Transcript No Slide Title

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: [email protected]
May 2003
1
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
2
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 minibureaucracies charged with putting it into action.”
Business Week June 23, 1997
3
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)
4
Popularity of Management Tools
1993
Tool
1999
Rank Usage
Mission/value statements
Rank
Usage
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
5
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
6
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
7
Reasons for Criticisms
• Unrealistic expectations and hype
• Sloppy research
• Poor scorekeeping
• Competition among management paradigms
8
Defending TQM
• Theory and common sense tells that TQM works
• Anecdote of success stories
• Cannot establish link between TQM and financial
performance
9
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
10
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)
11
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
12
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.
13
EFQM Framework - A Systems Perspective
L
e
a
d
e
r
s
h
i
p
People
Manage
ment
Policy
and
Strategy
Resources
and
Partnerships
Enablers
P
r
o
c
e
s
s
e
s
Customer
Results
Key
People
Results
Performance
Results
Society
Results
Results
14
Baldrige Framework - A Systems Perspective
CUSTOMER AND MARKET
FOCUSED STRATEGY AND
ACTION PLANS
5
2
Human
Resource
Focus
Strategic
Planning
7
1
Business
Results
Leadership
3
6
Customer &
Market Focus
Process
Management
4
Information and Analysis
15
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
16
TI Supplier Quality Program
Category
Items
Weight
Product Quality
Quality Management
1
2
20%
10%
Disruptions
Delivery
Cycle Time
1
1
2
10%
10%
10%
Cost -Price
Customer satisfaction
2
6
20%
20%
17
How are Quality Award Winners Determined?
Chrysler
GTE
24%
Texas Ins
40%
Xerox
Quality
40%
55%
On-time
Delivery
20%
24%
20%
23%
Price
20%
13%
20%
12%
Customer
20%
Satisfaction
37%
20%
12%
18
Sample
• Publicly traded quality award winners
• Sample of about 600 winners
– Median equity value
$ 400 million
– Median sales
$ 632 million
– Median assets
$ 516 million
19
Choice of Time Period
6 years
before
1 year
before
1984
1989
Implementation
period
Year of
1st award
1990
4 years
after
1994
Post-implementation
period
20
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)
21
Implementation Period’s Results
• No difference in the performance of the award winners
and benchmarks
22
Financial Performance
100%
90%
86%
Award Winners
Benchmark Firms
67%
Percent Change
80%
70%
62%
60%
50%
43%
40%
37%
32%
30%
22%
20%
12%
10%
0%
13%
6%
7%
0%
Operating
Income
Sales
Return on Return on
Sales
Assets
Total
Assets
Employees
Comparison of the performance of award winning firms and benchmark
23
firms during the post-implementation period.
Financial Performance
70%
63%
Smaller Firms
Larger Firms
Percent Change
60%
50%
42%
39%
40%
30%
22%
20%
20%
10%
18%
17%
6%
21%
9%
9%
5%
0%
Operating
Income
Sales
Return on Return on
Sales
Assets
Total
Assets
Employees
Comparison of the post-implementation period’s benchmark-adjusted
24
performance of smaller and larger award winners.
Financial Performance
70%
65%
Low Capital Intensity
High Capital Intensity
Percent Change
60%
47%
50%
38%
40%
30%
25%
22%
21%
20%
17%
15%14%
10%
10%
7%
4%
0%
Operating
Income
Sales
Return on Return on
Sales
Assets
Total
Assets
Employees
Comparison of the post-implementation period’s benchmark-adjusted
performance of lower capital and higher capital intensity award winners.
25
Financial Performance
60%
56%
Focused Firms
Diversified Firms
Percent Change
50%
40%
30%
42%
39%
30%
22%
20%
20%
17%
15%
18%
8%
7%
10%
1%
0%
Operating
Income
Sales
Return on Return on
Sales
Assets
Total
Assets
Employees
Comparison of the post-implementation period’s benchmark-adjusted
performance of focused and diversified award winners.
26
Financial Performance
80%
73%
Independent Award Winners
Customer Award Winners
70%
Percent Change
60%
40%
49%
48%
50%
33%
30%
23%
24%
22%
25%
20%
9%
10%
11%
10%
6%
0%
Operating
Income
Sales
Return on Return on
Sales
Assets
Total
Assets
Employees
Comparison of the post-implementation period’s benchmark-adjusted
performance of independent award winners and customer award winners. 27
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?
