Decision Sciences

Volume 26 Number 5
SeptJOct. 1995
Printed in the i%S.A.

A Path Analytic Model of a Theory

of Quality Management Underlying
the Deming Management Method:
Preliminary Empirical Findings*
John C. Anderson
Operations and Management Science Department, Curtis L Carlson School of Management,
University of Minnesota, 271 19th Avenue South, Minneapolis, MN 55455
Manus Rungtusanatham
Operations and Information Management Department, School of Business,
University of Wisconsin - Madison, 975 University Ave., Madison, WI 53706
Roger G. Schroeder and Sarvanan Devaraj
Operations and Management Science Department, Curtis L Carlson School of Management,
University of Minnesota, 271 19th Avenue South, Minneapolis, MN 55455

ABSTRACT
Despite the impact that Deming and his 14 Points have had on the practice of quality
management, empirical support for the effectiveness of the Deming Management
Method has not advanced beyond the presentation of anecdotal, case-study evidence.
In part, this is because theory to guide the conduct of empirical research has not
been available. Only recently has such a theory of quality management to describe
and explain the effectiveness of the Deming Management Method been articulated
in the literature.
This paper continues the journey of theory development; it reports the results
of an exploratory empirical analysis of an articulated theory of quality management
underlying the Deming Management Method. The constructs in the proposed theory
are operationalized using measurement statements developed by the World-Class
Manufacturing research project team at the University of Minnesota and Iowa State
University. Path analysis is applied to the World-Class Manufacturing project data
to explore the empirical strength of relationships advanced in the theory. The path
analytic: results provide support for several of the proposed relationships in the
theory, and more importantly, suggest a number of new relationships which have
not heretofore been proposed.
Subject Areas: Deming Management Method, Path Analysis, Quality Management, Theory
Development, and Theory Testing.

*An earlier version of this paper was presented at the 1993 Annual Meeting of the Decision
Sciences Institute in Washington, D.C.

637
638 A Path Analytic Model

INTRODUCTION
Quality management has increasingly become the focus of organizations competing
in both domestic and global economies. Quality has often been cited as the highest
competitive priority (e.g., [29]), an issue of strategic importance and survival (e.g.,
[181), and a means of competitive performance (e.g., [4]). Numerous descriptive
case studies of quality and other organizational improvements that accompany the
adoption of quality management approaches have found their way into the literature
(e.g., [16] [35]). Theorizinghow and why this occurs,and testing this theory empirically,
beyond case-based research, however, are far less common.
A case in point is W. Edwards Deming and his Deming Management Method
[7] [8] [9] [lo]. The Deming Management Method contains a set of 14 Points,
presented by Deming to be “principles of transformation” to improve the practice
of management [6, p. 231. Deming’s 14 Points have been embraced by many organiza-
tions, both domestically and internationally, across manufacturing and service
industries and profit and nonprofit sectors.Many firms (including Ford Motor Company,
Xerox Corporation, Zytec Corporation, etc.), have attributed the turnaround of their
organizations,in varying degrees, to the Deming Management Methd, their “success”
stories have been documented in Baker and Artinian [2], Hodgson [19], Scherkenbach
[30], and Walton [35, pp. 121-2381,
Despite the impact that Deming and his 14 Points have had on the practice of
quality management, empirical support for the effectiveness of the Deming Manage-
ment Method has not advanced beyond the presentation of anecdotal, case-study
evidence. In part, this is because theory to guide the conduct of empirical research
has not been available. Only recently has such a theory of quality management to
describe and explain the effectiveness of the Deming Management Method been
articulated by Anderson, Rungtusanatham, and Schroeder [l].
In this paper, the proposed theory of quality management underlying the Deming
Management Method is empirically examined. The constructs in this theory are
operationalized using measurement statements developed by the World-Class Manu-
facturing research project team at the University of Minnesota and Iowa State
University. Path analysis is applied to the World-Class Manufacturhg project data
to explore the empirical strength of the relationships advanced in the theory.
It is important to note that this paper does not claim to present formal conclusive
tests of the proposed theory; the secondary nature of both the construct operation-
alization and the data limits the ability to do so. The reported results are, therefore,
intended to be preliminary empirical observations conducive to further theory develop-
ment, marking a continuation of a journey begun by the original architects of the
proposed theory.

A DEMING-BASED THEORY OF QUALITY MANAGEMENT

In developing a theory of quality management to describe and explain the effective-
ness of the Deming Management Method, Anderson, et al. [ 13 began by conducting
an in-depth and objective analysis of the Deming Management Method. The analysis
examined the content and linguistic structure and traced the chronological evolution
of the 14 Points.
Anderson, Rungtusanatham, Schroeder, and Devaraj 639

