The impact of quality management principles on business performance

– A comparison between manufacturing and service organisations

by

Åsa Rönnbäck* and Lars Witell**

*Division of Quality Sciences, Chalmers University of Technology,

SE-412 96 Göteborg, Sweden,
+46 31-772 4885, [email protected]

**Service Research Center, Karlstad University,

SE-65188 Karlstad, Sweden,
+46 54-7002134, [email protected]

Keywords
Quality Management, Principles, Business performance

Category: Literature Review

Introduction
Quality management is widely discussed in the literature and can be seen as management
philosophy characterized by its principles, practices and techniques which emphasises among
other things continuous improvement, increased employee involvement and teamwork,
process orientation, competitive benchmarking, committed leadership, constant measurement
of results and closer relationships with suppliers. Most empirical studies on quality
management have been conducted in the manufacturing sector, while research on companies
in the service sector has been sparse. The characteristics of services (intangibility, co-
production, inseparability, heterogeneity) and the fact that service industries have grown to
dominate the economy, resulted in the development of new quality management principles for
service organisations of delivering high-quality service to customers.

There are several research studies that have been made with the purpose to examine the
impact of quality management on business performance; e.g. Hendricks and Singhal (2001).
There are also a number of research studies that aim at investigating the impact of quality
management principles on business performance with a comparison between manufacturing
and service organisations, e.g. Nilsson et al, (2001), Sun (2001), Solis et al (1998), Singh et al
(2006) and Powell (1995). These studies are intended to aid managers to implement quality
management more effectively by giving recommendations to which quality management
principles to adopt depending on if the organisation produces products or services. Going
through these studies a number of inconsistencies in the recommendations these studies make
to managers are identified. To provide an example, Beaumont (1997) concludes that there are
no relationship between quality management and business performance in either
manufacturing or service organisations, while Lagrosen and Lagrosen (2003) conclude that
quality management and business performance has a stronger relationship for manufacturing
organisations in comparison to service organizations. In the study by Woon (2000) no
significant difference between manufacturing and service organisations except for one
principle which is in favour for manufacturing organisations can be found. To conclude, the
studies mentioned above all study the same research issue but come to complete different
results - how is that possible? Instead of living up to the intention of identifying systematic
differences between manufacturing and service organizations concerning the relationship
between quality management and business results, these studies have provided us with
inconsistencies that have given managers a lot of frustration concerning what principles are
most important in different organizational contexts.

Since there are inconsistencies in previous research, the aim of our paper is to perform a
literature review and compare the results of 14 empirical studies published between 1988 and
2006 that focus on the differences related to quality management between manufacturing and
service organisations. In particular we are interested in the relationship between individual
quality management principles and business performance. Our results provide guidance to
managers concerning what recommendations that are consistent across the studies and what
the reasons may be for the identified inconsistencies in previous research.

Quality management
Quality management is a business philosophy or a company ideal. Several attempts have been
made to define quality management, total quality management, total quality control and
similar terms. Hellsten & Klefsjö (2000) define TQM as a management system in continuous
change, which consists of values, methodologies and tools, and the aim of which is to increase
external and internal customer satisfaction with a reduced amount of resources. view quality
management as an approach to management that can be characterized by its principles,
practices and techniques, see Table 1. Each principle is implemented through a set of
practices, which are simply activities such as collecting customer information. The practices
are, in turn, supported by a wide array of techniques to make the practices effective.

According to Dean and Bowen (1994) most of what has been written about quality is based on
three principles: customer focus, continuous improvement and teamwork. Advocates of the
quality movement include more principles in their conceptualizations of quality management.
Quality awards or so called excellence models are built on a large number of values, similar to
the underlying principles in the quality movement. The Swedish quality award, established in
1992, and based on the SIQ model, has 13 core values. As can be seen in the review of
principles of quality management, the suggested principles differ more or less between
different authors; also the number of principles differ . The range of the number of principles
presented above is three to 13, which contributes to the different perspectives on quality
management.
 Table 1: The building blocks of quality management.

