1. Does Investing in Excellence Pay? Prof. Tony Bendell Middlesex University Business School and Services Ltd., Nottingham Former Director of the Centre of Quality Excellence, University of Leicester © www.servicesltd.co.uk Tuesday 09 October 2007, 6pm Barnard’s Inn Hall Gresham College

2. © www.servicesltd.co.uk 2 Does Investing in Excellence Pay? Across Europe a number of companies have invested in the pursuit of quality and excellence as a core of their business strategy. Many more have not. Who is right? This lecture, building upon previous work in North America, explains the evidence from the latest European-wide study.

3. © www.servicesltd.co.uk 3 Business Strategy for Success Organisational Strategies to deliver business performance and share value vary dramatically Many companies believe a systematic balanced stakeholder-inclusive management approach, such as underlying the Tomorrow’s Company initiative, will deliver business performance Many more do not

4. © www.servicesltd.co.uk 4 Who is Right? Does the pursuit of a balanced approach to company Excellence pay?

5. © www.servicesltd.co.uk 5 Who is Right? Does the pursuit of a balanced approach to company Excellence pay? What is the evidence? How can we get evidence?

6. © www.servicesltd.co.uk 6 What is the Evidence? Systematic Balanced Stakeholder-Inclusive management approaches to deliver business success are in widescale use around the world Most established are - the Deming Prize Model (Japan since 1950’s) - the Malcolm Baldrige National Quality Award Model (US since 1980’s) - the EFQM Excellence Model (Europe since 1990’s)

7. © www.servicesltd.co.uk 7 International Usage European Level, National and Regional Excellence Awards based on these models across world Most based on Baldrige or EFQM Models e.g. Dubai Quality Award and Sheikh Khalifa Excellence Award (Abu Dhabi) UK; regional and national Excellence Awards (British Quality Foundation) 2006 Excellence Award winners included parts of Siemens, TNT and Grundfos Some key international players making extensive use of the Excellence Model in their strategy e.g Dubai Holding

8. © www.servicesltd.co.uk 8 RESULTS 50% EFQM Excellence Model ENABLERS 50% Key Performance Results 15% People 9% Policy & Strategy 8% Leadership 10% Partnerships & Resources 9% People Results 9% Customer Results 20% Processes 14% Society Results 6% INNOVATION & LEARNING

9. © www.servicesltd.co.uk 9 European Foundation for Quality Management – Fundamental Concepts of Excellence Results Orientation Customer Focus Leadership and Constancy of Purpose Management by Processes and Facts People Development and Involvement Continuous Learning, Innovation and Improvement Partnership Development Corporate Social Responsibility

10. © www.servicesltd.co.uk 10 History of Quality Improvement Strategies Guilds Inspection Quality Control Process Control Quality Assurance Total Quality Management Excellence

11. © www.servicesltd.co.uk 11  Developed from the experience of successful organisations  Based on a ‘Total Quality’ Model  Tests how effectively the organisation applies excellence principles  Frameworks to which all other activities and initiatives can be related  Largely, but not entirely, similar Background

12. © www.servicesltd.co.uk 12 ProcessesPeople Results Excellence Strategy:

13. © www.servicesltd.co.uk 13 Baldrige Framework 1. Leadership 2. Strategic Planning 3. Customer and Market Focus 4. Information and Analysis 5. Human Resource Focus 6. Process Management 7. Business Results Customer and Market Focused Strategy and Action Plans

14. © www.servicesltd.co.uk 14 Mission Vision Values Beliefs Management Development Succession Planning IiP MBO Employ’t Law Empowerment Appraisal and Development Objectives Plans Policy Development Devolved Management JIT MIS CMM Knowledge IT initiatives Kanban Out-sourcing Zero Budget’g QA/QMS ISO 9000 QS 9000 BPR Process Mapping Performance Management SPC Kaizen Kanban Deming Juran Ishikawa Crosby Surveys Suggestions Comm’s Forums Surveys Interviews Charters Guarantees Complaints Procedures ISO 14000 Health/Safety Community Activity Green initiatives Financial Results Internal Auditors Scorecards “Quality Costs” Benchmarks Performance Indicators Death By 1000 Initiatives!