This task was complemented by a three-round Delphi study, aimed at identifying

and defining concepts suggested in the Deming Management Method. Seven experts
on Deming and his 14 Points, from both academe and industry, participated in the
Delphi study. All seven have been andor are actively involved in implementing the
Deming Management Method in organizations. Several of the experts participating
in the Delphi study have attended Deming’s management seminars more than once.
Some have even conducted research and writing related to quality management and,
specifically, to the Deming Management Method.
The experts engaged in a three-round Delphi study to identify and define the
constructs underlying Deming’s 14 Points. Abstraction of the Delphi study outcomes,
using an affinity diagram method (see Mizuno [25]), led to the induction of seven
constructs or the “Whats” of a theory [37], believed to capture the essence of the
Deming Management Method. The seven constructs are: (1) Visionary Leadership,
(2) Internal and External Cooperation, (3) Learning, (4) Process Management, (5)
Continuous Improvement, (6) Employee Fulfillment, and (7) Customer Satisfaction.
Nominal definitions for the seven constructs are shown in Table 1.
To specify the relationships among the seven constructs, Anderson, et al. [l]
asked the questions: “Is this construct a cause or an effect? If this construct is a
cause, is there a preceding cause? If this is an effect, does it affect other constructs?“
[ 1, p. 4791. This process of logical deduction allowed the examination of all possible
pairwise connections in order to address the question of “How”-that is, How are
the constructs related? [37]. To aid in this process of logical deduction, the relations
diagram [25] was employed, using uni-directional and bidirectional arrows to explore
cause-and-effect relationships among the seven constructs. This theory-building
process produced a formal statement describing and explaining the effectiveness of
the Deming Management Method. This formal statement is depicted as a path
diagram (essemtially a statement of the nomological validity of the seven constructs
proposed as underlying the Deming Management Method) in Figure 1 and can be
stated as follows:
The effectiveness of the Deming Management Method arises from leadership
efforts toward the simultaneous creation of a cooperative and learning organization
to facilitate the implementation of process-management practices, which, when
implemented, support customer satisfaction and organizational survival through
sustained employee fulfillment and continuous improvement of processes, products,
and services. [l, pp. 4794801
In the final stage of theory development, Anderson, et al. [l] juxtaposed the
resulting set of relational elements and statements shown in Figure 1 in the literature
in order to determine the level of support for the proposed constructs and relation-
ships, essentially responding to the question of “Why”-Why are the constructs
related as proposed? [37]. This juxtaposition included identifying literature support
for (1) the definitions of the constructs, and (2) the individual relationships between
constructs. In addition, the theory in its entirety was compared and contrasted to
Taylor’s Scientific Management [33] and Lawrence and Dyer’s Theory of Readaptative
Organization [23]. This juxtaposition provided credibility for the theoretical com-
ponents, as well as an opportunity to position the proposed theory in the context of
prior theories of organizational improvement.
640 A Path Analytic Model

Table 1: Constructs underlying the Deming Management Method (Anderson,

Rungtusanatham, & Schroeder [ 1, p. 4801).

Visionary Leadership The ability of management to establish, practice, and lead

a long-term vision for the organization, driven by
changing customer requirements, as opposed to an internal
management control role.
Internal and External The propensity of the organizationto engage in non-
Cooperation competitive activities internally among employees and
externally with respect to suppliers.
Learning The organizationalcapability to recognize and nurture the
developmentof its skills, abilities, and knowledge base.
Process Management The set of methodological and behavioral practices
emphasizingthe management of process, or means of
actions, rather than results.
Continuous The propensity of the organizationto pursue incremental
Improvement and innovative improvements of its processes, products,
and services.
Employee Fulfillment The degree to which employees of an organization feel
that the organization continually satisfies their needs.
Customer Satisfaction The degree to which an organization’s customers
continually perceive that their needs are being met by the
organization’s products and services.

Because this paper marks a continuation of the work of Anderson, et al. [l], the
intent is not to reiterate further the details of the processes of theory development
and theory juxtaposition in literature, both of which have been fully described (see
[11). Several additional comments about the proposed theory are, however, appropriate
for the purposes of this study.
First, the articulated theory of quality management, quite obviously, has its
foundations in Deming’s 14 Points and other writings. The proposed constructs and
relationships, while stemming from the Deming Management Method, are also
reflected to varying extent in the writings of other quality advocates, as well as in
various national quality awards. The importance of leadership, for example, is high-
lighted by Crosby [6] and Juran [20], and in the Malcolm Baldrige National Quality
Award and the Deming Prize (see discussion in Dooley, Bush, Anderson, and
Rungtusanatham [ 111). The tools and techniques used in process management are
another similarity between Deming and Juran. Other similarities and differences can
be gleaned from Garvin [17].
A second comment concerns the generalizabilityof the proposed constructs and
relationships. As pointed out in Anderson, et al. [l], the Deming Management
Method has been implemented worldwide (see Hodgson [ 19]), suggesting an ease
of transferability of the prescriptions in the 14 Points, as well as the constructs and
relationships proposed in the path diagram in Figure 1. Conversely, others (e.g., [39])
Anderson, Rungtusanatham, Schroeder, and Devaraj 641

Figure 1: A p~qosedtheory of quality management underlying the Deming Management

Method.

Couperution
Lfll Iniprovenient

I’rucess
Orgaaizaliunal
Syrlciri

I Pullillnient
I
I
I 1
i i I I I
I
I
I
! ! t i 1
I

1
I
I
I
I

have argued that there may be cultural constraints on the applicability of the Deming
Management Method across different national cultures. One approach to resolving
this debate is by conducting an empirical investigation comparing the level and
success of implementing the Deming Management Method andor assessing the
validity of the proposed theory of quality management underlying the Deming
Management ]Method across national cultures. While the data is not available for
unaerraKlng siicn a sruay at tnis point, me empincai sway reponeu in mis paper
marks a beginning towards addressing this issue by exploring the validity of the
articulated theory using both American-owned and Japaneseamed plants in the U.S.
As noted earlier, this paper complements and furthers the theory development
task by subjecting the articulated theory to an empirical analysis, for the process of
theory development demands that any newly-proposed theory be confronted with
empirical realiig so as to substantiate and/or enhance a theory’s descriptive, explanatory,
and prescriptive properties.
To conduct this empirical examination, three questions need to be addressed in
a satisfactory manner:
1. How can the constructs and conceptual relationships be operationalized
for empirical study?
2. What are the empirical strengths of the relationships specified in the
proposed theory?
3. Are other relationships observable from an empirical standpoint?
The answers to these questions provide a reality-based foundation for modifying
and refining the proposed theory, making it more descriptive and prescriptive of the
effectiveness of the Deming Management Method.
642 A Path Analytic Model