Concepts Definitions Examples

Principles A set of underlying assumptions of how Customer focus, Continuous
to view the organization and its relation improvement, Teamwork
to customers, competitors and suppliers.
Practices Activities performed to display and Collecting customer information,
embody the principles Conduct a customer survey
Techniques Guidelines and infrastructure of how to Voice of the customer tables,
perform certain activities. Quality Function Deployment

The economic value of quality management

According to quality management advocates, quality management produces value through a
variety of benefits: improved understanding of customers´ needs, improved customer
satisfaction, improved internal communication, betters problem-solving, greater employee
commitment and motivation, stronger relationships with suppliers, fewer errors and reduced
waste. Most existing empirical studies conclude that quality management has a relationship to
business performance; see e.g. Hendricks and Singhal (2001). The strongest support for such
a relationship is provided by a series of papers by Hendricks and Singhal where they
investigate the financial effects of implementing a TQM program. By making comparisons
between quality award winners and other companies in the same industries, the authors
conclude that the award-winning firms outperform their competitors on operating-income
based measures. In addition, the authors show that the improvements of profitability are not a
result of winning the award but of the improvements of quality principles within the firm.

Most studies investigating the relationship between quality management principles and
business performance have focused on a single industry. However, some studies, such as
Powell (1995), Woon (2000), Badri et al (1995), Quazi et al (1998), Nilsson et al (2001) and
Huq and Stolen (1998) have studied quality management principles in both manufacturing
and service organisations. As an example Powell (1995) investigates the correlation between
twelve factors of quality management and business performance. The study concludes that
there are differences between service and product organizations, such as supplier relationships
are vital for a product organization, while process improvements are more important for a
service organization. To conclude, a quality principle might have a different role in a
manufacturing and a service organization.

Products and services

That a quality principle might have a different role in a manufacturing and a service firm
might depend on the service logic (IHIP), i.e., intangibility, heterogeneity, inseparability, and
perishability (Zeithaml, Parasuraman and Berry, 1985). Given the goods-to-service
continuum, there are many tangible products which possess one or more of these factors. It is
only in the extreme that tangible products are highly tangible; they are closely controlled for
variance, produced at a distance from customers, and stockpiled.
The empirical investigations of quality management in manufacturing and service
organizations suggest that the relationship between quality management and business results
is different for manufacturing and service organizations. The research is also full of
inconsistencies, which is an indication that what quality dimensions that have been included
in a study might have influenced the results of the different empirical investigations. Due to
the service logic, an individual quality principle might have a different role in a
manufacturing and a service organization. Based on this assumption we identify the following
research questions…

1. Is there a relationship between quality management and business performance in

manufacturing and service organisations?
2. Does the relationship between individual quality management principles and business
performance look different in manufacturing and service organisations?

Methodology
During the last couple of years some literature reviews have been performed on the
relationship between quality management and business results. Suosa and Voss (2002) focus
on the 5 most cited studies and go into detail investigating them In contrast, Sila and
Ebrahimpour (2002) identifies and reviews 347 survey-based empirical studies of quality
management. In contrast to these two studies, we aim to do a contribution by going through
the studies that empirically have investigated both goods and service firms. This meta-analytic
study critically examines the literature and evaluates business performance implications of
adoption of quality management principles in manufacturing and service organisations.
The literature review used the databases of Emerald, ASQ and Scirus and the main keywords
used were “Quality Management”, “Business performance” and “Products and services”.
Papers of interest were also found by using snowball sampling of identified studies.
Altogether we identified 14 research papers that had been published in English and that
focused on the relationship between quality management (either the overall relationship or the
principle level) between quality management and business performance. For each of the
studies we tried to identify sample size, methodologies, which quality management principles
that have been analyzed, the results, if the data is subjective and/or objective, which type of
study (overall quality management in relation to business performance and/or on principle
level) and what conclusions can be drawn from the different papers in relation to our research
questions. An overview of the studies included in our literature review is provided in Table 2.

Results and Analysis

First, concerning the overall relationship between quality management and business results,
Beaumont (1997) shows no relationship between quality management and business
performance in either manufacturing or service organisations, while Lagrosen and Lagrosen
(2003) conclude that quality management has a stronger relationship to business results in
manufacturing than in service organisations. There are inconsistencies in previous research
and the relationship between quality management and business performance is traditionally
lower for service organisations but there has been a progress in recent years in the adoption of
quality management in the service sector.

