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Cover spine v14 i4 9/20/07 10:12 AM Page 1

14

Quality Management
4

Journal V O L U M E 1 4 , I S S U E 4

Does Six Sigma Improve Performance?


S. Thomas Foster
QUALITY MANAGEMENT JOURNAL

The Long-Term Impact of ISO 9000 Certification on Business Performance:


A Longitudinal Study Using Turkish Stock Market Returns
Musa Pinar and Ceyhun Ozgur

Applying the Toyota Production System to a Healthcare Organization:


A Case Study on a Rural Community Healthcare Provider
Kevin F. Collins and Senthil K. Muthusamy

Ranking Customer’s Requirements in QFD by Factoring in


Their Interrelationship Values
J. R. Sharma and A. M. Rawani
2007

www.asq.org
Contents v14 i4 9/20/07 10:11 AM Page 1

Volume 14 Issue 4

ARTICLES
Contents DEPARTMENTS
7 Does Six Sigma Improve Performance? 4 Introduction
S. Thomas Foster
A look at the long-term financial and operational results of companies
implementing Six Sigma.
5 Executive Briefs

21 The Long-Term Impact of ISO 9000 Certification on Business 61 Book Reviews


Performance: A Longitudinal Study Using Turkish Stock Market Returns
Musa Pinar and Ceyhun Ozgur The annual index for Volume 14
Do ISO 9000 firms have higher returns and lower variability than can be found online:
non-ISO 9000 firms?
http://www.asq.org/pub/qmj/.
41 Applying the Toyota Production System to a Healthcare Organization:
A Case Study on a Rural Community Healthcare Provider
Kevin F. Collins and Senthil K. Muthusamy
The TPS can be a powerful technique—even to companies unaccustomed
to advanced production techniques.

53 Ranking Customer’s Requirements in QFD by Factoring in Their


Interrelationship Values
J. R. Sharma and A. M. Rawani
The most neglected part of the QFD process—the interrelationship matrix
among customer requirements—is examined.

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Masthead v14 i4 9/20/07 10:13 AM Page 2

QMJ EDITORIAL

EDITOR
James R. Evans
University of Cincinnati

FOUNDING EDITOR
William A. Golomski

BOOK REVIEW EDITOR


James B. Kohnen
St. Mary’s College of California

QMJ ADMINISTRATION/PRODUCTION

PUBLISHER
William Tony

MANUSCRIPT COORDINATOR
Valerie Funk

COPY EDITORS
Leigh Ann Klaus
Kris McEachern
JoAnn Regenauer

PRODUCTION
Cathy Schnackenberg

DIGITAL PRODUCTION SPECIALIST


Laura Franceschi
Editorial Board v14 i4 9/20/07 10:12 AM Page 3

Editorial Editorial
Advisory Board Review Board

John Anderson Stefano Biazzo* Yongjin (James) Kwon


University of Minnesota University of Padova Drexel University
Selwyn Becker Ching-Wen Chen* Keong Leong
University of Chicago National Kaohsiung First University of Science The University of Nevada–Las Vegas
and Technology
Robert E. Cole A. Magid Mazen
University of California Michael B.C. Khoo* Suffolk University
Universiti Sains Malaysia
James W. Dean Jr. Kathleen L. McFadden
University of North Adrian S. Choo Northern Illinois University
Carolina Rensselaer Polytechnic Institute
Kate McKone-Sweet
James R. Evans Edward Duplaga Babson University
University of Cincinnati Winona State University
Satish Mehra
John P. Evans Susan West Engelkemeyer University of Memphis
University of North Babson College
Carolina Kim I. Melton
Byron Finch North Georgia College and State University
Frank M. Gryna Miami University
University of Tampa Henry R. Neave*
Mark P. Finster British Deming Association
John Hamburg University of Wisconsin
APEX, Inc. Yoram Neumann
Thomas S. Foster Jr. California State University
David Luther Boise State University
Luther Quality Associates William Newman
Brian Fynes* Miami University
Ram Narasimhan The Michael Smurfit Graduate School of Business
Michigan State University Gertrude P. Pannirselvam
Thomas Gattiker Southern Illinois University Edwardsville
Duke Okes Boise State University
Quality Management Darrell Radson
Division, ASQ Soumen Ghosh Drexel University
Georgia Institute of Technology
Roger G. Schroeder Gary Ragatz
University of Minnesota Glenn H. Gilbreath
Virginia Commonwealth University Michigan State University
Kalyan Singhal Gipsie B. Ranney
University of Baltimore John M. Groocock*
TRW (Retired) Belmont University
Michael J. Stahl Borut Rusjan*
University of Tennessee Robert Handfield
North Carolina State University University of Ljubljana

Sandra J. Hartman Brooke Saladin


University of New Orleans Wake Forest University

David Hartmann Joseph Sarkis


University of Central Oklahoma Clark University

Marilyn Helms Helmut Schneider


Dalton State College Louisiana State University

Mary Collins Holcomb Nirmal Sethia


University of Tennessee California State Polytechnic University

Hale Kaynak Rui Sousa*


University of Texas-Pan American Universidade Catolica Portuguesa

Gary Kern John G. Surak


Indiana University South Bend Clemson University

David Kerridge* Mile Terziovski*


Aberdeen University The University of Melbourne
Ray A. Klotz Michael D. Tveite
Qualcomm Inc. Polaris Industries
Frank Knight Peter Ward
FISI Madison Financial The Ohio State University
Ronald D. Kurtzmann L. David Weller
Diamond Management Systems University of Georgia

*International reviewer
Introduction v14 i4 9/20/07 10:13 AM Page 4

Intro
duction
I am extremely honored to have been selected as the new editor of the Quality Management Journal.
I would like to thank the ASQ Publications Management Board for putting their trust in me, and the out-
going editor, Barbara Flynn, for her help during the transition process and the preparation of this issue.
Barb’s stewardship of the journal will certainly be missed, but she has joined its Editorial Advisory
Board to continue to provide counsel and advice. I wish her well in her work at Indiana University.
For those of you who may not know me, my formal educational background is in industrial engineer-
ing, and I have been on the faculty in the College of Business at the University of Cincinnati for more than
32 years. My involvement in quality began some 20 years ago with the preparation of the first edition of
a textbook entitled The Management and Control of Quality, with my coauthor William Lindsay. We
wrote this book to fill a need for a comprehensive text that focused more on managerial issues taught in
business schools, rather than just technical topics such as statistical process control and reliability. Now in
its 7th edition with Thomson/South-Western, and retitled Managing for Quality and Performance
Excellence, this book has helped me maintain currency in the field. I continue to actively write both books
and research papers on various quality topics. In addition, I have engaged in a variety of professional
activities in the field, including serving on the Board of Examiners and the Panel of Judges for the
Malcolm Baldrige National Quality Award for a total of 11 years since 1994.
The frequent citations of quality issues in the automotive industry, food safety, and in developing coun-
tries that we so often read in the press point to the continued need to better understand both the theoretical
foundations of quality management and how to translate these into better management practice. This can
be facilitated through good applied research, reflecting upon W. Edwards Deming’s philosophy that there
is no knowledge without theory. That’s what this journal is all about—providing relevant knowledge about
quality management practice that is grounded in rigorous research. In the next issue, I will present a more
detailed editorial philosophy that will guide my tenure as editor, a new Editorial Review Board and
Editorial Advisory Board, and some key changes to the Guidelines for Authors, all of which are geared
toward better serving the readership of this journal and the professional quality community.
This issue begins with two empirical research papers that add to our understanding of the impact on
quality-related initiatives. Tom Foster’s article, “Does Six Sigma Improve Performance?” examines the
effects of Six Sigma programs on long-term financial and operating results in a similar fashion by which
others have examined the effects of more general TQM initiatives. Musa Pinar and Ceyhun Ozgur’s article,
“The Long-Term Impact of ISO 9000 Certification on Business Performance: A Longitudinal Study Using
Turkish Stock Market Returns,” takes a similar focus, comparing long-term stock returns and variability
of returns of ISO 9000 certified versus noncertified firms in the Turkish stock market. Both of these articles
provide more rigorous evaluation of quality initiatives beyond the anecdotal knowledge commonly seen in
other publications. In “Applying the Toyota Production System to a Healthcare Organization: A Case Study
on a Rural Community Healthcare Provider,” Kevin F. Collins and Senthil K. Muthusamy present an inter-
esting case study of how healthcare can apply the principles of the Toyota Production System, focusing
on the challenges and techniques for effective implementation. This case study not only provides lessons
for practitioners, but also opportunities and ideas for further empirical research. Finally, J. R. Sharma
and A. M. Rawani propose a new approach to enhancing quality function deployment by considering
the interrelationships of customer requirements in their article, “Ranking Customer’s Requirements in
QFD by Factoring in Their Interrelationship Values.”
I look forward to your support of the journal. Please feel free to contact me with any questions or
suggestions.
James R. Evans
Editor

4 QMJ VOL. 14, NO. 4/© 2007, ASQ


Exec Briefs v14 i4 9/20/07 10:12 AM Page 5

Executive
Briefs
Does Six Sigma Improve The authors studied the follow- It is thought that the impact of ISO
Performance (pp. 7 – 20). ing outcome variables: free cash 9000 success should be reflected in
S. Thomas Foster, Brigham Young flow per share; cost per dollar sales; their stock prices and returns.
University earnings before interest, taxes, Specifically, this article seeks to:
What are the long-term financial depreciation, and amortization 1) provide information about the
and operational results from the (EBITDA); sales; sales per employee; characteristics of ISO 9000 and
implementation of Six Sigma? This asset turnover; return on assets; non-ISO 9000 firms; 2) analyze
article seeks to answer this question. return on investment; total assets; the impact of ISO 9000 certifica-
In recent years, many firms have and number of employees. tion on stock returns and stock
adopted Six Sigma in an effort to The results of the study were return variability; and 3) deter-
improve quality and reduce costs. somewhat mixed. It seems that Six mine if the stock returns and the
Whether they actually succeeded in Sigma has a significant effect on variability of returns of ISO 9000
doing so, however, is not clear. There free cash flow, EBITDA, and asset firms are influenced by certifying
is a need for more research eluci- turnover. It did not, however, seem organization.
dating the benefits and costs of Six to affect sales return on assets, For their study, the authors used
Sigma implementation. return on investment, for firm the monthly stock returns of all
The authors present two propo- growth. manufacturing firms listed on the
sitions: ISE market of Turkey from January
• Proposition 1: Six Sigma adop- The Long-Term Impact of 1997 to September 2005. Then, to
tion will positively affect financial ISO 9000 Certification on be included in the analysis, the ISO
results. This proposition is then Business Performance: A Lon- 9000 certified firms had to: 1) have
translated into five hypotheses gitudinal Study Using Turkish received their certification before
for this study. Stock Market Returns (pp. January 1997; and 2) have been list-
• Proposition 2: Six Sigma adop- 21– 40). Musa Pinar and Ceyhun ed on the ISE during the entire
tion results in better operational Ozgur, Valparaiso University study period. For non-ISO 9000
results. This proposition is also Despite the expected benefits of firms, the requirement was that
translated into five hypotheses. ISO 9000 certification, only a few they were traded on the ISE for the
To identify a group of companies empirical studies have examined entire study period. The study
to study, the authors performed a whether ISO 9000 certified compa- examined the yearly returns; vari-
keyword Lexis/Nexis online search nies actually perform better than ous combinations of two-, three-,
of corporate financial reports for the non-ISO 9000 certified companies. and four-year returns; and returns
terms Six Sigma, ISO 9000, TQM, This article looks to identify the lon- over the nine-year period.
and Baldrige. They then performed gitudinal effect of ISO 9000 certifi- Using annual two-year, three-
a content analysis to determine cation on business performance by year, and four-year averages of the
which firms had announced the comparing the stock performances monthly stock returns, the results
implementation of Six Sigma. Their of ISO 9000 certified firms vs. non- indicated that ISO 9000 certified
search eventually resulted in 41 ISO 9000 certified firms traded on firms generally have higher returns
companies to study. Turkey’s Instabul Stock Exchange. and lower variability than non-ISO

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Exec Briefs v14 i4 9/20/07 10:12 AM Page 6

Briefs
9000 firms. Also, results showed innovation/intervention technique to Quality function deployment
that ISO 9000 certified firms con- improve quality, safety, and cost (QFD) is a methodology used to
sistently had higher means and reduction, and survive accreditation achieve higher customer satisfac-
lower variances. Finally, the certi- audits. tion. The engineering characteristics
fying agency had little effect on the To achieve a competitive advan- affecting product performance are
stock performance and variability tage using TPS requires adherence to designed to match the customer
of returns. the fundamental technical rules, requirements. The study discussed
developing suitable organizational/ in this article deals with the most
Applying the Toyota Produc- structural design, and fostering cul- neglected and often-omitted part
tion System to a Healthcare tural norms and values that facilitate of the QFD process—the interrela-
Organization: A Case Study on the TPS processes. The TPS method tionship matrix among customer
a Rural Community Healthcare is very scientific in that it clearly requirements.
Provider (pp. 41–52). Kevin F. delineates the responsibilities at the This article presents a mathe-
Collins, Healthcare Consultant, and operational level to a very high matical solution to the correlation
Senthil K. Muthusamy, Bowling degree of specification, and it does triangle problem that incorporates
Green State University not promote vertical command and both customer requirements and
Over the last five decades the controls. TPS facilitates creative engineering characteristics. This new
Toyota Production System (TPS) behaviors and also emphasizes cer- approach addresses relationships in
has evolved from an advanced tain leadership qualities in managers a different and improved numerical
sociotechnical concept in manufac- implementing TPS. method.
turing to a participative design for Using TPS, CHS devised a busi- This article shows the effective-
large-scale change management. ness model that provides guidance to ness and preciseness of the proposed
Toyota has been able to sustain a its small rural community providers model. Numbers are used to repre-
strategic competitive advantage by in the area of quality and patient out- sent the imprecise nature of the
applying TPS as a process innova- come management, specifically judgments and to define more
tion and intervention, as measured requiring standardization of accred- appropriately the relationships
by quality, reliability, productivity, itation documentation. This is a among customer requirements.
cost reduction, sales and market model that, when enforced, can pro- The model is shown to be compu-
growth, and market capitalization. duce positive outcomes and result in tationally feasible for realistic
Many organizations are trying to building competitive advantages. problems and outperforms tradi-
replicate Toyota’s success with TPS tional approaches on the basis of
in their respective business and Ranking Customer Require- being relatively straightforward
industry environments. ments in QFD by Factoring and simplified. The proposed
Community Health Systems in Their Interrelationship approach is shown to produce
(CHS) is a network of rural hospitals Values (pp. 53–60). J. R. Sharma, more informative results, adding
that is trying to improve perfor- Manoharbhai Patel Institute of credibility to the outcome and its
mance using advanced management Engineering, and A. M. Rawani, analysis, for the benefit of the
techniques. This article looks at National Institute of Technology, product designers and developers.
CHS’s application of TPS as a process Raipur

6 QMJ VOL. 14, NO. 4/© 2007, ASQ


Foster v14 i4 9/20/07 10:10 AM Page 7

Does Six Sigma


Improve Performance?
S. THOMAS FOSTER JR.
BRIGHAM YOUNG UNIVERSITY
© 2007, ASQ

This article presents the long-term financial and oper-


ational results coming from the implementation of Six INTRODUCTION
Sigma. The results from Six Sigma programs were In recent years, many firms have adopted Six Sigma in
somewhat mixed. The author found a significant effect
an effort to improve quality and reduce costs (Pyzdek
on free cash flow (FCF), earnings before interest,
taxes, depreciation, and amortization (EBITDA), and 2003). Six Sigma has been attractive to business exec-
asset turnover. Six Sigma did not seem to affect sales utives, as it is thought to overcome some of the pitfalls
return on assets, return on investment, or firm of historical quality management implementations
growth. As a result, if firms want to improve cash, (Linderman et al. 2003). Quality management pro-
earnings, or productivity in using assets, Six Sigma grams have been criticized for relying on improvement
might be of use. In 1998, companies with high cash
without mechanisms for ensuring that positive results
flows and no quality management program (QMP)
had lower FCF in 2002 than companies that had will ensue (Howard, Foster, and Shannon 2005). That
adopted Six Sigma. Companies with low cash flow and is, if employees are trained and empowered in quality
no QMP did better than companies using Six Sigma, improvement approaches, quality improvements and
suggesting that for cash-poor firms, Six Sigma may be benefits will “percolate to the top,” thereby improving
a drain on resources. Also, these companies may not company performance.
have the cash necessary to sustain effective Six Sigma
On the other hand, the Six Sigma approach
results over four years. Among companies with low
and medium asset turnover, Six Sigma led to higher requires more direction and leadership from top
asset turnover. It could be that companies with low management than traditional quality management.
asset turnover could benefit more from process This is termed “leadership for Six Sigma” (Foster
improvement implicit in Six Sigma than firms with 2007; Treichler et al. 2002). Along with this higher
high asset turnover. degree of leadership is a more structured process for
Key words: financial and operational outcomes, quality improving performance. One approach to Six Sigma
management, Six Sigma is the five-phase define, measure, analyze, improve,
and control (DMAIC) process. Included with DMAIC
is a method for leaders to prioritize potential
improvement projects based on the probability that
such projects will result in financial benefit to the
organization.
Similarly, another defining aspect of Six Sigma is
its greater emphasis on cost reduction through quality
improvement. This aspect includes a target of at least
$200,000 in cost reduction for each Six Sigma project
taken on with two to three projects per Black Belt over
a one- to two-year period (Bisgaard and DeMast
2006). Such returns are the results expected from the
high cost of investing in Black Belt employees.

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Does Six Sigma Improve Performance?

The convergence of these dimensions of leadership, The most common process for Six Sigma is DMAIC.
structured process for improvement, and focus on This is similar to the plan, do, check, act (PDCA) cycle
financial results present in Six Sigma was designed to proposed by Walter Shewhart and W. Edwards Deming
address the perceived weaknesses of traditional quality (Deming 1986). Since results from Six Sigma are
management. It is expected that this increased focus closely related to the DMAIC process, the author dis-
on financial outcomes should result in improvements cusses it in detail. It should be noted that as recently
in financial and operational results. The purpose of as the 1990s, many companies used DMAIC to guide
this research is to determine if this is indeed the case. Six Sigma projects.
In the define phase, projects are identified and
selected. Project selection is performed under the
LITERATURE REVIEW AND direction and with the participation of a Six Sigma
champion. Also involved are Master Black Belts and
HYPOTHESIS DEVELOPMENT Black Belts or Green Belts. Project selection is per-
Several studies have examined the impact of quality formed in four steps: 1) developing the business case;
practices on financial and operational results 2) project evaluation; 3) Pareto analysis; and 4) project
(Kaynak 2003). Most of these studies compare the definition. Business case development involves identify-
results of firms that adopt quality practices versus ing a group of possible projects, writing the business
control groups to determine if quality practices signif- case, and stratifying the business case into problem and
icantly influence financial and operational results. objective statements. Project evaluation often involves
The purpose of this literature review is threefold. The risk and return assessment. The key individuals in per-
author defines Six Sigma. Then he identifies similar forming this analysis are project champions. Project
studies that have examined the financial and opera- champions are usually top management executives
tional impacts of different quality improvement who have legitimate and financial authority to support
approaches such as total quality management (TQM). Six Sigma projects (Treichler et al. 2002). The process
Finally, he uses this review to provide a basis for for defining Six Sigma projects helps in prioritizing
selecting variables to be studied in this research. which projects will provide the greatest financial and
operational returns.
The measure phase involves two major steps:
Six Sigma 1) selecting process outcomes; and 2) verifying meas-
The author’s literature review revealed only one article urements. To select process outcomes, process mapping
relating to Six Sigma in an A-level journal (Linderman is used to help understand and define the process
et al. 2003). Linderman et al. studied Six Sigma from itself. A process map is a flowchart showing responsi-
a goal-theoretic perspective. They examined the rela- bilities (Gourishankar 2003). The goal of a process
tionship between goals and Six Sigma success and map is to identify nonvalue-added activities. Two
developed a series of propositions suggesting that high, important measures that are monitored are defects per
yet attainable, goals were important to the success of unit (DPU) and defects per million opportunities
Six Sigma programs. They also examined the inter- (DPMO). Measurement systems analysis (MSA) is
vening effects of effort, persistence, and direction used to determine if measurements are consistent
resulting from explicit Six Sigma goals. Given the wide (Conklin 2006).
adoption of Six Sigma in many organizations around The analyze phase involves gathering and ana-
the world, there is a need for more research elucidat- lyzing data relative to a particular Black Belt project
ing the benefits and costs of Six Sigma implementa- (Pyzdek 2003). The analyze-phase steps are as follows:
tion. Currently, no studies investigate the relationship 1) define the performance objectives; 2) identify inde-
between Six Sigma implementation and financial and pendent variables (Xs); and 3) analyze sources of
operational results. variability. Defining objectives involves determining

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Foster v14 i4 9/20/07 10:10 AM Page 9

Does Six Sigma Improve Performance?

what characteristics of the process need to be changed to (1998) reviewed the financial results of 108 firms that
achieve improvement. Next, independent variables are started TQM programs between 1981 and 1991. They
identified for gathering data. These are variables that found that these firms’ stocks outperformed a control
significantly contribute to process or product variation. group by finding excess cumulative returns. Hendricks
The goal of analyzing sources of variability is to use and Singhal (1996; 1997; 2001a; 2001b) found similar
visual and statistical tools to better understand the rela- results by analyzing the market returns of quality
tionships between dependent (X) and independent (Y) award winners. Hendricks and Singhal used winners of
variables for use in future experimentation. A variety various awards to determine whether implementing
of tools are used in this analysis, including his- effective TQM resulted in improved operating perform-
tograms, box plots, scatter plots, regression analysis, ance in firms. They used the winning of a quality
and hypothesis tests. award as a proxy for effective implementation of TQM.
The improve phase of the DMAIC process involves In their research, they found strong evidence that
off-line experimentation (Antony and Esamilla 2003; winners of quality awards outperformed control firms
Montgomery 2004). Off-line experimentation involves on operating-income-based measures. Subsequent to
studying the identified variables and using design of their studies, other researchers have continued to
experiments (DOE) to determine whether the inde- study receipt of awards such as the Malcolm Baldrige
pendent variables significantly affect variation in National Quality Award as indicative of mature quality
dependent variables. implementation (Rajan and Tamimi 1999; Wilson and
The control phase involves putting into place Collier 2000; Dean and Tomovic 2004). The literature,
process checks to ensure that improvements are long however, is not unanimous. York and Miree (2004)
lasting. The DMAIC process provides a process for studied the links between TQM and financial perform-
improving operational results that is cost-reduction ance. Conducting a comparison of the financial per-
oriented. This results in the removal of waste from formance of quality award winners against their
processes. These improvements are expected to result in control firms by SIC groups, they studied performance
operational and financial improvements. In this both before and after the winning of the Baldrige
research, the author examines whether this is the case. Award. York and Miree found that TQM firms had better
financial performance before and after they won the
awards—some for even 20 years prior to winning the
Financial Results awards. The author suggested that winning the award
Previous studies on the financial and operational was a covariate for financial success.
impacts of quality efforts have provided mixed results. Adams, McQueen, and Seawright (1999) studied
The Jacobsen and Aaker (1987) study using the Profit the stock performance of Baldrige Award winners
Impact of Market Strategy (PIMS) database examined from the day their award was announced. They found
the relationship between quality and market share, only limited evidence to support the hypothesis that
return on investment (ROI), relative price, relative stockholders are rewarded with abnormal returns on
cost, and relative quality. Jacobsen and Aaker (1987) the day of the quality award announcement. They
found the impacts of quality improvement practices to suggested that stock analysts may have been fore-
be positive and significant. Depending on how busi- warned that the company was winning or that they
nesses were grouped, however, they found variance in were at least aware of prior TQM efforts. They also
results that might be reflective of business strategies. suggested that there may be little impact on stock
Phillips, Chang, and Buzzell (1983) found similar price, as stock impact is not the purpose of the
relationships and added that product quality appeared Baldrige Award. They do propose that stock impacts
to be negatively related to cost. relating to announcements are not as important as
Several researchers have investigated the impact improvements relating to quality improvement
of quality practices on stock prices. Easton and Jarrell efforts. While many studies have focused on the

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Does Six Sigma Improve Performance?

financial and operational results of TQM and the Next, this proposition is translated into five hypothe-
Baldrige Award (Pannirselvam, Siferd, and Ruch ses for this study. The author posits that investment in
1998), the author’s literature review revealed no such Six Sigma training and implementation signals a
studies relative to Six Sigma. focus on aggressive cost reduction coupled with
It is expected that Six Sigma should result in process and organizational improvement. Given that
improved financial performance. Since Six Sigma costs are reduced, cash is freed up for other uses. This
emphasizes reductions in cost and increases in meas- results in hypotheses H1a and H1b:
ures such as rolled-throughput, one should find that • H1a: Six Sigma adoption is positively associated with
cash flows, earnings, and other financial measures will free cash flow per share.
show improvement. General Electric (GE) has reported
more than $12 billion in savings due to Six Sigma. • H1b: Six Sigma adoption is positively associated with
Similarly, Motorola reported $15 billion in savings over cost per dollar sales.
11 years from Six Sigma implementation. As processes As a result of this signaling of a focus on process
and products are improved, it is also expected that sales and organizational improvement, operating margins
will improve. This research was performed to see if the should improve. This argument is similar to Deming’s
expected financial results occurred for companies that value chain—that focusing on quality will result in
implemented Six Sigma overall. lower costs and improved performance. Since operating
As the author has discussed, when compared with margin can be expressed as EBITDA/sales, the author
traditional quality management, Six Sigma is much proposes the following three hypotheses:
more cost-reduction and financial-results oriented. A
• H1c: Six Sigma adoption is positively associated
comprehensive review of the quality management lit-
with EBITDA.
erature reveals that financial and operational perform-
ance could generally be categorized as measuring • H1d: Six Sigma adoption is positively associated
profitability, cost, efficiency, and growth (Phillips, with sales.
Chang, and Buzzell 1983; Jacobsen and Aaker 1987; • H1e: Six Sigma adoption is positively associated
Ward, Leong, and Boyer 1994; Flynn, Schroeder, and with sales per employee.
Sakakibara 1995; Mohrman et al. 1995; Hendricks and
Singhal 1996; 1997; Easton and Jarrell 1998; Samson
and Terziovski 1999; Curkovic, Vickery, and Droge Operational Results
2000; Lapre, Mukherjee, and VanWassenhove 2000; In addition to looking at financial results, many stud-
Wilson and Collier 2000; Cua, McKone, and Schroeder ies have examined the relationship between quality
2001; Devaraj, Matta, and Conlon 2001; Douglas and implementation and operational results. Again, the
Judge 2001; Fynes and Voss 2001; Hendricks and author reviews these studies to understand impacts
Singhal 2001a; 2001b; Park, Hartley, and Wilson 2001; found by traditional quality improvement approaches.
Sousa and Voss 2001; Eriksson and Hansson 2003; Dow, Samson, and Ford (1999) studied the effect of
Fullerton, McWatters, and Fawson 2003; Kaynak quality practices on quality outcomes. They categorized
2003). For this study, the author used a modified ver- quality practices into nine dimensions. Not all of their
sion of Hendricks and Singhal’s (1997) performance dimensions, however, contributed to superior quality
measures. Financial measures used in this study performance. Employee commitment, shared vision,
include free cash flow per share; cost per dollar share; and customer focus yielded positive correlations with
earnings before interest, taxes, depreciation, and quality outcomes. Conversely, other hard quality
amortization (EBITDA); sales; and sales per employee. practices, such as benchmarking, work teams,
The author starts with the following proposition: advanced manufacturing technologies, and close
Proposition 1: Six Sigma adoption will positively supplier relations, were not related to superior quality
affect financial results. operational results.