MEASURING THE THEORETICAL CONSTRUCTS IN THE

PROPOSED THEORY
In order to empirically examine the articulated theory of quality management underlying
the Deming Management Method, the theoretical constructs in Figure 1 have to be
operationalized (see Wallace [34]). For this purpose, measurement statements were
identified from the World-Class Manufacturing research project (see [3], [ 141, and
[151 for a description of the study and related research). These measurement statements
were jointly written and developed by a team of researchers from the University of
Minnesota and Iowa State University. Selected measurement statements were then
pooled to create a multi-item perceptual scale for operationalizing the theoretical
constructs in the proposed theory-an approach successfully used to operationalize
Hofstede’s culture dimensions at the organizational level in Bates, Amundson,
Schroeder, and Morris [3]. The measurement statements used to operationalize each
theoretical construct are shown in Table 2.
%o interesting observations can be made about the resulting operationalization
of the theoretical constructs. First, statements were chosen in a careful manner to
tap as comprehensivelyas possible the conceptual domain of the theoretical constructs.
Visionary Leadership,for instance, is measured as a scale containingeight measurement
statements asking about plant management’s leadership for quality as demonstrated
by personal responsibility, encouragement of subordinates, type of goals set, and
communication of these goals to plant individuals. Because the measurement state-
ments were not originally designed to specifically measure the constructs in the
proposed theory, it was not possible to fully operationalize the conceptual domain
of certain constructs. For example, the measurement statements used to operationalize
Internal and External Cooperation were unable to capture the “external cooperation”
aspect of this construct. Second, the operationalization of Customer Satisfaction is
based on employee perceptions about the customers. Due to the secondary nature
of the data used in this study, reliable and valid, externally based, empirical indica-
tors of Customer Satisfaction were unavailable. Nevertheless, the World-Class
Manufacturing database does provide a useful measurement basis for the proposed
theory, especially in light of the exploratory nature of this research.
All measurement statements are perceptual questions anchored on a 5-point
Likert continuum. Most statements have response categories ranging from strongly
agree (1) to strongly disagree (5). Several statements are reverse-coded with strongly
disagree (1) and strongly agree (5), and two statements require informants to choose
from five response categories ranging from superior or better than average (1) to
poor or low end of the industry (5).
The statements were given to a comparable set of multiple informants within
the plant, selected from eight managers, three supervisors, and ten workers. A
plant-level score for each ith measurement statement (Li) in the kth measurement
scale was computed by taking a simple arithmetic average of the responses provided
by the multiple informants within the plant (see Equation 1):

j= 1
Anderson, Rurrgtusanatham, Schroeder, and Devaraj 643

where
Lick) = plant-level score for the ith measurement item in the kth measurement
scale,
IV = jth individual respondent score for the ith measurement item,
ni = number of respondents for ith measurement item.
A score for the kth measurement scale at the plant level (Sk)is then computed by
averaging the: plant-level individual item scores for the set of items defining the kth
measurement scale (see Equation 2):

where
Sk = plant-level score for the kth measurement scale,
Ii(k)= ith measurement item for the kth measurement scale,
ikfk = number of measurement items making up the kth measurement scale.

An exploratory assessment of the uni-dimensionality and internal consistency

reliability of the measurement statements was conducted prior to the evaluation of
the conceptual relationships in the proposed theory. Because the unit of analysis is
the plant, both uni-dimensionality and internal consistency reliability were examined
at the level of reference of the plant.
Exploratory factor analysis by means of principal components with no rotation
was performed separately for each construct; the factor analysis results supported the
uni-dimensionalityof the set of measurementstatements for each construct. Cronbach’s
a [5] was also computed in order to evaluate internal consistency reliability for the
set of measutcment statements for each construct; all Cmnbach’s a values (seeTable 2)
met the minimum criterion a value of 0.60,as suggested by Nunnally [28].

SAMPLE CONSTRUCTION AND DATA COLLECTION

This study utilized a comprehensive, existing database designed for research on
world-class rnanufacturing practices, including those of quality management. The
data were collected as part of a large study on manufacturing practices in 41 plants.
A dual stratified, random sampling strategy was adopted to select plants belonging
to three different industries and three different types. The industries included were
electronics, machinery, and transportation components. Within each industry, plants
were again sitratified into one of three mutually exclusive types: those U.S. plants
with Japanese ownership (Japanese Transplants), those U.S. plants with a reputation
for being world-class plants (A Priori Excellent), and those U.S.plants selected from
the three industries at large (Traditional). A master list of plants belonging to each
of the nine strata was compiled from multiple sources, including Dun’s Guide: The
Metalworking Industry [121; Schonberger’s honor roll [311; Japanese listings; and
industry experts. Schonberger’s honor roll, for example, helped to identify world-
class plants from all three industries that would be considered and classified as A
Priori Excellent.
644 A Path Analytic Model

a b l e 2: Measurement statements to operationalize theoretical constructs.

Visionary Leadership (a= 0.8602)a
All major department heads within our plant accept responsibility for quality.
Plant management provides personal leadership for quality products and quality
improvement.
Our top management strongly encourages employee involvement in the produc-
tion process.
Financial goals are the most important at our plant (Reversecoded).
Management outside of the plant is primarily concerned with short-range finan-
cial performance (Reverse-coded).
Short-term losses affect our decision making, but are less important than pursuing
long-term goals.
In our plant, goals, objectives, and strategies are communicated to me.
Strategies and goals are communicated primarily to managers (Reverse-coded).

Internal and External Cooperation (a= 0.8595)

Generally speaking, everyone in the plant works well together.
Departments in the plant communicate frequently with each other.
Departments within the plant seem to be in constant conflict (Reverse-coded).
0 Management works well together on all important decisions.
Our plant is organized into permanent production teams.
During problem-solving sessions, we make an effort to get all team members'
opinions and ideas before making a decision.
0 Problems are usually solved by supervisors (Reverse-coded).
In the past three years, many problems have been solved through small p u p sessions.

