Quality and Business Performance

University of Professional Studies, Accra
Introduction to Total Quality Management
Undergraduate Level 300
Quality and Organisational Performance
Learning Outcome
By the end of this lecture, students should be able to:
Discuss business performance and their indicators
Explain the relationship between quality and business
performance indicators
Compare and contrast the quality triangle to the extended
quality triangle
Discuss the concept of “cost of quality”
Background to the topic
Organization in contemporary times are faced with pressures of competition
in the business environment. Competition is non-negotiable, external
contextual factors that businesses must overcome to survive in the industry.
Globalization, technology and current economic recession as well as the
increasing knowledge and discerning customers has made this “monstercompetition” gain prominence in all spheres of business arrangements. This
has modified the production and service delivery ethos to quality ethics.
Businesses believe that Quality is now the strategic differentiation potential
for sustained competitive advantage.
Business Performance
• To this end, various industry practitioners, strategies,
researchers and consultants have tried to link quality to
business performance. Business performance is explained as
the efficiency and effectiveness of business actions to achieve
the overall organizational goals (Neely, 1998). As a result the
success of a business is equated to its ability to achieve its
shared vision, purpose and goals and gained sustained
competitive edge.
Business Performance Cont’d
The Malcolm Baldrige Criteria for Performance Excellence Results
category groups performance measures into five sets
Financial and Market
Human Resource
Supplier and Partner Performance
Organisational effectiveness
Business Performance Indicators
Value maximization
Reputation-image brand name
Customer satisfaction
Customer loyalty
Market share-customer base (competitive advantage-market superiority)
Employee relation (participations, commitment, turnovers)
Productivity (sales volume)
Cost of operation
What is the relationship between
Quality and Business Performance
• One of the most common questions posed by executives
seeking improvement is : "Will this quality efforts pay off ?"
• Edwards W. Deming, the father of Quality Management
espoused a theoretical basis to explain the relationship in
his “Deming Value Chain”.
Source: Adapted from S. T. Foster: Managing for Quality
Improve Quality
Cost Decrease( Less Reworks, Few Mistakes,
Fewer Delay, Better use of machine time and
Productivity Improves
Capture the Market
Stay in business
Provide jobs and more jobs
Empirical findings of the relationship
Quality is consider to be the driver for marketing and financial
performance strategy of modern businesses. The following studies
established a positive( favourable) relationship between Quality and
business performance indicators
• Cost (Crosby 1984)
• Profitability (buzzel and Gale 1987)
• Customer satisfaction (bolten and Drew 1991)
• Customer retention
• Positive word of mouth (Reicheld & Sasser 1990)
Relationship cont.d
The U.S. General Accounting Office (GAO) performed a study of 30
Malcalm Baldrige award winners and found the effects of quality
improvement to include; improved employee relations, lower cost,
greater customer satisfaction, and improved market share.
Relationship Cont.D
Further studies by PIMS Associates Inc. a subsidiary of Strategic Planning
institute conduct a study involving 1200 companies on the topic “the
impact of product quality on corporate performance” and their findings
reveals as model by the next slide:
• Determinant of business profitability
• Usually results in high market share at the cost of reduced short-run
• Positive and significant related to return on investment-3times
• Commands higher prices as a result of perceived value
Quality and indicators Cont’d (PIMS Findings)
Improved Quality of
Improved Quality of
Higher Perceived Value
Higher Prices
Lower Manufacturing
and Service Costs
Increased market Share
Increased Revenue
Higher Profitability
Factors affecting Quality and Business
• Competitions ( six dimension of competitions –quality triangle
and external quality triangle)
• Resources (10 Ms)
• Technology
Quality Triangle
William Procter, one of the founders of Procter and
Gamble identified three dimensions of competition for a
• Cost of the product (price)
• Availability of the product (level of productivity) and
• Quality of the product
Cost of
of Product
Competition Cont’d
Subsequent research by Noori et al, 1996 argued that competition is not
solely focused on the product but the organisation as part of the
environment is paramount. Therefore an organisation with a bad reputation
would find it difficult selling its products or services. They therefore proposed
an extension of the triangle with three new dimensions of competition:
Dependability -Reliability (consistency) and
The Extended Quality Triangle
Cost of Product
Availability of
the Product
Quality of
the Product
Message (information)
Milieu (environment)
Management systems
Manners (attitude)
Minutes/moments (time)
Constant pressure for managers to operate within very
tight budgets which creates tension between making
profit and expenditure on quality and performance
improvements (cost-cutting). Cash flows, access to
additional funding, existing debt burden, cost of capital.