28
Stock Price Performance
Date of winning the
first quality award
January 1, 1989
January 1, 1990
Award Winner
January 1, 1994
Return = 100%
5-year buy-and-hold return
January 1, 1989
Benchmark
January 1, 1994
Return = 75%
5-year buy-and-hold return
Difference = Award winner’s return - Benchmark’s return = 100% - 75% = 25%
29
Stock Price Performance
125%
114%
Percent Change
100%
88%
80%
76%
70%
75%
50%
25%
0%
Award
Winners
S&P 500
Portfolio of
all Stocks
Industry
Portfolio
Control
Sample
Comparison of the post-implementation period’s stock price
performance of award winners and various benchmark portfolios. 30
Financial Performance
80%
70%
Percent Change
60%
61%
50%
40%
36%
30%
20%
10%
0%
Independent Award Winners
Customer Award Winners
Comparison of the post-implementation period’s benchmark-adjusted
stock price performance of independent award winners and customer
31
award winners.
.
Financial Performance
Award Winners
S&P 500
Percent Change
26%
20%
21%
20%
17%
25%
21%
16%
14%
15%
12% 12%
13%
10%
5%
0%
First Year
Second Year
Third Year
Fourth Year
Fifth Year
Annual comparison of the post-implementation period’s stock price
32
performance of award winners against S&P 500.
.
Baldrige Winners Vs. S&P 500
900%
841%
Baldrige Award Winners
800%
S&P 500
685%
Percent Change
700%
600%
500%
425%
400%
300%
325%
323%
248%
200%
100%
362%
112%
148%
173%
222%
163%
110%
59%
0%
1995
1996
1997
1998
1999
2000
2001
Comparison of the Baldrige Award Winner’s stock price performance
33
against S&P 500 index.
.
Fund Comparison: Q-100 and S&P 500
200
180
Q-100
S&P 500
160
140
$
120
Se
p9
D 8
ec
-9
M 8
ar
-9
Ju 9
n9
Se 9
pD 99
ec
-9
M 9
ar
-0
Ju 0
n0
Se 0
pD 00
ec
-0
M 0
ar
-0
Ju 1
n0
Se 1
p0
D 1
ec
-0
1
100
Source: Steven George - Bull or bear? Published in Quality Progress, April 2002
Quarterly Fund Performance: Q-100 vs. S&P 500
25
Q-100
S&P 500
20
15
10
%
5
0
-5
Dec-98
-10
Jun-99
Dec-99
Jun-00
Dec-00
Jun-01
-15
-20
Source: Steven George - Bull or bear? Published in Quality Progress, April 2002
Dec-01
Customer Satisfaction and Market Value
Top 50% ACSI Firms
Bottom 50%
45
40
M
VA
35
42.5
30
33.7
25
20
22.8
15
10
5
12.3
8.1
1.8
4.3
14.7
22.1
23.2
13.4
7.6
0
1994
1995
1996
1997
1998
1999
MVA: Market value added in billions of dollars
36
Cause and Affect Relations - Baldrige Model
•
•
•
•
•
•
What and How?
• Process Results
• Customer results
Leadership
Strategic Planning
Customer/Market focus
Information and Analysis
Human Resource Focus
Process Management
Non-Financial Results
• Profitability
• Sales Growth
• Cost reduction
Financial Results
37
Evidence from Baldrige-Based Assessments
• Baldrige assessments at various business units since
1992
• Data on % score in each category
• Data from 200 such assessments
38
Categories 1-6 Drives Process Results
100
90
80
70
60
50
40
30
20
10
0
0
10
20
30
40
50
60
70
80
90
100
Categories 1-6
Process Results = - 4 + 0.8 * (Categories 1-6)
R-Sqaur e = 48%
39
Categories 1-6 Drives Customer Results
100
90
80
70
60
50
40
30
20
10
0
0
10
20
30
40
50
60
70
80
90
100
Categories 1-6
Customer Results = 10 + 0.8 * ( categories 1-6)
R-square = 27%
40
Categories 1-6 Drives Non-Financial results
100
90
80
70
60
50
40
30
20
10
0
0
10
20
30
40
50
60
70
80
90
100
Categories 1-6
Non-Financial Results = -2 + 1.2 * (Categories 1-6)
R-square = 59%
41
Categories 1-6 Drives Financial Results
100
90
80
70
60
50
40
30
20
10
0
0
10
20
30
40
50
60
70
80
90
100
Categories 1-6
Financial Results = 30 + 0.1 * (Categories 1-6)
R-Squar e = 10%
42
Categories 1-6 Drives Business Results
100
90
80
70
60
50
40
30
20
10
0
0
10
20
30
40
50
60
70
80
90
100
Categories 1-6
Business Results = 10 + 0.7 * (Categories 1-6)
R-square = 42%
43
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
44
Evidence from Australian Quality Award Applicants
30%
AUSTRALIAN BUSINESS EXCELLENCE AWARDS SCORES
Correlated With
BUSINESS PERFORMANCE IMPROVEMENTS
Average KPI Improvement (Annual)
R = 0.79
20%
10%
0%
200
300
400
500
600
700
-10%
Australian Business Excellence Awards Evaluation Score
-20%
Source: Alexander Hausner – University of Wollongong, Australia
45
Relation of different categories with Performance
0.8
Strong
0.75
1.1
5.2
6.4
0.7
3.2
Relation to
Org’s KPIs
7.1
2.2
0.65
2.1
0.6
5.1
4.2
6.3
4.6
0.55
1.2
6.1
6.2
4.5
0.5
5.3
1.3
4.1
4.3
0.45
Weak
3.1
4.4
0.4
0.6
Weak
0.65
0.7
0.75
0.8
0.85
0.9
0.95
Relation to AQA Score
Source: Alexander Hausner – University of Wollongong, Australia
1
Strong
46
Relation of different categories with Performance
6.4 Measures of Quality
0.8
Strong
0.75
3.2 Data
analysis
and use
1.1
5.2
6.4
0.7
3.2
Relation to
Org’s KPIs
7.1
2.2
0.65
2.1
0.6
5.1
4.2
6.3
7.1 Organisational
Performance
4.6
0.55
1.2
6.1
6.2
4.5
0.5
5.3
1.3
4.1
4.3
0.45
Weak
3.1
4.4
0.4
0.6
Weak
0.65
0.7
0.75
0.8
0.85
0.9
0.95
Relation to AQA Score
Source: Alexander Hausner – University of Wollongong, Australia
1
Strong
47
How can you link TQM to performance?