10 QMJ VOL. 14, NO. 4/© 2007, ASQ


Foster v14 i4 9/20/07 10:10 AM Page 11

Does Six Sigma Improve Performance?

Focusing on the competitive aspects of quality per- is on operational improvements. By focusing on the
formance, Douglas and Judge (2001) found strong processes and variables associated with operational
empirical support for a positive relationship between outcomes (for example, y=f(x)), it is expected that
the degree of TQM implementation and organizational Six Sigma programs will result in more efficient uses
performance. They also found some empirical evidence of assets and higher ROI. The general proposition is
that this relationship between TQM implementation stated as:
and organizational performance was moderated by Proposition 2: Six Sigma adoption results in better
organizational structure. operational results.
Das et al. (2000) used structural equation modeling
Using COMPUSTAT, the author computed several
to study the impacts of international competition on
operational measures using productivity ratios. Part of
quality. They found that competitive intensity provided
the process of Six Sigma is to improve the use of assets.
an explanation for the absence of returns from invest-
During the improve phase of the DMAIC cycle, DOE
ments in quality capital. Obtaining customer satisfaction
involves tolerance design, systems design, and parame-
performance from quality practices was shown to be
ter design (Foster 2006). Systems design involves
contingent on the degree of international competition
choices, tradeoffs, and improvements to existing assets.
present in the business environment.
These improvements may include the optimization of
Curkovic, Vickery, and Droge (2000) studied the
plant, equipment, or technology. Implicit in this
direct effects of 10 quality action programs on six firm
improved usage is a more productive usage of assets.
performance outcomes as well as their indirect effects
This results in hypotheses H2a through H2d.
through eight quality performance dimensions. Two
paths from action programs through quality perform- • H2a: Six Sigma adoption is positively associated with
ance to firm performance in the automotive supply asset turnover.
industry were identified. The first path was product • H2b: Six Sigma adoption is positively associated with
quality, whose hallmarks were superior performance on return on assets.
conformance and design quality. The second path • H2c: Six Sigma adoption is positively associated with
involved relationship quality. This path included supe- return on investment.
rior customer responsiveness and service. Both the
product-quality and the relationship-quality paths led • H2d: Six Sigma adoption is positively associated with
to superior operational ROI. Product quality led to total assets.
enhanced return on assets (ROA), and relationship Improvement efforts such as Six Sigma could help a
quality led to enhanced market share performance. company to grow as profitability improves. Often these
Flynn, Schroeder, and Sakakibara (1995) con- efforts result in downsizing and the more productive use
structed a framework that focuses on both core quality of employees. Therefore, Six Sigma could result in either
management practices and the infrastructure used to growth in the number of employees or a reduction in the
engender an environment supportive of their use. They number of employees. The literature is not clear on this
incorporated two measures of quality performance and issue. Therefore, hypothesis H2e is stated in null form.
their roles in establishing and sustaining competitive • H2e: Six Sigma adoption is not related to number of
advantage. The author used path analysis to test a pro- employees.
posed model that explained that perceived quality
market outcomes were primarily related to statistical
control/feedback and the product design process, while METHODS
the internal measure of percent that passed final This study examines the long-term financial and opera-
inspection without requiring rework was strongly tional impacts of implementing Six Sigma. In order to
related to process flow management and statistical create a population of Six Sigma-adopting firms, the
control/feedback. The focus of most Six Sigma efforts author performed a keyword Lexis/Nexis (LexisONE)

www.asq.org 11
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Does Six Sigma Improve Performance?

online search of corporate financial reports for the terms Firm data were collected using Standard and Poor’s
Six Sigma, ISO 9000, TQM, and Baldrige through the COMPUSTAT database. Data were collected for the firms
LexisONE subscription database. Since annual reports drawn from the Lexis/Nexis database for fiscal years
are used to transmit information to shareholders, the 1998 through 2004. This provided data for the author’s
mention of a quality management initiative such as Six longitudinal analysis.
Sigma is interpreted as signaling an organizational In this article, the author compares results from the
commitment to that effort. Since annual reports are time Six Sigma was mentioned in the annual report to
used to elucidate strategic emphases, it can be said that four years later. This four-year interval is needed, as it
these quality improvement efforts are strategic in nature. takes time for quality improvement programs to yield
Using this rationale, the author performed a content significant results. In a study of best quality practices,
analysis to determine which firms had announced the Ozan (1992) found that quality improvement pro-
implementation of Six Sigma. Initially, the year 1998 grams should be implemented gradually. A study by the
was searched. Since only 12 Six Sigma firms were United States General Accounting Office (1991) stated
returned, the author also searched 1996 and 1997. This that, on average, 3.5 years were required to see signifi-
content analysis of annual reports resulted in a list of 30 cant results for TQM programs. In a study of the U.S.
companies that had adopted Six Sigma as a means of auto industry, Narasimhan, Ghosh, and Mendez (1993)
improving performance. In a further step, they assem- found a 2.26-year lag between quality improvement
bled a panel of six judges, including academics and efforts and sales improvements. Foster (1996) studied
quality professionals, to perform a content analysis of the speed of quality improvement in five different pro-
the annual reports found in LexisONE to determine duction facilities and found that plants that improved
which firms showed strategic commitment to Six Sigma. more slowly actually had better financial results than
Based on this content analysis, six firms were removed plants that attempted to improve rapidly. Given these
from the analysis, resulting in a final set of 24 Six Sigma prior research results, it was thought that a four-year
firms. They also found 24 Baldrige firms, 26 TQM firms, interval would provide necessary time to see significant
and 23 ISO 9000 firms. In addition, a randomly selected improvement in results if it was present.
list of 50 companies from the 1998 Fortune 500 list was
used as a control group.
Company ticker symbols were obtained using RESULTS
Hoover’s Online, and the database of firms the author The results are organized according to the outcome
created was searched for duplicates and firms that were variables studied. For each dependent variable the
returned in more than one search. If a firm in the control author discusses data transformation (when needed).
group was also returned in the list of Six Sigma compa- Next, analysis of covariance (ANCOVA) results for main
nies, it was deleted from the control group and another effects are presented. ANCOVA was used to test where sig-
firm in the Fortune 500 was randomly selected. In addi- nificant differences exist between outcomes for each of
tion, firms no longer in business or that had been the treatments. ANCOVA is a general linear model with
acquired since 1998 were also stricken. In the end, the one explanatory variable and multiple factors. It was
database of control firms was reduced to 41 companies. applied where a potentially strong correlation exists
As stated, a modified version of Hendricks and between independent and dependent variables. Then,
Singhal’s (1997) performance measures was used. the author explains interactions between various quality
Profitability measures used were earnings (EBITDA), programs (Six Sigma, Baldrige, TQM, and ISO 9000)
ROA, operating margin (EBITDA/sales), and net sales. and no quality program relative to each financial or
Cost structure was analyzed by calculating cost per performance outcome. The interaction tests used
dollar of sales and FCF per share. Relative firm growth ANCOVA to determine if there are significant interaction
measures were obtained using total assets and number effects between quality management programs (QMP)
of employees. and outcomes. Model-based estimates are presented for

12 QMJ VOL. 14, NO. 4/© 2007, ASQ


Foster v14 i4 9/20/07 10:10 AM Page 13

Does Six Sigma Improve Performance?

Table 1 Summary statistics for FCF in 1998 Table 2 ANCOVA results main effects.
and 2002. Term F value Pr>F
1998 2002
Free cash flow .94 0.3300
Number of companies 138 138
Log cost per dollar sales 36.07 <.0001
Minimum -14.05 -22.18
EBITDA 9.57 0.0027
25th percentile -0.54 0.33
Log of sales 579.24 <.0001
Median 0.25 1.05
Sales per employee 306.97 <.0001
75th percentile 0.85 2.38
Asset turnover 3.01 0.0800
Maximum 17.58 12.40
ROA 1.12 0.2910

© 2007, ASQ
Mean 0.19 1.19
ROI 1.81 0.1806
Standard deviation 2.82 3.63

© 2007, ASQ
Total assets 1.66 0.2006

Log number of employees 860.94 <.0001


companies in the 10th percentile, median, and 90th
percentile. The percentiles were determined according to
firm size, as prior research has suggested that firm size Table 3 ANCOVA results interaction terms.
has a moderating effect on QMP effects (Hendricks and
Term F Value Pr>f
Singhal 2001a; York and Miree 2004). Finally, hypothe-
sis tests were performed to study the author’s research Free cash flow by QMP 6.08 0.0002
propositions. The results are presented according to Log cost per dollar sales by QMP 16.99 <.0001
financial or performance outcome in order to enhance
EBITDA by QMP 8.56 <.0001
clarity of presentation.
Log sales by QMP .83 0.5101

Free Cash Flow Per Share Sales per employee by QMP 0.46 0.7600

Summary statistics for free cash flow per share (FCF) in Asset turnover by QMP 14.94 <.0001
1998 and 2002 are presented in Table 1. This summary ROA by QMP 2.45 0.0490
shows that 138 companies were evaluated for this
ROI by QMP 2.42 0.0517
research. These companies are rank ordered, with the
© 2007, ASQ

34th company in the 25th percentile, company 69 at the Total assets by QMP 17.4 <.0001
median, and the 104th company at the 75th percentile. Log employees by QMP 1.14 0.3400
These statistical tests were performed using SAS.
The model for FCF in 2002 was fit with all data
present and no transformations. Table 2 shows the model-based estimates of FCF in 2002 at key levels of
ANCOVA results for FCF (as well as the other measures). FCF in 1998. For reference, Table 5 shows the counts
The author has combined tables here for efficient pres- of companies in various percentiles of FCF in 1998 to
entation. Table 2 shows that the main effect for FCF provide an indication of the range of data behind the
was not significant. However, as is shown in Table 3, estimates shown in previous tables and figures.
the interaction term for FCF by QMP was significant Companies without a QMP appear to have a differ-
(p < 0.0002). With a low R2 of 0.22, this suggests that ent relationship between FCF in 2002 and 1998 than
other variables are having an effect on an otherwise all other companies. While FCF in 2002 appears to be
null model. The first five rows in Table 4 present more or less positively related to FCF in 1998, these

www.asq.org 13
Foster v14 i4 9/20/07 10:10 AM Page 14

Does Six Sigma Improve Performance?

companies have a negative relation- Table 4 Model-based mean estimates (std. error of estimates)
ship between FCF in 2002 and 1998. of effects in year 5, based on levels of year 1.
Figure 1 plots this interaction.
Free Cash Flow 10th Median 90th
The author evaluates H1a in Table 6.
Among companies with high FCF in Six Sigma 1.59 (0.75) 1.64 (0.68) 1.7 (0.83)
1998, those with no QMP have an esti- Baldrige 1.27 (0.76) 1.94 (0.73) 2.65 (1.04)
TQM -0.29 (1.35) 1.61 (0.69) 3.61 (1.38)
mated FCF for 2002 that is substantially
ISO 0.79 (1.03) 1.21 (0.77) 1.65 (1.43)
lower than all other companies, whereas No QMP 2.59 (0.67) 1.13 (0.55) -0.4 (0.56)
companies using Six Sigma have an esti-
Cost Per Dollar Sales
mated 2002 FCF that is substantially
higher than all other companies. Thus, Six Sigma -0.18 (0.06) -0.13 (0.02) -0.11 (0.04)
they see Six Sigma companies and the Baldrige -0.34 (0.04) -0.13 (0.02) -0.02 (0.03)
TQM -0.1 (0.02) -0.1 (0.02) -0.098 (0.02)
average of all companies with a QMP as
ISO -0.16 (0.03) -0.07 (0.02) -0.02 (0.03)
having significantly higher FCF in 2002 No QMP -0.35 (0.03) -0.16 (0.02) -0.07 (0.02)
than those companies without a QMP.
EBITDA
At low FCF in 1998, however, those
companies without a QMP had signifi- Six Sigma 2.76 (3.56) 11.88 (2.97) 23.99 (3.14)
cantly higher FCF in 2002, leading to Baldrige 15.11 (4.96) 8.73 (3.49) 0.263 (3.79)
TQM 2.63 (4.8) 7.58 (3.07) 14.15 (7.04)
the patterns of significance displayed ISO 10.98 (4.27) 13.68 (3.29) 17.26 (3.79)
in Table 6. No QMP 5.69 (3.17) 13.8 (2.19) 24.57 (3.22)

Asset Turnover
Cost Per Dollar Sales Six Sigma 15,272 (2,550) 10,116 (2,083) 812 (2,725)
It was evident from the review of the Baldrige -2,352 (3,392) -627 (2,685) 2,487 (2,826)
TQM 11,426 (5,604) 4,765 (2,519) -7,255 (6,004)
1998 data that cost per dollar sales value
ISO 9,435 (8,878) 4,937 (2,614) -3,182 (12,084)
was extremely skewed, and to better No QMP 6,266 (1,957) 6,011 (1,579) 5,551 (2,252)
accommodate model fitting, the author
ROA
fitted the model to the natural log of
cost per dollar sales. The 2002 values, Six Sigma 2.18 (2.25) 2.28 (1.75) 2.37 (2.34)
however, were evenly distributed. Baldrige -1.17 (2.77) -1.12 (1.77) -1.13 (2.42)
TQM 3.74 (3.76) 3.08 (1.84) 2.55 (2.54)
Table 2 shows the ANCOVA results
ISO -1.52 (1.96) 2.65 (1.88) 5.96 (2.08)
for the model fit to logged cost per dol- No QMP 1.98 (1.71) 2.87 (1.29) 3.58 (1.8)
lar sales. As shown in Table 3, because
ROI
of the significant interaction between
1998 cost per dollar sales and QMP, the Six Sigma 3.91 (3.8) 4.25 (2.98) 4.47 (3.67)
effect of QMP is different depending on Baldrige -6.05 (4.76) -0.82 (3.02) 2.63 (3.68)
TQM 7.26 (7.96) 6.88 (3.06) 6.63 (5.32)
the level of cost per dollar sales in
ISO -2.08 (3.77) 6.81 (3.45) 12.67 (4.26)
1998. Table 4 gives the model-based None 8.2 (3.3) 6.46 (2.19) 5.3 (2.93)
estimates for mean (logged) cost per
Total Assets
dollar sales in 2002 by QMP and level
of 1998 logged cost per dollar sales. Six Sigma -705.3 (1659.4) 1894 (1 j610.9) 6140.6 (1562.7)
As can be seen in the plots of Baldrige 7682.9 (1937.1) 7523.7 (1804.5) 7263.5 (1741.2)
© 2007, ASQ

TQM -28.3 (3916.3) 1784.6 (1638.3) 4746.2 (6746.5)


means in Figure 1, the interaction
ISO 1502.8 (1846.6) 1950.3 (1718.7) 2681.4 (2220.2)
appears to result from different char- None 4135.2 (1193.8) 4545.1 (1167.6) 5214.9 (1396.8)
acteristics with respect to cost per

14 QMJ VOL. 14, NO. 4/© 2007, ASQ


Foster v14 i4 9/20/07 10:10 AM Page 15

Does Six Sigma Improve Performance?

dollar sales among compa- Table 5 Count of companies in each percentile category and QMP.
nies using TQM and those
Six Sigma Baldrige TQM ISO None Total
using either no QMP or one
of the other three under 0–10th percentile 3 6 1 4 14
study. All companies other 10th–50th percentile 7 10 14 16 7 54
than those with TQM appear
to have a direct relationship 50th–90th percentile 12 5 11 6 22 56

© 2007, ASQ
between cost per dollar sales 90th percentile and higher 2 3 1 8 14
in 2002 and 1998, while
Total 24 24 26 23 41 138
TQM companies appear to
have no such relationship.
Evaluation of the hypotheses of interest is given in was fairly symmetric, but it was peaked. Therefore, the
Table 6. Null hypotheses regarding Six Sigma compa- model for EBITDA in 2002 was fit with all data present
nies cannot be rejected. Among companies with low cost and no transformations.
per dollar sales in 1998, companies using the Baldrige Table 2 shows significant ANCOVA results (p < .0027).
Award criteria have a significantly lower predicted cost Table 3 shows the model-based estimates for EBITDA in
per dollar sales than companies using any of the other 2002. Because of the significant interaction between
three QMPs. Therefore, H1b is not supported. EBITDA 1998 and QMP, the effect of QMP is different
depending on the level of EBITDA in 1998. Table 4
shows model-based estimates of average EBITDA in
EBITDA 2002 at levels of 1998 EBITDA.
A review of the data showed that the distribution of Inspection of Figure 1 suggests the following as an
EBITDA in 1998 was skewed because of the presence of interpretation of the interaction: Among companies with
outlying companies. In 2002 the distribution of EBITDA the highest EBITDA in 1998, those using the Baldrige

Figure 1 Interaction Plots by Effect.


FCF 1998 by QMP interaction Return on Assets by QMP interaction
4 7
3.5 6
3 5
2002 Return on Assets

2.5 Six Sigma Six Sigma


4
2 Baldrige Baldrige
FCF 2002

3
1.5 TQM TQM
ISO 2 ISO
1
None 1 None
0.5
0 0
-2 -1 0 1 2 3 -4 -2 0 2 4 6 8 10
-0.5 -1

-1 -2
FCF 1998 1998 Return on Assets

Asset Turnover Logged Cost per dollar sales by QMP interaction ROI 1998 by QMP interaction
20,000 0 15
-0.35 -0.3 -0.25 -0.2 -0.15 -0.1 -0.05 0
-0.05
Logged cost/dollar sales, 2002

15,000
10
-0.1
2002 Asset Turnover

10,000 Six Sigma Six Sigma Six Sigma


-0.15 5
ROI, 2002

Baldrige Baldrige Baldrige


5,000 TQM -0.2 TQM TQM
ISO ISO 0 -4.1 8.4 16.6 ISO
-0.25
None None None
-3000 -2000 -1000 0 1000 2000 3000 4000 5000 6000
-0.3
-5
(5,000)
-0.35

(10,000) -0.4 -10


1998 Asset Turnover level Logged Cost/dollar sales, 1998 ROI, 1998

Mean EBITDA in 2002, by QMP and EBITDA in 1998 Total assets by QMP interaction
30.00 9000
8000
25.00 7000
6000
Six Sigma Six Sigma
Total assets 2002

20.00
5000
EBITDA 2002

Baldrige Baldrige
4000
15.00 TQM TQM
3000
ISO ISO
2000
10.00 None None
© 2007, ASQ

1000
5.00 0
-1000 0 1000 2000 3000 4000 5000 6000 7000
-1000
0.00 -2000
0 5 10 15 20 25 30
Total Assets 1998
EBITDA 1998

www.asq.org 15
Foster v14 i4 9/20/07 10:10 AM Page 16

Does Six Sigma Improve Performance?

Award criteria had the low- Table 6 Hypothesis results.


est EBITDA in 2002, and
Free cash flow 10th1 Median2 90th3
those using Six Sigma or no
QMP had the highest. That Six Sigma vs. No QMP -1 (0.99) 0.5 (0.87) 2.1 (1.01)*
result is somewhat reversed Six Sigma vs. Other QMP 1 (0.99) 0.05 (0.81) -0.94 (1.12)*
among companies with the
lowest EBITDA in 1998. Any QMP vs. No QMP 1.75 (0.85)* -0.46 (0.67) -2.8 (0.82)*

Evaluation of the Cost per dollar sales


hypotheses of interest is
Six Sigma vs. No QMP 0.17 (0.08) 0.03 (0.03) -0.04 (0.05)
given in Table 6. The
EBITDA in 2002 is statisti- Six Sigma vs. Other QMP 0.01 (0.07) -0.03 (0.03) -0.06 (0.05)

cally equivalent between Any QMP vs. No QMP -0.16 (0.04)* -0.06 (0.02)* -0.01 (0.03)
Six Sigma companies and
EBITDA
companies with no QMP,
regardless of EBITDA in Six Sigma vs. No QMP -2.93 (4.71) -1.92 (3.66) -0.57 (4.54)
1998. Among companies Six Sigma vs. Other QMP -6.81 (4.44) 1.88 (3.52) 13.43 (4.3)*
with a QMP, Six Sigma
Any QMP vs. No QMP -2.17 (3.84) 3.33 (2.76) 10.65 (4.13)*
companies have a higher
EBITDA in 2002. However, Asset turnover
this only holds among Six Sigma vs. No QMP 9005.74 (2813.7)* 4105.52 (2592.55) -4738.12 (2696.38)
companies with a higher
Six Sigma vs. Other QMP 9101.92 (4355.24)* 7091.12 (2571.04)* 3462.13 (5065.76)
EBITDA in 1998; for all
others, performance of Any QMP vs. No QMP -2179.08 (3458.55) 1213.03 (2110.05) 7334.95 (3709.69)
EBITDA in 2002 is equiva-
ROA
lent. This provides partial
support for H1c. Six Sigma vs. No QMP 0.20 (2.82) -0.58 (2.17) -1.21 (2.97)

Six Sigma vs. Other QMP 1.81 (2.85) 0.76 (2.06) -.09 (2.70)

Sales Any QMP vs. No QMP 1.16 (2.22) 1.15 (1.63) 1.15 (2.21)

Despite a large range of Total assets


sales data, the raw data Six Sigma vs. No QMP -4,840.5 (2,029.3) -2,651.1 (1,975.6) 925.7 (2,087.3)
were left in their original
scales. The author exam- Six Sigma vs. Other QMP -3,757.9 (2,293.2) -1,858.9 (1,894.2) 1,243.5 (2,895.8)
© 2007, ASQ

ined the summary of sales Any QMP vs. No QMP 2,022.1 (1,754) 1,257 (1,476.2) 7 (2,362.3)
data and found they were
* p < .0001
extremely skewed. To bet-
ter accommodate model
fitting, he modeled the natural log of sales.
Table 2 gives the ANCOVA table for the model for Sales Per Employee
logged sales. While the overall R2 for the model is 0.93, The raw data were divided by 1,000 to drop the scale to a
no terms other than sales in 1998 have any explanatory more useable level. It was evident from the summary
power for sales in 2002 (see Table 3). For this reason, the data that this value was extremely skewed, and to better
author concludes that the null hypotheses of interest accommodate model fitting, the author used the natural
cannot be rejected and that Six Sigma has no influence log of sales per employee (in thousands). Table 2 gives
on sales. Therefore, H1d is not supported. the ANCOVA table for the model fit. While the overall

16 QMJ VOL. 14, NO. 4/© 2007, ASQ


Foster v14 i4 9/20/07 10:10 AM Page 17

Does Six Sigma Improve Performance?

R2 for the model is a high 0.77, no terms other than means and standard errors of the return on asset data
sales per employee in 1998 have any explanatory power used in the model by QMP, company size, and year.
for sales per employee in 2002 (see Table 3). For this Therefore, H2b is not supported.
reason, they concluded that the null hypotheses H1e
cannot be rejected and that QMP has no influence on
sales per employee.
Return on Investment
ROI for either year looks bell-like in distribution except
for the presence of very long tails that show outlying
Asset Turnover observations in both the positive and negative direction.
Once again, Table 2 shows the ANCOVA table for the Attempts at transformation did little to pull in these
model fit, and Table 4 shows the model-based esti- strong outliers. Thus, the ANCOVA model was fit on the
mates for asset turnover in 2002. These estimates raw data. Table 2 shows the ANCOVA table. As one can
indicate that companies with high asset turnover in see in Table 3, at p < .05, the interaction of QMP by
1998 had a lower 2002 asset turnover than companies ROI in 1998 is technically not statistically significant.
with a low asset turnover in 1998. This is generally However, it is of borderline significance. Table 5 gives
true for companies using Six Sigma, TQM, and ISO the model-based estimates for ROI in 2002 by per-
9000. The 2002 asset turnover for Baldrige companies centiles of ROI in 1998 and QMP. Figure 1 plots these
shows the opposite pattern (companies with high asset means for easier interpretation. From Figure 1 it
turnover in 1998 had higher asset turnover in 2002 appears that Baldrige and ISO 9000 companies may be
than those with lower 1998 asset turnover). Those responding differently than the companies with the
companies with no QMP showed no real difference in other three QMPs. This is descriptive only, however,
2002 asset turnover, regardless of their 1998 asset owing to the lack of significance of any of the terms in
turnover. Figure 1 plots these estimates from Table 4. the ANCOVA model. Therefore, H2c is not supported.
Evaluation of the hypotheses of interest is given in
Table 6. Among companies with low and median 1998
asset turnover, companies using Six Sigma QMP had Total Assets
significantly higher asset turnover in 2002 than com- To bring the data to a more manageable scale, the
panies with no QMP; the asset turnover of these Six original data were divided by 1,000. The model was fit
Sigma companies was also higher than the average of with all available data for total assets in 2002. The
companies with the other three programs. Among nonsignificant ANCOVA result is presented in Table 2.
companies with high asset turnover in 1998, there was As is shown in Table 3, because of the significant
no significant difference among any of the hypotheses interaction between total assets 1998 and QMP, the
of interest. Therefore, H2a is partially supported. effect of QMP is different, depending on the level of
total assets in 1998. Table 4 shows the model-based
estimates of the average total assets (in thousands) for
Return on Assets 2002 for each QMP by levels of total assets in 1998.
Table 2 gives the ANCOVA table for the model fit, and Figure 1 shows a plot of the estimates to facilitate
Table 3 shows the model-based estimates for ROA in general interpretation of the interaction. Generally, it
2002. Table 3 shows a significant interaction between appears that the relationship between 1998 total assets
ROA and sales (p < .05). Table 4 provides the model- and 2002 total assets does not hold for companies
based estimates of average 2002 return on investments using Baldrige, ISO 9000, or no QMP.
at levels of 1998 ROA. Table 6 contains the tests of the hypotheses of
Evaluations of the hypotheses of interest are given interest. Among companies at the highest level of total
in Table 6. While the interaction is significant, none assets in 1998, there is no difference in 2002 total
of the hypotheses of interest are. Table 6 provides assets. For all others, however, those using the

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Does Six Sigma Improve Performance?

