An analysis of the relationship between TQM implementation and organizational performance : Evidence from Turkish SMEs PDF

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The current issue and full text archive of this journal is available at www.emeraldinsight.com/1741-038X.htm TQM and An analysis of the relationship organizational between TQM implementation performance and organizational 829 performance Received August 2005 Evidence from Turkish SMEs Revised Januar...

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The current issue and full text archive of this journal is available at www.emeraldinsight.com/1741-038X.htm

An analysis of the relationship between TQM implementation and organizational performance

TQM and organizational performance

Evidence from Turkish SMEs

Received August 2005 Revised January 2006 Accepted February 2006

Mehmet Demirbag

829

Management School, University of Sheffield, Sheffield, UK

Ekrem Tatoglu School of Business Administration, Bahcesehir University, Istanbul, Turkey

Mehmet Tekinkus Faculty of Economics and Administrative Sciences, Gaziantep University, Gaziantep, Turkey, and

Selim Zaim Faculty of Economics and Administrative Sciences, Fatih University, Istanbul, Turkey Abstract Purpose – The principal aim of this paper is to determine the critical factors of total quality management (TQM) and to measure their effect on organizational performance of SMEs operating in Turkish textile industry. Design/methodology/approach – Data for this study was collected using a self-administered questionnaire that was distributed to 500 SMEs in textile industry in the city of Istanbul in Turkey selected randomly from the database of Turkish Small Business Administration (KOSGEB). Of the 500 questionnaires posted, a total of 163 questionnaires were returned. Findings – Using exploratory and confirmatory factor analyses, seven empirically validated dimensions of TQM were identified. The structural equation modelling technique was employed to investigate the relationship between the implementation of TQM practices and organizational performance. Data analysis reveals that there is a strong positive relationship between TQM practices and non-financial performance of SMEs, while there is only weak influence of TQM practices on financial performance of SMEs. With only a mediating effect of non-financial performance that the TQM practices has a strong positive impact on financial performance of SMEs. Research limitations/implications – The sample is restricted to only a single region and a single industry, so it would be strongly recommended that data be gathered from various parts of Turkey including both various manufacturing and service industries. As the data in this study were collected from top managers of organizations on the basis of their subjective evaluations, objective performance indicators should also be employed in the analysis. Originality/value – Despite some attempts on the applicability of TQM practices and advanced manufacturing technologies as well as their impact on organizational performance of SMEs, there is a

Journal of Manufacturing Technology Management Vol. 17 No. 6, 2006 pp. 829-847 q Emerald Group Publishing Limited 1741-038X DOI 10.1108/17410380610678828

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lack of systematic empirical evidence regarding the extent of TQM implementation and its effect on performance of SMEs in emerging market economies. This paper presents new data and empirical insights into the relationship between TQM implementation and organizational performance in SMEs operating in Turkey. Keywords Total quality management, Organizational performance, Small to medium-sized enterprises, Turkey Paper type Research paper