Learning (a= 0.8526)

0 Employees receive training to perform multiple tasks.
Plant employees are rewarded for learning new skills.
Direct labor technical competence is high in this plant.

Process Management (a= 0.7629)

Charts showing defect rates are posted on the shop floor.
0 Charts plotting frequency of machine breakdowns are posted on the shop floor.
0 We have standardized process instructions which are given to personnel.
A large percent of the equipment or process on the shop floor are currently under
statistical quality control.
We make extensive use of statistical techniques to reduce variance in processes.

Continuous Improvement (a= 0.6032)

0 All employees believe that it is their responsibility to improve quality in the plant.
0 Continuous improvement of quality is stressed in all work processes throughout
our plant.
Anderson, Rungtusanatham, Schroeder, and Devaraj 645

lbble 2: (continued).
Employee Fulfilment (a= 0.6438)
I would feel unhappy if I could not take pride in my job.
Doing a good job should mean as much to a worker as a good paycheck.
If I do a sloppy job at work, I feel a little ashamed of myself.

Customer Satisfaction (a= 0.8210)

How does your plant compare to its competition in your industry in terms of cus-
tomer relations?
1. Superior or better than average.
2. Better than average.
3. Average or equal to the competition.
4. Below average.
5. Poor or low end of the industry.
How does your plant compare to its competition in your industry in termsof quality
of product conformance?
1. Superior or better than average.
2. Better than average.
3. Average or equal to the competition.
4.Below average.
5. Poor or low end of the industry.
In general, our plant’s level of quality performance over the past three years has
been low, relative to industry norms (Reverse-coded).
Our customers have been well satisfied with the quality of our products over the
past three years.

Tronbach’s ct is computed at the plant level.

Only plants with more than 100 employees from the three pre-specified industries
were retained and included in the population. An equal number of plants was randomly
selected from each of the nine master lists to total 72 plants. Forty-one out of 72
plants chose to participate, corresponding to a 60 percent participation rate. Table 3
shows the distribution of plants within each strata.
Plant managers andor vice presidents of manufacturing of target plants were
contacted by telephone and by letter to generate interest and obtain approval for
conducting the study. Each plant that agreed to the study was asked to assign a
coordinator to facilitate and handle survey administration. Q U e s t i ~ ~ a iwere
r e ~ admin-
istered to individuals with different job titles and responsibilities in the plant: plant
manager, accountant, production and inventory manager, quality manager, process
engineer, research coordinator, supervisors, and workers. Where multiple individuals
were available for a particular job class, the coordinator randomly selected a pre-
specified number of informants from within the job class.
646 A Path Analytic Model

Table 3: Distribution of plants within the sample.

Transportation
Machinery Electronics Components
World-class 4 4 5
Traditional 4 8 4
Japanese-owned 5 4 3

The World-Class Manufacturing database is appropriate for use in the present

study for several reasons. First, the stratification of plants by type into Japanese
Transplants, A Priori Excellent, and Traditional was purposely done to ensure variance
in the management practices used (including a comprehensive set of quality man-
agement practices), and in plant performance. In the context of this study, the
resulting stratified sampling process allowed the construction of a study sample with
substantial empirical variance in the seven proposed constructs in Figure 1, even
though the plants may not have considered themselves to be “Deming plants.”
Second, the stratification of plants by industry was also purposely done to permit
generalizability of findings across industries. The proposed constructs and relation-
ships are a priori expected to be valid across industries, although it is empirically
likely that industry effects may exist. As described later, industry effects are indeed
detected, and appropriately controlled for, in analyzing the data for this research.
Third, the constructs in the articulated theory underlying the Deming Management
Method that are measured using the World-Class Manufacturing database, describe
in detail how well a plant would be implementing the essence of the Deming
Management Method if, indeed, the plant were to implement Deming’s 14 Points.
Therefore, the World-Class Manufacturing research sample offers an opportunity for
“dis-confiiation” of the theoretical propositions that have been articulated.

APPLYING PATH ANALYSIS

The data from the World-Class Manufacturing research project were analyzed using
path analysis. A brief introductory discussion of path analysis follows; more detailed
expositions of the history, rationale, and mechanics of path analysis can be found
in Kenny [21], Land [22], and Li [24].
Path analysis is a multivariate analytical methodology for empirically examining
sets of relationships represented in the form of linear causal models [13] [241.
Examples of path analysis applications can be found in many disciplines including
sociology (see Duncan [13]), psychology (see Werts and Linn [36]), management
(see Neumann [27]), and operations management (see Swamidass and Newel1 [32]).
Path analysis gives insights into the causal ordering of variables in a system
of relationships. The first step in path analysis is to specify a path diagram as
supported by theory. In the path diagram, the theorized causal relationships are
represented by uni-directional arrows linking two variables together. A correlational
relationship between two variables, for which causality is unknown but a relationship
exists nonetheless, is depicted as two variables connected by a bi-directional arrow.
Anderson, Rungtusanatham, Schroeder, and Devaraj 647

Figure 2: Path analytic results of the proposed theoretical model.