Baldrige Award criteria have higher total assets in Among companies with low and medium asset
2002 than those using any other QMP. Therefore, H2d turnover, Six Sigma led to higher asset turnover.
is not supported. Therefore, H2a was supported for companies with low
and medium asset turnover in 1998. It could be that
these companies with low asset turnover could benefit
Number of Employees more from process improvement implicit in Six Sigma
Because these data are skewed, the author used the than firms with high asset turnover.
natural logarithm as the outcome in modeling efforts. The adoption of Six Sigma seemed to not affect ROA
Table 2 gives the results of the ANCOVA model. For this and ROI significantly. This may not be surprising
model, adding the indicator for company size was not because many factors affect ROA and ROI, as evidenced
appropriate, so it was not included here. Because no by the DuPont model. Further investigation showed that
term other than the number of employees in 1998 is large firms using Six Sigma performed better. That is,
statistically significant, H2e is not supported. the improvement rates were in the correct direction. The
differences, however, were not significant. Reflecting

DISCUSSION AND CONCLUSIONS on the original research question regarding financial


and operational outcomes, it appears that at a macro
As has been seen, the results from Six Sigma programs level, the effects, while in some cases significant, are
are at best mixed. The author found a significant effect somewhat modest. While the author did see benefits in
on FCF, EBITDA, and asset turnovers; however, Six both financial and operational areas, quality profes-
Sigma did not seem to affect sales, ROA, ROI, or firm sionals should be careful to not oversell the benefits of
growth. As a result, if firms want to improve cash, Six Sigma or any other QMP.
earnings, or productivity in using assets, Six Sigma That Six Sigma did not affect firm growth was not
might be of use. An intervening variable in this analy- surprising. There were many exogenous macroeconomic
sis was firm size, which confirmed Hendricks and factors, including 9/11, that could have influenced
Singhal’s finding on the importance of firm size. It growth during this period. Powell (1995) and others
appears that firm size mitigates the effects of programs have stated that there are many factors that affect firm
like Six Sigma. Certainly, large firms such as GE and growth other than quality management approaches.
Motorola have resources and assets to invest in Six Indeed, many quality programs have been associated
Sigma programs. These firms also showed great with reductions in number of employees. On the other
capacity for improvement. Smaller firms may not hand, that one is able to find any significant results for
have the same resources to apply to such programs; these small numbers of firms demonstrates that quality
however, smaller firms that invest in efforts such as programs such as Six Sigma can potentially provide
Six Sigma may be impacted more significantly as a important financial and operational returns. This
total proportion of the firm’s business results. research is very high level with much room for future
Companies with high cash flows in 1998 and no study. Future studies should examine specific effects on
QMP had lower FCF in 2002 than companies that had specific projects in companies. It is expected that such
adopted Six Sigma. Companies with low cash flow studies could verify and clarify these findings.
and no QMP did better than companies using Six
Sigma, suggesting that for cash-poor firms, Six Sigma
may in fact be a drain on resources. Also, these com- Limitations
panies may not have the cash necessary to sustain There were several limitations to this research. As was
effective Six Sigma results over four years. Therefore, discussed previously, financial results during this period
H1a was supported for firms with high cash flows, but were influenced by 9/11 and other events. In addition,
may have a negative effect for companies with poor these firms’ use of Six Sigma or other quality programs
cash flows. in 1998 does not guarantee that they implemented these

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Does Six Sigma Improve Performance?

programs effectively or maintained their strategic Cua, K. O., K. E. McKone, and R. G. Schroeder. 2001. Relationships
support through 2002 and beyond. Of course, the between implementation of TQM, JIT, and TPM and manufacturing
performance. Journal of Operations Management 19: 675-694.
normal provisos concerning COMPUSTAT hold, as
these data were firm-level data, and many times Six Curkovic, S., S. Vickery, and C. Droge. 2000. An empirical
analysis of the competitive dimensions of quality performance in
Sigma programs are implemented at the business unit the automotive supply industr y. International Journal of
level. While the methodology the author used is Operations & Production Management 20, no. 3: 386-403.
adapted from prior QMP studies, it is difficult to isolate Das, A., R. Handfield, R. Calantone, and S. Ghosh. 2000. A
the effects of Six Sigma at a macro level. Future stud- contingent view of quality management: The impact of interna-
ies at a more micro level may help the understanding tional competition on quality. Decision Sciences Journal 31, no. 3:
649-690.
of these phenomena.
This study included firms from a variety of indus- Dean, M., and C. Tomovic. 2004. Does Baldrige make a business
case for quality? Quality Progress 37, no. 4: 40-46.
tries. For future research, the author suggests industry-
specific studies of the effects of Six Sigma adoption. It Deming, W. 1986. Out of the crisis. Cambridge, Mass.: MIT Press.
has been suggested that Six Sigma is best suited for Devaraj, S., K. Matta, and E. Conlon. 2001. Product and service
process industries. It is expected that in some ways such quality: The antecedents of customer loyalty in the automotive indus-
try. Production and Operations Management 10, no. 4: 424-439.
industries would have been leading-edge adopters.
Douglas, T. J., and W. Q. Judge Jr. 2001. Total quality manage-
ment implementation and competitive advantage: The role of
Implications for Managers structural control and exploration. Academy of Management
Journal 441: 158-169.
This research has implications for managers. The
Dow, D., D. Samson, and S. Ford. 1999. Exploding the myth: Do
author found negative cash flows for small firms, but
all quality management practices contribute to superior quality per-
positive cash flows for larger firms. It is apparent that formance? Production and Operations Management 8, no. 1: 1-27.
managers in smaller firms should carefully consider
Easton, G. S., and S. L. Jarrell. 1998. The effects of total quality
the cash flow impacts of quality improvement invest- management on corporate performance: An empirical investiga-
ments. Managers should also carefully monitor the tion. Journal of Business 71, no. 2: 253-307.
effects of Six Sigma efforts and focus on “hard dollar” Eriksson, H., and J. Hansson. 2003. The impact of TQM on
benefits. If not skillfully implemented, the benefits of financial performance. Measuring Business Excellence 7, no. 1:
Six Sigma may be marginal. The “fad” element of Six 36-50.

Sigma should also be noted. It is more likely that Flynn, B. B., R. G. Schroeder, and S. Sakakibara. 1995. The impact
companies that understand the benefits of Six Sigma of quality management practices on performance and competitive
advantage. Decision Sciences Journal 26, no. 5: 659-684.
are able to effectively manage to achieve those bene-
fits. It could be that companies that implement Six Foster, S. T. Jr. 1996. Examining the impact of speed of quality
improvement on quality-related costs. Decisions Sciences Journal
Sigma to merely parrot industry practice will likely 24, no. 4: 623-646.
find modest competitive benefits from Six Sigma or
Foster, S. T. Jr. 2006. Managing quality: Integrating the supply
any other quality improvement effort. chain. Upper Saddle River, N.J.: Prentice Hall.

Foster, S. T. Jr. 2007. Quality survival guide: Leadership. Quality


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Hendricks, K. B., and V. R. Singhal. 1996. Quality awards and Powell, T. C. 1995. Total quality management as competitive
the market value of the firm: An empirical investigation. advantage: A review and empirical study. Strategic Management
Management Science 42, no. 3: 415-436. Journal 16, no. 1: 15-37.

Hendricks, K. B., and V. R. Singhal. 1997. Does implementing an Pyzdek, T. 2003. The Six Sigma handbook: The complete guide
effective TQM program actually improve operating performance? for greenbelts, blackbelts, and managers at all levels. New York:
Empirical evidence from firms that have won quality awards. McGraw-Hill.
Management Science 43, no. 9: 1258-1274.
Rajan, M., and N. Tamimi. 1999. Baldrige award winners: The
Hendricks, K. B., and V. R. Singhal. 2001a. Firm characteristics, payoff to quality. Journal of Investing 8, no. 4: 39-43.
total quality management, and financial performance. Journal of
Samson, D., and M. Terziovski. 1999. The relationship between
Operations Management 19: 269-285.
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Hendricks, K. B., and V. R. Singhal. 2001b. The long-run stock ance. Journal of Operations Management 17: 393-409.
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Sousa, R., and C. Voss. 2001. Quality management: Universal or
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Howard, L., S. T. Foster, and P. Shannon. 2005. Team climate no. 4: 383-404.
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Treichler, D., R. Carmichael, A. Kusmanoff, J. Lewis, and G.
ship. International Journal of Quality and Reliability Management
Berthiez. 2002. Design for Six Sigma: 15 lessons learned.
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Kaynak, H. 2003. The relationship between total quality man- efforts. Washington, D.C.: GAO Report to the Honorable Don
agement practices and their effects on firm performance. Journal Ritter, House of Representatives.
of Operations Management 21: 405-435.
Ward, P., K. Leong, and K. Boyer. 1994. Manufacturing proac-
Lapre, M., A. Mukherjee, and L. VanWassenhove. 2000. Behind tiveness and performance. Decision Sciences Journal 25, no. 3:
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Linderman, K., R. Schroeder, S. Zaheer, and A. Choe. 2003. Six tion of the Malcolm Baldrige National Quality Award causal
Sigma: A goal theoretic perspective. Journal of Operations model. Decision Sciences Journal 31, no. 2: 361-383.
Management 21, no. 2: 193-204.
York, K., and C. Miree. 2004. Causation and covariation: An
Mohrman, S. A., R. V. Tenkasi, E. E. Lawler III, and G. E. Ledford empirical re-examination of the link between TQM and financial
Jr. 1995. Total quality management: Practice and outcomes in the performance. Journal of Operations Management 22, no. 3:
largest U.S. firms. Employee Relations 17, no. 3: 26-41. 291-311.
Montgomery, D. 2004. Design and analysis of experiments.
Hoboken, N.J.: John Wiley and Sons. BIOGRAPHY
Narasimhan, R., S. Ghosh, and D. Mendez. 1993. A dynamic S. Thomas Foster is area leader of global supply chain at
model of product quality and pricing decisions on sales response. Brigham Young University. He has published more than 50 quality-
Decision Sciences Journal 20, no. 4: 893-908. related ar ticles in journals such as Decision Sciences,
Ozan, T. 1992. International quality study: Best practices report. International Journal of Production Research, the Journal of
New York: Ernst and Young. Operations Management, the International Journal of Quality
and Reliability Management, the Quality Management Journal,
Pannirselvam, G., S. Siferd, and W. Ruch. 1998. Validation of
and Quality Progress magazine. His book is titled, Quality
the Arizona governor’s quality award: A test of the Baldrige cri-
Management: Integrating the Supply Chain (Prentice Hall).
teria. Journal of Operations Management 16, no. 6: 529-550.
Foster is founder of http://www.freequality.org, was awarded
Park, S., J. Hartley, and D. Wilson. 2001. Quality management the ASBSU 2000 Outstanding Faculty Award, and received the
practices and their relationship to buyer’s supplier rating: A study prestigious 2002 Decision Sciences Institute Instructional
in the Korean automotive industry. Journal of Operations Innovation Award. He is currently serving as guest editor for a
Management 19, no. 3: 695-712. special issue on supply chain quality for the Journal of
Phillips, L. W., D. R. Chang, and R. D. Buzzell. 1983. Product Operations Management. He served twice as an examiner for
quality, cost position, and business performance: A test of some the Malcolm Baldrige National Quality Award and is a member
key hypothesis. Journal of Marketing 47 (Spring) 26-43. of ASQ. He can be reached by e-mail at tom_foster@byu.edu.

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The Long-Term Impact of ISO 9000


Certification on Business Performance:
A Longitudinal Study Using Turkish
Stock Market Returns
MUSA PINAR AND CEYHUN OZGUR
VALPARAISO UNIVERSITY
© 2007, ASQ

The goal of this research was to examine the longitudinal


impact of ISO 9000 certification on business perform- INTRODUCTION
ance. The study compared the monthly stock returns and Over the last two decades, the implementation of quality
variability of the returns of ISO 9000 certified versus systems has become a major initiative of companies
non-ISO 9000 certified firms traded on the Istanbul
throughout the world. The concepts of quality gurus
Stock Exchange (ISE) from January 1997 to September
2005. The study also compared the stock returns and the such as W. Edwards Deming, J. M. Juran, and Philip B.
variability of the returns for the firms certified by Crosby became highly publicized. Japan’s successful
Turkish agency vs. foreign certifying agency. Using implementation of continuous improvement, Kaizen,
annual two-year, three-year, and four-year averages of and statistical quality tools, concepts, and practices
the monthly stock returns, the results indicated that started the worldwide quality revolution. Eventually,
ISO 9000 certified firms generally had higher returns Japan became the world leader in quality for a wide
and lower variability of returns than non-ISO 9000
range of products. The emergence of Japan as a leader
firms. Moreover, the comparisons of the longitudinal
means covering successive years showed that ISO 9000 in quality products eroded markets of U.S. companies.
certified firms consistently had higher means and lower In response, U.S. companies began implementing total
variances, some of which were statistically significant. quality management (TQM) in their operations in the
Finally, the certifying agency (Turkish or foreign) and late 1970s and early 1980s. By improving the quality of
the length of time with ISO 9000 certification had little their products, U.S. automobile makers recaptured
effect on the stock performance and variability of the much of their lost market share. For example, Chrysler
returns.
moved from the brink of bankruptcy to being a highly
Key words: business performance, ISO 9000 certification, profitable company. In summary, the quality award
quality, Turkey winners experienced increased income and sales after
they implemented TQM. Effective TQM implementation
results in improved customer satisfaction, employee
involvement, and continuous improvement.
In response to the global quality movements, the
European Community (EC) countries initiated their
quality standards known as ISO 9000 certification. ISO
9000 is an international standard for quality manage-
ment systems. The International Organization for
Standardization (ISO) formed Technical Committee 176
(TC 176) to develop a universally accepted set of quality

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The Long-Term Impact of ISO 9000 Certification on Business Performance: A Longitudinal Study Using Turkish Stock Market Returns

standards. ISO adopted a series of quality standards in external motives were customer requirements and
1987, known as the ISO 9000 series of standards. These responding to competitors’ demands. In addition,
standards have been applied to firms of all sizes and achieving quality assurance certification is required by
from all areas of business. The worldwide impact of ISO legislation in several countries, and is implemented as a
9000 could be illustrated by the fact that the number of marketing and promotional tool.
countries adopting the standards has continually Several reasons for seeking ISO 9000 certification
increased from 51 prior to 1992 (Bureau of Business have been suggested and/or documented empirically.
Practices 1992) to 161 at the end of 2005 (ISO 2006a). Anderson, Daley, and Johnson (1999) found, in a sample
Worldwide the number of ISO 9000 certificates grew of both certified and noncertified U.S. firms between 1990
from only a few in 1987 to 776,608 by the end of 2005 and 1996, that contrary to the view held by many critics
(ISO 2006a). Large international industrial companies of ISO 9000, managers obtained certification as a signal
such as Corning, Exxon, Du Pont, Volkswagen, Sandoz, of effective quality management practices rather than in
and Kodak initiated vigorous company programs to response to regulatory requirements. Two other surveys
implement standards at their operation sites (Rao, revealed the most common reasons U.S. companies seek
Ragu-Nathan, and Solis 1997). ISO 9000 certification are: 1) to increase market share,
ISO 9000 is not a quality standard per se, but a series meet customer requirements, and improve process effi-
of requirements for a quality management system. As ciency (Ebrahimpour, Whithers, and Hikmet 1997); and
indicated in ISO 9001:2000 (Clause 1.1), the scope of 2) to meet customer requiremetns and the belief that ISO
ISO 9000 is to specify requirements for a quality man- certification would increase operational efficiency and
agement system that: 1) consistently provides products reduce costs (Struebing 1996). Compliance with various
and services that meet the requirements of its cus- regulatory and customer requirements were significant
tomers; and 2) enhances customer satisfaction through explanatory variables for firms dealing with customers in
the effective application of the system, including the EU (Anderson, Daley, and Johnson 1999). Brown, van
processes for continual improvement and the assurance der Wiele, and Loughton (1998) found that, in a study of
of conformity to customer requirements. The 2000 ver- firms in Western Australia, the main reasons for seeking
sion of ISO 9000 comprises three documents: ISO 9000, ISO 9000 certification included customer service, market-
ISO 9001, and ISO 9004. The latest document provides related factors, and potential quality improvement.
information and guidelines to help organizations estab- With increasing globalization of trade, the ISO 9000
lish and improve their quality management systems to standards have rapidly become a force to be reckoned
go beyond the minimum requirements (Peyrat 2001). with for any company doing business in international
Many have examined the motives for implementing markets, either directly or indirectly. As a result, a consid-
ISO 9000 standards and the benefits the companies have erable research effort has been devoted to investigating
gained from ISO 9000 certification (Al-Ghamdi 1998; the awareness, attitudes, concerns, barriers, and pre-
Barnes 1998; Bhuian 1998; Brumm 1995; Chittenden, paredness of companies, especially manufacturing firms,
Poutziouris, and Mukhtar 1998; Ebrahimpour, Whithers, in regard to ISO 9000 in different countries. In fact, it has
and Hikmet 1997; Eddy 1995; LRQA 1996; MORI 1996; become a competitive necessity for firms doing business
Morita 1996; O’Brien 1996; Peach 1997; Rabbit and globally to acquire ISO 9000 certification. Several studies
Bergh 1993; Rao, Ragu-Nathan, and Solis 1997; Rayner provided support for the strategic role of ISO 9000 certifi-
and Porter 1991; SGS Yarsley 1996; Struebing 1996; cation for enhancing and facilitating international trade
Vloeberghs and Bellens 1996; Weston 1995). These stud- and marketing, especially in Europe (Brumm 1995;
ies found that the most common motives for implement- Ferguson 1996; Morita 1996; Peach 1997; Rao, Ragu-
ing ISO 9000 fell into one of two broad categories of Nathan, and Solis 1997; Reimann and Hertz 1996;
internal or external company motives or activities. The Simmons and White 1999). As a series of standards, ISO
internal motives were improved customer service/reduced 9000 lays out the requirements for quality management
customer complaints, increased efficiency, and the desire systems, which ensures a company’s buyers that it at least
to embed a quality culture or management control. The has a fundamental quality system (Erel and Ghosh

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The Long-Term Impact of ISO 9000 Certification on Business Performance: A Longitudinal Study Using Turkish Stock Market Returns

1997). In different countries standards provide a com- ISO 9000 certification, while 61.9 percent said it was “too
mon reference point of quality. For more information early to decide or have not achieved” their expectations.
about ISO 9000 readers may refer to Clements (1993) or The results also showed a significant difference between
Rothery (1993). “achievers and nonachievers” of ISO 9000 expectations
with respect to firm size and export volume, and whether
the firm is classified as an exporter or a nonexporter,
Quality Initiatives and where the achievers outperformed the nonachievers in all

ISO 9000 in Turkey performance areas.


While ISO 9000 is arguably the most influential set
In recent years, the quality of Turkish products exported of standards of its kind in the world, there is no com-
to European countries has been steadily improving. pelling evidence that the standards are ultimately good
Evidence of this improvement is the number of or bad (Uzumeri 1997). Studies have shown that ISO
European Quality Awards and prizes won by Turkish 9000 companies expect that their quality systems will
manufacturing companies in the last few years. In 1998 lead to improved product design, process design, prod-
a consumer durable manufacturing company, Beko uct quality, public image, and supplier relationship
Ticaret, a subsidiary of Turkish conglomerate Koc Group, (Ebrahimpour, Whithers, and Hikmet 1997). Simmons
and Netas Inc., a Turkish telecommunications company, and White (1999), however, claim that the specific
won the small and medium enterprises (SME) and the empirical relationship between ISO 9000 registration
large business sector European Quality Awards, respec- and business performance has not been established,
tively. In 2000, Eczacibasi Vitra, a major pharmaceutical especially in the long term, based on objective measures.
company, and Arcelik A.S., another Turkish durable con- They state that while there has been much published
sumer goods manufacturer, were both named as two of work associated with ISO 9000, the empirical research
the “Large Business European Quality Prize” winners. As on this question is lacking systematic measurement and
the prospect of European Union (EU) membership multiorganizational comparisons.
improves Turkish firms’ abilities to export their goods
to EU members, TQM programs, especially ISO 9000
certification, has gained more significance for the Research Objectives
competitiveness of the companies in Turkey. The purpose of this article is to examine the longitudinal
In a study of 140 large Turkish manufacturing firms, effect of ISO 9000 certification on business performance
Ozgur, Meek, and Toker (2002) found differences in by comparing the stock performances of ISO 9000 certi-
usage and awareness of quality tools and concepts fied firms versus non-ISO 9000 certified firms traded on
between ISO 9000 certified and noncertified companies. Turkey’s Istanbul Stock Exchange (ISE). It is believed
ISO 9000 certified companies constituted 78 percent of that the impact of ISO 9000 success should be reflected
the companies surveyed that used basic quality tools in their stock prices and returns. The main premise of
more than noncertified companies. A study of ISO 9000 the study is that ISO 9000 certified firms are expected to
experiences of Turkish firms (Pinar, Guder, and Yucel outperform the non-ISO 9000 firms in their respected
2000) showed that: 1) improving organizational per- industries and, ultimately, on the stock market. The
formance and product quality were the most important specific objectives of the article are:
motives for seeking ISO 9000 certification; and 2) ISO
1. To provide information about the characteristics of
9000 had the highest impact on management and
ISO 9000 and non-ISO 9000 firms traded on the ISE
human resource factors, followed by organizational effec-
tiveness and customer factors. ISO 9000 certification had 2. To analyze the impact of ISO 9000 certification on
the least impact on financial market factors. Another stock returns and stock return variability
study of ISO 9000 certified Turkish companies (Pinar and 3. To determine if the stock returns and the variability
Crouch 2001) found that 38.1 percent of firms have of returns of ISO 9000 certified firms are influenced
“totally or somewhat achieved” their expectations from by certifying organization (Turkish vs. non-Turkish)

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The Long-Term Impact of ISO 9000 Certification on Business Performance: A Longitudinal Study Using Turkish Stock Market Returns

To accomplish these objectives, the study will use the Baldrige National Quality Award. Flynn, Schroeder, and
average stock market returns and variances obtained Sakakibara (1995) demonstrate the importance of
from monthly stock returns covering a time period from TQM in implementing various quality programs. Their
January 1997 through September 2005. The study also paper establishes that measures of quality performance
examines the difference in certifying agency (Turkish were related to competitive advantage. Many ISO 9000
vs. foreign). It is expected that the impact of ISO 9000 firms in Turkey got their certification believing that it
success should be reflected in their stock price returns would enable them to gain a competitive advantage.
and variances. In other words, the main premise of the Because of this, ISO 9000 appears to be related to TQM
study is that ISO 9000 firms should experience higher and other quality initiatives.
returns and lower variances than non-ISO 9000 firms. It is claimed that ISO 9001:2000 is now firmly estab-
Since this study uses historical stock returns of the lished as the globally accepted standard for providing
companies, it is possible to examine the longitudinal assurance of the quality of goods and services in supplier-
impact of ISO 9000 certification on business perform- customer relations (ISO 2006a). ISO 9000 is the world’s
ance over a 105-month time period from January 1997 largest developer of voluntary international standards
to September 2005. for business, government, and society. At the beginning
of June 2006 its portfolio comprised more than 15,900
standards that provide practical solutions and achieve
BACKGROUND AND PRIOR benefits for almost every sector of economic activity and
technology (ISO 2006a). The best-known standards are
RESEARCH ON ISO 9000 ISO 9001:2000 for quality management systems, ISO
One of the primary means of providing quality verifi- 14001 (both 1996 and 2004 versions) for environmental
cation is through ISO 9000 certification. ISO 9000 management systems, ISO/TS 16949:2002 for the auto-
certification is based on quality standards written in motive sector, and ISO 13485:2003 for medical devices
1987 by ISO and was adopted by the EC in 1989 (ISO 2005). The ISO 9000 2006 survey (ISO 2006a)
(Wilson 1999). The only requirement of the original reports the recent status of each of these standards.
ISO 9000 standards was that the organization should Table 1 presents the growth of the number of certifi-
have documentation and a verifiable process in place cates issued in different countries from December 2001
to ensure that it consistently produced what it said it to December 2005 for 608 ISO 9001:2000, ISO 14001,
would produce. Thus, a company could comply with ISO/TS 16949:2000, and ISO 13485:2003. These num-
the standards and still produce a poor-quality product. bers in Table 1 signify the global importance of ISO
As a result, these standards have been criticized in the 9000 certification for each of the standards.
literature (Erel and Ghosh 1997; Jackson and Ashton The revised ISO 9000:2000 series includes eight
1995; Reimann and Hertz 1996; Zuckerman 1997) for quality management principles as the basis of quality
omitting clauses that address customer satisfaction, management system standards (ISO 2006b). These
continuous improvement, and top management sup- principles are derived from the collective experience
port. In a response to the dissatisfaction with the old and knowledge of the international experts. They are:
standards, these standards were revised in 1994 and 1) customer focus; 2) leadership; 3) involvement of
again in 2000. The most recent version is called the people; 4) process approach; 5) system approach;
ISO 9000:2000 family of standards (ISO 2006b). The 6) continuous improvement; 7) factual approach to
current standards represent a fundamental change in decision making; and 8) mutually beneficial supplier
approach over the earlier versions by focusing on the relationships. Peyrat (2001) states that the primary
following elements: top management commitment, objective of this new version of standards is customer
customer satisfaction, emphasis on processes, and con- orientation: the ISO 9000:2000 series focuses on satisfy-
tinual improvement. These ISO 9000 standards are ing the customers of the organization, in the case of
closely aligned with the philosophy and objectives of ISO 9001, and on satisfying all interested parties, in the
most quality programs such as TQM and the Malcolm case of ISO 9004 and ISO 14001. With the publication

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The Long-Term Impact of ISO 9000 Certification on Business Performance: A Longitudinal Study Using Turkish Stock Market Returns

of the 1994 versions Table 1 Distributions of ISO 9000 standards in the world.
and after several years
of additional experi- ISO 9001:2000 Dec. 2001 Dec. 2002 Dec. 2003 Dec. 2004 Dec. 2005

ence, Peyrat (2001) World total 44,388 167,919 497,919 660,132 776,608
indicated that the ISO No. of countries & economies 97 133 149 154 161
9000 standards gradu-
ally acquired a reputa- ISO 14001:2000 Dec. 2001 Dec. 2002 Dec. 2003 Dec. 2004 Dec. 2005

tion of being fairly World total 36,464 49,440 64,996 89,937 111,164
easily transportable No. of countries & economies 112 116 113 127 138
management system
standards. In fact, they ISO /TS 16949:2002 Dec. 2001 Dec. 2002 Dec. 2003 Dec. 2004 Dec. 2005

have been imple- World total 0 0 0 10,019 17,047


mented by all types of No. of countries & economies 0 0 0 62 80
organizations, from
multinational corpora- IOS 13485:2003 Dec. 2001 Dec. 2002 Dec. 2003 Dec. 2004 Dec. 2005

tions to SMEs and from World total 0 0 0 2,403 5,065


humanitarian NGOs No. of countries & economies 0 0 0 55 67
(nongovernment-
organizations) to pub- Total 80,852 217,359 562,915 762,491 909,884