• Tracking self assessment scores and linking these to
business unit performance scores
48
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
49
GE Six Sigma Payback (1998 Annual Report)
50
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
51
Computing the Cost of Poor Quality
• 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
52
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
53
Cost of Quality at a Business Unit at Texas Instruments
12
10.7
Cost of Quality (%)
10
7.8
8
6.4
6
4.5
4.1
4
3.7
2
0
1982
1987
Prevention/Appraisal
Internal/External Failure
Note: Cost of Quality is expressed as a percentage of revenue
Total
54
Cost of Quality at Union Pacific Railroad
35
30.5
Cost of Quality (%)
30
26.8
24.8
25
23.2
20.8
18.6
20
18.5
15.9
15
10
5
0
1987
1988
1989
1990
1991
Note: Cost of Quality is expressed as a percentage of revenue
1992
1993
1994
55
Cost of Quality Performance at Union Pacific
1200
1100
$ (in millions)
1000
800
Prevention & Appraisal
Costs
Internal/External
Failure Cost
720
600
400
281
200
200
0
1987
1994
1987
1994
56
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
57
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
Employee
Attitudes
Employee
Behavior
Service
Customer
Impression
Financials
Customer
Retention
Source: Rucci, Kirn and Quinn – The Employee-customer profit chain at Sears, Harvard Business
Review, January-February 1998
58
Estimating relationships at IBM Rochester
Productivity (P)
Satisfaction
with Manager
Market
Customer
Satisfaction (CS)
Share
Cost of
Quality (Q)
Employee
Satisfaction (ES)
Job
Satisfaction
Satisfaction
with Right Skills
Productivity – revenue per employee
Cost of Quality - hardware warranty cost
Source: Steve Hosington and Earl Naumann – The Loyalty Elephant, Quality Progress -February 2003
59
Estimating relationships at IBM Rochester
Productivity (P)
0.97
0.93
0.92
Market
0.71
Customer
Satisfaction (CS)
Employee
Satisfaction (ES)
0.70
Share
Cost of
Quality (Q)
0.92
0.86
Satisfaction
with Manager
Job
Satisfaction
Satisfaction
with Right Skills
-0.86
0.84
Productivity – revenue per employee
Cost of Quality - hardware warranty cost
Source: Steve Hosington and Earl Naumann – The Loyalty Elephant, Quality Progress -February 2003
60
Estimating relationships at IBM Rochester
IBM-Rochester: Customer Loyalty - Planned and Actual Behavior, and Actual $ Spent
100
90
Percent Satisfied
80
70
60
50
40
30
20
10
0
V ery Sat
Sat
Customer Planned Loyalty
N e u tr a l
D issa t
V e r y D issa t
Actual Loyalty
95% of revenue from customers that are Very Satisfied or Satisfied
The higher the satisfaction rating, the higher the customer loyalty rating
Actual customer repurchase behavior is close to planned repurchase intentions
Source: Steve Hosington and Earl Naumann – The Loyalty Elephant, Quality Progress -February 2003
61
Estimating relationships at Johnson Control
Johnson Controls - Percent of Renewals by Customer Satisfaction Level
97%
Percent of Customer Renewals
100
80
60
100%
91%
90
70
100%
Cumulative Percent
59%
50
40
32%
30
20
6%
10
3%
0
Very Sat
Sat
Neither
Dissat
Customer Satisfaction Levels
0.3%
Very Dissat
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
62
Summary of Findings
• TQM pays-off handsomely
• Be realistic
• Be patient
• TQM is not a guarantee for success
63
Implications
• 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
64
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
65