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TQM and Corporate Financial Performance Dr. Vinod R. Singhal DuPree College of Management

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 : 404-894-6030 E-mail: vinod.singhal@mgt.gatech.edu May 2003. What is TQM?.

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TQM and Corporate Financial Performance Dr. Vinod R. Singhal DuPree College of Management

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  1. 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 : 404-894-6030 E-mail: vinod.singhal@mgt.gatech.edu May 2003

  2. 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

  3. Criticisms of TQM • “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

  4. Criticisms of TQM • “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)

  5. Popularity of Management Tools 19931999 ToolRank UsageRank 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

  6. 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

  7. 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

  8. Reasons for Criticisms • Unrealistic expectations and hype • Sloppy research • Poor scorekeeping • Competition among management paradigms

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

  10. 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

  11. 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)

  12. 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 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

  13. Partial Listof 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.

  14. 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

  15. CUSTOMER AND MARKET FOCUSED STRATEGY AND ACTION PLANS Baldrige Framework - A Systems Perspective 2 Strategic Planning 5 Human Resource Focus 1 Leadership 7 Business Results 3 Customer & Market Focus 6 Process Management 4 Information and Analysis

  16. 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

  17. 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%

  18. 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

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

  20. 4 years 6 years 1 year Year of after before before 1st award 1984 1989 1990 1994 Implementation Post-implementation period period Choice of Time Period

  21. 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)

  22. Implementation Period’s Results • No difference in the performance of the award winners and benchmarks

  23. Financial Performance Comparison of the performance of award winning firms and benchmark firms during the post-implementation period.

  24. Financial Performance Comparison of the post-implementation period’s benchmark-adjusted performance of smaller and larger award winners.

  25. Financial Performance Comparison of the post-implementation period’s benchmark-adjusted performance of lower capital and higher capital intensity award winners.

  26. Financial Performance Comparison of the post-implementation period’s benchmark-adjusted performance of focused and diversified award winners.

  27. Financial Performance Comparison of the post-implementation period’s benchmark-adjusted performance of independent award winners and customer award winners.

  28. 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?

  29. Date of winning the first quality award 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 winner’s return - Benchmark’s return = 100% - 75% = 25%

  30. Stock Price Performance Comparison of the post-implementation period’s stock price performance of award winners and various benchmark portfolios.

  31. Financial Performance Comparison of the post-implementation period’s benchmark-adjusted stock price performance of independent award winners and customer award winners. . .

  32. Financial Performance Annual comparison of the post-implementation period’s stock price performance of award winners against S&P 500. .

  33. Baldrige Winners Vs. S&P 500 Comparison of the Baldrige Award Winner’s stock price performance against S&P 500 index. .

  34. Fund Comparison: Q-100 and S&P 500 $ Source: Steven George - Bull or bear? Published in Quality Progress, April 2002

  35. Quarterly Fund Performance: Q-100 vs. S&P 500 % Source: Steven George - Bull or bear? Published in Quality Progress, April 2002

  36. 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

  37. 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

  38. Evidence from Baldrige-Based Assessments • Baldrige assessments at various business units since 1992 • Data on % score in each category • Data from 200 such assessments

  39. Categories 1-6 Drives Process Results

  40. Categories 1-6 Drives Customer Results

  41. Categories 1-6 Drives Non-Financial results

  42. Categories 1-6 Drives Financial Results

  43. Categories 1-6 Drives Business Results

  44. 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

  45. Evidence from Australian Quality Award Applicants Source: Alexander Hausner – University of Wollongong, Australia

  46. Relation of different categories with Performance Strong Relation to Org’s KPIs Weak Relation to AQA Score Weak Strong Source: Alexander Hausner – University of Wollongong, Australia

  47. Relation of different categories with Performance 6.4 Measures of Quality Strong 3.2 Data analysis and use Relation to Org’s KPIs 7.1 Organisational Performance Weak Relation to AQA Score Weak Strong Source: Alexander Hausner – University of Wollongong, Australia

  48. How can you link TQM to performance? • Tracking self assessment scores and linking these to business unit performance scores

  49. 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

  50. GE Six Sigma Payback (1998 Annual Report)

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