Introduction Quality has become one of the most important drivers of the global competition today. Intensifying global competition and increasing demand for better quality by customers have caused more and more companies to realize that they will have to provide high quality product and/or services in order to successfully compete in the marketplace. To meet the challenge of this global competition, many businesses have invested substantial resources in adapting and implementing total quality management (TQM) strategies. TQM can be defined as a holistic management philosophy aiming at continuous improvement in all functions of an organization to produce and deliver commodities or services in line with customers’ needs or requirements by better, cheaper, faster, safer, easier processing than competitors with the participation of all employees under the leadership of top management. The role of TQM is widely recognized as being a critical determinant in the success and survival of both manufacturing and service organizations in today’s competitive environment. TQM is also seen as a source of competitive advantage (Powel, 1995; Hackman and Wageman, 1995; Douglas and Judge, 2001), innovation (Singh and Smith, 2004), change and new organizational culture (Irani et al., 2004). Any decline in customer satisfaction due to poor service quality would be a serious cause of organizational failure. Consumers are becoming increasingly aware of rising standards in product/service quality, prompted by competitive trends, which have developed higher expectations. Despite some attempts on the applicability of TQM practices and advanced manufacturing technologies as well as their impact on organizational performance of SMEs (Ahire and Golhar, 1996; McAdam and McKeown, 1999; Yusof and Aspinwall, 2000; Cagliano et al., 2001; Sun and Cheng, 2002; Lee, 1998, 2004; Raymond, 2005; Dangayach and Desmukh, 2005), there is a lack of systematic empirical evidence regarding the extent of TQM implementation and its effect on performance of SMEs in emerging market economies such as Turkey. SMEs play a very crucial role to the economies of most emerging nations from the viewpoint of generating employment and economic growth. They account for more than half of the employment and added value in most countries (UNCTAD, 1993). Similar trend is also observed in Turkey where SMEs constitute 99 per cent of all business establishments and employ 53 per cent of the workforce in the manufacturing sector (Taymaz, 1997). In view of the fact that the success of small business has a direct impact on the national economy, this paper presents new data and empirical insights into the relationship between TQM implementation and organizational performance in SMEs operating in Turkey. The paper is organized as follows: The next section provides a review of the theoretical literature and sets out the hypotheses of the study. The research methods are presented in the section Research methodology. The next section presents the results followed by conclusion and managerial implications.

Literature review and hypotheses development Although the literature on TQM includes a rich spectrum of works, there is no consensus on the definition of quality. The notion of quality has been defined in different ways by different authors. Gurus of the TQM practices such as Garvin, Juran, Crosby, Deming, Ishikawa and Feigenbaum all provided their own definitions of quality concept and TQM. Garvin (1987) proposed a definition of quality in terms of the transcendent, product based, user based, and manufacturing and value-based approaches. He also identified eight attributes to measure product quality (Garvin, 1987). Juran defined quality as “fitness for use” and focused on a trilogy of quality planning, quality control, and quality improvement (Mitra, 1987). Similarly, Crosby (1996) defined quality as “conformance to requirements or specifications” that is based on customer needs. He identified 14 steps for a zero defect quality improvement plan to achieve performance improvement. According to Deming, quality is a predictable degree of uniformity and dependability, at low cost and suited to the market. He also identified 14 principles of quality management to improve productivity and performance of the organization (Deming, 1986). Ishikawa also emphasized importance of total quality control to improve organizations’ performance. He contributed to the quality literature by introducing a cause and effect diagram (Ishikawa diagram) to diagnose quality problems (Mitra, 1987). In a similar vein, Feigenbaum introduced the concept of organization-wide total quality control and defined quality as “the total composite product and service characteristics of marketing, engineering, manufacturing and maintenance through which the product and service in use will meet the expectations by the customer” (Mitra, 1987). Major common denominators of these quality improvement plans include management commitment, strategic approach to a quality system, quality measurement, process improvement, education and training, and eliminating the causes of problems. TQM is the culture of an organization committed to customer satisfaction through continuous improvement. This culture varies from one country to another and between different industries, but has certain essential principles, which can be implemented to secure greater market share, increased profits, and reduced costs (Kanji and Wallace, 2000). Management awareness of the importance of TQM, alongside business process reengineering and other continuous improvement techniques was stimulated by the benchmarking movement to seek, study, implement and improve on best practices (Zairi and Ahmed, 1999). A review of extant literature on TQM and continuous improvement programs identifies 12 common aspects: Committed leadership, adoption and communication of TQM, closer customer relationships, benchmarking, increased training, open organization, employee empowerment, zero defects mentality, flexible manufacturing, process improvement, and measurement. Furthermore, to determine critical factors of TQM, various studies were undertaken and different instruments were developed by individual researchers and institutions such as Malcolm Baldrige Award, EFQM (European Foundation for Quality Management), and the Deming Prize criteria. Based on these studies, a wide range of management issues, techniques, approaches, and systematic empirical investigations have been generated. Saraph et al. (1989) developed 78 items related to TQM practices, which were classified into eight critical factors to measure the performance of TQM in an organization. They labelled these critical factors as: Role of divisional top management and quality policy, role