15. © www.servicesltd.co.uk 15 “RADAR” Mechanism 1. Determine RESULTS required 2. Plan and develop APPROACHES 3. DEPLOY approaches 4. ASSESS AND REVIEW approaches and their deployment © EFQM 1999 The Model is a registered trademark of the EFQM

16. © www.servicesltd.co.uk 16 Time 300:Good organisation, quality assurance in place, starting continuous improvement 500:Very good organisation, sustaining improvement, process orientation, clear performance improvement 700:Excellent organisation, improvement a way of life, empowered employees, sector benchmark, sustained excellent business results The Journey to “World Class”

17. © www.servicesltd.co.uk 17 What is the Evidence That Excellence Pays? The danger of self-evident truth; the ‘Quality Religion’ Case Studies or Surveys; reliance on management perception What is the objective evidence?

18. © www.servicesltd.co.uk 18 Vinod Singhal and Kevin Hendricks - US Baldrige study 1990’s (Management Science 1997) Used publicly available data to compare performance of Excellence Award winners and other companies in their sectors Award winning companies have superior performance on share price and usual financial measures, for up to five years following an award The perfect investment portfolio! The Excellence Strategy Pays!

19. © www.servicesltd.co.uk 19 Methodology Identify award winners that have effectively implemented the principles of Excellence Identify the year in which a company received a first award Collect accounting data for the award winning companies Identify comparison companies Collect accounting data for the comparison companies Calculate the performance differences between each award winner and its comparison company Trim for Outliers

20. © www.servicesltd.co.uk 20 Limitations Companies need to be publicly traded Where an award winner is a subsidiary of a publicly listed company, account data is collected on the parent company Multiple Awards Selection of Comparison Companies Outliers

21. © www.servicesltd.co.uk 21 European Study 2005-6 Commissioned by EFQM and BQF Undertaken by my team in the Centre of Quality Excellence at the University of Leicester (now closed) Team consisted of myself, Dr Louise Boulter (project leader), Hanida Abas plus Prof. Vinod Singhal, Georgia Tec and Prof. Jens Dahlgaard, Linköping University Methodology, similar to US study but more difficult due to different accounting system

22. © www.servicesltd.co.uk 22 Creating Matched-Pairs of Companies For each award winning company a comparable company was identified This is based on the following key criteria: Same country of incorporation of the parent company Same accounting data available over at least the same time period as the award winning company Has at least the same first digit industry code as classified by Datastream Is closest in size as measured by total assets at the fiscal year end before the winning of a first award, with the constraint that the ratio of value of assets is always less than a factor of three

23. © www.servicesltd.co.uk 23 Time Period for Analyses Accounting data for the appropriate time period has been collected on: The year a company received the first award The five years before a company received the first award The five years after a company received the first award Analyses based on a time period of eleven years, but this had to be flexible because of the availability of data

24. © www.servicesltd.co.uk 24 Time Period 1990199419952000 Five years before One year before Year of First known award Five years after Implementation Period Post-Implementation Period Determining the implementation and the post-implementation time periods for a company that received a first award in 1995

25. © www.servicesltd.co.uk 25 Overview of Key Performance Measures Share Value – Primary Measure Revenue/Sales measures Cost measures Operating income measures Other accounting based measures

26. © www.servicesltd.co.uk 26 Share Value Primary measure for the study Return on shares that an investor would have earned by investing in companies that have effectively implemented the principles of the EFQM Excellence Model The buy and hold returns for each award winning company has been calculated and compared against buy and hold returns for each comparison company The returns include capital gains, regular dividends and special dividends, having been already adjusted by Datastream for any stock splits The aggregate differences give an estimate of the element of share value that corresponds to the effective implementation of the principles of the EFQM Excellence Model

27. © www.servicesltd.co.uk 27 Effective Size of Study Numbers reduced due to match pair requirements Overall analysis based on the population of 120 companies and their Comparison Companies 85 European head-officed companies: 70.8% 35 Non-European companies: 29.2%

28. © www.servicesltd.co.uk 28 Results: One Year Before to One Year After 3 8 3 13 10 12 3 -1.5 -2 0 2 4 6 8 10 12 14 Mean difference of % change Share Value Sales Sales over Assets Capital Expenditure over Assets Capital Expenditure over Sales Assets Employees Total Costover Sales Share Value SalesOtherCost Performance Measures Mean Difference of % Change in Performance Measures between each Award Winning Company and its Comparison Company from one year before to one year after the first known award

