QUALITY, COST, MARKET SHARE

&PROFITABILITY
COST DRIVEN APPROACH (PROCESS
APPROACH)
Reduction of cost or waste at the production
level hence premium prices are charged to
increase profits. Eg. The cost decreases whiles
the selling price and volumes either remains the
same or changes positively.

Crosby (1979) asserts that there is an inverse

relationship between conformance quality and
cost and therefore Quality is Free. As quality
improves cost reduces and profits increase.
CONTND...

According to Heldt as captured in Harrington

(1987) : "Reducing the cost of poor quality will
increase your overall profit more than doubling
sales
Where the causes of poor quality involves some
waste or MUDA captured as: TIMWOOD
Transportation Over production
Inventory Defects
Motion

Waiting

Over processing
CONTND....
Katzan (1985) mentions that poor quality is
costly and has a ripple effect, which will eat away
profits.
Day (1988) demonstrated how profits can double

because of the elimination of scrap and rework

through the improvement of process capability.
The most impressive assertion regarding the
cost-driven approach of the quality and profit
relationship is proposed by G. Taguchi. In the
early 1980s, Taguchi presented a "loss function"
concept, which aims at reducing the variability of
products. The variability is product's deviation
from its target value.
CONTND
He believes that the loss caused by the variability
is incurred by society. Therefore, Taguchi (1985)
defines quality as the loss a product imposes on
society after this product is shipped. He
maintains that variability must be decreased so
that the total loss can be reduced. Because of the
reduction of loss, profits increase.

Since the increased profit can be quickly obtained

from the reduction of costs, Taguchi's method has
been widely applied in industries.
 MARKET DRIVEN APPROACH
Emphasizes that profit is increased by having more
customers which is explained by increased market
share.
Halpin (1966) stresses that Zero Defects can deliver
the best possible product at the lowest possible price
on time. This will "assure management a strong
market position in the years to come

Crosby (1984) stresses that if the top management

respected the rights of customers like it respects the
rights of the stockholders, then quality and profit will
both increase at the same time.
CONTND.....
Buzzell and Bradley (1987) assert that with higher
quality, stronger customer loyalty and more repeat
purchases can result
Owen (1989) believes that attaining higher quality
will cost more at first; however, this cost will pay off
and result in a higher return on investment.
Ishikawa (1990) stresses that quality assurance
approach is "customer-first philosophy, (customer
focus)
Smith (1990) points out that quality is a strategic and
competitive weapon. With a higher level of quality, it
is easier to attract customers and increase sales.
CONTND..
Bauer (1990), a retired director of IBM and winner of
National Quality Award in 1990, points out that
"Market-Driven Quality" is IBM's quality strategy,
and aims at enlarging market shares.

Both Huge (1990) and Bhote(1991) indicate that

PIMS(Profit Impact of Market Strategy) research
shows a strong relationship exists between quality and
profitability. Huge also indicates more definitely that
if the quality improves from low to high, market share
and profit on sales will at least double from low to
high.
CONTD..

Tschohl and Franzmeier (1991) claims that profit is

determined by customer satisfaction. Although good
product quality alone will not guarantee profit, it
helps to increase customer satisfaction and profit.

Munoz, Civille, and Carr (1992) think a strong

relationship exists between quality and customers'
buying decisions. Customers not only care about
quality, but also buy quality. Munoz et al. believe
this is the reason that Japanese businesses succeed
in U.S. markets.
CONTND...
Feigenbaum (1986) maintains that quality is the
"most powerful corporate leverage point for achieving
both customer satisfaction and low costs This means
that more profit can result from improving quality and
reducing cost simultaneously

Juran and Gryna (1993) explain the four reasons high

quality produces more profits: by the increase of
market share, by earning premium prices, by
obtaining benefits of a larger production scale, and by
attracting and sticking to customer's loyalty.
 QUALITY & VALUE OPTIMIZATION
The Rationale
Todays customers do not forgive easily when they
experience poor products & service. The repercussions
of bad service can be considerably detrimental to your
business, affecting your ability to retain customer
loyalty and protect your companys reputation. Bad
news travels fast, so a single failed interaction can
spread to a customers family, friends and an entire
database of contacts. Thus, one unhappy individual
can affect a widespread network of prospects through
adverse feedback.
 THE CONCEPT OF VALUE
Affordable cost of service or product + Quality of
service or product = VALUE
Results Expectations = VALUE

The customers perception of value is shaped by the

following factors :

Freedom from faults

Degree to which requirements/expectations are met
Emotional engagement with product/service
Quality of contact with supplier
Cost of product/service
CONTND..
When the customers service or product experience is
the same as their expectations customer satisfaction
becomes the minimum achievement. This does little in
terms of customer retention and profit increments.

However when their expectations are exceeded, thus

generating positive value then repeated purchase is
guaranteed but it does not guarantee customer loyalty
because customers expectations are volatile, they
would switch to the next competitor that gives them
superior value. Eg the fashion industry and the
mobile technology industry.
 OPTIMIZING VALUE
Invest in technology that improves your business
processes and constantly or continually improve through
Business Process Re-engineering to reduce cost and
improve process capability by reducing process
variability to deliver value.

Invest in training the frontline employees especially the

process owners (operations) with the latest skills to be
equipped to deliver value at both value frontiers (Product
and Customer service or relationship management)

Encourage an atmosphere of everybodys involvement

that encourages innovation and creativity to assure
customer retention.
CONTND...

The focus of quality management is not solely on

profit maximisation but rather more on value
maximisation and optimisation. In other words,
TQM is not interested in short run profits as they
are dangerous.

Investment in TQM programs would deliver

value in the long run and it would guarantee the
sustainability of the business as long as
continual improvements remains a priority.
THE QUALITY TRIANGLE
THE DIMENSIONS OF COMPETITION
ARGUMENT
First Proponent: William Procter, co-founder PROCTER &
GAMBLE
After several years in industry, he believed that successful
products competes on the following dimensions:
Cost of the product

Availability of the product (level of productivity) and

Quality of the product

This meant that competition was solely driven by the

product so that if the above product competitive
dimensions went wrong then the product was bound to fail
on the market.
CONTND...
Second Proponent: Noori, H., Munro, H., Deszca, G. and
Cohen, M.(1996) in their work :Methodologies for
developing breakthrough products and services: what
we know and dont know.Laurier Business School,
Wilfried Laurier University,Waterloo, Ontario, Canada.,
observed that competition is not solely by the product but by
the organisation, because the organisation produces the
product. Therefore an organisation with a bad reputation
would find it difficult selling its products or services. They
therefore proposed an extension of the triangle with three
new dimensions of competition.
 QUALITY TRIANGLE EXTENSION
The extension proposed by Noori et al (1996) are as
follows:
Dependability

Flexibility

Serviceability

According Noori et al (1996) once the product is a subset of

the organisation it is crucial that it maintains the
reputation for being dependable (does what it promises it
would do), flexible enough to adjust and respond to changes
in customer expectations, requirements and environmental
requirements which is very fluid and be serviceable do pre-
sale services, after sales service and most importantly
community service, these are all strategies to improve
and enhance organisational image and reputation.
 DIMENSIONS FOR COMPETITION
Putting the ideas of the two proponents together we get
the overall dimensions for competition hence competition
operates at two levels:
The organizational level

The product or service level

Both the organization & the product/service operate at the

following dimensions:
Dependability

Flexibility

Serviceability

Cost of the product

Availability of the product (level of productivity) and

Quality of the product