© 2007, ASQ
lic services. This makes ISO 9001:2000 for quality management systems, ISO 14001 (both 1996 and 2004 versions) for environmental
management systems, ISO/TS 16949:2002 for the automotive sector, and ISO 13485:2003 for medical devices
the 2000 version of the Source: The ISO Survey—2005
ISO 9000 series truly
generic (Peyrat 2001).
There have been several recent studies that investi- (2001), based on their results, concluded that ISO 9000
gated the relationship between ISO 9000 certification certification serves organizations that are internally
and business performance. There are no agreements motivated better than organizations that are externally
among results of the studies. Some support a positive motivated (as a result of external pressures such as
relationship between the two, while others indicate no buyer demands). While these papers indicate and discuss
direct relationship. Haversjo (2000) reported that in possible benefits of ISO 9000 certification, none shows a
Denmark, ISO 9000 certified companies seem to have direct relationship between ISO 9000 certification and
higher returns than non-ISO 9000 certified companies. bottom-line performance.
He believes, however, that ISO 9000 registration did not The findings of several studies concerning a rela-
cause the change in superior financial performance of tionship between ISO 9000 certification and business
the firm; rather, it could be attributed to other factors performance were contrary to those findings cited pre-
such as innovative management. The study by Brown, viously. For example, Jeng (1998) found that at least
van der Wiele, and Loughton (1998) found that the 30 percent of Taiwanese managers don’t believe that
most significant benefits of ISO 9000 certification are having ISO 9000 approval or pursuing certification is
in the area of raising quality awareness and in setting the best way to improve organizational performance,
a foundation to improve quality (internal factors). and 70 percent of ISO 9000 certified Taiwanese compa-
Gustafson et al. (2001) analyzed the implementation of nies surveyed exhibited performance results similar to
ISO 9000 in small business enterprises in Sweden. Their those prior to certification (Jeng 1998). However, the
results showed that the higher the level of involvement of results of Jeng’s study showed that ISO 9000 implemen-
the CEO and the employees, the higher the satisfaction tation works well for the entire organization in improv-
level of the company with ISO 9000 certification and ing overall performance. Terziovski, Samson, and Dow
the higher the continuation of quality improvements (1997) found that, for manufacturing companies in
after obtaining it. Singels, Ruel, and van de Water Australia and New Zealand, ISO 9000 certification is

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The Long-Term Impact of ISO 9000 Certification on Business Performance: A Longitudinal Study Using Turkish Stock Market Returns

not significantly related to organizational performance In Turkey, TSE has been approved to consider and
measures. certify firms with ISO 9000. TSE is the only organization
Despite the expected benefits of ISO 9000 certification, in Turkey that can approve ISO 9000 certification.
the standards have several criticisms (Erel and Ghosh KALDER also promotes quality by offering training pro-
1997; Jackson and Ashton 1995: Reimann and Hertz grams and publishing a quarterly practice journal, but
1996; Zuckerman 1997). Some of the ISO 9000 criticisms cannot offer any quality certification. In addition to TSE,
are: 1) the standards are static, inflexible, and cannot be there are a number of European certification agencies
adapted to certain situations; 2) they are not customer operating in Turkey that also issue ISO 9000 certification.
driven/market oriented; 3) they mainly concentrate on It has been argued that the source of certification makes
production firms; and 4) concentration on ISO 9000 a difference in the reputation of the certified company,
takes the attention away from continuous improve- and it may affect them getting certain export contracts.
ment. Despite these concerns, adoption of ISO 9000 is A study performed by Erel and Gosh (1997) indicates
rapidly growing. that 57 percent of companies were certified by foreign
agencies and approximately 30 percent had both foreign
certification and TSE certification.
Quality Movements in Turkey The popularity of ISO 9000 certification as a part
TQM had to be sponsored by a number of national of a quality program among Turkish companies has
organizations in Turkey. Data indicated that Turk grown in recent years. More companies in Turkey are
Standard Enstitusu (TSE) (or Turkish Standards looking to become ISO 9000 certified. As of the end of
Institute), National Council for Quality Accreditation December 2005, there were 12,133 Turkish firms with
(KAMK), and quality association (KALDER) had signif- some form of ISO 9000 certification (ISO 2006a).
icant roles in convincing managers through training Table 2 shows the distributions of ISO 9000 certifica-
and publications that TQM was a good initiative and, if tion by type of certification (ISO 2006a). Based on the
implemented, companies would experience rewarding survey results, at the end of December 2005, 10,929
benefits. The mission statement of Turkish companies Turkish firms had received ISO 9000:2000 certification,
reflected the commitment to TQM; however, on a global 918 firms had received ISO 14001:2000 certification,
basis all companies must be able to demonstrate that 265 firms had ISO/TS 16949:2002 certification, and 21
they have the systems in place to provide a quality firms had received ISO 13485:2003 certification.
product if they wish to be competitive. The demand for It seems that only a small number of ISO certified
quality in products and services brought about the Turkish firms, however, applied for the National Quality
development of the ISO 9000 series of quality system Award. Even though Turkish firms appear to be interested
requirements and made ISO certification an important in improving quality, as evidenced by a large number
quality factor in the international marketplace. ISO of ISO 9000 certifications, only a few of them have truly
quality certification has almost become a prerequisite adopted TQM (Yildirim 1999). The duration of getting
for doing business in the
global arena. In Turkey one Table 2 Distributions of ISO 9000 standards in Turkey.
motivation for quality came
Type of certification Dec. 2001 Dec. 2002 Dec. 2003 Dec. 2004 Dec. 2005
from Turkey’s desire to
become a member of the EU. ISO 9001:2000 72 911 3,248 5,009 10,929
Companies that desire to ISO 14001:2000 91 135 240 338 918
market to countries in the EU
ISO/TS 16949:2002 0 0 0 98 265
are expected to be ISO 9000
certified. This is especially ISO 13485:2003 0 0 0 12 21
© 2007, ASQ

true for companies that are Total 163 1,046 3,488 5,457 12,133
doing or desire to do business
Source: The ISO Survey—2005
in the EU.

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The Long-Term Impact of ISO 9000 Certification on Business Performance: A Longitudinal Study Using Turkish Stock Market Returns

to be ISO 9000 certified takes one to one-and-a-half A survey by Lloyd’s Register Quality Assurance (LRQA
years, and the certification time is affected among oth- 1996) compared the financial and sales performances of a
ers by employee involvement, top management support, sample of 222 ISO 9000 certified British companies with
existence of relevant procedures, professional consultant the industry average. The survey found that ISO 9000
participation, and effective communication within the registered companies: 1) were two or three times more
organization (Halls and Oztas 2002). Difficulties profitable than their nonregistered competitors and sig-
encountered in ISO 9000 implementation in Turkey nificantly outperformed the industry average on five
include: changing the department’s traditional policies other key financial and sales measures of profit margin,
and procedures, using statistical techniques/tools, and return on capital employed, sales per employee, capital
motivating personnel (Calisir, Bayraktar, and Beskese employed per employee, and asset turnover; 2) experi-
2001). A 1996 study by Erel and Ghosh (1997), which enced improved efficiency and productivity, reduced waste
documented the state of ISO 9000 implementation in and costs, and had improved market share; and 3) were
Turkey, showed that 68 percent of the 73 firms surveyed financially stronger than their noncertified competitors.
had an ISO 9000 certification. Simmons and White (1999) conducted a systematic,
In a study by Calisir, Bayraktar, and Beskese (2001), multiorganizational analysis of the relationship between
the following factors were considered important in the ISO 9000 registration and objective measures of business
implementation of ISO 9000 in Turkey: 1) enhancing performance, using the ratio sales/stockholder equity,
the quality reputation, and 2) increasing market share. profitability (ROA), and foreign sales (as a percentage of
They point out that, using ISO 9000, the importance of total sales) as indicators of business outcome. Based on
achieving the expected improvements included reducing 126 U.S. companies (63 ISO 9000 and 63 non-ISO 9000
the defect rate, improving product/service quality, firms) with cross-sectional data from seven SIC coded
enhancing organization’s quality reputation, and industries, Simmons and White (1999) found that ISO
improving standardization. Moreover, ISO certification 9000 companies had significantly higher average prof-
implies that a bona fide commitment to quality and to itability than non-ISO 9000 certified companies, but ISO
obtaining ISO 9000 certification can be: 1) a strategic 9000 certified companies did not have higher opera-
marketing tool; 2) a means for improving productivity; tional performance or higher foreign sales than non-ISO
3) a strategy for gaining competitive advantage; and 4) a 9000 companies. Their findings did not support the
way to enhance position in the global marketplace. claim that ISO 9000 companies realize advantages in
operational performance and foreign sales over non-ISO
9000 companies; thus, they did not offer any evidence
Impact of ISO 9000 Certification that ISO 9000 may ultimately be good for organizations.
Given that their sample data only covered 1995, they rec-
on Business Performance ommend longitudinal analysis to better examine the
Despite the expected benefits of ISO 9000 certification, long-term impact of ISO 9000 on business performance.
only a few empirical studies have examined whether Lee (2003), based on a survey of ISO 9000 and non-
ISO 9000 certified companies actually perform better ISO 9000 firms in the Korean electronics industry,
than non-ISO 9000 companies. Past studies have found that manufacturing strategies differed signifi-
detailed perceived relationships between quality and cantly between the two groups, and these differences
business success in Deming (1982); Garvin (1987); significantly impacted firms’ business practices and
Kannan et al. (1999); Lam (1996); Lofgren (1991); and performance. Specifically, his results showed that the
Pfau (1989). There are also a few studies that empiri- ISO 9000 certified firms are more likely to do business
cally compared the performance of ISO 9000 certified globally and be affiliated with foreign firms, tend to be
firms to non-ISO 9000 firms. Some of these studies more quality-conscious and more concerned about
include LRQA (1996); Lee (2003); Rajan and Tamimi product identity, are more likely to have just-in-time
(2003); Simmons and White (1999); and Terziovski, (JIT) or Kanban-based production planning and control
Power, and Sohal (2003). systems, tend to have lower material cost with less labor

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The Long-Term Impact of ISO 9000 Certification on Business Performance: A Longitudinal Study Using Turkish Stock Market Returns

intensive operation, are likely to have much less safety empirically examine the impact of ISO 9000 certification
margin of inventory, and tend to put more priority on on the variability (or volatility) of business performance.
research and development and the introduction of new As variability of returns represents a measure of risk, it is
products with more focus on quality. important to examine how ISO 9000 impacts the risk (or
In investigating the link between attaining ISO 9000 variability) of the returns. Brigham and Houston (2007)
certification and the benefits to the shareholders, Rajan claim that risk is a difficult concept to grasp. They indi-
and Tamimi (2003) compared the performance of a cate that the tighter the probability distribution of
portfolio consisting of the stocks of ISO 9000 certified expected future returns, the lower the variability of the
companies to the performance of the S&P 500 index for returns, thus the smaller the risk. Therefore, it is custom-
different investment holding periods. They found that ary to assess risk by using standard deviation (sigma).
while the ISO 9000 portfolio appears to be considerably The lower the value of sigma, the lower the risk
more volatile than the S&P, it has significantly outper- (Brigham and Houston (2007: 251). Following the same
formed the market index. Also, Terziovski et al. (2003) logic, the lower the variability (variance) of the returns,
showed a significant and positive relationship between the lower the risk of those returns.
the manager’s motives for adopting ISO 9000 certifica- Many of the ISO 9000 studies used surveys to examine
tion and business performance. the performances of ISO 9000 firms based on financial
In order to determine whether ISO 9000 certification and sales measurements. The literature on ISO 9000 is
pays off, Corbett et al. (2002) used “event study” to com- overwhelmingly either prescriptive or descriptive, with
pare the financial performance of a group of companies studies that are speculative, anecdotal, and often based
that have gone through ISO 9000 certification with the on the observation of a single company (Ebrahimpour,
financial performance of a comparable group of compa- Whithers, and Hikmet 1997). In addition, Simmons and
nies that did not have ISO 9000 certification. The authors White (1999) also claim that the specific empirical rela-
of the paper claimed that superior performance of ISO tionship between ISO 9000 registration and business
9000 firms may not be related to ISO 9000 certification, performance has not been established. They state that
but may simply reflect that these firms already had supe- while there has been much published work associated
rior performance prior to their certification. Their results with ISO 9000, the empirical research on this question
showed that the companies demonstrated better perform- is lacking systematic measurement and multiorganiza-
ance after deciding to seek ISO 9000 certification than tional comparisons. Unlike most of the other studies
non-ISO firms from the same industry with similar per- with self-reported (subjective) performance measures
formance prior to certification. Corbett et al. (2002) state involving ISO 9000 certification or cross-sectional stud-
that the decision to get certified led to superior cost con- ies, this paper used objective measures of monthly stock
trol and higher sales; therefore, one could argue that the returns that include 105 months or almost nine years of
decision to seek ISO 9000 certification is positively related data. This is a significantly longer time than the study
to other good management practices that result in by Pinar, Guder, and Yucel (2000), which included only
improvements in sales and ROA, instead of certification four years of data.
itself. Also, since the control group consists of companies
with the similar ROA prior to certification, this indicates
that certification is helpful, where the companies with Research Hypotheses
ISO 9000 certification experienced significant improve- As stated before, the main goal of this study is to investi-
ments in their ROAs. Their results suggest that companies gate the performance of ISO 9000 and non-ISO 9000
that are not seeking ISO 9000 certification have gradually firms traded on Turkey’s ISE market of Turkey by using
decreasing performance in terms of their ROA and sales. their average stock market returns and the variability of
Some studies alluded that ISO 9000 improved the the stock returns from January 1997 through September
smoothness of the business operations, which might 2005. Both theoretical research (Fine 1986; Lederer and
imply that ISO 9000 certification could lower the vari- Rhee 1995) and empirical studies (Chowdhury and
ability of the returns. The prior studies, however, did not Menon 1995; Hendricks and Singhal 1997; Jacobson

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The Long-Term Impact of ISO 9000 Certification on Business Performance: A Longitudinal Study Using Turkish Stock Market Returns

and Aaker 1987; Powell 1995) have established links H03: γ3 <
– γ4 = 0 where 3 = foreign certified and
between quality and business performance, which is 4 = TSE certified
consistent with the conceptual and empirical founda- Ha31: γ3 > γ4 = 0 where 3 = foreign certified and
tions provided by the authorities on quality (that is, 4 = TSE certified
Deming 1986; Juran 1974; Ishikawa 1985). There have
H04: σ32 > 2
– σ4 = 0 where 3 = foreign certified and
not been enough studies on the effectiveness of the ISO
4 = TSE certified
9000 standard on business performance. Based on the
claims of expected higher business performance, Ha4: σ32 < σ42 = 0 where 3 = foreign certified and
increased profitability, and marketing and global com- 4 = TSE certified
petitive advantages of ISO 9000 certified companies
presented in the previous sections, the following
research hypotheses were developed:
DATA AND METHODOLOGY
For this study, the authors used the monthly stock returns
• H01: ISO 9000 certified firms don’t have higher stock
(the percent change in their prices from one month to
returns than non-ISO 9000 firms.
the next month) of all the manufacturing firms (with or
• H a1: ISO 9000 certified firms have higher stock without ISO 9000 certification) listed on the ISE market
returns than non-ISO 9000 firms. of Turkey from January of 1997 to September of 2005 (a
• H02: ISO 9000 firms don’t have lower stock variability full year of data was not available for 2005). This study
than non-ISO 9000 firms. excludes the service firms because of their different
• Ha2: ISO 9000 firms have lower stock variability than income statement structures. The monthly stock returns
non-ISO 9000 firms. were obtained from the ISE (ISE 2006). Previous studies
used monthly return data to examine the ISE of Turkey
• H03: ISO 9000 firms certified by non-Turkish certifying
(that is, Akdeniz, Altay-Salih, and Aydogan 2000). A list
organization’s returns do not differ from returns of
of all ISO 9000 certified companies traded on the ISE
ISO 9000 firms certified by TSE.
were obtained from KALDER (KALDER 2006). The list
• Ha3: ISO 9000 firms certified by non-Turkish certifying included the names of the companies, their ISO 9000
organizations have higher returns than ISO 9000 certification dates, the certifying organization, and the
firms certified by TSE. primary industries they were operating in.
• H04: ISO 9000 firms certified by non-Turkish certify- The stock market and ISO 9000 certification are
ing organizations’ variability of returns do not differ recent phenomena in Turkey. As a part of the economic
from variability of returns of ISO 9000 firms certified stabilization and liberalization programs in the early
by TSE. 1980s, Turkey’s ISE market was established in 1986.
• Ha4: ISO 9000 firms certified by non-Turkish certifying According to ISE (2001), there were only 80 companies
organizations have lower variability than ISO 9000 listed at the beginning with market capitalization of
firms certified by TSE. $938 million. The number of firms has steadily
Expressed in mathematical notation the aforemen- increased and reached 387 in 2001 (ISE 2001), but
tioned hypotheses are as follows: because of recent economic crises, the number of firms
listed on ISE declined to 319 in late 2005 (ISE 2006).
H01: α1 < – α2 = 0 where 1 = ISO certified and Market capitalization has also experienced dramatic
2 = non-ISO,…,n
growth over the years, reaching more than $93.1 billion
Ha1: α1 > α2 ≠ 0 where 1 = ISO certified and at the end of 2001 (ISE 2001) and $201.8 billion at the
2 = non-ISO,…,n end of 2005 (ISE 2006). ISE officials classified all the
2> 2
H02: σ1 – σ2 = 0 where 1 = ISO certified and firms on the stock market into 17 distinct industry
2 = non-ISO,…,n groups (ISE 2001; 2006).
Ha2: σ12 < σ22 = 0 where 1 = ISO certified and Turkish companies began receiving ISO 9000 cer-
2 = non-ISO,…,n tification in 1992. Throughout 1992, there were six

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The Long-Term Impact of ISO 9000 Certification on Business Performance: A Longitudinal Study Using Turkish Stock Market Returns

companies on the ISE that were ISO 9000 certified. At the include them because of the requirement of keeping the
beginning of the study period, there were about 220 firms same firms on their panel. Of these companies, 62 were
that traded on the ISE market (ISE 2001). One hundred ISO 9000 certified and 33 were non-ISO 9000 firms that
and three firms had ISO 9000 certification and 117 of met the two requirements to be included in the study for
them did not have ISO 9000 certification. Sixty percent of analysis. While these requirements limited the number of
the firms on the ISE belong to seven industry groups as firms in the study, it made the results and interpretations
classified by the ISE board (food and beverage, textile and more consistent for both ISO 9000 and non-ISO 9000
leather, wood, paper and printing, chemical, petroleum firms. Given that this was a longitudinal study, it was
and plastics, non-metal minerals, basic metals, and important to keep the same companies over the study
machinery and metal products) and 40 percent belong to period so that the results would not be distorted with the
other industry groups. The majority (87.4 percent) of the addition and/or deletion of new companies. This process
103 ISO 9000 certified firms on the ISE belongs to the of studying the same companies over time is similar to
seven industry groups (manufacturing industries) and consumer panel studies, where a group of same con-
the remaining 12.6 percent belong to other industry sumers is observed over time to examine various pur-
groups. It is just the opposite for non-ISO 9000 firms, chase behaviors and activities (Churchill and Iacobucci
where only 35.9 percent belong to the seven industry 2005; Hair, Bush, and Ortinua 2006). Also, it is desirable
groups and 64.1 percent belong to other groups. Of the to have the same number of ISO 9000 and non-ISO com-
ISO 9000 certified companies, 62.1 percent received panies from the same industries; however, this was not
their ISO 9000 certification from the TSE, the govern- possible because of the limited number of companies
ment quality-certifying agency, and 37.8 percent of traded on the ISE and the authors’ selection criteria.
them from certifying agencies from other countries. The study examined the yearly returns, various com-
binations of two-, three-, and four-year returns, and
returns over the nine-year period. The yearly returns
Selection of Sample and allowed the authors to compare the stock performance of
ISO 9000 vs. non-ISO 9000 firms on a year-by-year basis.
Research Design They also used the two-, three-, and four-year averages to
The objectives of the study and time period covered set smooth out the effects of yearly fluctuations or changes
the criteria for the firms to be included in the study. The in returns of ISO 9000 or non-ISO 9000. For example,
two criteria for ISO 9000 certified firms to be included in 1999 and 2000 seem to be unique years for stock
the analysis were that they should: 1) have received their returns. By having averages for different time periods
ISO 9000 certification before January 1997; and 2) have (that is, two-, three-, four-year), the authors were able
been listed on the ISE during the entire study period. to smooth out these extreme situations of 1999 or 2000
For non-ISO 9000 firms, the requirement was that they and eliminate these random changes. This is similar to
were traded on the ISE for the entire time period. This the time-series procedure recommended for economic
was important to examine the longitudinal impact of data by Makridakis, Wheelwright, and McGee (1978).
ISO 9000 certification on business performance. In Therefore, the averages of the stock returns for different
addition, the selected companies operate in seven man- time periods were essential to capture the long-term
ufacturing industries, as was stated earlier. Companies effects of ISO 9000 certification vs. non-ISO 9000 certifi-
from other industries were not included in the study, to cation. The authors also obtained the variances of ISO
prevent any potential inconsistency in the data. 9000 and non-ISO 9000 firms for the yearly returns as
Given the aforementioned criteria and requirements, well as other time periods used for means.
a total of 95 firms were qualified for the study. These were The aforementioned mean and variance values were
the only firms that were traded on ISE for the entire time used to compare the performances of ISO and non-ISO
period of nine years. In fact, the authors do not have a 9000 firms with the two-sample t-test procedure.
sample, but the entire population. Later, more firms Specifically, the authors compare means and variances of
started being traded on the ISE, but the authors could not ISO 9000 certified and non-ISO 9000 certified companies

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The Long-Term Impact of ISO 9000 Certification on Business Performance: A Longitudinal Study Using Turkish Stock Market Returns

Table 3 Distribution of the firms by industries.


that they are more quality oriented than the firms in
other industries, and certain industries seem to be more
ISO 9000 Non-ISO 9000 receptive than others to quality improvements.
n Percent n Percent
Food and beverage 5 8.06 6 18.18

Textile and leather 7 11.29 13 39.39


RESULTS
Wood, paper, and
printing 6 9.68 3 9.09 Comparison of ISO 9000 vs.
Chemical, petroleum,
and plastics 13 20.97 5 15.15 Non-ISO 9000 Firms
The main purpose of this study was to investigate the
Non-metal minerals 14 22.58 1 3.03
impact of ISO 9000 certification on stock returns and
Basic metals 6 9.68 1 3.03 stock variability. Based on this intent, two hypotheses
Machinery and were developed.
© 2007, ASQ
metal products 11 17.74 4 12.12
• H01: ISO 9000 certified firms don’t have higher stock
Total 62 100.00 33 100.00 returns than non-ISO 9000 firms vs.
• H a1: ISO 9000 certified firms have higher stock
for yearly data as well as for other time periods. The two- returns than non-ISO 9000 firms and,
sample t-test procedure allows them to determine if the • H02: ISO 9000 firms don’t have lower stock variability
means and variances of ISO 9000 and non-ISO 9000 than non-ISO 9000 firms vs.
firms were significantly different. Even though p < .05 • Ha2: ISO 9000 firms have lower stock variability than
and p < .01 are most commonly used for testing sig- non-ISO 9000 firms.
nificance, the studies have also used p < .10 in their
In order to test these two hypotheses, the authors
statistical significance testing (Jain and Tabak 2002).
used two-sample independent sample t-test to compare
Thus, they consider p-values less than .10 (p < .10) as
the means and variances of returns from January 1997
significant for their mean comparisons.
to September 2005 for ISO 9000 certified and non-ISO
9000 certified firms. As shown in Table 4, these compar-
Selected Characteristics of isons covered: 1) yearly returns for nine years; 2) the
two-year moving average returns; 3) three-year and
the Firms four-year simple average returns; 4) nine-year average
Table 3 presents a distribution of the firms by industry. return. All of these resulted in a total of 23 time-period
The distributions of ISO 9000 firms by industry show scenarios. These combinations provided an opportunity
that five firms were in the food and beverage industry; to compare the performances of ISO 9000 certified firm
seven firms were in the textile and leather industry; six vs. those of non-ISO 9000 certified firms over multiple
firms were in wood, paper, and printing; 13 firms were time periods. As stated before, having different time
in chemical, petroleum, and plastics; 14 firms were in period averages, it was possible to smooth out the effects
non-metal minerals; six were in basic metals; and 11 of fluctuations and changes in any year in order to better
firms were in machinery and metal products. The distri- identify the impact of ISO 9000 certification.
butions of non-ISO certified firms were six firms in the The comparisons of the mean returns for both ISO
food and beverage industry; 13 firms in textile and 9000 vs. non-ISO 9000 firms in Table 4 and Figure 1
leather industry; three firms in wood, paper, and print- show that ISO 9000 firms had significantly higher
ing; five firms in chemical, petroleum, and plastics; one returns than non-ISO 9000 firms for the years of 1999
in nonmetal minerals; one in basic metals; and four in (means of 16.41 percent for ISO 9000 vs.13.87 percent for
machinery and metal products. A large number of firms non-ISO 9000, p < .05) and 2000 (means of .05 percent
with ISO 9000 certification in certain industries indicate for ISO 9000 vs. -2.05 percent for non-ISO 9000, p < .05).

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The Long-Term Impact of ISO 9000 Certification on Business Performance: A Longitudinal Study Using Turkish Stock Market Returns

The mean annual returns for Table 4 Comparisons of means and variability of the returns for ISO 9000
other years are not statisti- vs. non-ISO firms on the Istanbul Stock Exchange, 1997-2005.
cally significant. This indi-
Means Variances
cates that both ISO 9000 and
Years ISO 9000 Non-ISO 9000 p-sign. ISO 9000 Non-ISO 9000 p-sign.
non-ISO 9000 firms seem to
have similar performances. Avg 97 9.56 8.58 0.389 18.38 45.84 0.108

During the nine-year period, Avg 98 0.38 0.40 0.985 24.05 21.62 0.691
the increase and decrease of Avg 99 16.41 13.87 0.015 21.84 21.62 0.879
the annual returns for ISO
Avg 00 0.05 -2.05 0.018 16.14 16.42 0.840
9000 and non-ISO 9000
firms appear to follow simi- Avg 01 7.27 8.15 0.546 14.90 60.40 0.006
lar patterns. In 1999 both Avg 02 0.86 1.58 0.390 10.49 23.71 0.027
ISO 9000 and non-ISO
Avg 03 4.54 4.89 0.635 10.84 13.64 0.588
90000 firms had very good
returns, but ISO 9000 firms Avg 04 3.89 3.39 0.678 52.70 18.92 0.001
had significantly higher Avg 05 2.87 1.31 0.101 18.30 20.28 0.969
returns than non-ISO 9000
97-98 4.97 4.49 0.524 9.77 16.77 0.287
firms. The year 2000 was the
worst year for non-ISO 9000 98-99 8.40 7.13 0.059 6.81 14.20 0.287
firms (mean of -2.04 percent 99-00 8.23 6.25 0.002 8.10 8.30 0.625
returns) and not a very good
00-01 3.66 3.39 0.750 5.25 21.15 0.000
year for ISO 9000 certified
firms either (mean of .05 01-02 4.07 4.86 0.213 5.86 14.20 0.116

percent return), but ISO 02-03 2.70 3.24 0.385 4.32 10.14 0.079
9000 firms still had a signifi- 03-04 4.21 4.14 0.931 18.64 7.79 0.636
cantly higher average return
04-05 3.45 2.50 0.282 21.01 8.30 0.584
than non-ISO 9000 firms.
Similar comparisons of 97-99 8.78 7.62 0.058 6.50 10.74 0.239
ISO 9000 versus non-ISO 00-02 2.73 2.79 0.921 3.27 10.09 0.003
9000 were conducted for
03-05 3.85 3.37 0.465 11.53 4.44 0.356
other time period combina-
tions. As presented in Table 4 97-00 6.60 5.37 0.011 2.93 5.65 0.033
© 2007, ASQ

and Figure 1, the mean com- 01-04 4.14 4.50 0.460 4.74 5.97 0.297
parisons for two-year moving
97-05 5.16 4.63 0.082 1.91 1.95 0.567
average returns show that
the mean returns for ISO
9000 are significantly higher than those for non-ISO non-ISO 900 firms for 1997-1999 period (mean of
9000 firms for the time periods of 1998 to 1999 (mean 8.78 percent for ISO 9000 vs. 7.62 percent for non-ISO
of 8.40 percent for ISO 9000 vs. 7.13 percent for non- 9000, p < .10) and for 1997-2000 period (mean of
ISO 9000, p < .10) and 1999 to 2000 (8.23 percent for .6.60 percent for ISO 9000 vs. 5.37 percent fro non-ISO
ISO 9000 vs. 6.25 percent for non-ISO 9000, p < .05). 9000, p < .05). During other time periods, there was
The study found no significant difference between the no significant difference between the returns for ISO
returns for ISO 9000 and non-ISO 9000 firms during 9000 and non-ISO 9000 firms. Finally, the study com-
other two-year periods. Also, the mean comparisons of pared the mean returns over a nine-year time period
three-year and four-year simple mean returns show that from 1997 to 2005 and found that ISO 9000 firms
ISO 9000 firms had significantly higher returns than (mean of 5.16 percent) had significantly higher

32 QMJ VOL. 14, NO. 4/© 2007, ASQ


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The Long-Term Impact of ISO 9000 Certification on Business Performance: A Longitudinal Study Using Turkish Stock Market Returns

Figure 1 Mean Comparisons of ISO 9000 vs. Non-ISO 9000 Returns on the Istanbul Stock Exchange, 1997-2005.