Disturbance
Coefficients p-value Variable $ Term
0.59 o.ooo1 A -N- -N-
0.46 0.002 B 0.35 0.81
0.71 o.ooo9 C 0.21 0.89
-0.17 0.4 D 0.35 0.81
0.21 0.002 E 0.21 0.89
0.27 0.085 F 0.07 0.96
0.15 0.317 G 0.18 0.91
0.35 0.026

The path diagram for the theory proposed in Figure 1 is shown in Figure 2.
According to the proposed theory, Visionary Leadership is posited to exert simulta-
neous, direct, and linear influences on both Internal and External Cooperation and
Learning. The path diagram in Figure 2, therefore, shows two paths emanating from
Visionary Leadership, with one path leading to Internal and External Cooperation
and the other leading into Learning. The strength of the Visionary Leadership’s
influence is deinoted by the value of the path coefficient associated with each path;
in the case of the Visionary Leadership + Internal and External Cooperation relation-
ship, the magnitude of the proposed relationship is captured by the path coefficient,
PBA-
Likewise, both Internal and External Cooperation and Leaming are postulated
as affecting Prccess Management, which, in turn, simultaneously affects Continuous
Improvement and Employee Fulfillment-accounting for paths pDB, pDc, pED and
pFD.Figure 2 also shows paths pGE andpGFto operationalize the effect of Continuous
Improvement and Employee Fulfillment on Customer Satisfaction.
Mathematically, path analysis decomposes the empirical correlations or covariances
among the measured variables to estimate the path coefficients in the path diagram
[27]. Mechanically, the path coefficients can be estimated in a number of ways (e.g.,
tracing rules, the First Rule, etc.) [21]. Most empirical applications of this methodology
have employed multiple regression analyses (i.e., ordinary least squares estimation).
It can be shown that the path Coefficients are identical to the standardized regression
coefficients [38:1 (see Li [24] for proof). Therefore, to estimate pBA one would regress
Internal and External Cooperation on Visionary Leadership.
648 A Path Analytic Model

Paralleling multiple repssion analysis, path analysis uses the error term (distur-
bance term), to capture the effects of all other variables not explicitly captured in
the path diagram. The path analytical results can be interpreted in a manner consistent
with the evaluation of multiple regression results. Tests of the significance of path
coefficients and the overall significance of individual relationships can be examined
by conducting t-tests and by examining coefficients of determination,R2s, respectively.
The t-test indicates whether or not a path coefficient differs statistically from zero,
that is, whether or not the hypothesized linear relationship holds. The coefficient of
determination, on the other hand, indicates the amount of variance in the dependent
variable which is accounted for by the variables entered in the path or structuralequation.

PATH ANALYTIC RESULTS

Before applying path analysis, the data were checked for differences in the mean
levels and variances of the constructs across industries. The results, shown in Tables 4
and 5, generally indicate that there were statistically significant differences in the
mean levels of the constructs across industries, with these differences being most
evident between those plants in the Transportation Components industry and those
in the Machinery industry. No statistically significant difference in the mean levels
for Continuous Improvement was detected across the three industries; whereas, the
mean levels for Customer Satisfactionappear to be different across the three industries.
In terms of the variances associated with each construct, only Continuous Improvement
exhibited statistically significantdifferences in the variances across the three industries.
To control for industry effects, the constructs were standardized by industry,
with the Electronics and Transportation Components plants being classified into one
category and the plants in the Machinery industry forming the second category. This
is justified because no statistical differences in either mean levels or variances for
the constructs were detected between these two industries, with one noted exception
being the mean levels of the Customer Satisfaction construct. Alternatively, the
plants in the Electronics industry can be lumped together with those in the Machinery
industry to form one category, leaving the plants in the Transportation Components
industry making up a separate category. Either classification approach removes the
industry effect. Furthermore, the path analytic results with either classificationapproach
are very similar and lead to the same overall conclusions. Lastly, comparing the path
analytic results of either classification approach with the path analytic results, com-
puted by including industry types as dummy categorical variables in the analysis,
also lead to similar conclusions.
A post-standardization check revealed no statistical differences in either the
mean levels or the variances for all constructs across industries. The constructs were
then standardized a second time across all plants to prepare the data for path
analysis. Finally, a check on the normality of the constructs revealed no statistically
significant departures from the normality assumption.
Table 6 shows the first-order parametric correlation coefficients among the
constructs in the proposed theory. Many of the pairwise correlations are statistically
significant at a 0.05 level of significance. These correlations were then decomposed
to derive the path analytic results depicted in Figure 2, and summed up as follows:
1. Visionary Leadership (A) appears to have a very strong and direct effect
on Internal and External Cooperation (B), R2 = 0.35, and on Learning (C),
Anderson, Rungtusanatham, Schroeder, and Devaraj 649

’Igble 4: Between industries comparison of the means of study variables.

~ ~~

Transportation Components Machinery

A B C D E F G A B C D E F G

TransportatioriComponents
A Visionary Leadership 0.05
B Internal 8t External Cooperation 0.05
C Learning 0.05
D Process Management 0.10
E Continuoius Improvement -
F Employee Fulfilment 0.05
G Customer Satisfaction 0.005

R2 := 0.21. The path coefficients from Visionary Leadership to Internal and

ExtlEmal Cooperation (p,=0.59) and from Visionary Leadership to Learning
@,,=0.46) are both statistically significant at p<O.OOOl and fi0.002,
respectively.
2. Of the two paths leading to Process Management (D), only the path from
1nte:maland External Cooperation to Process Management is statistically
significant (pD@.7 1, p<0.0009). The two paths together explain approxi-
mately 35 percent of the observed variance in Process Management.
3. Process Management significantly affects both Continuous Improvement (E),
pEL;,=0.21(p<0.002), and Employee Fulfillment (F), p,=0.27@<0.085).
Nenty-one percent of the variance in Continuous Improvement is accounted
for by Process Management; whereas, 7 percent of the variance in Employee
Fulfillment is accounted for by Process Management.
4. The effect of Employee Fulfillment on Customer Satisfaction (G) is fairly
strong as indicated by the path coefficient of 0.35 (p<0.026).No relation-
ship appears to exist between Continuous Improvement and Customer
Satisfaction. The two paths together explain approximately 18 percent of
the observed variance in Customer Satisfaction.
One advantage of path analysis over conventional regression analysis is the
ability to extend “the single-multiple-regression-equationtreatment to a network of
equations invo’lvingmoTe than one equation” [24, p. 1351. The estimation of path coeffi-
cients also miakes it possible to decompose the observed empirical correlation or
650 A Path Analytic Model

Table 5: Between industries comparison of the variance of study variables.

