TOTAL QUALITY MANAGEMENT AND GLOBAL COMPETITIVE ADVANTAGE:Customer Focus

<< FUNDAMENTALS OF TOTAL QUALITY AND RATERS VIEW:The Concept of Quality

TOTAL QUALITY MANAGEMENT AND PLANNING FOR QUALITY AT OFFICE >>

Total Quality Management MGT510

Lesson# 05

TOTAL QUALITY MANAGEMENT AND GLOBAL COMPETITIVE ADVANTAGE

Bringing TQ to Life at ABC Engineering Company:

ABC is a contract manufacturer of precision sheet metal and machined components for

telecommunications semi-conductor, and medical equipment industries. Some of the ways it exemplifies

the principles of TQ are described below.

Customer Focus

ABC made a strategic decision to carefully select customers that support its valuesparticularly a

systematic approach to business and performance management, desire for long-term partnerships, and

global leadership. Management and Tam Leaders work with each customer to establish current

requirements and future needs, and each customer is assigned a three-person Customer Service team

that is on call 24 hours a day for day-to-day production issues.

Process Orientation

Processes such as prototype development, scheduling, production setup, fabrication, assembly, and

delivery have process owners responsible for maintaining the process to customer requirements. A

Quality Assurance team member works with manufacturing teams to create process documentation.

Continuous Improvement and Learning

Teams use a structured approach to evaluate and improve their processes, documenting them, and

presenting a status report of improvements to senior leaders and the ABC Steering Committee. Teams

benchmark competitors, "best practice" companies, and customers to learn from others.

Empowerment and Teamwork

Production and delivery processes are designed around cell manufacturing. Teams are responsible for

knowing their customer's requirements and producing according to those requirements. Teams are

empowered to change targets recommended during strategic planning if they believe it will help them

achieve higher performance, as well as to schedule work, manage inventory, and design the layout of

their work areas.

Management by Fact

Team analyzes defect data, customer-reported problems, and control charters generated during

production to identify problems and opportunities for improvement. Every business goal and project has

defined methods for measurement, and senior leaders meet weekly to review company performance and

ensure alignment with directions and plans.

Leadership and Strategic Planning

Senior Executive Leaders. (SELs) and the Leadership Committee (LC) set the strategic direction of the

company, and communicate and reinforce values and expectations through performance reviews,

participation in improvement or strategic projects, regular interactions with customers and team

members, and recognition of team member achievements.

All this has contributed to an annual average increase in sales growth of 35 percent from 1995 to 2000,

and high levels of customer and employee satisfaction, and quality and operational performance.

TQM and Strategic Focus

Total Quality Management MGT510

The nature of TQ differs from common management practices in many respects.

Strategic Planning and Management

In traditional management, financial and marketing issues such as profitability, return on

investments, and market share drive strategic planning. Quality planning activities are delegated

to the "quality control" department. Long-term quality initiatives are viewed as being costly and

not contributing to the ultimate performance measure profit. Quality planning and strategic

business planning are indistinguishable in TQ. Quality goals are the cornerstone of the business

plan. Measures such as customer satisfaction, defect rates, and process cycle times receive as

much attention in the strategic plan as financial and marketing objectives.

Changing Relationship with Customers and Supplier

In traditional management, quality is defined as adherence to internal specifications and

standards. Quality is defined as adherence to internal specifications and standards. Quality is

measured only by the absence of defects. Inspection of people's work by others is necessary to

control defects. In TQ, quality is defined as products and services beyond present needs and

expectations of customers. Innovation is required to meet and exceed customers' needs.

Traditional management places customers outside of the enterprise and within the domain of

marketing and sales. TQ views everyone inside the enterprise as a customer of an internal or

external supplier, and a supplier of an external or internal customer. Marketing concepts and

tools can be used to assess internal customer needs and to communicate internal supplier

capabilities.