17.00

12.00

7.00

2.00

-3.00
Avg Avg Avg Avg Avg Avg Avg Avg Avg 97- 98- 99- 00- 01- 02- 03- 04- 97- 00- 03- 97- 01- 97-
97 98 99 00 01 02 03 04 05 98 99 00 01 02 03 04 05 99 02 05 00 04 05
** ** * ** * ** *
ISO 9.56 0.38 16.41 0.05 7.27 0.86 4.54 3.89 2.87 4.97 8.40 8.23 3.66 4.07 2.70 4.21 3.45 8.78 2.73 3.85 6.60 4.14 5.16

© 2007, ASQ
Non- 8.58 0.40 13.87 -2.05 8.15 1.58 4.89 3.39 1.31 4.49 7.13 6.25 3.39 4.86 3.24 4.14 2.50 7.62 2.79 3.37 5.37 4.50 4.63
ISO
p-sign.: *p < .10, **p < .05, ***p < .01

returns than non-ISO 9000 firms (mean of 4.63 percent) the returns. To explore this issue, a part of the second
at p < .10 level (see Table 4 and Figure 1). objective was to examine the impact of ISO 9000 certifi-
These mean comparisons indicate that ISO 9000 cation on stock return variability (or volatility). This led
firms did not outperform non-ISO firms for all time to the hypothesis that H02: ISO 9000 firms don’t have
periods or for all scenarios. However, the study found lower stock variability than non-ISO 9000 firms vs. Ha2:
that during two years (1999 and 2000) ISO 9000 firms ISO 9000 firms have lower stock variability than non-ISO
had significantly higher returns than non-ISO 9000 9000 firms. To test this hypothesis, the variances of ISO
firms. Some of these findings support H01, and others 9000 and non-ISO 9000 firms were compared over differ-
support Ha1. The results, based on various time period ent time-period scenarios, and the results are presented in
combinations, suggest that the returns for both ISO Table 4 and Figure 2. The comparisons of the variances
9000 and non-ISO 9000 firms seem to follow fairly sim- for annual returns covering from 1997 to 2005 show that
ilar patterns. The nine-year average stock returns show ISO 9000 firms had significantly lower variances than
that in the long run ISO 9000 firms appear to perform non-ISO 9000 firms for the years 2001 (p < .01), 2002
better than non-ISO 9000 firms, which supports Ha1. (p < .05), and marginally for 1997 (p = .108). However,
non-ISO 9000 firms had a significantly lower variance

Comparisons of Variances and than ISO 9000 firms in 2004 (p < .01). The study found
no significant differences between the return variances of
Cumulative Means for ISO 9000 ISO 9000 and non-ISO 9000 firms for other years. Some
of these results support H02, while others support Ha2.
vs. non-ISO 9000 firms Again, the similar comparisons were conducted for
The prior studies did not consider the impact of ISO 9000 two-year, three-year, four-year, and nine-year average
certification on the variability (or volatility) of business returns. The variances of two-year moving average
performance. As variability of returns represents a meas- returns for ISO 9000 and non-ISO 9000 did not seem
ure of risk (Brigham and Houston 2007), it is important to follow any predictable pattern, and neither group
to examine how ISO 9000 impacts the risk (or variabil- had consistently lower or higher variances. The com-
ity) of the returns. As indicated before, some studies parisons of the variances showed that ISO 9000 firms
alluded that ISO 9000 improved the smoothness of the had a significantly lower variance than non-ISO 9000
business operations, which might imply that ISO 9000 only during two periods (2000-2001, p < .01 and 2002-
certification could lower the variability (or volatility) of 2003, p < .10). For the three-year and four-year periods,

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The Long-Term Impact of ISO 9000 Certification on Business Performance: A Longitudinal Study Using Turkish Stock Market Returns

Figure 2 Variance Comparisons of ISO 9000 vs. Non-ISO 9000 Firms on the Istanbul Stock Exchange, 1997-2005.

60.00
50.00
40.00
30.00
20.00
10.00
0.00
Avg Avg Avg Avg Avg Avg Avg Avg Avg 97- 98- 99- 00- 01- 02- 03- 04- 97- 00- 03- 97- 01- 97-
97 98 99 00 01 02 03 04 05 98 99 00 01 02 03 04 05 99 02 05 00 04 05
*** ** *** *** * *** **
ISO 18.38 24.05 21.84 16.14 14.90 10.49 10.84 52.70 18.30 9.77 6.81 8.10 5.25 5.86 4.32 18.64 21.01 6.50 3.27 11.53 2.93 4.74 1.91

© 2007, ASQ
Non- 45.84 21.62 23.85 16.42 60.40 23.71 13.64 18.92 20.28 16.77 14.20 8.30 21.15 14.20 10.14 7.79 8.30 10.74 10.09 4.44 5.65 5.97 1.95
ISO
p-sign.: *p < .10, **p < .05, ***p < .01

ISO 9000 firms had signifi-


Table 5 Comparisons of means and variability of the returns for ISO 9000
cantly lower variances during
vs. non-ISO firms on the Istanbul Stock Exchange.
2000-2003 (p < .01) and
1997-2000 (p < .05). Finally, Means Variances
Years ISO 9000 Non-ISO 9000 p-sign. ISO 9000 Non-ISO 9000 p-sign.
comparison of the variances
of ISO 9000 and non-ISO Avg 97 9.56 8.58 0.389 18.38 45.84 0.108
9000 over a nine-year period 97-98 4.97 4.49 0.524 9.77 16.77 0.287
found no significant differ-
97-99 8.78 7.62 0.058 6.50 10.74 0.239
ence between the two groups.
These findings indicate that 97-00 6.60 5.37 0.011 2.93 5.65 0.033
ISO 9000 certification does 97-01 6.73 5.37 0.004 1.88 5.65 0.000
not seem to lower the vari-
97-02 5.76 5.20 0.088 1.70 3.26 0.029
ability of the stock returns
significantly for all time peri- 97-03 5.58 5.16 0.197 1.37 2.75 0.034
© 2007, ASQ
ods and scenarios. Similar to 97-04 5.37 4.94 0.165 1.85 2.36 0.216
yearly returns, some of these
97-05 5.16 4.63 0.079 1.91 1.95 0.578
results support the hypothesis
H02, while others support Ha2.
In addition to yearly return comparisons, the study and variance comparisons are presented in Table 5.
compared the mean and variability of returns for ISO The unique feature of these returns is that they make it
9000 vs. non-ISO 9000 over time by combining the possible to measure the cumulative effect of ISO 9000
returns for successive years. This allows one to examine certification over time, rather than year by year. The
the cumulative impact of ISO 9000 on business per- comparisons of mean returns in Figure 3 (also in
formance (in this case stock returns) over time. To Table 5) indicate that ISO 9000 companies consis-
accomplish this, the average returns for successive years tently had higher stock returns than non-ISO 9000
of one, two, three, and so on were calculated, which firms during nine scenarios. However, they were signifi-
produced nine scenarios consisting of one-year, two- cantly higher only for 1997-1999 (p < .10), 1997-2000
year, three-year, four-year, five-year, six-year, seven-year, (p < .01), 1997-2001 (p < .01), 1997-2002 (p < .10),
eight-year, and nine-year mean returns. These mean and 1997-2005) (p < .10). These findings support H01

34 QMJ VOL. 14, NO. 4/© 2007, ASQ


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The Long-Term Impact of ISO 9000 Certification on Business Performance: A Longitudinal Study Using Turkish Stock Market Returns

Figure 3 Comparisons of Mean Returns Over Time for ISO vs. Non-ISO 9000 firms on the Istanbul Stock
Exchange, 1997-2005.
10.00
9.00
8.00
7.00
6.00
5.00
4.00
3.00
2.00
1.00
0.00
Avg 97 97-98 97-99* 97-00*** 97-01*** 97-02* 97-03 97-04 97-05*
ISO 9.56 4.97 8.78 6.60 6.73 5.76 5.58 5.37 5.16

© 2007, ASQ
Non-ISO 8.58 4.49 7.62 5.37 5.37 5.20 5.16 4.94 4.63
p-sign.: *p < .10, **p < .05, ***p < .01

Figure 4 Comparisons of Variability of Returns Over Time for ISO vs. Non-ISO 9000 firms on the Istanbul
Stock Exchange, 1997-2005.
50.00

40.00

30.00

20.00

10.00

0.00
Avg 97 97-98 97-99 97-00** 97-01*** 97-02** 97-03** 97-04 97-05
ISO 18.38 9.77 6.50 2.93 1.88 1.70 1.37 1.85 1.91

© 2007, ASQ
Non-ISO 45.84 16.77 10.74 5.65 5.65 3.26 2.75 2.36 1.95
p-sign.: *p < .10, **p < .05, ***p < .01

for these time periods, and the findings for other peri- The variances were not significant during other periods.
ods support Ha1. As stated previously, after nine years These findings support Ha2. One interesting thing is that
ISO 9000 certified firms still have a significantly the variances of ISO 9000 and non-ISO 9000 seemed to
higher return than non-ISO 9000 certified firms. This converge over time, and after nine years their variances
could be an indication of the long-term effect of ISO were almost identical. This may suggest that the impact
9000 certification on business performance. of ISO 9000 on the variability of business performance
Also, the study examined the cumulative impact of might disappear over time.
ISO 9000 certification on the variability of the stock
returns. Figure 4 (also Table 5) shows the comparisons
of the variability of the stock returns for ISO 9000 vs. The Effects of ISO 9000
non-ISO 9000 firms. The results show that ISO 9000
firms had lower variances than non-ISO 9000 firms for Certifying Agency
each of the nine scenarios over the nine-year period. The final objective of the study was to examine whether
However, the differences were significantly lower in the stock returns of ISO 9000 certified firms were influ-
1997-2000 (p < .05), 1997-2001 (p < .01), 1997-2002 enced by the certifying organization. As there seems to be
(p < .05), and 1997-2003 (p < .05), which support H02. a preference among the Western European countries for

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The Long-Term Impact of ISO 9000 Certification on Business Performance: A Longitudinal Study Using Turkish Stock Market Returns

the European certifying registrars (Barnes 1998), Table 6 Comparisons of means and variability of returns
the study examined whether such a preference is for Turkish vs. foreign ISO 9000 certified firms
reflected by the stock returns of the ISO 9000 on the Istanbul Stock Exchange, 1997-2005.
firms certified by foreign non-TSE vs. TSE agen-
Means Variances
cies. Based on this notion, the authors developed
Years Turkish Foreign p-sign. Turkish Foreign p-sign.
hypothesis H03: The returns of ISO 9000 firms
certified by non-TSE certifying agencies are not Avg 97 9.08 9.74 0.646 28.89 14.85 0.075

significantly higher than those returns of ISO Avg 98 1.71 -0.12 0.193 40.17 17.79 0.124
9000 firms certified by TSE vs. Ha3: The returns Avg 99 16.03 16.55 0.700 21.06 22.55 0.251
of ISO 9000 firms certified by non-TSE certify-
Avg 00 -0.48 0.25 0.524 12.47 17.69 0.677
ing agencies are significantly higher than those
returns of ISO 9000 firms certified by TSE. This Avg 01 7.61 7.14 0.677 20.81 13.03 0.128
hypothesis was tested with data covering Avg 02 0.34 1.06 0.442 11.77 10.11 0.579
January 1997 to September 2005, again using:
Avg 03 5.32 4.24 0.252 15.58 9.04 0.427
1) yearly returns for nine years; 2) the two-year
moving average returns; 3) three-year and four- Avg 04 3.89 3.89 0.999 16.53 67.05 0.930
year simple average returns; and 4) nine-year Avg 05 3.64 0.81 0.019 12.83 18.45 0.129
average return. The comparisons of means for
97-98 5.40 4.81 0.516 11.48 9.28 0.745
different time periods in Table 6 found that,
with the exception of 2005, there were no signif- 98-99 8.87 8.22 0.382 5.59 7.29 0.526

icant differences between returns of TSE and 99-00 7.77 8.40 0.443 10.19 7.42 0.914
non-TSE certified firms. These results indicate 00-01 3.56 3.70 0.837 4.94 5.48 0.695
that hypothesis H03 cannot be rejected in all sce-
01-02 3.97 4.10 0.855 5.84 6.00 0.952
narios but one. The results for 2005 show that,
in contrast to the prediction of Ha3, TSE certified 02-03 2.83 2.65 0.796 7.01 3.43 0.056
firms had higher returns (3.64 percent) than 03-04 4.60 4.06 0.664 10.40 21.98 0.860
non-TSE certified firms (.81 percent), which is
04-05 2.57 3.78 0.356 4.21 27.19 0.264
significant at p < .05 level. These findings do
not support the implied preferences for the 97-99 8.94 8.73 0.769 5.38 7.04 0.592
European certifying agencies. 00-02 2.49 2.82 0.526 2.34 3.66 0.356
Concerning the variances, the authors tested
03-05 3.57 3.95 0.697 5.66 13.89 0.617
the following hypothesis H04: The variances of
the returns for ISO 9000 firms certified by non- 97-00 6.58 6.61 0.963 3.61 2.75 0.376
© 2007, ASQ

TSE agencies are not significantly different 01-04 4.29 4.08 0.741 2.17 5.77 0.775
from the variances of returns for ISO 9000 97-05 5.04 5.20 0.689 1.95 1.93 0.501
firms certified by TSE vs. Ha4: The variances of
the returns for ISO 9000 firms certified by non-
TSE agencies are significantly higher than the variances Based on these results, hypothesis H04 can be rejected for
of returns for ISO 9000 firms certified by TSE. The all scenarios, except two. This indicates that the firms
analysis for variability of the returns in Table 6 showed certified by non-TSE certifying agencies had a lower
that the variances of TSE and non-TSE certified firms variability in their returns. However, these results from
were not significantly different in all time periods but two scenarios do not provide strong evidence for rejecting
two years. During the year of 1997 and the time period H04. In fact, the comparisons over longer time periods
of 2002-2003, non-TSE firms had significantly lower suggest that the certifying agency does not have any
variances than those of TSE certified firms (p < .10). impact on the variability of the stock returns.

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The Long-Term Impact of ISO 9000 Certification on Business Performance: A Longitudinal Study Using Turkish Stock Market Returns

variability) between Turkish (TSE) certified firms and for-


CONCLUSIONS AND LIMITATIONS eign certified firms. These findings do not support the
In contrast to previous studies, which used surveys to implied preferences for the European certifying agencies
examine the performance of ISO 9000 certified firms, this both in average returns and variability of the stock returns.
study examines the performance of ISO 9000 certified These findings are consistent with other empirical
firms and non-ISO 9000 firms on the ISE by using their ISO 9000 studies (LRQA 1996; Simmons and White 1999;
average monthly stock market returns over 105 months. Uzumeri 1997) that say ISO 9000 certification is benefi-
Specifically, the article compared: 1) the monthly stock cial for the companies. This study also provides support
returns and their variability of ISO 9000 certified firms for the links between quality and business performance
with non-ISO 9000 firms that are traded on Turkey’s ISE suggested by theory (Deming 1986; Fine 1986; Juran
market; and 2) the returns of ISO 9000 certified firms 1974; Lederer and Rhee 1995) and empirical studies
traded on the ISE based on ISO 9000 certifying organi- (Chowdhury and Menon 1995; Hendricks and Singhal
zation (Turkish vs. non-Turkish). The study used aver- 1997; Jacobson and Aaker 1987; Powell 1995). While only
age monthly stock market returns of 95 firms listed on one prior study examined the impact of variability on
the ISE, 62 of which had ISO 9000 certification and 33 business risk, future studies could include the impact of
of which did not have ISO 9000. The main premise of ISO 9000 (or any quality system) on the variability of
this research was that ISO 9000 firms, because of their the business performance.
quality orientation (Lee 2003; Ozgur, Meek, and Toker Since the study found no significant difference
2002), are expected to have higher performance than between the mean stock returns and variances of TSE
those of non-ISO 9000 certified firms. certified ISO 9000 firms and those of non-TSE certified
To determine if there was a difference between the ISO 9000 firms, the ISO 9000 certifying organization
performances of ISO 9000 certified firms and non-ISO did not have a significant impact on the performance
9000 firms, the study compared the mean stock returns of the Turkish firms that are traded on the ISE. These
and average stock variances of ISO 9000 certified and findings indicate that the firms do not gain any com-
non-ISO 9000 firms over various time periods of one petitive advantage from being certified by foreign
year, two years, three years, and four years during a time (European) agencies. Since international marketing
period between 1997 and 2005. The results of these sce- and foreign sales is one of the potential expected bene-
narios showed that the ISO 9000 certified firms generally fits of ISO 9000 certification, one could expect that the
seem to have higher mean returns than those of non- foreign (all European in this case) certified firms
ISO 9000 firms, but they not are significantly higher for might be more successful with their exports.
all time periods/scenarios. In addition, comparing the
average variances of ISO 9000 firms and non-ISO 9000
firms, the authors found that ISO 9000 firms had lower Limitations of the Study
variances than non-ISO 9000 firms over a nine-year There are several limitations to this study. It is impor-
period. It appears that, in addition to higher perform- tant to state that ISO 9000 registration does not cause
ance given by higher average stock returns, ISO 9000 or lead to higher stock returns. Following the sugges-
certification seems to reduce the volatility (variability) of tions by Hendricks and Singhal (1997) and Simmons
the stock returns, making these stocks less risky. One and White (1999), the longitudinal data covering a
interesting observation is that the variability (variances) 105-month time period provided an opportunity to
of stock returns for ISO 9000 and non-ISO 9000 firms examine the long-term impact of the ISO 9000 certifi-
declined over time and converged after nine years. This cation on business performance. While results showed
may suggest that in the long-run ISO 9000 may not be that ISO 9000 firms had generally higher average stock
an important factor in reducing the variability of their returns and lower stock variability than non-ISO 9000
performance (or variance of the returns). certified firms, this study, by design, included only few
The authors also made comparisons to see if there variables (factors) and omitted many others, which
were differences in performance (mean returns and could have impacted the performance of individual

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The Long-Term Impact of ISO 9000 Certification on Business Performance: A Longitudinal Study Using Turkish Stock Market Returns

firms. Since this study used the stock market returns, it restricted the authors’ analysis, especially with the com-
was not possible to identify additional firm profiles to be parisons of ISO 9000 vs. non-ISO 9000 firms within the
included in the analysis. To overcome this limitation, same industries. Therefore, the differences in industries
future studies may wish to include additional variables/ and the number of companies from these different
firm characteristics to better understand the impact of industries could pose some problems for comparisons.
ISO 9000 certification on business performance. Stock Despite this limitation, this article offers some insights
market returns of the firms in this study fluctuated into the long-term effect of ISO 9000 certification on
widely during the 105 months of this study. A study in business performance. However, the authors recom-
the past analyzed differences in ISE stock returns and mend that similar analysis must be replicated in other
stock variability and reached similar conclusions (Pinar, countries where the stock market is more established
Guder, and Yucel 2000). The contribution of this study is and where many firms are listed.
that it enables one to examine the long-term impact of The final limitation is that this study included only
ISO 9000 on business performance with objective data Turkish firms. While the results provided some insights
and also to analyze the changes in the stock market into the long-term effect of ISO 9000 certification, the
returns and variability over a long time period (nine future studies should include other countries, as well as
years). Unlike the short time period, over nine years multicountry comparisons. Given these limitations, the
unexpected positive changes or negative changes will authors’ findings must be interpreted with caution.
tend to balance out.
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Turkey. Journal of Global Awareness, no. 2: 62-71. BIOGRAPHIES

Powell, T. C. 1995. Total quality management as competitive advan- Musa Pinar is associate professor of marketing in the College of
tage: A review and Empirical study. Strategic Management Journal Business Administration at Valparaiso University in Indiana. He
16 (January): 15-37. received his undergraduate degree from Ege University in Turkey and
his MBA and doctorate from Mississippi State University. He has
Rabbit, T. J., and P. A. Bergh. 1993. The ISO 9000 book: A global
published numerous articles in proceedings and refereed journals
competitor’s guide to compliance & certification. New York: Quality
such as Journal of Euromarketing, Services Marketing Quarterly,
Resources.
Journal of Global Awareness, Tourism Analysis, Journal of Business
Rajan, M., and N. Tamimi. 2003. Payoff to ISO 9000 registration. and Economics, The Journal of American Academy of
Journal of Investing 12, no. 1. Business – Cambridge, The International Journal of Business and
Rao, S. S., T. S. Ragu-Nathan, and L. E. Solis. 1997. Does ISO 9000 Public Administration, Journal of Business and Behavioral Sciences,
have an effect on quality management practices? An international Sex Roles, and Journal of International Food and Agribusiness
empirical study. Total Quality Management 8, no. 6: 335-346. Marketing, and also presented papers at regional, national, and inter-
national conferences. Pinar teaches various undergraduate and MBA
Rayner, P., and L. J. Porter. 1991. BS5750/ISO 9000—The experi- marketing classes. His research interests are in the areas of market
ence of small and medium-sized firms. International Journal of orientation and marketing strategy, tourism marketing, service quality,
Quality and Reliability Management 8, no. 6: 16-28. and services marketing in banking, ISO 9000, and gender effect on
Reimann, C. W., and H. S. Hertz. 1996. The Baldrige Award and sales recruiting, selling performance, and sales management. He
ISO 9000 registration compared. Journal for Quality and has conducted various marketing seminars in Turkey.
Production 19 (January-February): 12-19.
Ceyhun Ozgur is a professor of information and decision sciences
Rothery, B. 1993. ISO 9000, second edition. Brookfield, Vt: Gower. in the College of Business Administration at Valparaiso University.
He earned a bachelor’s degree in industrial management and a
SGS Yarsley, International Certification Services. 1996. ISO
master’s degree in management from the University of Akron and a
9000—Does it work? ISO 9000 News 5, no. 6: 4-11.
doctorate in business (operations management/operations
Simmons, B. L., and M. A. White. 1999. The relationship between research) from Kent State University. He coauthored a textbook by
ISO 9000 and business performance: Does registration really matter? McGraw-Hill Irwin titled Introduction to Management Science with
Journal of Managerial Issues 11, no. 3: 330-343. Spreadsheets, first edition. Among others, Ozgur has published in
Singels, J., G. Ruel, and H. van de Water. 2001. ISO 9000 the Journal of Modern Applied Statistical Methods, Journal of Data
series—Certification and performance. The International Journal of Science, Decision Sciences Journal of Innovative Education,
Quality and Reliability Management 18, no. 1: 62-75. Interfaces, OMEGA, Quality Management Journal, Mid-American
Journal of Business, Production Planning and Control, International
Struebing, L. 1996. Survey finds ISO registration is market driven. Journal of Operations and Quantitative Management, International
Quality Progress 29, (March): 23.
Journal of Quality and Reliability Management, International
Terziovski, M., D. Samson, and D. Dow. 1997. The business value Journal of Business Disciplines, Bogazici Journal, and Industrial
of quality management systems certification: Evidence from Mathematics and Teaching Statistics. He is a member of the
Australia and New Zealand. Journal of Operations Management Decision Sciences Institute and APICS. He can be reached by e-mail
15, no. 1: 1-18. at Ceyhun.ozgur@valpo.edu.