Transportation Components Machinery
A B C D E F G A B C D E F G

0.005

Transportation Components
A Visionary Leadership -
B Internal & External Cooperation --
C Learning -
D Process Management -
E Continuous Improvement 0.05
F Employee Fulfillment -
G Customer Satisfaction -

a b l e 6: Correlation coefficients among study constructs.

A B C D E F G
A 1.0 0.5ga 0.46b 0.58' 0.35' 0.38' 0.57'
B 1.0 0.76' 0.58' 0.64' 0.26 0.21
C 1.0 0.37' 0.43b 0.31' 0.10
D 1.0 0.4Sb 0.27 0.30
E 1.0 0.26 0.24
F 1.0 0.39'
G 1.0

ap<o.001
bp<O.Ol
'pcO.05
Notes:
A = Visionary Leadership
B = Internal & External Cooperation
C = Learning
D = ProcessManagement
E = Continuous Improvement
F = Employee Fulfillment
G = Customer Satisfaction
Anderson, Rungytusanatham, Schroeder, and Devaraj 65 1

covariance between any two variables into three components: direct (D), indirect
(N), and unexplained (U) effects [22].
A direct effect is posited to exist if a single arrow connects two variables. When
two variables of interest are connected only via other intervening variables-in other
words, the relationship is represented by compound paths with no direct path between
the two variablles of interest-the effect is deemed to be indirect. In the context of
Figure 2, Visionary Leadership has a direct effect on Internal and External Cooperation,
but has an indirect effect on Process Management through its influence on Internal
and External Cooperation and Learning. The total indirect effect, which can be
traced along all1 possible compound paths connecting two variables, is computed by
summing the values of all possible compound paths, where a compound path value
is simply the product of the path coefficients constituting the compound path. In
this case, the total indirect effect (NDA) of Visionary Leadership on Process Man-
agement is given by the following expression:

An unexplained effect between two variables (e.g., Visionary Leadership and

Process Management) is simply the residual portion of the empirical correlation or
covariance between Visionary Leadership and Process Management not accounted
for by the total effect (sum of direct and indirect effects) of Visionary Leadership
on Process Management. If the total effect computed for any pair of variables equals
the observed empirical correlation or covariance between the two variables, then the
path diagram as drawn is deemed to be consistent with empirical d t y . The unexplained
effect, therefore, can serve as an indication of how well a proposed path diagram is
supported empirically and how descriptive the proposed theory is of the observed
phenomenon o F interest. Computationally,the unexplained effect is readily calculated
as follows:

where
rji = ernpirical correlation between variables i andj;
Uji = portion of the empirical correlationbetween variables i andj not accounted
for by the sum of the direct and indirect effects of i on j ;
Dji = direct effect of variable i on variablej, denoted by the value of the path
coefficient Pji;
N i = total indirect effect of variable i on variablej.
For the path diagram in Figure 2, the computed direct, indirect, and unexplained
effects are shown in Table 7.
According to Figure 2, Visionary Leadership is posited to only have indirect
effects on F’rocess Management, Continuous Improvement, Employee Fulfillment,
and Customer Satisfaction. After factoring out these indirect effects, there remains
considerable residual unexplained effects, suggesting that there may be direct effects
of Visionary Leadership that need to be accounted for. For example, the unexplained
effect of Visionary Leadership on Continuous Improvement is 0.19; 55 percent of
652 A Path Analytic Model

Table 7: Direct, indirect, and total effects for Figure 1.

Effect on
B C D E F G
Effect of
A Direct 0.59 0.46 0.00 0.00 0.00 0.00
Indirect 0.00 0.00 0.34 0.16 0.09 0.06
Unexplained 0.00 0.00 0.23 0.19 0.29 0.51
B Direct 0.71 0.00 0.00 0.00
Indirect 0.00 0.00 0.32 0.19 0.12
Unexplained 0.76 -0.13 0.32 0.07 0.10
C Direct -0.17 0.00 0.00 0.00
Indirect 0.00 -0.08 -0.04 -0.03
Unexplained 0.54 0.50 0.36 0.12
D Direct 0.45 0.27 0.00
Indirect 0.00 0.00 0.16
Unexplained 0.00 0.00 0.14
E Direct 0.00 0.15
Indirect 0.00 0.00
Unexplained 0.26 0.09
F Direct 0.35
Indirect 0.00
Unexplained 0.04

Notes:
A = Visionarykadership
B = Internal & External Cooperation
C = Learning
D = ProcessManagement
E = Continuous Improvement
F = Employee Fulfillment
G = Customer Satisfaction

the observed empirical correlation between Visionary Leadership and Continuous

Improvement is unexplained. Likewise, the unexplained effects of Visionary Leadership
on Employee Fulfillment and Customer Satisfaction are 0.29 and 0.5 1, respectively.
In percentage terms, this corresponds respectively to 76 percent and 90 percent of
the empirical correlation being unexplained. On the other hand, only 40 percent of
the observed empirical correlation between Visionary Leadership and Process Man-
agement is unexplained. Therefore, it appears that the further apart a construct is
postulated from Visionary Leadership, the larger the unexplained effect of Visionary
Leadership on that particular construct.
A fair amount of the unexplained effects of Internal and External Cooperation
on other constructs also exist in the context of this path model. Specifically, the
unexplained portions of the correlations between Internal and External Cooperation
Anderson, Rung,tusanatham, Schroeder, and Devaraj 653

and the construicts of Continuous Improvement, Employee Fulfillment, and Customer

Satisfaction amount to 0.32 (50 percent of the empirical correlation unexplained),
0.07 (27 percent of the empirical correlation unexplained), and 0.10 (45 percent of
the empirical Correlation unexplained), respectively.
Interestingly, the direct effect of Internal and External Cooperation on Process
Management is 0.71, which is greater than the observed empirical correlation between
the two (rDB= 0.58). This anomaly, however, can be explained once the effects of
Learning are aJso considered. The direct and indirect effects of Learning are all
negative, stemming primarily from the negative, but statistically non-significant,
path coefficient value between Learning and Process Management (pDc=-O. 17).
This negative ]path coefficient value is unexpected, given the hypothesized linear,
positive relationship between Learning and Process Management. One probable
explanation for this unexpected result is the presence of multicollinearity among the
constructs affecting Process Management [26], which, in the context of this path
model, include Internal and External Cooperation and Learning. The two constructs,
in fact, are highly and statistically correlated (rcB=0.76,pcO.OOl), yet the proposed
theory fails to specify either a correlational or a causal relationship between the them.
Table 7 also indicates an unexplained effect of Process Management on Customer
Satisfaction of 0.14, amounting to 46 percent of the observed empirical correlation
between the two constructs being unexplained. Likewise, both of the direct paths
from Continuous Improvement and Employee Fulfillment to Customer Satisfaction,
that is pGE and pGF, do not fully account for the observed empirical correlations
between Continuous Improvement and Customer Satisfaction and between Employee
Fulfillment and Customer Satisfaction. Whereas pGE has a value 0.15, a value of
0.24 is reported for rGE,the observed empirical correlation between Continuous
Improvement and Customer Satisfaction, leaving a 37 percent unexplained effect of
0.09; similarly, whereas PGF has a value of 0.35, rGFequals 0.39, with an unexplained
effect of only 0.04 or approximately 10 percent.

DISCUSSION OF RESULTS
The path analytic results, in general, indicate support for many of the relationships in
the proposed theory. Ofthe eight direct paths, only two are statisticallynon-significant-
the relationship between Learning and Process Management and between Continu-
ous Improvement and Customer Satisfaction. In the first case, the failure to
statistically uncover a significant relationship may be attributed to the multicol-
linearity problem explained earlier. The latter case, on the contrary, is intriguing and
counter-intuitive because, conceptually, Continuous Improvement and Customer
Satisfaction should be related. Several explanationscan be offered for this surprising
result: the measurement of Continuous Improvement may be problematic, the sec-
ondary nature (of the data may have affected the outcome, or the aggregation of
individual percieptions into a plant-level response may have reduced the magnitude
of the true relationship. In any case, it is not possible, given the purpose and nature
of this study, to explore this further.
While the remaining relationships are statistically significant, the coefficients
of determination, or $s, for some of the proposed relationships are rather low. A case
in point is the impact of Process Management on Continuous Improvement and
Employee FulfiHlment. It appears that Process Management, by itself, does not explain
654 A Path Analytic Model

a large portion of the observed variance. Perhaps there are other variables, either
captured in or excluded from the proposed theory, which may add considerable
explanatory power to the observed variances of Continuous Improvementand Employee
Fulfillment.
One statistically significant relationship worth further investigation is the direct
effect of Employee Fulfillment on Customer Satisfaction. The statistical significance
of this result, however, needs to be interpreted carefully because Customer Satisfaction
has been operationalized based on employee perceptions. In any case, the results
need to be examined and replicated with externally based measures of Customer
Satisfaction, in light of the increasing interest on the nature and strength of this
relationship. The literature, for example, is just beginning to examine the role that
satisfied employees play in ensuring customer satisfaction. While Deming did not
explicitly address this relationship, it is implicitly treated in the Deming Management
Method as a natural outcome of employees’being able to attain pride of workmanship.
The logic of this relationship in the context of Deming’s 14 Points quality manage-
ment philosophy rests fundamentally on the interaction of pride (of quality) of work,
and Deming’s enunciation of the three comers of quality [6, p. 1771 [7, p. 2281. As
explained by Anderson, et al.:
Pride of quality of work necessarily relies upon (a) understanding and satisfying
changing customers requirements, (b) providing relevant product- or service-related
information, and (c) anticipating customer usage. [I, p. 4961
The presence of large unexplained effects for the path model representation of
the proposed theory, nevertheless, suggests that the present theory may not be
exhaustive in its specification of plausible causal and correlational relationships. A
number of other plausible relationships can be suggested. For example, it is quite
likely that Visionary Leadership, in addition to indirectly affecting Process Manage-
ment through the creation of a highly cooperative and leaming environment, may
directly affect Process Management through leadership actions and policies embracing
Process Management practices. The empirical correlations reported in Table 6 cer-
tainly advocate a direct path from Visionary Leadership to Process Management, as
well as the existence of several other direct paths emanating not only from Visionary
Leadership but also from Internal and External Cooperation, Learning, Process
Management, and Continuous Improvement. The possibility of direct paths from
Visionary Leadership, Internal and External Cooperation, and Learning to both
Continuous Improvement and Employee Fulfillment is consistent with earlier insights
that other constructs, besides Process Management, may affect Continuous Improve-
ment and Employee Fulfillment. Similarly, Customer Satisfaction may be directly
affected by Visionary Leadership and Process Management.
Additionally, at least two bi-directional (i.e., correlational) relationships are
supported by the data. The multicollinearity problem, noted earlier, can be resolved
by drawing a bi-directional arrow linking Internal and External Cooperation and
Learning. Alternatively, one can specify a reciprocal relationship between the two
constructs, indicating a “looping” causal effect between the two. That is, Internal
and External Cooperation facilitates Learning, which, in turn, facilitates greater
Internal and External Cooperation. Of course, these changes should be made to the
proposed theory only if they can be supported theoretically.
Anderson, Rungtusanatham, Schroeder, and Devaraj 655

