tracking benefits and costs at a project level
How can you link TQM to performance?
50
GE Six Sigma Payback (1998 Annual Report)
51
• 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
How can you link TQM to performance?
52
• 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
• 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
Computing the Cost of Poor Quality
53
• Opportunity cost of extra resources used to produce defectives
• Poor customer loyalty
• Poor word of mouth/ bad publicity
• Loss of goodwill/sales
Hidden Cost of Poor Quality
54
4.5 4.1
6.4
3.7
10.7
7.8
0
2
4
6
8
10
12
1982 1987
Co
st o
f Q
ual
ity
(%)
Cost of Quality at a Business Unit at Texas Instruments
Note: Cost of Quality is expressed as a percentage of revenue
Prevention/Appraisal
Internal/External Failure
Total
55
Cost of Quality at Union Pacific Railroad
30.5
26.824.8
23.220.8
18.6 18.515.9
0
5
10
15
20
25
30
35
1987 1988 1989 1990 1991 1992 1993 1994
Co
st o
f Q
ual
ity
(%)
Note: Cost of Quality is expressed as a percentage of revenue
56
Cost of Quality Performance at Union Pacific
200281
720
1100
0
200
400
600
800
1000
1200
1987 1994 1987 1994
$ (i
n m
illi
on
s) Prevention & Appraisal Costs
Internal/External Failure Cost
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• 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
How can you link TQM to performance?
58
• Employee satisfaction survey• Customer satisfaction survey• Financials: ROA, OM, Revenue• Detailed statistical analysis of all three types of data
provided causal links
ServiceService
Source: Rucci, Kirn and Quinn – The Employee-customer profit chain at Sears, Harvard Business Review, January-February 1998
EmployeeAttitudes
EmployeeAttitudes
EmployeeBehavior
EmployeeBehavior
CustomerImpression
CustomerImpression FinancialsFinancials
CustomerRetention
CustomerRetention
Estimating relationships at Sears
59
Estimating relationships at IBM Rochester
Cost ofQuality (Q)
Productivity – revenue per employeeCost of Quality - hardware warranty cost
Source: Steve Hosington and Earl Naumann – The Loyalty Elephant, Quality Progress -February 2003
Productivity (P)
Satisfaction with Manager
Employee Satisfaction (ES)
Satisfactionwith Right Skills
Job Satisfaction
Customer Satisfaction (CS)Market
Share
60
Estimating relationships at IBM Rochester
Cost ofQuality (Q)
Productivity – revenue per employeeCost of Quality - hardware warranty cost
Source: Steve Hosington and Earl Naumann – The Loyalty Elephant, Quality Progress -February 2003
Productivity (P)
Satisfaction with Manager
Employee Satisfaction (ES)
Satisfactionwith Right Skills
Job Satisfaction
Customer Satisfaction (CS)Market
Share
0.84
0.92
0.86
0.92
0.93
0.71
0.97
-0.86
0.70
61
Estimating relationships at IBM Rochester
0
1 0
2 0
3 0
4 0
5 0
6 0
7 0
8 0
9 0
1 0 0
V e r y S a t S a t N e u tr a l D issa t V e r y D issa t
Per
cen
t S
atis
fied
Customer Planned Loyalty Actual Loyalty
I BM- Rochester: Customer Loyalty - Planned and Actual Behavior, and Actual $ Spent
95% of revenue from customers that are Very Satisfied or SatisfiedThe higher the satisfaction rating, the higher the customer loyalty ratingActual customer repurchase behavior is close to planned repurchase intentions
Source: Steve Hosington and Earl Naumann – The Loyalty Elephant, Quality Progress -February 2003
62
Estimating relationships at Johnson Control
0
10
20
30
40
50
60
70
80
90
100
Very Sat Sat Neither Dissat Very Dissat
Pe
rce
nt
of
Cu
sto
me
r R
en
ew
als
Customer Satisfaction Levels
59%
32%
6% 3% 0.3%
91%
97% 100% 100%
Cumulative Percent
J ohnson Controls - Percent of Renewals by Customer Satisfaction Level
91% of renewals were from customers that were Very Satisfied or Satisfied
Source: Steve Hosington and Earl Naumann – The Loyalty Elephant, Quality Progress -February 2003
63
• TQM pays-off handsomely
• Be realistic
• Be patient
• TQM is not a guarantee for success
Summary of Findings
64
• Don’t 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
Implications
65
• Not a tool or technique
• Not a program
• Not a replacement for corporate strategy
• It is a source of competitive advantage
Final Thoughts: What is TQM?