ABSTRACT
 
The number of companies applying for ISO 9000 certification is
increasing rapidly in Malaysia. People usually presume that
having the ISO 9000 certificate means having a better quality
and usually increased profitability. This paper assesses the
impact of ISO 9000 on firm profitability. Further, the
profitability of companies that implemented ISO together with
other Total Quality Management (TQM) programmes is compared to
the profitability of companies that implemented ISO in
isolation. This is accomplished through the analysis of a
survey addressed to managing directors of 200 ISO certified
manufacturing companies as well as the profit data received
from the Malaysian Registry of Companies (ROC).
 
INTRODUCTION
 
Quality is a critical success factor that can lead firms to
gain competitive advantage. With the seeds of Vision 2020 (the
year Malaysia plans to be a fully developed nation) planted in
all industries, Malaysia strives to achieve global recognition
for quality management. The Malaysian government encourages
companies and government agencies to obtain ISO 9000
certification in order to enhance their quality management
system. Based on SIRIM (Malaysian certifying body) Directory
of Certified Products and Companies which was issued in June
1997, there are 936 companies (from the manufacturing and
services sectors) certified to MS ISO 9000. Although much
effort is put in by the industries in Malaysia to obtain ISO
9000 certification, there has been no attempt made to verify
whether implementation of ISO 9000 leads to any increase in
firm profitability.
 
Although research work in the field of Quality Management has
been increasing tremendously for the past few decades, very
few known studies have been conducted to find out if Quality
management systems bring improvement to company profit. There
are examples of companies in the USA which have won the
coveted Malcolm Baldrige National Quality Award (MBNQA), but
had failed to show any improvements in terms of profit. One
such company is Wallace Company (Tatikonda and Tatikonda,
1996), which won the MBNQA but eventually had to file for
protection 11 Bankruptcy Protection.
 
Though many of the Quality Management practitioners strongly
support the notion that implementation of ISO 9000 leads to a
higher level firm profitability, this notion is not supported
by strong evidences, as there has not been any known study
which compares the firm profitability before and after
implementation of ISO 9000. This study is conducted to come up
with the evidence that can confirm whether the implementation
of ISO 9000 leads to a higher level of firm profitability.
Through this study, we also want to examine whether the
expected positive impact of ISO 9000 on firm profitability is
greater when the system is implemented with other TQM
programmes or not. From the responses received, this study
will be able to grasp the extent of implementation of TQM
programmes in ISO 9000 certified companies.
 
The major objectives of this research are to investigate
whether:
 
1. Firms that obtained ISO 9000 certification yield higher
profits after implementation of ISO 9000, compared with
profits before implementation of ISO 9000.
 
2. The approach of implementing ISO 9000 in combination with
other TQM programmes leads to greater firm profitability,
compared with the approach of implementing ISO 9000 in
isolation.
 
This paper consists of five sections. The first section gives
the introduction and background of this study. The second
section is a review of the available literature on this
subject. The third outlines the data collection. The fourth
presents an analysis of the results in view of the objectives
of this work and the literature review. The fifth gives the
conclusion and recommendations.
 
LITERATURE REVIEW
 
This section presents relevant literature related to this
study and particularly a review of the studies assessing the
impact of quality programmes on profitability.
 
Empirical evidence of ISO 9000's potential for improving
financial performance is not available to date. A small number
of studies have been carried out on TQM and its impact on
financial performance. These studies are usually supported by
a few success stories.
 
Studies have so far shown that the benefits of TQM are only
marginal. For example, the Boston Consulting Company carried
out a survey on TQM and its impact on firm competitiveness
(Schaffer and Thompson, 1992) and found that only one-third of
the companies surveyed acknowledged that their TQM process had
a significant impact on improving competitiveness.
 
An empirical study by Opara (1996) investigated the effects of
successful implementation of total quality management
philosophy in a corporation. Likert scale questionnaires which
measure attitude, were administered to selected Chevron
employees in five of its facilities in California. The survey
concluded that, if TQM principles are successfully
implemented, not only will it better productivity and reduce
cost per unit, but customers will also respond to better
quality, which will increase corporate market share, create
more jobs and maintain a higher return on investment.
 