Organizational Structure

Traditional management views an enterprise as a collection of separate, highly specialized

individual performers and units, loosely linked by a functional hierarchy. Lateral connections

are made by intermediaries close to the top of the organization. TQ views the enterprise as a

system of interdependent processes, linked laterally over time through a network of

collaborating (internal and external) suppliers and customers. Each process is connected to the

enterprise's mission and purpose through a hierarchy of micro-and macro processes. Every

process contains sub processes and is also contained within a higher process. This structure of

processes is repeated throughout the hierarchy.

Organizational Change

Once a traditional organization has found a formula for success, it keeps following ti.

Management's job is to prevent change, to maintain the status quo. In TQ the environment in

which the enterprise interacts is changing constantly. If the enterprise continues to do what it

has done in the past, its future performance relative to the competition will deteriorate.

Management's job, therefore, is to provide the leadership for continual improvement and

innovation in processes and systems, products, and services. External change is inevitable, but a

favorable future can be shaped.

Team work

In traditional management, individuals and departments work for themselves. Individuals are

driven by short-term performance measures, have narrowly defined jobs, and rarely see how

they fit into the whole process or system. Little communication and cooperation exists between

design and manufacturing, manufacturing and marketing, and sales / service and design. In TQ

individuals cooperate in team structures such as quality circles, steering committees, and self-

Total Quality Management MGT510

directed work teams. Departments work together toward system optimization through cross-

functional teamwork.

The adversarial relationship between union and management is inevitable in traditional

management. The only room for negotiation is in areas such as wages, health, and safety. In TQ

the union is a partner and a stakeholder in the success of the enterprise. The areas for

partnership and collaboration are broad, particularly in education, training, and meaningful

involvement of employees in the improvement of processes that they affect and that affect their

work.

Motivation and Job Design

Motivation untraditional management is often akin to McGregor's Theory X model of

motivation: worker dislike work and require close supervision and control. TQ organizations

support the premise of Theory Y: workers are self-motivated, seek responsibility, and exhibit a

high degree of imagination and creativity at work. TQ managers provide leadership rather than

overt intervention in the processes of their subordinates, who are viewed as process managers

rather than functional specialists. People are motivated to make meaningful contributions to

what they believe is an important and noble cause, of value to the enterprise and society.

In traditional management, competition is inevitable and inherent in human nature. Performance

appraisal, recognition, and reward systems place people in an internally competitive

environment. Individualism is reinforced to the detriment of teamwork. Competitive behavior

one person against another or one group against another is not a natural state in TQ. TQ

reward systems recognize individual as well as team contributions and reinforce cooperation.

Management and Leadership

Traditional management views people as interchangeable commodities, developed to meet the

perceived needs of the enterprise. People are passive contributors with little autonomy-doing

what they are told and nothing more. TQ views people as the enterprise's true competitive edge.

Leadership provides people with opportunities for personal growth and development. People are

able to take pride and joy in learning and accomplishment, and the ability of the enterprise to

succeed is enhanced. People are active contributors, valued for their creativity and intelligence.

Every person is a process manager presiding over the transformation of inputs to outputs of

greater value to the enterprise and to the ultimate customer.

Competitive Advantage on basis of Quality Strategy

A firm has many options in defining its long-terms goals and objectives, the customers it wants

to serve, the products and services it produces and delivers, and the design of the production and

service system to meet these objectives. Strategic planning is the process by which the members

of an organization envision its future and develop the necessary procedures and operations to

carry out that vision. Strategy the result of strategic planning is the patter of decisions that

determines and reveals a company's goals, polices, and plans to meet the needs of its

stakeholders. An effective strategy allows a business to create a sustainable competitive

advantage.

Quality as a Strategy

The concept of strategy has different meanings to different people. James Brian Quinn characterizes

strategy as follows:

A strategy is a pattern or plan that integrates an organization's major goals, policies, and action

sequences into a cohesive whole. A well formulated strategy helps to marshal and allocate an

Total Quality Management MGT510

organization's resources into a unique and viable posture based on its relative internal

competencies and shortcomings, anticipated changes in the environment, and contingent moves

by intelligent opponents.

