For Immediate Release
August 17, 1998

BOOSTING THE BOTTOM LINE OVER TIME: LONG-TERM STUDY SHOWS TQM PAYS OFF IN HIGHER STOCK PRICES, SALES & INCOME

One of the hottest business paradigms of the 1980s, Total Quality Management (TQM), has come under fire in recent years. Lambasted by critics for lackluster economic gains, TQM has been pronounced dead by many business gurus.

Well, don't write any epitaphs yet.

Dr. Vinod Singhal, associate professor at the Georgia Institute of Technology, and Dr. Kevin Hendricks, associate professor at the College of William and Mary, conducted an extensive study of companies practicing TQM, a management concept that focuses on customer satisfaction, employee involvement and continuous improvement.

A five-year study showed that a group of 600 companies adopting TQM performed significantly better than a control group. (Numbers show average percent change in stock price, operating income, sales and total assets.)

Their findings: albeit no quick fix, TQM pays off significantly. In fact, the stock price of companies with effective TQM programs outperformed that of control groups by about 44 percent over a five-year period.

Hendricks and Singhal began their study in 1991, when attacks against TQM were initially launched. The business professors, both teaching at Georgia Tech's DuPree College of Management at that time, were intrigued by a newspaper article that profiled a company for winning a prestigious TQM award. That same day, the Dow Jones Index fell substantially, but the stock of the profiled company rose.

Could the company's TQM program be a significant factor in the strength of its stock? Hendricks and Singhal decided to launch a study measuring the long-term effects of TQM on financial performance. "After all, TQM is about continuous improvements," said Singhal. "Small improvements over a long period of time, hopefully will add up to big improvements in performance."

In their quest for empirical evidence, Hendricks and Singhal took a different approach. Little statistical evidence existed regarding TQM's impact on its practitioners. Most studies were anecdotal in nature, with information derived internally from company executives giving their opinion on TQM's results.

Hendricks and Singhal selected a group of 600 publicly traded companies. Comprised of different sizes and drawn from different industries, the firms had a common denominator: all had won awards for effective implementation of TQM. By using award winners, Hendricks and Singhal could avoid biases connected with self-judging. And, by using publicly traded companies, a greater wealth of objective data was readily available — without bias from self-reporting.

To adjust for any impact the general economy or health of a particular industry might have had, a control group was constructed, similar to award winners as far as size and industry. Both groups were tracked over a five-year pre-award and a five-year post-award period. No differences were noted in the pre-award period, but considerable differences showed up in the post-award period.

Compared to the control group, TQM award winners averaged a 44 percent higher stock price return, a 48 percent higher growth in operating income and a 37 percent higher growth in sales. Award winners also outperformed the control group with regard to operating margins, employee growth and growth in assets.

Some other surprises also surfaced after all numbers were crunched. Many managers believe that TQM programs are better suited to larger firms, but Hendricks' and Singhal's study shows the contrary — smaller firms fared better than larger companies.

After adjusting for the performance of the control group, smaller firms chalked up: a 63 percent increase in operating income (compared to 22 percent increase for larger firms); a 39 percent jump in sales (compared to 20 percent for larger firms); and a 21 increase in employment (compared to 9 percent for larger firms). The study also indicated that lower capital-intensive firms do significantly better than higher capital-intensive firms.

Not only does Hendricks and Singhal's study confirm that TQM is a good investment, it also establishes benchmarks — when to expect gains and what kinds of gains to expect.

Setting proper expectations is crucial, and a lack of them contributed to TQM's fall from grace, observed Singhal: "TQM is difficult to implement as it requires major organizational changes. Some companies went into it thinking they would get fast returns, while others expected a very high payoff. When results didn't match expectations, managers turned sour on the concept."

The introduction of new management paradigms was another factor in TQM's negative press. "TQM is kind of a drug — a drug that promises to improve your performance," explained Singhal. "Like drug companies, management consultants are always coming out with new drugs. The best way to sell these new drugs? Tell them the old drug is not working."

The previous lack of objective information made TQM an easy target. "Anyone who wanted to criticize TQM could show two or three case studies that say that it did not work," added Singhal.

"Paradigms are going to come and go. But managers should be careful about switching paradigms quickly," said Singhal. "There is strong evidence TQM works — and pays off handsomely. But it takes time. You can't expect returns overnight."

Hendricks and Singhal are currently following up their study by looking at different types of quality awards. "Very few companies are really practicing TQM — they may say they are, but there's a difference between doing TQM and doing it effectively," said Singhal. Recent surveys show that about 30 percent of U.S. manufacturing plants have widely embraced TQM. "There's still a long way to go on this," he noted.

Conclusions from the study have been published, beginning in 1996, in a number of journals including Management Science. The work will be part of a forthcoming book.

RESEARCH NEWS & PUBLICATIONS OFFICE
Georgia Institute of Technology
75 Fifth Street, N.W., Suite 100
Atlanta, Georgia 30308 USA

MEDIA RELATIONS CONTACTS:
John Toon (404-894-6986);
Email: john.toon@edi.gatech.edu; FAX: (404-894-4545) or
Jane Sanders (404-894-2214);
E-mail: jane.sanders@edi.gatech.edu.

TECHNICAL INFORMATION:
Dr. Vinod Singhal (404-894-4908); Fax: (404-894-6030); E-mail: vinod.singhal@mgt.gatech.edu

WRITER: T.J. Becker