29. © www.servicesltd.co.uk 29 Award Winners: One Year Improvements in Financial Performance After the First Award Improvements within a short period of time after having received a first award Compared to the comparison companies, award winning companies experience greater mean % change increases in: Share value Efficiency measures Capital expenditure over assets Capital expenditure over sales Assets

30. © www.servicesltd.co.uk 30 Results: One Year Before to Three Years After 36 17 5 8 4 20 -1.8 -1.4 -5 0 5 10 15 20 25 30 35 40 Mean difference of % change Share Value Sales Sales over Assets Sales over Employees Capital Expenditure over Sales Assets Employees Total Cost over Sales Share Value SalesOtherCost Performance Measures Mean Difference of % Change in Performance Measures between each Award Winning Company and its Comparison Company from one year before to three years after the first known award

31. © www.servicesltd.co.uk 31 Award Winners: Three Year Improvements in Financial Performance After the First Award Compared to the comparison companies award winners experience further mean increases in performance by an average of: 36% in share value 17% in Revenue/Sales 20% in Assets 5% in Sales over Assets 1.5% reduction in Total Cost over Sales

32. © www.servicesltd.co.uk 32 Results: One Year to Five Years After 77 1816 13 28 30 44 -4.4 -10 0 10 20 30 40 50 60 70 80 Mean difference of % change SalesOperating Income Operating Income/Sales Operating Income over Assets Capital Expenditure over Assets Capital Expenditure over Sales AssetsTotal Cost over Sales SalesOperating IncomeOtherCost Performance Measures Mean Difference of % Change in Performance Measures between each Award Winning Company and its Comparison Company from one year before to five years after the first known award

33. © www.servicesltd.co.uk 33 Award Winners: Five Year Improvements in Financial Performance After the First Award Award winners experience even greater increases in growth and cost efficiency measures Compared to the comparison companies, award winning companies indicate higher performance by an average: 77% in sales 18% in operating income 28% in capital expenditure over assets 30% in expenditure over sales 40% in assets 4.4% reduction in costs

34. © www.servicesltd.co.uk 34 Implications An Excellence strategy appears to pay! Improvements in Excellence-focussed companies compared to the comparison companies are more about increased/improved sales and assets etc than cost reduction It’s not just about leanness and process efficiency Performance over time is complex and varies between companies, industries and countries Also some evidence that European Excellence Award winners, i.e. those who have maybe done most to pursue Excellence, outperform other Award winners on Share Value

35. © www.servicesltd.co.uk 35 Level of Excellence Award Similar effect for Total Cost over Sales However, national Award winners outperform European ones for aspects of some other measures e.g Sales, Assets Source: Phase 3 Report, 06 Sept 2005 © Boulter, Bendell and Abas Overall Results European winners National winners Regional winners

36. © www.servicesltd.co.uk 36 Industrial Sectors Four sectors with sufficient data for analysis: Basic Industries Construction and Building Material and Steel and Other Metals Cyclical Consumer Goods Automobile and Parts General Industries Aerospace and Defence, Electronic and Electrical Equipment and Engineering and Machinery Information Technology Information Technology Hardware

37. © www.servicesltd.co.uk 37 Share Value Similar pattern for Sales and Operating Income Source: Phase 3 Report, 06 Sept 2005 © Boulter, Bendell and Abas (months)

38. © www.servicesltd.co.uk 38 Summary Investing in Excellence as a core of business strategy pays Objective evidence for this now exists in both North America and Europe The studies are not perfect, but use best available research methodology Excellence strategies contribute to business performance through increased sales etc and not primarily through reduced cost and process efficiency Performance over time is complex and varies by company, industrial sector and country

39. © www.servicesltd.co.uk 39 Finally The work presented here are the results of a team project We are grateful to the project sponsor, EFQM (www.efqm.org) and BQF (www.bqf.org.uk) The project team at the University of Leicester has been split up, but would still be very happy to discuss the project Contact: Prof. Tony Bendell Services Ltd. Quality & Reliability House 82 Trent Boulevard West Bridgford Nottingham NG2 5BL Tel: 0115 9455285 Email: tony@servicesltd.co.uk