The Best-Kept Secret: Quality Pays
The names Maytag, Federal Express, Digital Equipment, and Walt Disney conjure images of high-quality products and services—as well as profitability and fast- growth. Nonetheless, the degree to which customers are willing to pay for such quality remains one of the best kept business secrets.
Look at firms in any industry that's reeling—from autos to semiconductors—and you'll find, rhetoric aside, that relative quality is much higher on the list of thorny problems than relative cost.
While stories about quality-oriented firms induce nods, there is a surprising absence of systematic research that links quality and performance. The most decisive evidence comes from the Strategic Planning Institute of Cambridge, Massachusetts. Its data base on business performance, called PIMS, for Profit Impact of Market Strategy, is based on thousands of companies that share detailed, confidential product-line data with PIMS researchers.
Early PIMS analyses focused on the strong tie between market share and profitability. But recently, as studies have delved a level deeper into cause-and-effect linkages, researchers have modified their tune. "Relative perceived product quality," they now say, is the clear-cut key to sustainable top performance. PIMS studies compare customer perceptions of tangible and intangible traits, other than price, among competing products. Companies rated in the top third on relative perceived product quality out-earn those in the bottom third by about two-to-one (on return on investment) over the long haul. Alternatively, market share that's "bought" with a low-price strategy may yield a few good years, but it rarely lasts.
A striking confirmation of the chief PIMS conclusion comes from TRW Inc., a firm that is a microcosm of the economy, with activities ranging from financial services to automotive aftermarket parts and million-bit semiconductors. Dr. John Groocock, recently retired vice president for quality at the $5 billion company, compared customers' perceptions of relative quality for 140 product lines in 47 TRW business units, against 560 competitors' product lines.
The top one third of TRW's business units earned a quality score of 4.6 out of a possible 5.0; the middle one-third rated 3.1; and the worst third scored 1.9. The top third outperformed the bottom by about a three-to-one margin. Return on sales for the top third ran 7.7 percent compared with the bottom third's 2.9 percent; return on assets employed were 26.6 percent and 8.9 percent, respectively.
There's more. Groocock also decisively found that it doesn't pay to practice an "in-between" strategy. The middle third's 1.4 percent ROS and 5.1 percent ROAE noticeably under-performed the bottom third! Other systematic research supports this finding. So does common sense. As one seminar participant put it, "You don't go to the Yellow Pages and look for a product with an average number of defects at an average price." Or take Sears' poor retail performance in the 1970s and early 1980s. It drifted between the low end and the high end of the retail market. The company could not resolve its identity crisis—did it want to be a Bloomingdales or a K-Mart? Confused customers responded by flocking to one or the other, at Sears' expense.
Look more closely, then, and you find that the top third of TWR's businesses were marked by products considered to be the very best; their prices were higher, too. The bottom third were of average quality, but at a distinguishably lower price. The middle third, those poor performers, had prices a bit on the high side, and quality that most often tied for first ("joint best," as Groocock calls it). The stunning implication is that to gain a profit and growth advantage, a product must not only be "good, it must be perceived to be noticeably better than that of competitors!
Groocock concludes: "The PIMS results for quality are so impressive that it is surprising that they have had so little effect on American management." Amen.
Despite the intuitive sensibility of these results, most people I talk with still seem surprised at the extent to which hard evidence—such as the PIMS or Groocock data—demonstrates that quality pays in any product or service arena. (Mainly, I'm constantly surprised that so few know about the PIMS data or have examined this relationship systematically on their own.) Yet evidence surrounds us—just count the Hondas and Toyotas on the highway or the Maytags in laundry rooms. And where did reporter Nicholas Daniloff celebrate his release from Russia? At Disney World!
In a speech to the recent White House Conference on Small Business, I urged (only somewhat facetiously) that we put a partial gag order on the business press—prohibiting them from reporting any firm's revenue or profit for five years, but requiring them to publish relative quality statistics for every company. We must simply make the achievement of superior quality a national obsession.
(c) 1986 TPG Communications.
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