Formal strategies contain three elements:

Goals to be achieved,

Policies that guide or limit action, and

Action sequences, or programs, that accomplish the goals.

Effective strategies develop around a few key concepts and thrusts that provide focus. The essence of

strategy is t build a posture that is so strong in selective ways that the organization can achieve its goals

despite unforeseeable external forces that may arise.

The traditional focus of business strategies has been finance and marketing. These parallel two of the

principal sources of competitive advantage i.e. cost and differentiation. Total quality with a focus on

people leads t improvements in both areas. Therefore, quality can be viewed as a strategy in itself.

The role of quality in business strategy has taken two significant steps since 1980. First, many firms

have recognized that a strategy driven by quality can lead to significant market advantages. Second, the

lines between quality strategy and generic business strategies have become blurred to the point where

TQ principles are integrated into most businesses' normal business planning; that is, TQ is a basic

operating philosophy that provides the foundation for effective management

For most companies, integration of TQ into strategic business planning is the result of a natural

evolution. For most new companies or those that have enjoyed a reasonable measure of success

quality takes a back seat to increasing sales, expanding capacity, or boosting production. Strategic

planning usually focuses on financial and marketing strategies.

As a company begins to face increasing competition and rising consumer expectations, cost-cutting

objectives take precedence. Some departments or individuals may champion quality improvement

efforts, but quality is not integrated in the company's strategic business plan. In the face of market

crises, which many U.S. firms experienced in the 1970s and 1980s, top management begins to realize

the importance of quality as a strategic operating policy. In many cases, however, quality is considered

separate from financial and marketing plans. Companies that aspire to world-class status reach the

highest level of evolution where quality becomes an integral part of the overall strategic plan and is

viewed as a central operating strategy.

Competitive advantage denotes a firm's ability to achieve market superiority over its competitors. In the

long run, a sustainable competitive advantage provides above-average performance. A strong

competitive advantage has six characteristics:

It is driven by customer wants and needs. A company provides value to its customers that

competitors do not.

It makes a significant contribution to the success of the business.

It matches the organization's unique resources with the opportunities in the environment.

No two companies have the same resources; a good strategy uses them effectively.

It is durable and lasting and difficult for competitors to copy. A superior research and

development department, for example, can consistently develop new products or processes

to remain ahead of competitors.

It provides a basis for further improvement.

It provides direction and motivation to the entire organization.

As each of these characteristics relates to quality, quality can be an important means of gaining

competitive advantage. Let us see how total quality contributes to competitive advantage.

Total Quality Management MGT510

Discuss cost leadership, differentiation, and people as principal sources of competitive

advantage, and their relationship to quality;

Relate quality to the achievement of higher profitability;

Describe the importance of quality in meeting customer expectations in product design, service,

flexibility and variety, innovation, and rapid response; and

Discuss empirical results showing the impact of quality on business results.

Sources of Competitive Advantage

The classic literature on competitive strategy suggests that a firm can posses' two basic types of

competitive advantage: low cost and differentiation.

Cost Leadership

Many firms gain competitive advantage by establishing themselves as the low-cost leader in an industry.

These firms produce high volumes of mature products and achieve their competitive advantage through

low prices. Such firms often enter markets that were established by other firms. They emphasize

achieving economies of scale and finding cost advantages from all sources. Low cost can result from

high productivity and high capacity utilization. More importantly, improvements in quality lead to

improvements in productivity, which in turn lead to lower costs. Thus a strategy of continuous

improvement is essential to achieve a low-cost competitive advantage.

To achieve cost leadership for high volume products, companies use a variety of approaches:

Early manufacturing involvement in the design of the product both for make-versus-buy

decisions and for assurance that the production processes can achieve required tolerances.