Machines: Facilities and equipment: capabilities, location, age,
maintenance and replacement cost
Methods: How organisations conceptualise quality and
business performance and set about to
achieve it. Operations, marketing, HR, supplies
Materials: Forms the inputs for the realisation of products
and services. Raw materials, existing products
and services, potential for new products
An act, art or manner of Planning,
Leading, Organizing and Controlling ....
Message: (information)Inform, request,
persuade, build good will, ICT,
Moments: (timings) Seizing business
opportunities at the right time
Planning time, product design time,
delivery time, response time for
Milieu (Environment): Consideration of events that
present threats and opportunities . SWOT
Competitor’s activities: number and strength of
competitors, basis of competition – price,
special features, changing consumer needs
Size, location, ease of entry, potential for
new markets/growth, demographics
Concept of “Cost of Quality”
• It’s a term that's widely used – and widely misunderstood
• What is Cost of Quality?
Cost of Quality (COQ)
Cost of Quality refers to total cost incurred by an organization to
on the following three key activities:
• Investing in the prevention of nonconformance to
• Appraising a product for conformance to requirements.
• Failing to meet requirements.
COQ=Prevention Cost + Appraisal Cost + Failure Cost
Types of Quality Cost
(The first two costs are incurred in the hope of preventing the
second two)
Quality Control Costs
 prevention costs and
 appraisal costs.
Quality Failure Costs (cost
consequences of poor quality)
 External Failure Costs
 Internal Failure Costs
Prevention Costs
They are all costs incurred in the process of preventing poor quality from occurring.
Usually before producing a product.
• Quality planning costs
• costs of product and process design
• Process capability evaluations
• Cost of new product reviews
• Cost of Researching to know customer requirements
• Employee training in quality measurement education
• Quality improvement team meetings
• Quality improvement projects
Appraisal costs
They are incurred in the process of uncovering defects for improving before
the product is sold to the customer:
• quality inspections
• product testing
• performing audits
• costs of worker time spent measuring quality
• cost of equipment used for quality appraisal.
• Cost of calibration of testing equipment's
Failure cost
The costs resulting from products or services not conforming to
requirements or customer/user needs.
• Failure costs are divided into
 Internal failure cost
External failure cost
Internal Failure Cost
Failure costs occurring prior to delivery or shipment of the product, or the furnishing of
a service, to the customer. They are associated with discovering poor product quality
before the product reaches the customer site
Examples includes cost associated to
• Scrap
• Rework
• Re-inspection
• Re-testing
• Material review
• costs of discounting defective items for salvage value.
• Downgrading
External Failure Costs
Failure costs occurring after delivery or shipment of the product and during or after
furnishing of a service to the customer.They are associated with quality problems that
occur at the customer site. These costs can be particularly damaging because customer
faith and loyalty can be difficult to regain. Examples of costs associated with this includes:
• Processing customer complaints
• product returns
• warranty claims
• recalls
• litigation costs resulting from product liability issues.
• cost is lost sales and lost customers
Summary of Cost Of Quality
Quality Control Cost
Prevention costs
Appraisal costs
Costs of preparing and implementing a
quality plan.
Costs of testing, evaluating, and inspecting
Quality Failure Cost
Internal failure costs
External failure costs
Costs of scrap, rework, and material losses
Costs of failure at customer site, including
returns, repairs, and recalls
Companies that consider quality important invest heavily in
prevention and appraisal costs in order to prevent internal
and external failure costs. The earlier defects are found, the
less costly they are to correct. For example, detecting and
correcting defects during product design and product
production is considerably less expensive than when the
defects are found at the customer site.
External failure costs tend to be particularly high for service
organizations. The reason is that with a service the
consumption and production is simultaneous for the
organisation and its customer. Hence there are fewer
opportunities to correct defects than there are in
manufacturing. Examples of external failure in services
include an airline that has over- booked flights, long delays
in airline service, and lost luggage.
• Evans, J.R. & Lindsey, W.M. (2002). The Management and Control of Quality (5th Ed.).
South-Western College Publishing: USA.
• Evans, J.R. & Lindsey, W.M. (1999). The Management and Control of Quality (4th Ed.).
South-Western College Publishing: USA
• Alabi, G. B. (2013). Technology in Quality Management, Lecture note. Accra: UPSA
• Chuck, W. (2009). Management (5th Ed.). South-Western Cengage Learning: USA
• Pegels, C.C. (1995). Total Quality Management, a Survey of its Important Aspects.
Boyd & Fraser publishing company: Danvers, Massachusetts