Christensen (1995) carried out a study that utilized 150 of
Ford Motor Company's Q1 suppliers as models for the successful
implementation of a TQM programme. Tests comparing 3-year pre-
and post-sample period performance concluded that significant
improvements occurred from the adoption of a TQM programme.
Accounting and market-based financial performance measures
revealed that Q1 firms outperformed their competitors.
However, Christensen recommended that more studies be
conducted before a broad based endorsement of TQM from a
financial standpoint is warranted.
 
Lawler, Mohrman and Ledford (1995), in their book, discuss the
findings of a long-term research project sponsored by the
Association of Quality and Participation. In 1993, survey
forms were sent to 985 companies from the Fortune 1992 listing
of large manufacturing and service organizations. A total of
279 companies responded. The relationships between Employee
Involvement (EI) and TQM practices and measures of performance
such as return on sales, return on investment and return on
equity were studied. The authors mentioned that multiple
regression analyses showed that five out of seven financial
performance measures were significantly related to the levels
of adoption of EI and TQM programmes. They, however, did not
report the actual regression results. Although the authors
concluded that companies could improve their financial
performance by adopting EI and TQM practices, they did not
provide the evidence to support this conclusion, in the text.
 
Cunningham, Barton and Ho (1996) carried out an empirical
study to assess the impact of TQM-related programmes in
Singapore. The study was based on an interview questionnaire
with 289 companies in Singapore. The major finding of this
study is that progress on quality improvement is more clearly
linked to reducing absenteeism and turnover, than to
increasing profits; and profits are negatively correlated with
absenteeism. The study also showed that lack of knowledge,
employee resistance and training were key factors affecting
the introduction of quality-related ideas.
 
It is suggested that TQM and ISO 9000 can be more beneficial
if applied in an integrated manner. An elevator company in
Hong Kong, Ryodan Lift and Escalator, (Jon and Chan, 1997) has
integrated ISO 9001 with the TQM process, in their
organization. The positive image of TQM and ISO 9000 has been
accepted by employees throughout the organization. The company
was certified to ISO 9001 in late 1994 after implementing the
system for one-and-a-half years. The company's market share
has improved during recent years.
 
Intuitively, improvements in quality of design enhance the
firm's quality reputation and perceived value of a product in
the market, which means the company can command higher prices
and achieve an increased market share. This leads to increased
revenues. These revenues will cover the added costs of
improved design. Improved conformance leads to lower
manufacturing and service costs. The net effect of improved
quality of design and conformance is increased profits. As
Crosby (1979) says, "Quality is not only free, it is an
honest-to-everything profit maker. Every penny you don't spend
on doing things wrong, over, or instead of, becomes half a
penny right on the bottom line."
 
According to Tatikonda and Tatikonda (1996), however, even
companies that won the much-coveted MBNQA faced financial
failure. One such company is Wallace Company, which won the
MBNQA but failed to show any improvements in terms of profit.
The company finally filed for Section 11 bankruptcy
protection.
 
From the literature review, we find that most of the known
studies have been conducted in the USA. Moreover, most of the
studies were on the impact of TQM on company performance,
particularly profitability. No study has been conducted on the
specific impact of ISO 9000 on company profitability. While a
total of 936 Malaysian companies have been certified to ISO
9000, no study has been conducted to assess the impact of ISO
9000 or TQM programmes on company profit. Hopefully, this
study will provide the structure base for future researches in
this area.
 
DATA COLLECTION
 
The four hypotheses to be tested in this study are:
 
H1 : Companies which have successfully implemented ISO 9000
have managed to increase company profitability.
 
H2 : Companies which implemented ISO 9000 in addition to other
TQM programmes have shown more profitability than companies
which implemented ISO 9000 in isolation.
 
A survey questionnaire was developed to gather information to
test the hypotheses that were proposed. The questionnaires
were issued to 200 manufacturing companies in Malaysia.  The
manufacturing sector was chosen because of its significance in
the Malaysian economy. In 1996, 34.5% of the nation's GDP
(Economic Report 1996/1997) was contributed by the
manufacturing sector.
 