Product design to take advantage of automated equipment by minimizing the number of parts,

eliminating fasteners, making parts symmetric whenever possible, avoiding rigid and stiff parts

and using one-sided assembly designs.

Limited product models and customization in distribution centers rather than in the factory.

A manufacturing system designed for a fixed sequence of operations. Every effort is made to

ensure zero defects at the time of shipment. Work-in-process inventory is reduced as much as

possible, and multi skilled, focused teams of employees are used.

A cost leader can achieve above-average performance if it can command prices at or near the industry

average. However, it cannot do so with an inferior product. The product must be perceived as

comparable with competitors or the firm will be forced to discount prices well below competitors'

prices to gain sales. This can cancel any benefits that result from cost advantage.

Differentiation

To achieve differentiation, a firm must be unique in its industry along some dimensions that are widely

valued by customers. It selects one or more attributes that customers perceive as important and positions

itself uniquely to meet those needs. For instance, Dell's direct business model was the first of its kind in

the computer industry and continues to be a principal source of the company's success.

Often, a firm with a differentiation strategy can command premium prices and achieve higher profits.

Juran cites an example of a power tool manufacturer that improved reliability well beyond that of

competitors. Field data showing that the differences in reliability resulted in significantly lower

operating cost were publicized, and the company was able to secure a premium price.

However, a firm that uses differentiation as its source of competitive advantage must make its products

or systems difficult to copy. Often this involves culture, habits, and sunk costs. For example, why

Total Quality Management MGT510

doesn't every company copy Dell's superior direct business model? Dell's approaches are hardly a

secret; even Michael Dell has written a book about it. Competitors have copied its Web site with

stunning precision, but they face far greater difficulty copying the supporting activitiespurchasing,

scheduling, and logisticsthat Dell has built around its direct model over several decades. Competitors

are burdened by long-standing relationships with suppliers and distributors and by a different culture.7

People

The competitive advantage resulting from an organization's people can drive low cost and

differentiation. For example, over several decades, Southwest Airlines has been the most profitable U.S.

carrier. It has fewer employees per aircraft and flies more passengers per employee. Much of its cost

advantage comes from its very productive, motivated, and unionized workforce.9 Is its competitive

advantage low cost, or is it the people? It would appear that the real driver of Southwest's competitive

advantage is its people. Herb Kelleher, former CEO, once stated, "It's the intangibles that are the

hardest things for competitors to imitate. You can get on an airplane. You can get ticket-counter space,

you can get baggage conveyors. But it is our esprit de corp.the culture, the spiritthat is truly our most

valuable competitive asst." Providing a work environment that foster cooperation, initiative, and

innovation; educating and training the workforce; and enhancing the factors that affect well-being,

satisfaction, and motivation are very difficult for competitors to copy. This is a significantly different

philosophy from the work environment that came into being during the Industrial Revolution.

The Importance of Quality to Competitive Advantage

The role of quality in achieving competitive advantage was demonstrated by several research studies

during the 1980s. PIMS Associates, Inc., a subsidiary of the Strategic Planning Institute, maintains a

database of 1,200 companies and studies the impact of product quality on corporate performance.11

PIMS researchers have found that

Product quality is the most important determinant of business profitability.

Business offering premium quality products and services usually have large market shares and

were early entrants into their markets.

Quality is positively and significantly related to a higher return on investment for almost all

kinds of products and market situations. PIMS studies have shown that firms with products of

superior quality can more than triple return on sales over products perceived as having inferior

quality.

A strategy of quality improvement usually leads to increased market share, but at a cost in terms

of reduced short-run profitability.

High quality producers can usually charge premium prices.

The value of product in the marketplace is influenced by the quality of its design. Improvements in

performance, features, and reliability will differentiate the product from its competitors, improve a

firm's quality reputation, and improve the perceived value of the product. This allows the company to

command higher prices and achieve an increased market share. This, in turn, leads to increased revenues

that offset the added costs of improved design and provides sustainable basis for the competitive

advantage.

Table of Contents: