Quality Management Proves to be a Sound Investment, Says NIST

The Commerce Department's National Institute of Standards and Technology said today that investing in quality management can result in an impressive payoff.

NIST "invested" a hypothetical $1,000 in each of the five publicly traded, whole company winners of the Malcolm Baldrige National Quality Award and the parent companies of seven subsidiary winners. The success of the investment was tracked from the first business day in April of the year they won the award (or the date they went public) to Oct. 3, 1994. Adjustments were made for stock splits and/or stock dividends. Another hypothetical $1,000 was invested in the Standard & Poor's 500 at the same time.

NIST found that the five whole company winners--Eastman Chemical Co., Federal Express Corp., Motorola Inc., Solectron Corp. and Zytec Corp.--outperformed the S&P 500 by 6.5 to 1, a 188 percent return on investment compared to a 28 percent return for the S&P 500.

A hypothetical $1,000 also was invested in seven publicly traded parent companies--Westinghouse Electric Corp., Xerox Corp., General Motors, IBM, AT&T and Texas Instruments--of subsidiaries that had won, and the five whole company winners. The result was a 92 percent return on investment, compared to a 33 percent return for the S&P 500. All together these companies outperformed the S&P 500 by almost 3 to 1. Other independent studies have shown similar results.

The winning subsidiaries are: Westinghouse's Commercial Nuclear Fuel Division; Xerox Business Products and Systems; GM's Cadillac Motor Car Division; IBM Rochester; two of AT&T's winning units--Network Systems Group/Transmission Systems Business Unit and Universal Card Services; and Texas Instrument's Defense Systems & Electronics Group.

In addition, NIST invested a hypothetical $1,000 in the publicly traded Baldrige Award applicants receiving site visits during 1990 through 1993. As with the other companies, the investment period began the first business day in April of the year the companies were site-visited or the date they went public. The eight whole company applicants outperformed the S&P 500 by 4.5 to 1. As a group of 32, which includes the whole- company applicants and the parent companies of subsidiary applicants, they outperformed the S&P 500 by 2 to 1. (Names of applicant companies are kept confidential.)

Says Curt W. Reimann, director of the Baldrige award program at NIST, "This review adds to the mounting evidence that, done right, quality management can lead to outstanding returns in many business areas, including financial performance, satisfied customers and improved market share."

While quality management cannot guarantee success, Baldrige award winners report many improvements as a result of investing in quality management. For example,

• According to Ko Nishimura, president and chief executive officer of Solectron Corp., "We continue to use the Malcolm Baldrige National Quality Award criteria even after winning the award in 1991. These criteria have helped us build a quality company and return substantial value to our shareholders." Adds Nishimura, "From 1989 to 1994, sales have increased from $130 million to $1.457 billion, net profit has increased from $4 million to $56 million, Solectron's stock price has had an average growth of 82 percent per year, and the number of customer awards for quality and service has increased from 14 to 63."
• Another 1991 winner, Marlow Industries, reports that through the Baldrige criteria, it has developed a wide variety of quality tools and a quality system that has resulted in successful penetration of new markets and a sales increase of 35 percent for 1994.
• For 1992 winner, Ritz-Carlton Hotel Co., quality management has helped the company eliminate $75 million in waste through project improvements.
• A 1993 winner, Ames Rubber Corp., reports that through sharing total quality management techniques, its suppliers have achieved a 99.9 percent quality and on-time delivery status.
• Cumulative manufacturing cost savings at Motorola, a 1988 winner, for the years 1987 through the second quarter of 1994 were over $5.5 billion.

Other reports also show that "quality pays." In a 1991 study of 20 U.S. companies, the U.S. General Accounting Office found that "in nearly all cases, companies that used total quality management practices achieved better employee relations, higher productivity, greater customer satisfaction, increased market share, and improved profitability."

A more recent report by The Conference Board says, "A majority of large U.S. firms have used the criteria of the Malcolm Baldrige National Quality Award for self-improvement, and the evidence suggests a long-term link between use of the Baldrige criteria and improved business performance."

In conjunction with the private sector, NIST developed and manages the award program. A non-regulatory agency of the Commerce Department's Technology Administration, NIST promotes U.S. economic growth by working with industry to develop and apply technology, measurements and standards. NIST was selected by Congress to design and manage the award program because of its role in helping U.S. companies compete, its world-renowned expertise in quality control and assurance and its reputation as an impartial third party.