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Applying the Toyota Production


System to a Healthcare Organization:
A Case Study on a Rural Community
Healthcare Provider
KEVIN F. COLLINS, HEALTHCARE CONSULTANT
SENTHIL K. MUTHUSAMY, BOWLING GREEN STATE UNIVERSITY
© 2007, ASQ

Over the last five decades the Toyota Production


System (TPS) has evolved from an advanced socio- INTRODUCTION
technical concept in manufacturing to a participative Small rural community healthcare providers, in gen-
design for large-scale change management. Toyota eral, have limited access to labor and capital resources
has been able to sustain a strategic competitive
advantage by applying TPS as a process innovation
compared to their larger counterparts; however, they
and intervention, as measured by quality, reliability, face the same regulatory pressures from accreditation
productivity, cost reduction, sales and market share organizations with regard to quality of care and patient
growth, and market capitalization. Many organiza- safety. A paradoxical relationship exists between the
tions are trying to replicate Toyota’s success with TPS amount (and changing nature) of regulation that
in their respective business/industry environments. It exists within the healthcare environment, and the
could be argued that the correlation between the
ability of community healthcare providers to absorb
application of TPS as part of organizational strategy
and Toyota’s documented success in achieving the the impact of frequent policy and market changes.
aforementioned outcomes creates an “industrial This is because such providers generally serve smaller
engineering paradigm” or “social change interven- dedicated markets and, because of aging populations,
tion” that crosses multiple industries. In this light, TPS are dependent on federal Medicare program reim-
can be a powerful intervention technique, even in bursement. Because that reimbursement is established
industries unaccustomed to advanced production
prospectively (not based on cost), the requirement for
techniques such as the healthcare industry. Because
the healthcare industry is under enormous pressure to providers to effectively manage their cost per patient
reduce costs, increase reliability and quality, and case is paramount to ensure viable margins. In addi-
enhance organizational effectiveness, TPS-like inter- tion to the challenge of managing costs, community
ventions are significant to healthcare organizations. healthcare providers also must be able to offer broad-
This article captures the process of applying TPS to a based healthcare services to the populations they
healthcare organization. It analyzes the challenges, serve. That puts them in a position to manage quality
problems, and outcomes, and addresses remedies for
enhancing the success of TPS implementation.
care as well as cost and do so in an environment of
intense patient safety compliance concerns.
Key words: healthcare, patient safety, quality, Toyota Community Health Systems (CHS) is one network
Production System
that is facing these challenges and trying to improve
the performance of its rural hospitals through
advanced management techniques. Rural community
healthcare systems constitute 41 percent of the com-
munity healthcare service provided in the United

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Applying the Toyota Production System to a Healthcare Organization: A Case Study on a Rural Community Healthcare Provider

States (AHA 2006). Heartland Regional Medical Center describes TPS as striving toward an ideal whole system
in Marion, IL, is one of the hospitals in the CHS net- (Emiliani et al. 2003; Spear and Bowen 1999) or one
work that is addressing quality, cost management, that has the following output characteristics:
and patient safety goals together. This hospital is • Is defect free (elimination of “Jidoka” or “Andon”
Medicare dependent (qualifying also as a Medicare events causing the warning system to “flash”)
disproportionate share hospital) and designated as a
“small/rural” provider, according to the Illinois • Can be delivered one request at a time
Hospital Association Health Information Department. • Can be supplied on demand in the version requested
In preparation for a 2005 accreditation survey, this • Can be delivered immediately
hospital applied a business-level strategy that not only
• Can be produced without wasting materials, labor,
created a compliant environment of quality care and
energy, or other resources
safety, but also established the foundation for
improved margins based on cost control. In this arti- • Can be produced in a work environment that is safe
cle, the authors capture the application of the Toyota physically, emotionally, and professionally for every
Production System (TPS) as a process innovation/ employee
intervention technique in this hospital to improve This definition combines employee involvement in
performance in quality, safety, and cost reduction, and work design output objectives, and is possibly more
survive accreditation audits. suitable for organizations of all kinds to directly relate
This article reviews various historical and modern to, regardless of technology employed.
conceptualizations of TPS; traces the significance of
TPS in strategy, structural, and cultural interventions;
and highlights the role of TPS in establishing control The Need for TPS in
systems and standards. Through this case study on
Heartland Regional Medical Center, the authors assess Healthcare Organizations
the prerequisites for successful intervention and eval- Based on the aforementioned conceptualizations of
uate the preparedness of rural community healthcare TPS, one can visualize how TPS can result in outcomes
providers to implement TPS. The authors also analyze that can be considered building blocks of competitive
the regulatory environment within the healthcare advantage, for example, efficiency (elimination of
industry, and highlight the need for TPS to improve waste), customer responsiveness (time and cus-
patient safety outcomes. Emphasis is placed on TPS as tomization elements), quality (zero defect output),
a participative design (PD) intervention within the and innovation (creation of a culture that involves and
healthcare setting. Projects undertaken by the Quality empowers all employees to enhance creativity). Toyota
Assurance/Regulatory Compliance Department at has been able to sustain strategic competitive advan-
Heartland Regional Medical Center also are identified. tage by applying this process intervention/innovation
over five decades, as measured by quality, reliability,
productivity, cost reduction, sales and market share
TOYOTA PRODUCTION SYSTEM growth, and market capitalization. It could be argued
(TPS) AND ITS APPLICATIONS: that the correlation between the application of TPS as
part of organizational strategy and its documented
A REVIEW success in achieving the aforementioned outcomes
The TPS is a manufacturing philosophy and method- creates an “industrial engineering paradigm” that
ology created by Toyota with the main objective of crosses multiple industries. Further, from a strategic
reducing wastes, defects, transportation costs, inven- perspective, it could be argued that the application of
tory, waiting time, and the extent of processing (Liker TPS plays to cost leadership advantage in industries
2003; Monden 1998; Ohno 1995). A modern viewpoint unaccustomed to advanced production techniques,

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Applying the Toyota Production System to a Healthcare Organization: A Case Study on a Rural Community Healthcare Provider

Table 1 Applicability of TPS attributes to hospital operations.


TPS attribute Hospital application

• Product delivered defect free • Defects correlate to patient safety standards in healthcare. Standards that are established
by JCAHO require adherence in order for hospitals to be licensed, participate in the
federal Medicare program, and differentiate themselves on the basis of quality, in order
to effectively deal with increasing demand for specialized acute services. Higher quality
hospitals will be rewarded.

• Product delivered one request at a time • Each patient represents a unique treatment complexity and demands a customized
• Product can be supplied on demand treatment plan. When presenting for treatment, care is requested, but may not be available
in the version requested immediately; however, providers can differentiate themselves based on the speed with
• Product can be delivered immediately which they can deliver care.

• Product can be produced without • Faced with increasing costs for drugs, technology, and labor, hospital expenses must be
wasting materials carefully contained within the context of net revenue produced. Sophisticated material
• Product can be produced without and labor management systems assist hospitals with controlling and budgeting costs.
wasting labor

© 2007, ASQ
• Product can be produced in a work • Labor shortages in healthcare are expected to grow. With this in mind, hospitals are
environment that is physically, required to ensure adequate employee training and development in order to mitigate
emotionally, and professionally safe turnover, improve morale, and ensure a safe working environment.

such as healthcare services (Spear 2004). Healthcare 5. An adequate work force is not guaranteed. Labor
providers in general and small rural healthcare shortages are expected to grow.
providers in particular are in need of a process inter- 6. Improved quality and safety standards are a must.
vention such as TPS and are characteristically similar Higher performing hospitals will be rewarded.
to that of a manufacturing environment.
These trends are more painstakingly realized by
Moreover, the external industry environment is also
rural community hospitals, as access to capital, tech-
forcing the healthcare industry to seek performance
nology, and resources is somewhat limited because of
enhancements through the application of techniques
their locations and size.
such as TPS (Spear 2004; 2005). There are several
Like manufacturing organizations, healthcare
environmental forces that are demanding a change
providers like those within the CHS network are facing
within the healthcare industry (Futurescan 2005).
challenges from rising labor and material costs,
These forces include:
intense competition, scarce human resources, cus-
1. The level and nature of demand for acute care services tomer demand for impeccable quality, and stringent
is changing to include dramatic increases in the safety and performance standards. Table 1 represents
need for specialized services, due to the aging popu- applicability of TPS attributes to hospital operations.
lation and the increasing uninsured population.
2. Hospitals are facing increasing competition in
delivering acute care services. Physician-based clin- CRITERIA FOR SUCCESSFUL
ics and specialty hospitals are taking business away.
An emphasis on quality also is making consumers
APPLICATION OF TPS
To achieve a competitive advantage using TPS
proactive.
requires adherence to the fundamental technical
3. New technology offers advantages and challenges. rules, developing suitable organizational/structural
Increased patient safety value comes at a high price. design, and fostering cultural norms and values that
4. Costs grow while available capital may be shrinking. facilitate the TPS processes. Several scholars have
Increasing costs for wages and pharmaceuticals are traced the important criteria for successful applica-
challenging profits. tion of TPS in terms of task, structural, cultural, and

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Applying the Toyota Production System to a Healthcare Organization: A Case Study on a Rural Community Healthcare Provider

control systems prerequisites (Emiliani et al. 2003; a minimum chain of command. Additionally, control
Spear and Bowen 1999). For example, Spear and systems are established to raise the level of both inno-
Bowen (1999) have identified four rules that form the vation and quantitative performance. TPS facilitates
basis of TPS as a suitable application within the creative behaviors and stimulates workers and man-
organization. To be applied successfully, TPS demands agers to engage in “experimentation” that is widely
that an organization’s task structure comply with recognized as the cornerstone of the learning organi-
these rules: zation. Successful companies adapting versions of
1. All work must be highly specified as to content, TPS use the collective talents of multiple individuals
sequence, timing, and outcome. to invent or reinvent work processes. TPS also
emphasizes certain leadership qualities in managers
2. Every customer-supplier connection must be direct,
implementing TPS. For example, it demands an
and there must be an unambiguous yes-or-no way
operations-oriented team leader who is passionate
to send requests and receive responses.
about ideas and innovations (Moore 2004; Spear
3. The pathway for every product and service must be 2004). So, it is evident that TPS as a process innova-
simple and direct. tion demands sponsorship and commitment from all
4. Any improvement must be made in accordance levels of employees, and emphasizes organizational
with the scientific method, under the guidance culture that is driven by knowledge creation and
of a teacher, at the lowest possible level of the innovation. While this may be a hurdle for some
organization. companies, it is a prerequisite to the implementation
These rules specify how the work is performed, of TPS.
how knowledge is transferred between workers and
within the system, how production is coordinated
between tasks and services, and how the process is
ACHIEVING QUALITY CARE AND
controlled, measured, and sustained. These rules also PATIENT SAFETY THROUGH TPS
implicitly prescribe the organizational structure and Under the audit methodology established by the
control systems that are required to be in place to Joint Commission on Accreditation of Healthcare
implement TPS gainfully. Additionally, organizational Organizations (JCAHO), hospitals must explicitly
cultural norms that need to be adhered to are evident demonstrate a compliant environment of care in
in the knowledge exchanges demanded in the TPS each of the six patient safety goal categories (see
model. For example, TPS emphasizes knowledge Table 4). They must do so through the process intelli-
transfers, knowledge creation at the lowest level of the gence of patient caregivers, and appropriate action
organization, and the contributions required of steps along the clinical pathway. The clinical pathway
employees at all levels as they interact with their work or “production line” is audited using two techniques:
environment. Structure, control systems, and cultural the patient tracer methodology and the system tracer
specifications are integrally built into the TPS model, methodology. JCAHO defines the patient tracer
and in order for this system to work appropriately, methodology as “taking the patient’s experience and
organizations need to evaluate these areas and design tracing it through the organization and determining
them to match the demands of TPS. in a variety of different areas—it could be informa-
The TPS method is scientific in that it clearly tion management, assessment, treatment, patient
delineates the responsibilities at the operational level education — for that individual patient how the
to a very high degree of specification, and it does not organization is performing, how it’s executing on its
promote vertical command and controls (Spear and plans related to standards compliance, and best quality
Bowen 1999). As a result one can see the structure in safest care” (JCAHO 2005). System tracer methodol-
a TPS environment as decentralized, flat, and having ogy is defined as “tracing a process through the

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Applying the Toyota Production System to a Healthcare Organization: A Case Study on a Rural Community Healthcare Provider

Table 2 The correlation between TPS elements and the accomplishment of quality and patient safety.
TPS rule Enhancement to patient safety

All work shall be highly specified as to content, • All patient treatment is highly specified through documentation of actions,
sequence, timing, and outcome. located in patient’s medical record.
• Events, specification of treatment intervention times, and patient outcomes
management must be noted.

Every customer-supplier connection must be direct • The patient-nurse interaction is direct, as is the nurse-alternate caregiver.
and there must be an unambiguous yes-or-no way • Ambiguity can result in compromises to patient safety; therefore, communication
to send requests and receive responses. must be precise and clear.

The pathway for every product and service must • Clinical pathways established for each treatment initiative, ensuring that a
be simple and direct. “best practice” methodology is employed.

Any improvement must be made in accordance with • Quality improvements initiated under the direction of an internal independent

© 2007, ASQ
the scientific method, under the guidance of a teacher, body (Quality and Regulatory Compliance), which documents, experiments,
at the lowest possible level of the organization. guides, and coordinates patient safety initiatives to be compliant with patient
safety goals, at the caregiver level within the organization.

organization and focusing on the process or the system


itself” (JCAHO 2005). JCAHO uses these tools to review ORGANIZATIONAL ASSESSMENT
the confluence of individual activities and organiza-
tionwide systems and processes to gain a complete
OF RURAL COMMUNITY
picture of effectiveness and performance, much like HEALTHCARE SYSTEMS
the TPS analysis technique. In Table 2, the authors A small rural healthcare provider is defined as one that
show the correlation between TPS elements and the has fewer than 150 acute care beds and/or is located
accomplishment of quality and patient safety. outside a metropolitan statistical area. Heartland
Hospitals, in general, are in need of a high degree Regional Medical Center represents a prototype of a
of integration, because often they are organized small rural healthcare provider in the CHS network.
around functions or disparate departments. As such, Located in Marion, IL, it is the only full-service hospital
they inherently lack the reliable mechanisms for inte- in Williamson County, IL, which has a population of
grating the individual departments into a coherent 63,094 (U.S. Census Bureau 2004). Its business
whole (Spear 2004). One such example of this need model is defined as follows (CHS 2006):
for integration is that in hospital environments, the • Increase the share of healthcare dollars spent by
revenue generation process is started at the time of local residents and limit inpatient and outpatient
patient registration, with the input of a “raw mate- migration to larger urban facilities. This is done
rial,” that is, patient demographic, insurance, and through the recruitment of primary care physi-
chief complaint information. In order for the hospital cians and specialists; targeted capital expenditures
to appropriately bill for patient care, there must be
designed to expand the breadth of services; and
significant coordination between the registration
providing capital to invest in facilities, primarily
process, the throughput clinical and ancillary diag-
the emergency room and ancillary services.
nostic areas that charge for services, and the
billing/patient accounting department that sends an • Growth through selective acquisitions (approxi-
invoice to the insurance companies to get paid. mately three to four per year).
Without coordination, lapses in information and • Reduce costs through standardizing and centraliz-
process standards result in delays, defects, and extra ing operations; optimize resource allocation by
cost burdens. TPS allows for effective coordination optimizing the company devised case and resource
to occur. management program; capitalize on purchasing

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Applying the Toyota Production System to a Healthcare Organization: A Case Study on a Rural Community Healthcare Provider

Table 3 Quality and regulatory compliance


at the facility. This banding, by JCAHO standards, is to
team case problems. have two patient identifiers. As part of the audit process
at Heartland, it was found that expectant mothers
Case problems Accountable areas
arriving for delivery were told by their physicians to
Obstetrical admission/ Patient registration/ report directly to the obstetrical unit and bypass admis-
check-in procedures Obstetrical nursing unit
sions. By doing so, the admission requirements were
Medication management Pharmacy/ not being met and, therefore, a breach in the standard
and storage procedures Emergency nursing unit was identified. This created ambiguity in the nursing
Use of standard abbreviations Health information unit and resulted in the patient being sent back
management/ upstream in the process. In this case, treatment com-
Nursing administration
menced on the patient prior to proper identification

© 2007, ASQ
Reconciling patient medications Pharmacy/Nursing units and treatment consent, which is a JCAHO violation of
Patient risk prevention program Nursing units patient safety goal no. 1.
To deal with this issue, a team comprising first-
shift nursing unit staff and two admitting clerks from
efficiencies; install standardized management the dayshift hypothesized that coordinating patient
information systems; and manage staffing levels. registration closer to the point of presentation/care
• Improve quality through training, best practice would alleviate incorrect routing of patients. The
sharing, assistance in complying with regulatory team devised a countermeasure plan to create a
requirements, standardized accreditation documenta- mini-registration unit in the obstetrical unit. They
tion, and patient/ physician/staff satisfaction surveys. stocked supplies and forms, and requested a label
As part of the strategy to improve quality, the CHS printer from information services to be used for identi-
network has established a standard structure that sup- fication banding, so they could band patients arriving
ports regulatory compliance objectives and internal directly from the physician’s office. Admitting clerks
operating performance. Table 3 identifies the quality trained nurses on the proper procedures, and the
and regulatory compliance team case problems. method was tested with staff members acting as
patients. The result was improved customer respon-
siveness from the patient, as well as physicians, who
DEMONSTRATION OF TPS previously received negative feedback from their
patients. And although complaint issues had been
ACTION STEPS WITHIN documented, directly observing the breakdown in the
HEARTLAND REGIONAL system prompted the change to occur.

MEDICAL CENTER Testing of Hypotheses


Observation Through Experimentation
In action, TPS insists on learning from the defects or TPS also involves fine tuning or constant “experi-
failures in operations. Observing failures or defects mentation.” This allows contingencies to be explored
within the system that cause that system to be inefficient in greater depth, and the interaction among the staff
is a key principle of TPS. An example of inefficiencies in creates more unity as alternative options are
hospital operations is observing patients being routed to explored, problem scenarios are presented, and
a nursing unit after arrival for inpatient admission. The results are debated. In the previous example, two
admission check-in procedures require all patients to original alternative hypotheses were agreed upon
have identification banding performed when they arrive to move to experimentation. The first one has been

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Applying the Toyota Production System to a Healthcare Organization: A Case Study on a Rural Community Healthcare Provider

discussed; the second one involved a paging system, constraint of worker turnover. It acts as a learning lab
whereby an admitting clerk would receive notifica- for new employees, and shortens the learning curve on
tion that a breakdown had occurred on the unit, so as required processes.
to then be summoned to the unit to complete the It’s important, therefore, to engage in constant
admitting and banding procedure. A pilot of this experimentation to solicit better ideas and ensure
hypothesis failed for the following reasons: respon- continuous training, as Heartland and hospitals in
siveness from the admitting staff could not always be general compete to recruit and retain valuable
predicted. When a page was sent, it was found that human resources.
admitting clerks may not have been available at the
time because they were performing admitting proce-
dures on other patients. Their ability to respond to Manage Through Enabling
the page was compromised, but for good reason. Also,
because of staffing constraints on the second shift,
Lower-Level Workers
particularly during the 3:00 p.m. to 6:00 p.m period, TPS is effective only when lower-level workers are
admitting clerks were unable to leave the work area. involved in solving problems. Spear (2004) points out
On the nursing side, the staff members were primarily that the higher the level of management, the lesser the
interested in ensuring that the patient received initial level of employee involvement in problem solving.
treatment and, therefore, became ambivalent to going Within the hospital sphere, the Quality Assurance and
through the paging procedure. This hypothesis was Regulatory Compliance (QRC) department manages
discarded, but only after experimentation among the the boundary. They are observed acting as enablers in
same group of workers occurred and findings were the system, using the JCAHO patient safety goals as a
confirmed. guideline for staff and managers to produce their own
results. The result is measured against the patient
safety goal and the QRC department processes
Coordinated Constant descriptive statistics to allow for team evaluation.

Experimentation The QRC team is also there for interpretation—to


evaluate experimentation against the context of the
As customization increases, demand increases, and patient safety goal, as intended by JCAHO. Also, func-
service or product categories are enhanced, existing tional managers are not formal managers in the
sociotechnical systems cannot remain static. As a change management process within Heartland’s
result, existing processes must undergo coordinated, quality initiatives. They are members of the team,
constant experimentation. Documentation of the and content expertise is pushed down the formal
coordinated experimentation efforts through a log- chain of command. Another example solidifies the
ging system allows for reflection and progression. This rules of engagement and TPS action steps described
process permits the adaptation of design as the prod- up to this point.
uct or service changes, and it does so in shorter cycle
times, allowing for quicker changes to occur. As such,
any redesign process does not become burdensome,
overcomplicated, or drawn out over long periods of
Establishing Countermeasures to
time. Members of the original obstetrical department Breaching Quality/Safety Goals
“mini-registration” initiative continue to evaluate The QRC observation practices usually result in evi-
the process as new physicians are recruited, a change dence of a gap in the process of delivering patient
in key personnel takes place, or other departments care. Something within the clinical pathway can be
such as case management require information from pinpointed as askew, and in the case of medication
the task. Constant experimentation also battles the management within three clinical departments, that

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Applying the Toyota Production System to a Healthcare Organization: A Case Study on a Rural Community Healthcare Provider

gap was discovered. A drowning victim arrived in the analyze this situation. The first point made was that
emergency room at Heartland. At the same time, a this represented a breach in patient safety goal no. 3, as
QRC team member was stationed in the emergency prescribed by the JCAHO, and if the JCAHO was on site
room setting, observing practices being followed on a during this event it would be considered a “type 1,” or
number of patient encounters. Drowning victims severe, violation causing the hospital to potentially
have a hypothermic body temperature of less than 95 lose accreditation. This was the “burning platform”
degrees F. Part of the treatment protocol is introduc- required for the next step, and that was the solicita-
ing warm intravenous (IV) fluid to the victim in an tion of open ideas to mitigate this from occurring in
attempt to revive the organs. This technique also the future. Focus was on accountability to ensure an
increases body temperature slowly, without inducing adequate record was kept of the three variables
shock. involved in the storage of IV fluid medication, that is,
The QRC team member observed the case nurse existing temperature of the incubator, date of original
proceed to an incubation storage unit, which looks storage, and manufacturer’s recommended storage
much like a refrigerator except that it is designed to threshold. The team members chose a lead from each
warm the contents rather than cool them. Each IV fluid shift to comply with completion of a mediation man-
set has a manufacturer’s recommended temperature- agement log on the incubator, which included these
level threshold, so as not to disable the effectiveness three items as well as the name of the team member
of the medication when introduced to a patient. The checking them.
sequence of steps involved in obtaining the IV fluid For a period of one month, the same person is
from the incubation unit includes verification of date required to perform the evaluation, and a second team
stored, temperature setting, and manufacturer’s rec- member verifies that it was performed. This project is
ommended threshold. The discovery by the case nurse in the “experimentation” stage at Heartland. The
of an excessive temperature setting within the incu- important lessons are: 1) the huddle took place
bation unit caused her to question the reliability of immediately after the observation; 2) the QRC team
the IV solution she was obtaining for the patient member acted only to create the “burning platform”
under her care. To her surprise, the heat threshold instead of acting as the problem solver; and 3) the
had been exceeded to a level greater than what was team created a countermeasure within the context of
recommended by the manufacturer and, of course, participative design, that is, the form and accountabil-
caused an immediate patient safety concern. ity for completing it was generated by a collaboration
Because of the ambiguous situation, the nurse cre- of workers. This exercise clearly follows the spirit of
ated a work-around, which meant a “stat” page to TPS. However, for it to be useful to the hospital as a
pharmacy for retrieval of the same IV solution from whole, it must be spread throughout the institution,
their storage unit. Luckily for everyone involved, the and the process of observation and experimentation
clinical pathway continued with a favorable outcome must be everyone’s task.
for the patient, notwithstanding the delay involved in
procuring the IV solution. This is precisely the value of
TPS. The observation of a work-around, a noticeable Additional Observations
defect in the process, and an ambiguity of next steps all It was found that the QRC team employed the same
required intervention toward standardization so as to TPS “whole system” methodology when performing
confirm patient safety rather than guess at it. When additional patient safety audits. These findings and the
the “red light” went on, a “Jidoka” or “Andon” event implemented remedies are explored here. In order to
occurred, and the wheels were put into motion to improve communication among caregivers and ulti-
break down the sequence of events. Within minutes, a mately ensure patient safety, a common theme within
team comprising first-shift nurses and two emergency hospital facilities is to implement a standardized list of
room clerks huddled with the QRC team member to abbreviations and also identify a “dangerous” list of

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Applying the Toyota Production System to a Healthcare Organization: A Case Study on a Rural Community Healthcare Provider

Table 4 Goals related to improving quality of care and patient safety and the associated TPS strategy.
Goals Affect on healthcare operations Application of TPS philosophy

Goal 1 Wrong-patient errors occur in virtually all aspects of Creating a treatment plan that is unique to the
Improve the accuracy diagnosis and treatment. The intent for this goal is individual fulfills the TPS requirement that all work
of patient identification twofold; first, to reliably identify the individual as is highly specified as to content. While clinical
the person for whom the service or treatment is pathways can be created for “categories” of care,
intended; second, to match the service or treatment each represents a customized version of the care
to that individual. template. Pathways must be documented and act
as controls during delivery of care.

Goal 2 Ineffective communication is the most frequently Reduction in errors is the direct result of creating
Improve the effectiveness cited category of root causes of sentinel events. an unambiguous customer-supplier connection.
of communication Effective communication, which is timely, accurate, Role-playing and experimentation allows caregivers
among caregivers complete, unambiguous, and understood by the to identify weaknesses in that connection.
recipient, reduces error and results in improved
patient safety.

Goal 3 When medications are part of the patient treatment A specific pathway must be created and followed
Improve the safety of plan, appropriate management is critical to consistently in order to analyze variations from
using medications ensuring patient safety. The development of the standard.
standardized and redundant systems has been
shown to decrease errors and improve outcomes.

Goal 4 Compliance with the CDC hand-hygiene guidelines Work environments must be physically safe.
Reduce the risk of will reduce the transmission of infectious agents by Training and development programs that address
healthcare-associated staff to patients, thereby decreasing the incidence the environment of care satisfies the TPS attribute
infections of healthcare-associated infections. of workplace safety.

Goal 5 Patients are most at risk during transitions in care Implementation of a product delivery plan
Accurately and (handoffs) across settings, services, providers, or (reconciling medications at the point of production
completely reconcile levels of care. The development, reconciliation, and dispensing) ensures safe customized delivery.
medications and communication of an accurate medication list
throughout the continuum of care is essential in the
reduction of transition-related adverse drug events.

Goal 6 Falls account for a significant portion of injuries in Identify risks that create a potential for failure,
Reduce the risk of hospitalized patients, long-term care residents, and through repeat assessment of patient care areas
patient harm resulting home care recipients. In the context of the population from shift to shift. Identify potential risks as “defects”
from falls it serves, the services it provides, and its environment and mitigate them accordingly.
of care, the organization should evaluate its patients’
risk for falls and take action to reduce the risk of
falling and to reduce the risk of injury, should a
fall occur. The evaluation could include fall history,
medications and alcohol consumption review, gait
© 2007, ASQ

and balance screening walking aids, assistive


technologies and protective devices assessment, and
environmental assessments.

abbreviations to be avoided. The QRC team at compromise. The abbreviation “IU” was documented
Heartland, through chart auditing, discerned that with the intended meaning of “international unit;”
several abbreviations and symbols were potentially in however, it could have been misinterpreted as “IV”—
use that could result in the intended meaning being “intravenous,” or the number 10. To abate this prob-
misinterpreted and patient safety being compromised lem, the recommendation was to require that the
(a potential breach of patient safety goal no. 2). phrase “international unit” be appropriately spelled
Two examples of this are illustrated here to draw the out, instead of abbreviated. Another “dangerous”
link between interpretation and potential patient safety abbreviation identified was the symbol “Q.D,” which

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Applying the Toyota Production System to a Healthcare Organization: A Case Study on a Rural Community Healthcare Provider

Table 5 Specific case problems categorized by patient safety goal.


Goals Process rules to implement TPS Problem assessment Remedies

Goal 1 • Use at least two patient identifiers (neither to be the • Direct admissions to • Implementation of
Improve the accuracy of patient’s room number) whenever administering obstetrical unit precluded “mini-registration”
patient identification medications or blood products, taking blood proper identification of process on the
samples and other specimens for clinical testing, patients. obstetrical unit.
or providing any other treatments or procedures.

Goal 2 • For verbal or telephone orders, verify the complete • Potential misinterpretation • Eliminate common
Improve the effectiveness order or test result by having the person receiving of abbreviations and misinterpretations in
of communication the order or test result “read back” the complete symbols. favor of mandated
among caregivers order or test result. documentation.
• Standardize a list of abbreviations, acronyms, and
symbols that are not to be used throughout the
organization.
• Measure, assess, and take action to improve the
timeliness of reporting of critical test results.
• Implement a standardized approach to “hands off”
communications including an opportunity to ask
and respond to questions.

Goal 3 • Standardize and limit the number of drug • Excessive temperature • Implementation
Improve the safety of concentrations available within the organization. setting within IV storage of medication
using medications • Identify and annually review a list of look alike/ incubation unit. management log,
sound alike drugs used in the organization, and accountability for
take action to prevent errors involving the completion of log
interchange of these drugs. assigned to team lead.
• Label all medications, medication containers, or
other solutions in preoperative and sterile settings
and ensure proper storage conditions.

Goal 4 • Comply with the CDC hand-hygiene guidelines. • Potential noncompliance • Install signage and
Reduce the risk of • Manage as sentinel events all identified cases with CDC handwashing provide emblematic
healthcare-associated of unanticipated death or major loss of function guidelines. method as a reminder.
infections associated with a healthcare infection.

Goal 5 • Implement a process for obtaining and documenting • Potential avoidance of • Mandate use of
Accurately and a complete list of the patient’s current medications medication management medication
completely reconcile upon admission. assessment. management
medications • A complete list of the patient’s medications is documentation as
communicated to the next provider of service essential component
when a patient is referred or transferred to of patient’s chart.
another setting. Subject to QRC audit.

