1

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: vinod.singhal@mgt.gatech.edu

May 2003

2

• 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?

3

“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

4

• “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

5

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

6

• 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

9

• Theory and common sense tells that TQM works

• Anecdote of success stories

• Cannot establish link between TQM and financial performance

Defending TQM

10

• 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

11

• 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

12

• 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

13

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

14

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

16

• 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

18

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

20

6 yearsbefore

1 yearbefore

Year of1st award

4 yearsafter

Implementationperiod

Post-implementation period

1984 1989 1990 1994

Choice of Time Period

21

• 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

22

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

Implementation Period’s Results

23

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.

24

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.

26

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.

27

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

30

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.

31

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

36

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

46

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

47

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

48

• 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?

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• 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

57

• 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?

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• 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?