Why Bother With Quality Anyway?

The University of Michigan study found that for the companies with the happiest customers, stock performance increased 75% for the period of 2000-2004 versus only 19% for the S&P 500 as a whole
There are a number of studies that show the connection between improved financial returns and quality. The most systematic and complete was started as far back as 1972.
In 1972, based on work done by General Electric, the PIMS (Profit Impact of Market Strategy) research program was set up to evaluate how different corporate strategies were likely to affect profitability and growth. Companies participating in this program submitted financial and strategic information to a database house at the Strategic Planning Institute. During the 12-year period between 1972 and 1984, 3000 business units representing some 450 corporations participated in the program.
In 1987, Harvard Business School Professors Robert Buzzell and Bradley Gale of the Strategic Planning Institute published a book, “The PIMS Priniciples” in which they provide six general principles from the data. Among other things they concluded that: The most important single factor affecting a business unit’s performance is the quality of its products and services, relative to those of the competitors.
They also noted that these companies achieved faster market share growth, and that while there might be short term cost increases related to improving quality, in the long term, these costs were offset by economies of scale as the companies continued to grow. These companies also earned superior margins versus those of their competitors.
The companies that ranked in the top one fifth of the database realized 8% higher prices than their competitors.
In more recent studies, researchers at the Stephen M. Ross School of Business at the University of Michigan measured stock performance of a sample portfolio of the S&P 500 against customer satisfaction scores accumulated in the ACSI (American Customer Satisfaction Index) for these same companies for a period between 2000 and 2004. The results were not surprising. For the companies with the happiest customers, stock performance increased 75% for the period versus only 19% for the S&P 500 as a whole.
Faster growth, better prices than competitors, better earnings than competitors and greater market share all sound like good reasons to concern oneself with quality and its measurement.

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