Goal 6 • Implement a fall reduction program and evaluate • Potential improper lifting • Implement employee
Reduce the risk of the effectiveness of the program. and transportation retraining and build
© 2007, ASQ

patient harm resulting techniques. training into new


from falls employee orientation.
Subject to QRC audit.

was intended to mean “everyday.” This, however, was To reduce the risk of healthcare-acquired infec-
routinely misinterpreted as “Q.I.D” or “every other tions (patient safety goal no. 4), the QRC department
day.” Clearly, this misinterpretation could result in at Heartland not only installed reminder signs to
medication errors and a patient safety concern. This “wash hands for a minimum of 10 to 15 seconds”
abbreviation was discontinued in favor of the phrase within each clinical area, but also came up with a
“daily,” or “every day.” rhetorical/symbolic method for helping employees

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Applying the Toyota Production System to a Healthcare Organization: A Case Study on a Rural Community Healthcare Provider

understand this. During orientation for new employees, when enforced can produce positive outcomes, and
and reorientation of existing employees, the QRC team when implemented with the help of methods like TPS
demonstrated the use of the “Happy Birthday” song, can result in building competitive advantages.
that is, singing the song while washing one’s hands to In returning to Emery’s (1995) rationale for devel-
ensure hygiene guidelines are met. This was not only oping participative design, one can find constraints in
engaging, but also emblematic and pragmatic. introducing TPS to a community hospital. In essence,
Patient safety goal no. 5 requires hospitals to the rationale describes universal organizational con-
accurately and completely reconcile patient medica- straints that must be overcome. Traditional hierarchies
tions. As a patient proceeds through the admission are unacceptable in a TPS environment, where partici-
process and is referred to a clinical unit, that unit is pation of employees creates collective consciousness
required to document existing medication use. The and a shared mental model, rather than fragmented
QRC team facilitates this requirement by ensuring top-down solutions. This requires rethinking the role
that the medication management documentation is a of management, one that precludes the higher levels
mandated component of the patient’s chart and sub- of the hierarchy exclusively acting in roles of problem
ject to review by the QRC audit team. Finally, patient solvers at the expense of the ideas of the work group.
goal no. 6 requires hospitals to engage in a risk Additional studies that account for variations in
reduction program to manage patient harm resulting management style are recommended.
from falls. In many cases, it was determined that Systemwide, expansion of TPS from a work unit
patient falls resulted from inappropriate physical concept to a whole system change is limited by “silo”
assistance provided to the patient by the caregivers. affects, or the divisional nature of hospital operations.
This was observed by QRC members, and a retraining Breaking down these silos through challenging
program was implemented to ensure proper lifting processes within each of them increases the interaction
and transportation techniques. In addition, the pro- among divisional employees and recognizes their
gram was instilled in the new employee orientation interdependence. Additional TPS intervention studies
program, and is also subject to audit through QRC that take into account the diversity of multidiscipli-
observation. A summary of the goals related to nary operations is necessary to ascertain the level of
improving quality of care and patient safety, the effect sustainability of the TPS intervention.
on healthcare operations, and the associated TPS Successful projects that are not sustainable through
strategy are presented in Table 4. time because of worker turnover can be mitigated by
The specific case problems are categorized accord- strategic reward systems such as pay for performance
ing to patient safety goal, with remedies identified in or best practice rewards tied to patient safety and cost
Table 5. reduction outcomes. Incentives built into a control
system help the employees to realize a sense of owner-
ship in their actions. Additional studies are needed to
LESSONS LEARNED determine the strength of correlation between com-
As previously mentioned, small rural community pensation/reward systems and TPS sustainability.
providers have a magnified challenge in dealing with Finally, hiring practices and skill-building mecha-
current trends, particularly access to capital, technol- nisms associated with a learning organization can
ogy, and resources, and dealing with cost burdens create an expert-driven process that possesses the
imposed by pharmaceuticals and technically skilled energy for change rather than the complacency of
human resources. CHS has devised a business model resistance. This would include creating observation
that provides guidance to its small rural community skills associated with TPS, training in the scientific
providers in the area of quality and patient outcome method, and establishing interdisciplinary process
management, specifically requiring standardization education sessions. This will build the perception that
of accreditation documentation. This is a model that redesign is part of the job description rather than a

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Applying the Toyota Production System to a Healthcare Organization: A Case Study on a Rural Community Healthcare Provider

complicated process, and move the right people into Spear, S. 2005. Fixing healthcare from the inside today. Harvard
the right “experimentalist” positions, such that the Business Review (September): 78-91.

organization will start to achieve documented strate- Spear, S. 2004. Learning to lead at Toyota. Harvard Business
gic results, much like Toyota. The structure, control Review (May): 79-86.

systems, and culture will make the difference. Spear, S., and H. K. Bowen. 1999. Decoding the DNA of the Toyota
Production System. Harvard Business Review (Sept.-Oct): 97-106.

REFERENCES U.S. Census Bureau. 2004. Estimate. Washington D.C.: U.S.


Census Bureau, Population Division.
AHA. 2006. American Hospital Association (AHA) statistics.
Washington D.C.: American Hospital Association.
BIOGRAPHIES
CHS. 2006. See URL: http://www.chs.net/pdf/Investor-FactSheet.pdf.
Kevin F. Collins is a management consultant to a diverse range of
Emery, F. 1995. Participative design: Effective, flexible and successful
healthcare organizations. He received his master’s degree in
now! The Journal for Quality and Participation 18, no. 1: 6-10.
organization development from Bowling Green State University.
Emiliani, M. L., D. Stec, L. Grasso, and J. Stodder. 2003. Better He specializes in revenue optimization and organizational
thinking, better results: Using the power of lean as a total business process improvement strategies. Collins is a member of the
solution. Kensington, Conn: The CLBM. American Health Information Management Association, the
Healthcare Financial Management Association, and the Academy
Futurescan. 2005. Futurescan: Healthcare trends and implications
of Management. His research interests include healthcare strat-
2005-2010. Chicago: Society for Healthcare Strategy and Market
egy, organizational behavior, clinical quality outcomes analysis,
Development.
and leadership development. He can be reached by e-mail at
JCAHO. 2005. Facts about hospital accreditation. See URL: Kevincollins3@lycos.com.
http://www.JCAHO.org.
Senthil Kumar Muthusamy is an associate professor of strategic
Liker, J. 2003. The Toyota way: 14 management principles from management in the College of Business Administration at
the world’s greatest manufacturer. New York: McGraw-Hill.
Bowling Green State University. He received his doctoral degree
Monden, Y. 1998. Toyota production system: An integrated in management from Oklahoma State University. He is a member
approach to JIT, third edition. Norcross, Ga.: Engineering and of the Academy of Management, the Strategic Management
Management Press. Society, and the Organization Development Network. His
research interests include social exchanges in interfirm alliances,
Moore, G. 2004. Innovating within established enterprises, top-
cooperative strategies, knowledge management, and organiza-
line growth. Harvard Business Review (July-August): 87-92.
tional cognition. His articles have appeared in Organization
Ohno, T. 1995. Toyota Production system: Beyond large scale Studies, Journal of Business Research, Organization Development
production. University Park, Ill.: Productivity Press. Journal, and Journal of Information & Knowledge Management.

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Ranking Customer Requirements


in QFD by Factoring in Their
Interrelationship Values
J. R. SHARMA, INSTITUTE OF MANAGEMENT TECHNOLOGY, NAGPUR
A. M. RAWANI, NATIONAL INSTITUTE OF TECHNOLOGY, RAIPUR
© 2007, ASQ

Quality function deployment (QFD) is a methodology


used to achieve higher customer satisfaction. The engineer- INTRODUCTION
ing characteristics (ECs) affecting product performance In any kind of project, the design team needs to create,
are designed to match the customer requirements (CRs). improvise, innovate, or improve a product by incorporat-
Computing raw weights of CRs and priority scores of ECs
from various input variables is one of the most critical
ing the customer requirements (CRs) and engineering
phases in QFD application. This study deals with the most characteristics (ECs) recognized in the quality function
neglected and often-omitted part of the QFD process—the deployment (QFD) planning process into a product. A
interrelationship matrix among customer requirements. design team needs to make tradeoffs while selecting the
This article presents a mathematical solution to the cor- CRs and ECs based on the order of their relative raw
relation triangle problem that incorporates both CRs and weights and priority scores and their ranking to achieve
ECs. An attempt is made to address the issue by consider-
total customer satisfaction without violating the time,
ing the impact of these interrelationships on the overall
calculations, using weighted average method for the CR money, and effort constraints. The technical priority
interrelationship value operator in order to prioritize score and their rankings are the key results of QFD, since
customers’ requirements in QFD. The outcome of the they guide the design team in decision making, resource
study is a mathematical solution to the perennial corre- allocation, and the subsequent product analyses.
lation triangle problem in the form of a framework that Therefore, deriving the final importance rankings of CRs
factors in the correlation triangle values in conjunction
and ECs from input variables is a crucial step toward
with computed raw weights for customer requirements.
The model fine tunes and adds precision to an otherwise successful QFD. The inherent abstraction and the
qualitative strategic decision process. The applicability inexactness of the result, however, presents a special
of the authors’ proposed model is demonstrated with a challenge in effectively calculating the customer raw
real-life example. weights and technical priority scores and, hence, the
Key words: customer requirements, interrelationship importance rankings of CRs and ECs. The aim of this
values, prioritization, QFD article is to advance the theory and practice of incor-
porating and factoring in the interrelationship values
of the house of quality (HoQ). Implementation of
this improvised approach to comprehensive matrix
analysis is discussed from the perspective of a product
by conducting a hypothetical analysis.

QFD: ORIGIN AND PROGRESSION


QFD is the systematic translation of the voice of the
customer (VOC) to the actions of the manufacturer
required to meet the customers’ desires, based on a

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Ranking Customer Requirements in QFD by Factoring in Their Interrelationship Values

matrix that compares what the customer wants and Figure 1 Basic building blocks of QFD
how the supplier plans to provide it. It is said that QFD (Sharma, Sharma, and Rawani 2006).
was proposed in Japan in 1966 by Yoji Akao. However,
it did not emerge as a viable and formalized approach
to quality control in planning until 1972 when Akao Roof

developed a quality control chart previously introduced Voice of


Product engineer
at the Kobe shipyard of Mitsubishi Heavy Industries
and instituted the QFD quality tables (Griffin and

customers
Hauser 1996). QFD is an innovative approach to

Voice of
triangle
Strategic
Relationship

CR
bringing quality—as demanded by the customers— planning
room
room
upstream into the product development process (Akao
1990). QFD’s first industrial applications in the United
Technical

© 2007, ASQ
States originated primarily in the automotive industry. priorities
With some modifications, QFD could be applied to the room
continuous improvement of any product, process, or
technique (Sharma and Rawani 2006). Early users of product or service. The most common approach is to
QFD included Ford Motor Company, Procter & Gamble, ask: Who must be satisfied with the product for it to be
and 3M Corp., but many other U.S. companies have also considered successful? Identifying the CRs and their
adopted it. In Europe, the first symposium on QFD took importance remains one of the most serious obstacles to
place in 1992 in the United Kingdom, but companies a successful QFD application in product development.
like Philips Corporation have reportedly worked with
QFD since 1986 (Govers 1996). QFD has been in use in
the manufacturing industry since 1987. Meanwhile, CR Triangle
many authors have advocated it as a planning tool to The CR correlation triangle is designed to show the
help manage product and process development. interrelationship between the CRs of the matrix.
Tradeoffs between the different CRs are identified and
captured as strong positive, positive, negative, and strong
QFD FRAMEWORK negative. If two CRs help each other move in their
In the QFD approach, the matrix to be built is the desired direction, they are considered to be positively
product planning matrix. It also is called the “house” related. Similarly, if moving in the desired direction on
of quality (HoQ) because of its house-like shape. Its one CR has a detrimental effect on another, they are
purpose is to translate important customer require- considered to be negatively related. Since they are gener-
ments regarding product quality into key end-product ally not used in calculation, the interrelationship data
control characteristics. The HoQ comprises several are defined with symbols for associated relationships.
different parts or rooms, which are sequentially filled
in order to achieve an actionable translation from
requirements into characteristics (see Figure 1). Strategic Planning Room
Once the CRs and their priority rankings are established,
the next step is to understand where the company and
Voice of Customer its competitors stand in terms of satisfying customers in
The HoQ’s first room concerns the product and deals the marketplace. This is achieved through an index of
with the definition of the selected product for which QFD the customer perceptions as to how well the product
is constructed. The second room concerns the VOC, but one uses meets his or her needs. This section provides a
before this there is a need to identify the customers. link between the QFD project and the company’s strate-
There are different ways to identify the customers of a gic vision by uncovering market opportunities and

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Ranking Customer Requirements in QFD by Factoring in Their Interrelationship Values

identifying priorities for product development or Based on the information depicted in the HoQ, the
improvement. Moreover, it helps build competitive QFD team then must select the end-product character-
advantage by focusing on the requirements that cus- istics to be deployed through the remainder of the
tomers would like to see better addressed by the market. product development and market introduction activi-
ties. ECs showing a technical importance rating above
a predetermined threshold, thus indicating a strong
Voice of the Engineer and Roof relative importance in achieving the CRs, are selected
At this stage, the QFD team should have a clear picture for further deployment. The same happens to ECs
of what the customer requires from the concept or related with CRs that have strong sales points or poor
product and how this can be related to the company’s competitive performance satisfaction rating.
strategy. The team now has to decide how these require-
ments can be incorporated into the final product, so that
the customer is satisfied. This is achieved by building RANKING METHODS IN QFD:
the Voice of Engineer Room. The goal is to develop a
set of engineering specifications from the CRs.
A REVIEW
The study of the available literature on various models
and frameworks for QFD suggests that most of the
Relationship Room methodologies suffer from one major weakness—a
The Relationship Room is the core of the HoQ—where lack of concrete, clear guidelines as to how one could
the relationship between each CR (VOC) and the ECs adequately conceptualize, integrate, and implement
(voice of the engineer), as well as their intensity, is its correlation triangle phase. Several methodologies
depicted. The relationship between CRs and ECs might have been worked out, but their validity and applica-
be achieved by asking, “To what degree does this engi- bility to prioritize CRs remains inconclusive and the
neering characteristic predict the customer’s satisfaction implementation results and findings are scarce.
with this requirement?” Based on in-house expertise, In QFD studies various CRs are always stated and
surveys, data from statistical studies, and controlled included, but interrelationship with one another is
experiments, the team seeks consensus as to how much hardly ever incorporated and, even if depicted, is
each EC affects each CR. This task is widely recognized never brought into the tabulations of the CR final
as highly complex and represents another critical stage importance ratings. One reason for this is the diffi-
in the HoQ building process. culty in obtaining the relevant data, although it
could be expressed in a symbolic manner using
appropriate synergistic or detrimental scales.
Technical Priorities Room Interrelationships among the CRs require the QFD
The Technical Priorities Room starts with technical personnel to make a lot of pair-wise comparisons
descriptors. These descriptors pertain to the ECs and about the degree of association and the direction to
the units of measurement in each column. They add which these CRs are interrelated. Also, there are few,
the details necessary to bring the product definition if any, acceptable methods to incorporate the interre-
from the abstraction of words to the concrete reality of lationship into the calculation of the final impor-
product and process engineering. With technical com- tance ratings of the CRs. Most of these methods,
petitive assessment of the ECs (voice of the company) however, adopt calculation procedures using the
in the currently marketed products, the QFD team can weighted product of the relationship measures in the
view their competitors’ and their own technical per- importance rating column, sales factor, and
formance level regarding ECs directly affecting CRs. A improvement ratio column, without considering the
row indicating the level of organizational difficulty magnitude, direction, and degree of association
related with realizing each EC can also be added. among all CRs.

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Ranking Customer Requirements in QFD by Factoring in Their Interrelationship Values

Figure 2 Flowchart for the proposed method. an approach based on the application of possibility
theory and fuzzy arithmetic to address the vagueness
in QFD operation. Fung, Popplewell, and Xie (1998)
START
developed a hybrid system to incorporate the principles
of QFD, analytical hierarchy progress, and fuzzy set
i=1 theory for customer requirements analysis and product
attribute targets determination. Shen, Tan, and Xie
IRWi = NPRWi (2001) proposed a fuzzy procedure to examine the
sensitivity of ranking different parameters to the
j=1 defuzzification strategy and degree of fuzziness of
fuzzy numbers. Vangeas and Labib (2001) proposed a
model for deriving optimum targets of CRs and ECs
Yes through the implementation of the fuzzy weighted
If j ≠ i
average. On the similar lines, new methods for rating
No CRs and ECs in fuzzy QFD is proposed by integrating
n fuzzy weighted average method (Kao and Liu 2001)
IRWi = NPRWi + Σ [NPRWi * (1 + NPRWj) * Xij]
j=1 and the fuzzy expected value operator (Liu and Liu
2002). Karsak, Sozer, and Alptekin (2002) combined
j=j+1 the AHP and goal programming approach for deter-
mining the priority levels of CRs. Han, Kim, and Choi
(2004) suggested a linear partial ordering approach
Yes for prioritizing ECs in QFD with incomplete informa-
If j ≤ n
tion. Karsak (2004) used the fuzzy multiple objective
No programming framework for prioritization in QFD.
i=i+1 Chen, Fung, and Tang (2005) proposed a ranking
model using the weighted average method in the fuzzy
expected value operator in fuzzy QFD.
If i ≤ n

INTERRELATIONSHIP
OUTPUT: IRW VALUES INTEGRATED MATHEMATICAL
© 2007, ASQ

STOP
MODEL
To overcome the aforementioned problem, a new
method for prioritizing CRs in QFD is proposed by
A few approaches have been introduced for deter- integrating the CR correlation triangle values with
mining CRs and ECs importance rating in the QFD preliminary (initial) raw weights. The proposed
process. The noticeable ones found in the QFD litera- method can weigh the CRs more efficiently, as not only
ture dealing with prioritization are mentioned here: the relative importance ratings, sales points, and
The prioritization that is consistent with CRs impor- improvement ratios of CRs are considered, but the val-
tance ratings was advocated by Lyman (1990) ues and their degree of association in the correlation
through the concept of deployment normalization. triangle are also factored in. Through the method
Armacost et al. (1994) used the analytic hierarchical proposed in this study, the CR correlation triangle
process to prioritize CRs and ECs in an industrialized symbols are translated into numerical values and
housing application. Khoo and Ho (1996) proposed with this a discreet but exact solution is obtained.

56 QMJ VOL. 14, NO. 4/© 2007, ASQ


Sharma v14 i4 9/20/07 10:11 AM Page 57

Ranking Customer Requirements in QFD by Factoring in Their Interrelationship Values

The prioritization weights are then Figure 3 Customer requirements and their interrelationships.
computed by using the prelimi-
nary raw weights. To factor in the Customer Requirements PRW NPRW Rank
CR correlation triangle values— Cleanliness and purity 69 0.1076 IV
which usually are in the form of +
Safe, reliable, and efficient 72 0.1123 III
symbols — the model starts only –
–– Ease of handling and use 40 0.0624 X
after the prioritization of the CRs +
+ Cost of the product 86 0.1342 II
by rating them through their raw + –
+ + – Leakage factor (air/liquid) 59 0.0920 VII
weights. This article considers + ++ + – +
++ –– Right size/Correct volume 63 0.0983 VI
QFD done on a healthcare prod- – + ++
–– Proper visible markings 42 0.0655 IX
uct. It should be noted, however,
Precise movement 47 0.0733 VIII
that the whole QFD matrix prepa-

© 2007, ASQ
Safe convenient packaging 67 0.1045 V
ration and its calculation for the ++
Tamper proof (no reuse) 96 0.1498 I
selected product are beyond the
scope of this article. The legends
used are: The rationale behind the devised formulae is the
• n—Number of customer requirements relative direction and the magnitude of change that
one CR causes on to the other, depicted with the help of
• PRW—Preliminary raw weight
synergistic or detrimental symbols. If there is a syner-
• SPRW—Sum of all preliminary raw weights gistic (or detrimental) relationship between two CRs,
• NPRW—Normalized preliminary raw weight the effect is positive (or negative). This causes CRs to
• IRW—Intermediate raw weight move in the right (or opposite) direction, the intensity
of which is decided by the nature of relationship, that
• SIRW—Sum of all intermediate raw weights
is, strong or weak. The net effect is to increase (that is,
• NIRW —Normalized intermediate raw weight multiplying factor > 1.00) or decrease (that is, multi-
• FRW—New raw weight plying factor < 1.00) the considered CR’s weight by
• Xij —Interrelationship values among CRs, that is, the related percentage value of other related CRs, thus
between row i and column j taking into account the assigned degree and direction
of association. A Visual Basic Code has been written
The interrelationship values are taken as 1.5 for
for the proposed method. A flowchart for the same is
“+ +”, 1.25 for “+”, 0.5 for “–”, 0.25 for “– –” and
shown in Figure 2.
0.00 for “blanks.” The value conversion has been done
considering the synergistic or detrimental effect of these
relationships on various CRs under consideration. The
calculations for ith (i = 1 to n) CR is given next:
AN ILLUSTRATIVE EXAMPLE
After going through all QFD steps depicted previously in
NPRWi = PRWi / SPRW the basic building blocks for the selected healthcare
n
IRWi = NPRWi + Σ [NPRWi * (1 + NPRWj) * X ij ], for product “syringe and needle,” the calculated raw
j=1 weights for each CR are shown next. The matrix ignores
all j ≠ i
redundant steps and considers only the relevant ones,
These intermediate raw weights are then normal-
that is, CR, interrelationship among CRs, raw weights,
ized, and these normalized values are distributed
normalized raw weights, and their ranks, as shown in
according to preliminary raw weights to give final
Figure 3. The sample calculation (of CR2) shown next
raw weights, as given next.
helps in deciphering how changes in the correlation
NIRWi = IRWi / SIRW triangle value get reflected in IRW and finally in FRW,
FRWi = NIRWi * SPRW thus affecting the resultant rankings of the CRs.

www.asq.org 57
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Ranking Customer Requirements in QFD by Factoring in Their Interrelationship Values

Table 1 CR with correlation values, preliminary and final raw weights.

(No reuse possibility)


Safe & Convenient
Ease of Handling

Correct Volume
Safe, Reliable,

Tamper Proof
No Leakages

Movements
Cleanliness

Right Size/
Cost of the

Packaging
(Air/Fluid)
& Efficient

Markings
& Purity

Product

Precise
Proper
& Use
CR PRW NPRW IRW NIRW FRW

Cleanliness
& purity – 1.25 0 0.50 0 0 0 0 1.25 1.25 69 0.1076 0.6217 0.1046 67.03

Safe, reliable,
& efficient 1.25 – 0 0.25 1.25 1.25 1.25 0 1.50 1.50 72 0.1123 1.1367 0.1912 122.54

Ease of
handling
& use 0 0 – 0 0 0 1.25 1.25 0 0 40 0.0624 0.2292 0.0386 24.71

Cost of the
product 0.50 0.25 0 – 0.50 0.50 0.50 0.25 0.50 0.25 86 0.1342 0.6128 0.1031 66.07

No leakages
(Air/Fluid) 0 1.25 0 0.50 – 1.25 0 1.25 0 0 59 0.0920 0.5221 0.0878 56.29

Right size/
Correct vol. 0 1.25 0 0.50 1.25 – 1.50 0 0 0 63 0.0983 0.5819 0.0979 62.74

Proper
markings 0 1.25 1.25 0.50 0 1.50 – 0 0 0 42 0.0655 0.3887 0.0654 41.91

Precise
movements 0 0 1.25 0.25 1.25 0 0 – 0 0 47 0.0733 0.2916 0.0490 31.44

Safe
packaging 1.25 1.50 0 0.50 0 0 0 0 – 1.50 67 0.1045 0.6632 0.1115 71.50

Tamper proof

© 2007, ASQ
(No reuse) 1.25 1.50 0 0.25 0 0 0 0 1.50 – 96 0.1498 0.8976 0.1510 96.77

SUM 641 1.000 5.9455 1.000 641.00

Considering row no. 2 (CR2: safe, reliable, and Similarly, values of IRW for all other CRs are
efficient) computed.
PRW2 = 72.00 (Old rank is 3) SIRW = 5.9455
NPRW2 = 72.00 / 641.00 = 0.1123 NIRW2 = IRW2 / SIRW = 1.1367 / 5.9455 = 0.1912
X2j = {0.00, – , 0.00, 0.25, 1.25, 1.25, 1.25, 0.00, FRW2 = NIRW2 * SPRW = 0.1912 * 641.00 = 122.5449
1.50, 1.50} (New rank is 1)
SPRW = 641.00 Similarly, values of FRW for all other CRs are
n
IRW2 = NPRW2 + { Σ [NPRW2 * (1 + NPRWj ) * X2j ]} = computed (see Table 1).
j=1
0.1123 + {0 + 0 + 0.1123 * (1 + 0.1342) *
0.25 + 0.1123 * (1 + 0.0920) * 1.25 + 0.1123 * RESULTS
(1 + 0.0983) * 1.25 + 0.1123 * (1 + 0.0655) * Results can be deciphered from the comparative
1.25 + 0 + 0.1123 * (1 + 0.1045) * 1.50 + analysis of CRs raw weights and their ranking (see
0.1123 * (1 + 0.1498) * 1.50} = 1.1367 Table 2). The old traditional method and the resulting

58 QMJ VOL. 14, NO. 4/© 2007, ASQ


Sharma v14 i4 9/20/07 10:11 AM Page 59

Ranking Customer Requirements in QFD by Factoring in Their Interrelationship Values

Table 2 A comparative analysis of CRs preliminary and final raw weights and rankings.
C R (Conventional Method) PRW NPRW Rank C R (Proposed Method) FRW NIRW Rank

Tamper proof (no reuse) 96 0.1498 I Safe, reliable, and efficient 122.5449 0.1912 I

Cost of the product 86 0.1342 II Tamper proof (no reuse) 96.7727 0.1510 II

Safe, reliable, and efficient 72 0.1123 III Safe & convenient packaging 71.4992 0.1115 III

Cleanliness and purity 69 0.1076 IV Cleanliness and purity 67.0252 0.1046 IV

Safe convenient packaging 67 0.1045 V Cost of the product 66.0727 0.1031 V

Right size/Correct volume 63 0.0983 VI Right size/Correct volume 62.7384 0.0979 VI

No leakages (Air/Fluid) 59 0.0920 VII No leakages (Air/Fluid) 56.2857 0.0878 VII

Precise movements 47 0.0733 VIII Proper markings 41.9110 0.0654 VIII

© 2007, ASQ
Proper markings 42 0.0655 IX Precise movements 31.4355 0.0490 IX

Ease of handling and use 40 0.0624 X Ease of handling and use 24.7148 0.0386 X

rankings leave a lot to be desired. However, this more appropriately the relationships among CRs. The
lacuna gets solved with the computation of the final model is shown to be computationally feasible for
raw weight obtained through CR correlation triangle realistic problems and outperforms traditional
values. The final raw weights, their rankings, and approaches on the basis of being relatively straight
their order are much more precise and accurate, forward and simplified. A systematic algorithm for
leading to better and informative decision making by calculating the critical targets of CRs is followed. The
product designers. framework presented in this article for prioritizing
CRs extends the single objective viewpoint of maxi-

CONCLUSIONS mizing customer satisfaction by considering the com-


pany’s other market-related objectives, and thus,
The prioritization and the judicious selection of CRs precludes an unreasonable QFD planning in practice.
from the market’s perspective is a complex task and The proposed methodology provides product develop-
needs special attention. Over the past few years, there ers, designers, and engineers with an objective
has been an huge effort in establishing a decision method for making a judicious selection of critical
framework that quantifies the imprecise and subjective CRs satisfying the overall CRs. The illustrated exam-
customer information inherent in the product plan- ple clearly shows that the proposed approach can
ning process. This research has proposed a novel QFD produce more informative results, adding credibility
approach that solves some methodological problems to the outcome and its analysis, for the benefit of the
encountered in the conventional QFD. While the con- product designers and developers.
ventional approach uses only symbols to express the
strength or weakness of the relationships among CRs,
REFERENCES
albeit only in few cases, the new approach addresses
Akao, Y. 1990. Quality function deployment: Integrating cus-
relationships in a different and improved numerical
tomer requirements into product design , Cambridge, Mass.:
method. Productivity Press.
The article shows the effectiveness and preciseness
Armacost, R., P. Componation, M. Mullens, and W. Swart. 1994.
of the proposed model. Numbers are used to represent AHP framework for prioritizing customer requirement in QFD: An
the imprecise nature of the judgments and to define industrialized housing application. IIE Transactions 26, no. 4: 72-79.

www.asq.org 59
Sharma v14 i4 9/20/07 10:11 AM Page 60

Ranking Customer Requirements in QFD by Factoring in Their Interrelationship Values

Chen Yizeng, R. Fung, and J. Tang. 2005. Rating technical attrib- Sharma, J., and A. Rawani. 2006. Customer driven product
utes in fuzzy QFD by integrating fuzzy weighted average method development through quality function deployment (QFD). Asia
and fuzzy expected value operator. European Journal of Pacific Business Review — A Journal of Asia-Pacific Institute of
Operational Research (Production, Manufacturing and Logistics). Management 2, no. 1: 45-51.

Fung, R. Y. K., K. Popplewell, and J. Xie. 1998. An intelligent Sharma, J., D. Sharma, and A. Rawani. 2006. Quality driven prod-
hybrid system for customer requirements analysis and product uct development. Manufacturing Engineer (IET). (June-July): 38-41.
attribute targets determination. International Journal of
Shen, X., K. Tan, and M. Xie. 2001. The implementation of qual-
Production Research 36, no. 1: 13-34.
ity function deployment based on linguistic data. Journal of
Govers, C. 1996. What and how about quality function deploy- Intelligent Manufacturing 12: 65-75.
ment (QFD). International Journal of Production Economics :
Vangeas, L., and A. Labib. 2001. A fuzzy quality function
575-585.
deployment (FQFD) model for deriving optimum targets.
Griffin, A., and J. Hauser. 1996. Integrating R & D and marketing: International Journal of Production Research 39, no. 1: 99-120.
A review and analysis of the literature. Journal of Product
Innovation Management: 191-215.
BIOGRAPHIES
Han Chang, Kim Jae, and Choi Sang Hyun. 2004. Prioritizing
J. R. Sharma is assistant professor at the Institute of Management
engineering characteristics in QFD with incomplete information:
Technology, Nagpur. Before joining this organization, he served
A linear partial ordering approach. International Journal
as senior faculty in the Department of Production and Mechanical
Production Economics 91: 235-249.
Engineering, Manoharbhai Patel Institute of Engineering and
Kao, C., and S. Liu. 2001. Fractional programming approach to Technology (MIET), Gondia, India. He is pursuing his doctoral
fuzzy weighted average. Fuzzy Sets and Systems 120: 435-444. research at the National Institute of Technology, Raipur. His
research interests are in the areas of quality management and
Karsak, E. 2004. Fuzzy multiple objective programming frame-
product development. Sharma has more than 20 research papers
work to prioritize design requirements in QFD. Computers &
published in various national and international conferences, tech-
Industrial Engineering 47: 149-163.
nical periodicals, and journals. He has the honor of reviewing
Karsak, E., S. Sozer, and E. Alptekin. 2002. Product planning in papers for several international and national journals including
QFD using a combined analytic network process and goal pro- Elsevier’s European Journal of Operations Research. He can be
gramming approach. Computers and Industrial Engineering 44: reached by e-mail at sjiten1@gmail.com.
171-190.
A. M. Rawani is professor and head of the Department of
Khoo, L., and N. Ho. 1996. Framework of a fuzzy quality function Mechanical Engineering, National Institute of Technology, Raipur,
deployment system. International Journal of Production Research India. He has more than 23 years of experience in academics.
34, no. 2: 299-311. He acquired his doctorate from IIT-Delhi. He has pursued his
research in the area of strategic management. Rawani has done
Liu, B., and K. Liu. 2002. Expected value of fuzzy variable and
commendable work in research and has more than 35 publications
fuzzy expected value models. IEEE Transactions on Fuzzy Systems
in national and international journals to his credit. He has been a
10, no. 4: 445-450.
nominated member of the Confederation of Indian Industry
Lyman, D. 1990. Deployment normalization. In Transactions from (CII) — HR & Training Program Panel. He can be reached by
the 2nd Symposium on Quality Function Deployment: 307-315. e-mail at amrawani@rediffmail.com.

60 QMJ VOL. 14, NO. 4/© 2007, ASQ


Book Reviews v14 i4 9/20/07 10:11 AM Page 61

Book
Reviews
China Now: Doing Business Part 1, “The Necessary Back- complete and with rules of the
in the World’s Most Dynamic ground for Negotiations with game still being written.” (p. 56)
Market 2007. N. Mark Lam and Chinese Business People,” provides This is especially evident in the
John L. Graham. New York: McGraw- informative tidbits of information book’s concluding chapter on
Hill. 385 pages. about China, beginning with a Chinese legal and business envi-
Globalization requires that chapter on the history and culture ronment. The Chinese legal system
managers are aware of the nuances of the Chinese people. Lam and is not as well defined as the
of the business customs and char- Graham have done an excellent Western system nor is the legal
acteristics of major international job of providing salient points profession. In China, businesses
markets. China Now provides an from the 5,000 years of Chinese are driven by technically trained
excellent primer on the emerging history and enormous diversity of individuals rather than lawyers. In
Chinese business culture with a its immense population. Certainly, fact, today China has about
specific focus on the techniques of the 18 things they have selected as 115,000 lawyers, and being a
negotiating in various areas of the key things one needs to know con- lawyer is not a prerequisite for
country. Lam and Graham have cerning key people, turning points, serving as a judge. There is a con-
produced a suburb overview of the and prominent themes are worthy stitution, civil, and criminal code,
business culture that exists in of investigation. as well as laws and regulations
China today and how to effectively The next area explored con- covering commerce in general and
cope with it in negotiations. cerns the economic development of a variety of specific business con-
As an illustration of how nego- China. The authors enthusiasm for cerns. Because of the developing
tiations work in Shanghai, the China is found in their statement: nature of Chinese law most dis-
book begins with an anecdotal tale “There is no more important sin- putes are settled by negotiation
of the attempts of the American gle market than China…China’s rather than adjudication because
automotive industry to break into dual economic system, embracing the outcome is unpredictable
the Chinese market. It describes socialism along with many tenets under the best of circumstances.
why the Ford Taurus did not get of capitalism, has produced an Part 2 explores what happens
the Chinese checkered flag while economic boom with expanded when Americans meet Chinese
General Motors’ (GM) Buicks did. opportunity for foreign investment across the negotiation table.
GM’s negotiator, Shirley Young, is that has resulted in annual gross Americans are characterized as
having a free-enterprise, cowboy
said to have “not only brought a national product (GNP) averag-
style of negotiations. On the other
marketing imagination to the GM ing nearly 10 percent since 1970.”
hand, the elements of the Chinese
team, but she also brought great (p. 43) China is said to be “neither
style of business negotiation are:
gaunxi (connections). (p.5) She an economic paradise nor an eco-
understood that for Chinese, face- nomic wasteland. It is a relatively • Guanxi (personal connections)
to-face meetings and relationships poor nation going though a • Mianzi (face or social capital)
between people at all levels are the painfully awkward transformation • Shehui Dengji (social hierarchy)
essential elements of successful from a socialist market system to a • Renji Hexie (interpersonal
negotiations. hybrid socialist/free system, not yet harmony)

www.asq.org 61
Book Reviews v14 i4 9/20/07 10:11 AM Page 62

Reviews
• Qundai Guanxi (nepotism) Made to Stick: Why Some after the specifics are lost, modified,
• Zhengti Guannian (holistic Ideas Survive and Others Die or completely replaced. The authors
thinking) 2007. Chip Heath and Dan Heath. say, “A story is powerful because it
• Chiku Nailao (endurance) New York: Random House. 291 provides the context missing from
pages. active prose.” (p. 214)
• Jiejian (thrift)
Made to Stick is a wonderful The point of developing ideas
• Linghe Tanpan (zero-sum
book designed to entertain, inform, that incorporate the SUCCES prin-
negotiations)
and enlighten anyone interested in ciples is said to be to “beat the
• Jiao Ta Liangshi Chuan (threat- effectively communicating an idea. curse of knowledge” which inhibits
ening to do business elsewhere) Chip Heath and Dan Heath have embracing new ideas. (p. 20) The
The remaining chapters synthesized their perception of how well-developed notes at the end of
describe the “how to” of preparing, to do this for organizations, groups, the book document the research
conducting, and following up after and individuals into six succinct that supports this theory, which
negotiations. Each provides help- principles (SUCCES): says it “increases as people gain
ful tips on what to do and not to do 1. Simplicity more expertise.” So the more a per-
to assure success in the negotiation 2. Unexpectedness son knows about something, the
process. more difficult it is for him or her to
3. Concreteness
Every region is not the same in accept a new idea that challenges
4. Credibility
China, so each of the generic point- or changes what he or she knows
ers has to be modified for the specific 5. Emotions about a topic. (p. 260-261)
office in which the negotiations take 6. Stories The Heath brothers present
place. Part 3 illustrates each of the Each point is thoroughly pre- their profound concepts of making
general areas of China and their sented in a chapter of the book ideas survive in almost a playful
respective cultural differences. that is effectively explained with fashion. The solid academic
The book’s final two parts pre- supporting data, anecdotal informa- research that supports their theory
sent brief discussions of the issues of tion, and experiential findings. The articulated as SUCCES principles is
negotiating and enforcing intellec- Introduction and Epilogue provide hidden in each of the tales they
tual property rights and speculating added material that contributes to spin to make point after point to
about the future of Chinese and the book’s readability. A section present a creditable case for it. The
American commercial relations. At called “The Easy Reference Guide” urban legends, business anecdotes,
some point a quality issue will at the end of the book further sup- and findings from their own inde-
develop that requires skillful negoti- ports the material by providing a pendent research provide a rich
ating to resolve a disagreement with comprehensive outline that jogs background that draws the reader
a supplier, outsource producer, or the reader’s memory of the topics into their world. Using the meta-
customer. The insights presented in presented. phor developed in each story they
China Now by Lam and Graham Stories seem to be the common are able to build a bond of believ-
will provide an excellent road map denominator for making some ability with the reader, which is not
to a successful resolution of the ideas survive and others die, often seen in management texts.
differences, perceived or real. because they provide the context in Reading this book is truly a
which fact and fiction can be delightful experience.
Reviewed by
Dr. James Kohnen weaved to illustrate a point. A good Because the information pre-
St. Mary’s College of California story will be remembered long sented is universal, the book has a

62 QMJ VOL. 14, NO. 4/© 2007, ASQ


Book Reviews v14 i4 9/20/07 10:11 AM Page 63

uniquely wide appeal to organiza- from the center of mass of the as time, language, and cultural
tions of all types and to their organization, indicated by its differences that must be considered
members at all levels. The Heath business address; rather, they are to be effective. Then they move to
brothers keep their word when they in an organization that clearly an informative discussion related
say: “We can promise you this: considers their actual global loca- to time management and the need
Regardless of you level of ‘natural tion exactly the same as if it were for team processes and procedures
creativity,’ we will show you how a located at its stated business that standardize the efforts of the
little focused effort can make address. In this virtual environment members of the team. The insight-
almost any idea stickier, and a audio, visual, and printed commu- ful reviews of virtual politics,
sticky idea is an idea that is more nication is possible universally and managing conflict, and virtual
likely to make a difference.” instantaneously regardless of the management of high-risk and cata-
(p. 24) individual’s actual location at the strophic events are very relevant to
Reviewed by
given moment. the management challenges found
Dr. James Kohnen This emerging phenomenon in organizations today. The book
St. Mary’s College of California creates a huge paradigm shift in the concludes by presenting sections
way workers and work is managed. describing virtual management
Managing Without Walls: Organizational norms of behavior and communication tools and
Maximize Success with are no longer transferred by indi- leadership. One of the specific lead-
Virtual, Global, and Cross- vidual and group interaction at the ership points stressed by the
Cultural Teams Colleen Garton workplace. The informal commu- authors relates to controlling one’s
and Kevin Wegryn. 2006. Lewisville, nication chain takes on greater emotions. They say, “Staying calm
Texas: McPress. 409 pages. significance when it is transmitted and unemotional are the keys to
As virtual offices become more through cyberspace, mainly because successfully managing conflict and
common for quality professionals, it is done without body language highly emotional situations. When
the concepts presented by Garton or other visual indicators to clarify everyone else is stressed out, angry,
and Wegryn in Managing Without its total meaning. and frustrated it takes just one per-
Walls become more and more ger- After justifying the need for vir- son remaining calm and being the
mane. The idea of virtual offices tual management, they describe voice of reason to bring everyone
removes the collective place for the desired virtual manager’s ideal else back to resembling normal,
the value-added activity that skill set that includes: general healthy human beings! Strive to
defines the work being done indi- management, people skills, com- be that person.” (p. 354)
vidually or collectively by a team. munications, technical knowl- Managing Without Walls is an
When meaningful work supporting edge, decision making, problem excellent introduction to an emerg-
the common goals of an organiza- solving, team orientation, and ing form of organizational structure
tion can be performed anyplace, at administration, which are also and behavior found in global busi-
any time, management of the held by traditional managers. nesses today. Garton and Wegryn
individuals engaged in it enters They emphatically state, however, have done a commendable job
into a new dimension of time and that not all traditional managers identifying the idiosyncrasies of
space. can adapt to the virtual arena. managing in this environment.
Employees engaged in this They cite some obvious things a
Reviewed by
kind of working relationship are virtual manager must cope with to Dr. James Kohnen
not traveling when they are away develop effective virtual teams such St. Mary’s College of California

www.asq.org 63
Book Reviews v14 i4 9/20/07 10:11 AM Page 64

Reviews
Project Sponsorship: for each step. These generally begin • Know when to pull the plug.
Achieving Management Com- with the phrase “I (Bucero)” and In the final chapter of the book,
mitment for Project Success continue as first person accounts of “Knowledge Management,” the
Randall L. Englund and Alfonso some event that he has either par- authors stress the importance of
Bucero. 2006. San Francisco: Jossey- ticipated in or witnessed during his reflecting periodically on the
Bass/Business & Management career. lessons learned. Periodic project
Series. 201 pages. The authors make full use of reviews are essential for the pro-
Most organizations employ some the Project Management Body of ject sponsor to capture not only
form of project management to Knowledge published by the the status of the project but also
accomplish special tasks outside the Project Management Institute ways to improve its execution. The
scope of their normal operations or (PMI) throughout the book. In four steps in the process include:
to serve the specific needs of a Chapter 2, “Obtaining a Project preparing the session, conducting
unique customer base. Traditionally, Sponsor,” they cite the “Top 10 the session, collecting learning,
a project team led by a project Attributes of a Great Project and sharing the lessons learned.
manager is assigned to the task to Sponsor” presented by Lonnie According to the authors, the
assure that the elements of cost, Pacelli at the 2005 PMI Global importance of the project sponsor
schedule, and quality are fulfilled Congress. (pp. 42-43) sharing the outcomes of these
to meet the organization’s and • Clearly understand the problem meetings with others cannot be
customer’s expectations. Englund to be solved. overstated in teams of benefits to
and Bucero make a convincing • Ensure that the solution fixes the organization.
argument for having a project the problem. Englund and Bucero have done
sponsor to champion the project • Know where “good enough” is. a creditable job of defining the
with the organization. Their con- value of having a project sponsor
• Build the right team to solve
cern is that many executives are to achieve management commit-
the problem.
assigned as project sponsor with- ment for project success. The role
• Hold the team accountable for
out a full understanding of their of the project sponsor and the
results.
expected roles and responsibilities importance of formal development
during project life cycles. • Know the big issues and what is
programs are clearly articulated in
The authors offer an intriguing needed to resolve them.
a very succinct method that is wor-
10-step model that outlines the • Be the advocate, coach, influ-
thy of anyone’s attention involved
progress of sponsor development, encer, and battering ram.
in project management.
from responsibilities to knowledge • Make the thoughtful, tough,
Reviewed by
management. Bucero provides decisions.
Dr. James Kohnen
informative experiences he has had • Ensure that the project finishes St. Mary’s College of California
in the field as antidotal evidence strong.

64 QMJ VOL. 14, NO. 4/© 2007, ASQ


Annual Index v14 i4 9/20/07 10:20 AM Page 1

QMJ Volume 14 Author


Index
A G Pinar, Musa, and Ceyhun Ozgur, “The
Long-Term Impact of ISO 9000
Al-Marsumi, Mujbil, “Total Quality Guimaraes, Tor, D. Sandy Staples, and Certification on Business Perfor-
Management in a Chosen Section James McKeen, “Assessing the mance: A Longitudinal Study Using
of the Hospitals in Amman, Jordan” Impact From Information Systems Turkish Stock Market Returns”
(vol. 14, no. 1): 45–57. Quality” (vol. 14, no. 1): 30–44. (vol. 14, no. 4): 21–40.

C H R
Cheng, Jung-Lang, “Six Sigma and TQM Hillmer, Steve, and Canan Kocabasoglu, Rao, K. S. P. See Saravanan, R.
in Taiwan: An Empirical Study” “Improving Quality and Productivity
(vol. 14, no. 2): 7–18. via Stratification: A Call Center Rawani, A. M. See Sharma, J. R.
Example for Forming Homoge-
Collins, Kevin F., and Senthil K. Roelofse, Frederick, “An Exploratory
neous Employee Groups” (vol. 14,
Muthusamy, “Applying the Toyota Study into the Multidimensional
no. 1): 19–44.
Production System to a Healthcare Nature of Quality in Analytical Lab-
Organization: A Case Study on a oratories: Managerial Implications”
L (vol. 14, no. 3): 7–14.
Rural Community Healthcare
Provider” (vol. 14, no. 4): 41–52. Lorente, Ángel Rafael Martínez. See
Costa, Micaela Martínez S
Costa, Micaela Martínez, and Ángel
Rafael Martínez Lorente, “ISO Saravanan, R., and K. S. P. Rao, “Service
M Quality From the Customer’s Per-
9000:2000: The Key to Quality? An
Exploratory Study” (vol. 14, no. 1): Masters, Brad, and Gregory V. Frazier, spective: An Empirical Investigation”
7–18. “Project Quality Activities and Goal (vol. 14, no. 3): 15–24.
Setting in Project Performance
Şenol, Şanslı, “Poisson Process Approach
D Assessment” (vol. 14, no. 3): 25–35.
to Determine the Occurence Degree
de Koning, Henk, and Jeroen de Mast, McKeen, James. See Guimaraes, Tor in Failure Mode and Effect Reliability
“The CTQ Flowdown as a Concep- Analysis” (vol. 14, no. 2): 29–40.
Muthusamy, Senthil K. See Collins,
tual Model of Project Objectives”
Kevin F. Sharma, J. R., and A. M. Rawani,
(vol. 14, no. 2): 19–28.
“Ranking Customer’s Requirements
de Mast, Jeroen. See de Koning, Henk O in QFD by Factoring in Their Inter-
relationship Values” (vol. 14, no. 4):
Ozgur, Ceyhun. See Pinar, Musa 53–60.
F
Foster, S. Thomas, “Does Six Sigma P Staples, D. Sandy. See Guimaraes, Tor
Improve Performance?” (vol. 14,
no. 4): 7–20. Pasupathy, Kalyan Sunder, and T
Konstantinos P. Triantis, “A Frame-
Frazier, Gregory V. See Masters, Brad work to Evaluate Service Operations: Triantis, Konstantinos P. See Pasupathy,
Dynamic Service-Profit Chain” Kalyan Sunder
(vol. 14, no. 3): 36–49.

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Annual Index v14 i4 9/20/07 10:20 AM Page 2

QMJ Volume 14 Subject


Index
Automobile Sector Functional Quality Measurement
Saravanan, R., and K. S. P. Rao, “Service Roelofse, Frederick, “An Exploratory de Koning, Henk, and Jeroen de Mast,
Quality From the Customer’s Per- Study into the Multidimensional “The CTQ Flowdown as a Concep-
spective: An Empirical Investigation” Nature of Quality in Analytical Lab- tual Model of Project Objectives”
(vol. 14, no. 3): 15–24. oratories: Managerial Implications” (vol. 14, no. 2): 19–28.
(vol. 14, no. 3): 7–14.
Guimaraes, Tor, D. Sandy Staples, and
Critical to Quality
James McKeen, “Assessing the
de Koning, Henk, and Jeroen de Mast, Healthcare
Impact From Information Systems
“The CTQ Flowdown as a Concep- Al-Marsumi, Mujbil, “Total Quality
Quality” (vol. 14, no. 1): 30–44.
tual Model of Project Objectives” Management in a Chosen Section
(vol. 14, no. 2): 19–28. of the Hospitals in Amman, Jordan”
Performance Assessment
(vol. 14, no. 1): 45–57.
Cheng, Jung-Lang, “Six Sigma and TQM
Customer Satisfaction
Collins, Kevin F., and Senthil K. in Taiwan: An Empirical Study”
Pasupathy, Kalyan Sunder, and
Muthusamy, “Applying the Toyota (vol. 14, no. 2): 7–18.
Konstantinos P. Triantis, “A Frame-
Production System to a Healthcare
work to Evaluate Service Operations: Masters, Brad, and Gregory V. Frazier,
Organization: A Case Study on a
Dynamic Service-Profit Chain” “Project Quality Activities and Goal
Rural Community Healthcare
(vol. 14, no. 3): 36–49. Setting in Project Performance
Provider” (vol. 14, no. 4): 41–52.
Assessment” (vol. 14, no. 3): 25–35.
Sharma, J. R., and A. M. Rawani,
“Ranking Customer’s Requirements Information Systems
Performance Improvement
in QFD by Factoring in Their Inter- Guimaraes, Tor, D. Sandy Staples, and
Foster, S. Thomas, “Does Six Sigma
relationship Values” (vol. 14, no. 4): James McKeen, “Assessing the
Improve Performance?” (vol. 14,
53–60. Impact From Information Systems
no. 4): 7–20.
Quality” (vol. 14, no. 1): 30–44.
Financial Outcomes Hillmer, Steve, and Canan Kocabasoglu,
Foster, S. Thomas, “Does Six Sigma ISO 9000 “Improving Quality and Productivity
Improve Performance?” (vol. 14, Costa, Micaela Martínez, and Ángel via Stratification: A Call Center
no. 4): 7–20. Rafael Martínez Lorente, “ISO Example for Forming Homoge-
9000:2000: The Key to Quality? An neous Employee Groups” (vol. 14,
FMEA Exploratory Study” (vol. 14, no. 1): no. 1): 19–44.
Şenol, Şanslı, “Poisson Process Approach 7–18.
Pinar, Musa, and Ceyhun Ozgur, “The
to Determine the Occurence Degree
Pinar, Musa, and Ceyhun Ozgur, “The Long-Term Impact of ISO 9000
in Failure Mode and Effect Reliability
Long-Term Impact of ISO 9000 Certification on Business Perfor-
Analysis” (vol. 14, no. 2): 29–40.
Certification on Business Perfor- mance: A Longitudinal Study Using
mance: A Longitudinal Study Using Turkish Stock Market Returns”
Turkish Stock Market Returns” (vol. 14, no. 4): 21–40.
(vol. 14, no. 4): 21–40.

2 QMJ VOL. 14, NO. 4/© 2007, ASQ


Annual Index v14 i4 9/20/07 10:20 AM Page 3

Subject Index

Project Management Six Sigma Total Quality Management


Masters, Brad, and Gregory V. Frazier, Cheng, Jung-Lang, “Six Sigma and TQM Al-Marsumi, Mujbil, “Total Quality
“Project Quality Activities and Goal in Taiwan: An Empirical Study” Management in a Chosen Section
Setting in Project Performance (vol. 14, no. 2): 7–18. of the Hospitals in Amman, Jordan”
Assessment” (vol. 14, no. 3): 25–35. (vol. 14, no. 1): 45–57.
de Koning, Henk, and Jeroen de Mast,
“The CTQ Flowdown as a Concep- Cheng, Jung-Lang, “Six Sigma and TQM
Quality Function Deployment
tual Model of Project Objectives” in Taiwan: An Empirical Study”
Sharma, J. R., and A. M. Rawani,
(vol. 14, no. 2): 19–28. (vol. 14, no. 2): 7–18.
“Ranking Customer’s Requirements
in QFD by Factoring in Their Inter- Foster, S. Thomas, “Does Six Sigma Costa, Micaela Martínez, and Ángel
relationship Values” (vol. 14, no. 4): Improve Performance?” (vol. 14, Rafael Martínez Lorente, “ISO
53–60. no. 4): 7–20. 9000:2000: The Key to Quality? An
Exploratory Study” (vol. 14, no. 1):
Reliability Analysis Stratification 7–18.
Şenol, Şanslı, “Poisson Process Approach Hillmer, Steve, and Canan Kocabasoglu,
Masters, Brad, and Gregory V. Frazier,
to Determine the Occurence Degree “Improving Quality and Productivity
“Project Quality Activities and Goal
in Failure Mode and Effect Reliability via Stratification: A Call Center
Setting in Project Performance
Analysis” (vol. 14, no. 2): 29–40. Example for Forming Homoge-
Assessment” (vol. 14, no. 3): 25–35.
neous Employee Groups” (vol. 14,
Service Quality no. 1): 19–44.
Toyota Production System
Pasupathy, Kalyan Sunder, and
Collins, Kevin F., and Senthil K.
Konstantinos P. Triantis, “A Frame- Technical Quality
Muthusamy, “Applying the Toyota
work to Evaluate Service Operations: Roelofse, Frederick, “An Exploratory
Production System to a Healthcare
Dynamic Service-Profit Chain” Study into the Multidimensional
Organization: A Case Study on a
(vol. 14, no. 3): 36–49. Nature of Quality in Analytical Lab-
Rural Community Healthcare
oratories: Managerial Implications”
Roelofse, Frederick, “An Exploratory Provider” (vol. 14, no. 4): 41–52.
(vol. 14, no. 3): 7–14.
Study into the Multidimensional
Nature of Quality in Analytical Lab-
oratories: Managerial Implications”
(vol. 14, no. 3): 7–14.

Saravanan, R., and K. S. P. Rao, “Service


Quality From the Customer’s Per-
spective: An Empirical Investigation”
(vol. 14, no. 3): 15–24.

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