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of the quality department, training, product and service design, supplier quality management, process management, quality data and reporting, and employee relations. Flyyn et al. (1994) developed another instrument which they identified seven quality factors of TQM. These are top management support, quality information, process management, product design, workforce management, supplier involvement, and customer involvement. This instrument is in close resemblance to the preceding instrument developed by Saraph et al. (1989). In a later study, Flyyn et al. (1995) measured the impact of TQM practices on quality performance and competitive advantage. On the other hand, Anderson et al. (1994) developed the theoretical foundation of quality management practice by examining Deming’s 14 points. They reduced the number of factors from 37 to 7 using the Delphi method, which consist of visionary leadership, internal and external cooperation, learning, process management, continuous improvement, employee fulfilment and customer satisfaction. In a similar vein, using the Malcolm Baldrige Award criteria Black and Porter (1996) identified ten empirically validated critical TQM factors, which include corporate quality culture, strategic quality management, quality improvement measurement systems, people and customer management, operational quality planning, external interface management, supplier partnerships, teamwork structures, customer satisfaction orientation, and communication of improvement information. In addition to Black and Porter (1996), various authors also assessed the validity of Malcolm Baldrige Award criteria (Wilson and Collier, 2000; Flynn and Saladin, 2001). Ahire et al. (1996) developed 12 integrated quality management constructs, which were labelled as supplier quality management, supplier performance, customer focus, statistical process control usage, benchmarking, internal quality information usage, employee involvement, employee training, design quality management, employee empowerment, product quality, and top management commitment. Performance measurement is very important for the effective management of an organization. According to Deming without measuring something, it is impossible to improve it. Therefore, to improve organizational performance, one needs to determine the extent of TQM implementation and measure its impact on business performance (Madu et al., 1996; Gadenne and Sharma, 2002). Traditionally, organizational performance has been measured by using financial indicators, which may include inter alia profit, market share, earnings, and growth rate. Kaplan and Norton (1996) emphasized that financial indicators would measure only past performance. Therefore, in order to overcome potential shortcomings of traditional organizational performance systems they added non-financial categories to the traditional performance measurement system. There is a relatively large body of empirical studies that measure business performance by TQM criteria (Samson and Terziovski, 1999; Flyyn et al., 1995; Wilson and Collier, 2000; Fynes and Voss, 2001; Flynn and Saladin, 2001; Montes et al., 2003; Benson et al., 1991; Choi and Eboch, 1998). These studies explore a variety of theoretical and empirical issues. If TQM plan is implemented properly, it produces impact on a wide range of areas including understanding customers’ needs, improved customer satisfaction, improved internal communication, better problem solving and fewer errors. In the following subsections, we develop a number of hypotheses to investigate the relationship between the implementation of TQM practices and organizational performance in SMEs. First, we examine the relationship between the critical factors of

TQM and their effect on both financial performance and non-financial performance. Next, we investigate to what extent non-financial performance mediates the relationship between TQM practices and financial performance. TQM practices and financial performance Empirical studies investigating the relationship between TQM practices and financial performance have produced mixed results. These studies either use stock price performance (Hendricks and Singhal, 1996, 2001; Easton and Jarrel, 1998) or perceptual measures developed by researchers themselves (Powel, 1995; Kaynak, 2003; Samson and Terziovski, 1999; Prajogo and Sohal, 2006). Hendricks and Singhal (1996) studied award-winning companies (as a proxy for TQM implementation) to establish a link between TQM and stock price performance but found no evidence of long-term abnormal performance. In contrast to the findings of Hendricks and Singhal (1996), Easton and Jarrel (1998) found significant relationship between stock-price performance and TQM implementation. A follow up study by Hendricks and Singhal (2001) with a larger dataset revealed that in the post implementation period, the sample of effective TQM implementers significantly outperformed the various matched control groups. Douglas and Judge (2001) used perceptual measures of financial performance (alongside with expert rated performance measures). Their results indicated that the level of TQM implementation was positively and significantly related to both perceived financial performance of a hospital and its industry-expert rated performance. It appears that the degree to which the entire TQM philosophy is implemented strongly correlated with financial performance perception (Kaynak, 2003). When the firm size is taken into account, evidence seems to get mixed. Some TQM advocates argue that TQM cannot produce consistent financial performance for SMEs (Schmidt and Finnigan, 1992; Powel, 1995; Strubering and Klaus, 1997), while others found some significant results in TQM implementations in SMEs (Ahire and Golhar, 1996; Hendricks and Singhal, 2001). Hendricks and Singhal’s (2001, p. 287) analyses indicate that smaller firms tend to benefit more from TQM as compared to larger firms. This finding contradicts with some of the earlier arguments that TQM is less beneficial to smaller firms. While in general the evidence seems conflicting at least for SMEs, we expect that: H1. TQM practices have a moderate positive impact on financial performance. TQM practices and non-financial performance Although financial performance is generally accepted as the ultimate aim of business organizations, in the case of SMEs, non-financial performance indicators are also equally important in implementing TQM principles. TQM practices may not only affect financial performance directly (Kaynak, 2003), but also in some indirect ways such as increasing innovation (Singh and Smith, 2004), changing organizational culture (Irani et al., 2004), market competitiveness (Chong and Rundus, 2004), overall organizational performance (Powel, 1995), market share and market share growth (Kaynak, 2003); employee morale (Rahman and Bullock, 2005), productivity (Rahman and Bullock, 2005; Kaynak, 2003; Rahman, 2001). Prajogo and Sohal (2001) report two main arguments on the relationship between TQM and innovation where the first argument suggests that TQM be positively related to increasing innovation capacity of TQM practicing firms. The second argument, however, focuses on the negative

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relationship between TQM implementation and innovative performance of firms. The logic behind this argument is that customer focus and its principles may trap organizations into captive markets where they focus only on existing customers, which may result in ignoring the search for innovation and novel solutions (Prajogo and Sohal, 2006). Samson and Terziovski (1999) found support for the relationship between some non-financial measures (i.e. export growth, market share growth, innovation growth, cost of quality, etc.) and implementation of TQM practices. In the case of SMEs, however, the evidence is sketchy. Choi and Eboch (1998) argue that the strength of positive relationship between plant performance, as influenced by TQM practices, and customer satisfaction, is still far from being conclusive. Samson and Terziovski (1999) noted negative relationship for smaller size firms in their survey, whereas Lee (2004) reports that Chinese SMEs perceive positive relationship between TQM practices and non-financial performance measures (i.e. production performance, cost improvement and sales improvement). While there is no detailed analysis of the relationship between TQM practices and non-financial performance for SMEs in the prior literature (Ahire and Golhar, 1996), we rely on the argument of the first group of researchers and assert the following hypothesis: H2. TQM practices have a strong positive impact on non-financial performance. Relationship between financial and non-financial performance The relationship between financial and non-financial measures of organizational performance has long been discussed in organization and strategy literature. Hackman and Wageman (1995) provide an insightful account of conceptual and practical issues in researching TQM implementation and change. York and Miree (2004) argue that non-financial performance such as improved quality, innovativeness and increased market share should actually reduce costs, and thus have a positive effect on measures of financial performance. Increased quality helps SMEs to retain current customers and create greater customer loyalty, which in return may increase market share and financial performance (Rust et al., 1994). Although studies of SME performance and TQM relations do not examine non-financial performance measures directly, evidence from larger organisations supports the argument that operational performance indicators are related to financial performance dimensions (Fuentes-Fuentes et al., 2004). Some other studies also demonstrate positive relationship between operational performance dimensions such as product quality (Larson and Sinha, 1995), innovation and R&D (Prajogo and Sohal, 2001; Singh and Smith, 2004) employee performance (Fuentes-Fuentes et al., 2004). Giv...