Second, concerning the relationship between different quality principles and business results
Quazi et al (1998) conclude that there is a relationship between certain principles and business
performance and that manufacturing organisations show a higher mean score than service
organisations in each principle. In contrast, Huq and Stolen (1998) show significantly lower
scores for service organisations in 10 out of 19 principles, while Woon (2000) shows no
significant difference between manufacturing and service organisations except for one
principle for which manufacturing organisations outperforms service organizations.
 Table 2: An overview of empirical studies comparing manufacturing and service organizations.
Paper Sample Method/test quality management principles Results Subjective Type of study Conclusions
/objective
Nilsson et 360 product, Structural Quality management, Employee Customer Subjective Principles lead Service: Employee management leads to business
al (2001) 122 service equation management, Process orientation, Customer satisfaction, + to business performance improvements
modelling orientation Business objective performance Service: Process orientation leads to customer satisfaction
T-test performance Product: Customer orientation leads to customer satisfaction
Lagrosen 187 product, ANOVA Customer satisfaction, Process orientation, Process Subjective Quality Product: Quality management leads to (business
and 54 private Chi-square Participation of everybody, Leadership improvements; management performance) processes improvements
Lagrosen service, Correlation commitment, Continuous improvement, positive and leads to
(2003) (26 public) analysis Management by facts negative effects business
T-test performance
Sun (2001) 180 product, Factor Leadership, Information and analysis, Business Subjective Quality Product: quality management leads to business performance
85 service analysis, Strategic management, Human resources, performance management improvements. All principles influence business
Cronbach´s Process management, Supplier relationship, (internal and and principles performance improvements
alpha, Customer focus external) leads to Service: Leadership, process management and customer
correlation business orientation effect business performance improvements. Only
analysis performance correlation to external business performance is significant.
Beaumont 313 product, Chi-square, Quality management Business Subjective Quality No relationship between Quality management and business
et al (1997) 105 service Non- performance management performance
parametric leads to
tests business results
Sharma and 62 product, Factor Product: Value chain integration, Efficiency Return on total Subjective Principles lead Service:
Gadenne 58 service analysis, improvement, Customer liaison, Employee assets + to business Subjective results: Supplier quality cooperation leads to
(2002) Cronbach´s involvement, Office efficiency, Employee Total performance objective performance business results improvements, Defects reduction leads to
alpha, training, Open organisation, and Top business results improvements
MANOVA executive commitment to quality Objective results: Value chain integration leads to business
performance improvements, Supplier chain cooperation
Service: Value chain integration, Employee leads to business performance improvements
efficiency, Supplier quality cooperation, Product:
Executive involvement, Customer- Subjective results: Value chain integration leads to business
employee cooperation, Efficiency- performance improvements, Open organisation leads to
transparency, Emphasis on overall quality, business results improvements, Top executive quality
and Defects reduction commitment leads to business performance improvements
Objective results: None
Solis et al 131 product, T-tests Quality leadership, Strategic quality Business Subjective Quality Product: quality management leads to business performance
(1998) 109 service planning, Quality information and analysis, performance management improvements
Human resource development, Quality leads to (significantly on Customer orientation, Quality citizenship,
assurance, Supplier quality, Customer business Quality results and Quality assurance)
orientating, Quality citizenship performance Service: Quality leadership