A second possible correlational relationship exists between Continuous Improve-

ment and Employee Fulfillment. This is indicated (a) by the inequality between
pGE,the path c:oeficient representing the direct impact of Continuous Improvement
on Customer Satisfaction, and rGE,the correlation between Continuous Improvement
and Customer !Satisfaction, and (b) by the inequality between pGF, the path coefficient
representing thle direct impact of Employee Fulfillment on Customer Satisfaction,
and rGF,the correlation between Employee Fulfillment and Customer Satisfaction.
These inequalities imply the existence of indirect effects of Continuous Improve-
ment and Employee Fulfillment on Customer Satisfaction. In fact, by including a
bi-directional arrow connecting Continuous Improvement and Employee Fulfillment
into Figure 2, the impact of Continuous Improvement on Customer Satisfaction
would be quantified as the sum of a direct effect and an indirect effect, resulting in
the equating of pGE to rGE The direct effect captured in pGE remains unchanged
(pGE= 0.15); the indirect effect of Continuous Improvement on Customer Satisfac-
tion is represented by the compound path, ~ G E P G F whose
, numerical value is 0.09
or 0.26 multiplied by 0.35. The total effect of Continuous Improvement on Customer
Satisfaction is, therefore, 0.24, the same as the rGEvalue of 0.24. The same is me
of the impact of Employee Fulfillment on Customer Satisfaction; the total effect of
Employee Fulfillment on Customer Satisfaction is given by the expression,
pGF+rFEpGE. Substituting corresponding numerical values into this expression,
that is, 0.35+(0.26xO.15), yields 0.39, which is essentially the observed empirical
correlation between Employee Fulfillment and Customer Satisfaction.
On the whole, this exploratory analysis has been successful in demonstrating
empirical support for several relationships postulated in the proposed theory and in
suggesting several possible relationships missing from the proposed theory. What
needs to be doine now is to conceptually redefine the path model representation of
the proposed theory, adding in relationships suggested by this study to the extent
that they can be theoretically justified, and reexamining those relationships that
appear to enjoy little empirical support. This reformulation of the theory should be
followed by fuirther empirical testing using a new data sample.

CONCLUSIONS
The empirical results reported here are based on an analysis of an available data
source. Becausle both Japanese-owned and Amencan-owned plants are included in
the analysis, and knowing Deming’s influence on Japanese management, the results
of this study provide a glimpse of the cross-cultural validity of the proposed theoretical
relationships. A more valid approach, of course, would be to empirically examine
the relationships in the proposed theory in plants located in multiple countries, a
task which is the focus of future research plans related to the proposed theory shown
in Figure 1.
More importantly, it must be emphasized that these results represent an inter-
mediate step in theory development, and more specifically, provide an opportunity
for theory refinement and reformulation. The limitations presented by the secondary
nature of the construct operationalization and data source, however, discourage the
interpretation of these empirical findings as formal statistical tests of the relationships
in the proposed theory. Nonetheless, the insights generated by analyzing secondary
656 A Path Analytic Model

data in the context of the proposed theory, besides lending credence to many of the
proposed relationships, also provides an opportunity to explore at least two addi-
tional relationships not specified in the original theory.
From an academic perspective, therefore, the empirical analysis of the proposed
theory has served to focus attention on previously unidentified and unconceptualized
relationships among the constructs in the proposed theory-relationships deserving
of further theoretical and empirical examination. Subsequent research needs to engage
in the development of more valid and reliable operational definitions for the pro-
posed constructs, overcoming the limitations posed by the data source used in the
present study. Once the proposed constructs have been operationally defined in a
valid and reliable manner, formal theory testing can proceed, with such results
contributing to the evolving scientific knowledge base on the Deming Management
Method and its organizational consequences and implications.
Even though the results are exploratory, there appears to be some practical
utility. From a pragmatic perspective, for instance, the empirical results suggest the
importance of organizational leadership and its impact on creating an organizational
form and instituting organizational practices to bolster the goal of organizational
survival. The results also suggest that while organizations can theoretically survive
by continually satisfying customers through innovations that lead to quality improve-
ments in processes, products, and services, efforts to enable organizational constituents
to derive happiness, satisfaction, and pride of work are potentially instrumental in
improved customer satisfaction as well-a conclusion that is intuitively appealing.
Lastly, the fact that many of the relationships appear to receive exploratory empirical
support should help organizations better understand and more effectively embrace
the adoption of quality management within organizations. [Received: October 5,
1994. Accepted: June 1, 1995.1

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John Anderson is an associate professor of operations and management science

at the Carlson School of Management at the University of Minnesota. He received
his Ph.D. from the University of Minnesota and has served as president of the
Decision Sciences Institute. His teaching and research interests involve quality
management, operations strategy, and operations analysis.

Manus Rungtusanatham is an assistant professor of business at the University

of Wisconsin-Madison, having just completed his Ph.D. in operations and manage-
ment sciences from the University of Minnesota. His research interests include
quality management and operations management.

Roger Schroecler holds the Frank A. Donaldson Professorship in Operations

Management at the Carlson School of Management at the University of Minnesota,
and is co-director of the Quality Leadership Center. He received his Ph.D. from
Northwestern University. His research interests include quality management,
manufacturing strategy, and world-class manufacturing.

Sarvanan Devaraj is a Ph.D. candidate in operations and management science

within the Carlson School of Management at the University of Minnesota. His
research interests include quality and productivity management, technology
management, and world-class manufacturing.