Principle level
Parasurama 35 product, T-test Future emphasis on product/service quality Financial Not Comparison Differences between product and service concerning quality
n, 39 service strategies applicable between future management practices can only be found for certain
Varadarajan Future emphasis on HR strategies level of employee management issues
(1988) principle
Badri et al 196 product, Factor Top management leadership, Role of Quality Not Principle level Association between product and service: Training,
(1995) 228 service analysis, quality department, Training, Product performance applicable Product/service design, Supplier quality management and
Correlation, design, Supplier quality management, Employee relations.
Cronbach´s Process management, Quality data Negative agreement with regard to the Role of quality
alpha reporting, Employee relations department and Quality data reporting
Quazi et al 13 product, Factor Management leadership and quality policy, Customer Subjective Principles lead Product: Have a higher mean score in each factor than
(1998) 20 service analysis, Role of the quality department, Training, satisfaction to customer service companies.
Cronbach´s Product/service design, Supplier quality Quality satisfaction and Identifies relationship between all principles and business
alpha management, Process management, Quality performance quality performance.
Correlation data and reporting, Employee relations performance
Huq and 18 product, Chi-square Quality mission statement, Customer focus, Not included Subjective Principle level Service: Apply quality management principles selectively
Stolen 18 service Management commitment, Worker (focus on human interactions and processes)
(1998) empowerment, Communications in Product: Apply quality management totally (favour
company, Performance appraisal system, scientific)
Satistical evidence of quality, Familiarity
with TQM, Measures of costs of quality, 10 out of 19 principles were found to be significantly lower
Causes of quality variation, Customer in the service organizations
feedback, Commitment for continual
improvement, Problem solving approach,
Activities to remove barriers for consensus,
Comparison of actual with planned
performance, Education and training,
Supplier development, Quality
circles/quality improvement teams,
Applications of advanced analysis
techniques
Woon 129 product, Cronbach´s Quality management, Leadership and Business Subjective Principles lead No significant difference between the mean scores for
(2000) 111 service alpha, quality culture, Use of information and performance to business service and manufacturing organisations except for
Correlation, analysis, Strategic planning, Human performance Management of process quality, which is higher for
ANOVA, resource development and management, manufacturing organisations.
ANCOVA, Management of process quality, Quality
and operational results, Customer focus
Singh et al 160 product, Cronbach´s Top management leadership, Customer Business Subjective Quality Differences between service and manufacturing companies
(2006) 149 service alpha focus, Supplier relationships, Employees, performance management concerning Customer loyalty, Employee morale, Response to
Non- Business processes and principles customer needs, Market share, and Flexibility to change the
parametric leads to volume of production, which is higher for service
statistic business organisations.
performance
Powell 24 product, Cronbach´s Executive commitment, Adopting the Business Subjective Quality Differences between service and product organisations;
(1995) 15 service alpha, philosophy, Closer to customers, Closer to performance management Product: Supplier relationships are more important
Correlation suppliers, Zero defects mentality, Training, and principles Service: Process improvements are more important
Open organisations, Benchmarking, leads to
Employee empowerment, Flexible business
manufacturing, Process improvement, performance
Measurement
Benson et al 79 product, Mancova Management leadership, Role of the quality Not included Not Quality Level of quality management is lower in service firms.
(1991) 152 service department, training, product/service applicable management Product: Quality management influenced by both internal
design, supplier quality management, influenced by and external factors.
process management, quality data and context Service: Quality management influenced by internal factors.
reporting, employee relations
Sun (2001) shows that manufacturing firms outperform service firms in most quality
management principles. conducted a similar investigation and they found that
manufacturing organisations are more advanced in six of the eight investigated quality
principles compared to service organisations, the exceptions being quality leadership
and supplier quality. Even though the empirical results of the studies are quite
different, in general terms we can argue that manufacturing firms to a higher extent
have adopted quality management. But our literature review shows no systematic
difference between manufacturing and service organisation to what individual quality
principles they have adopted.

Discussions
A number of inconsistencies concerning the fundamental relationship between quality
management and business results have been identified. Such differences in research
results are frustrating both for researches designing new studies and practioners that
seek advice on how to implement quality management. In the following text we will
discuss what role differences in research design might have to explain the identified
differences in results.

First, some of the studies lack rigor concerning the chosen sample and what methods
have been used. Some studies use small samples when making their analyses and
conclusions; e.g. Powell (1995), Parasuraman, Varadarajan (1988), Quazi et al (1998)
and Huq and Stolen (1998). Some results concerning the relationship between
principles and business performance are based on correlations, such as Badri et al
(1995) and Huq and Stolen (1998). Their results do not take the multicollinearity
between different quality principles in to account. As a result, these studies provide an
overestimation of the role of quality principles in organizations. In addition, in certain
studies some of the survey questions have been adapted to manufacturing
organisations; e.g. Solis et al (1998) and Beaumont et al (1997). In the next step of the
study the same questions have been used to survey service organisations. This may
lead to an underestimation of the level of quality management in service
organizations.

When investigation the relationship between different quality management principles

and business performance it is important to keep in mind that the principles are not
distinct from another, instead all principles are interrelated. If quality principles are
interrelated, some direct and some indirect; e.g. top management commitment, which
attention to a quality initiative in an organisation might lead to increased customer
orientation, which in turn can lead to increased quality and customer satisfaction. This
example emphasises the importance for a quality management model to include not
only quality management principles but also the relationship between them.

The study indicates that some quality management principles can be more appropriate
for manufacturing companies than service companies and vice versa, but the two
sectors can learn from each other and include techniques from other sectors. Many
manufacturing industries begin to adopt more service attributes in their offerings and
could by this learn more about customer satisfaction techniques and service quality in
general, and service companies could learn more about methods from manufacturing
companies and maintain a balance between customer satisfaction and internal
productivity and profitability.
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