A list of ISO 9000 certified companies was obtained form SIRIM
(Malaysian certifying body) Directory of Certified Products
and Companies. Contact persons and contact numbers were
obtained from the Federation of Malaysian Manufacturers (FMM)
Directory. In this study, the Managing Director was used as
the key respondent of the questionnaire, to get top
management's view and to eliminate self-reporting bias that
could result when quality managers are addressed. There is
high potential of self-reporting bias when data is collected
from managers about managerial issues with which they are
directly associated. After sending the same questionnaire
twice and a long period of persuasion through telephone calls,
only 30 valid responses were received. This reflects the
difficulties faced in gathering information. Some also explain
the low response rate of 15% to the lack of knowledge of the
managing directors about quality management.
 
The survey sample represented a wide cross-section of the
manufacturing industry, in terms of products and size.
Products manufactured include tyres, wire harness, tiles,
consumer goods, packing materials, electronic components,
computer peripherals, steel products, plastic products, food
and beverages, knitwear and footwear. Hetero-geneous samples
with respondents from different industries provide for
external validity, that is, the results of this study are
valid for different industries in the manufacturing sector.
 
The number of employees in the firms ranged from 75 to 3,000.
Ahire and Golhar (1996) defined firms with fewer than 250
employees as small firms. Using the same definition, nine
respondents are classified as small firms and 21 respondents
are classified as large firms. 26% of the respondents are
public listed companies and 73.3% are non-public listed
companies. Only one of the respondents obtained ISO 9001
certification - the first in Malaysia to obtain ISO 9000
certification. All the other 29 respondents obtained ISO 9002
certification. All the respondents were certified by SIRIM
(Standards and Industrial Research Institute of Malaysia)
Berhad.
 
To test hypotheses H1 and H2, the availability of data on the
financial performance of the company is a prerequisite. To
test hypothesis H3, the data on the number of customer
complaints was needed. However, collecting objective numerical
data is not an easy task. Data inquiries on the number of
customer complaints and financial performance figures such as
sales amount, net income, total asset and total equity require
respondents to disclose information that they perceive to be
confidential. Most respondents wrote "confidential" in the
space provided for numerical data. The poor response rate of
15% also reflects this perception of "confidential
information".
 
Little did the respondents realize that every company's
balance sheets and profit and loss statements are available
for public reference from the Registry of Companies (ROC). So,
in order to ensure accurate financial figures used to test
hypotheses H2 and H2, key financial information was collected
from the ROC.
 
To test hypothesis H1, profitability ratios are calculated,
for the period before implementation of ISO 9000 and after
implementation of ISO 9000. For the purpose of this study, the
year that the company had obtained certification is considered
the year after implementation of ISO 9000 because normally the
ISO 9000 system would have been implemented for a period of
six months to one and a half years before the company is
certified.
 
To test hypothesis H2, a total of 22 companies are categorized
as "companies that implement ISO 9000 in addition to other TQM
programmes" a total of eight companies are categorized as
"companies that implement ISO 9000 in isolation, without other
TQM programmes". The TQM programmes carried out are: QIT
(Quality Improvement Team), Cross-functional teams, Kaizen,
Small Group activities, Employee Involvement Programmes, Waste
Elimination Programmes, Statistical Process control and Cost
Reduction Programmes. Profitability ratios after the
implementation of ISO 9000 are compared between these two
groups to find out whether companies which implemented ISO
9000 in addition to other TQM programmes have shown more
profitability than companies which implemented ISO 9000 in
isolation.
 
To test H1 and H2, three most commonly used profitability
ratios are calculated. The three ratios calculated are:
 
1. Net Profit Margin, NPM (%) = Net Income/Sales
 
2. Return on Assets, ROA (%) = Net Income/Total Assets
 
3. Return on Equity, ROE (%) = Net Income/Total Shareholder
Equity
 
These three ratios measure how efficiently the firm uses its
assets and how efficiently the firm manages its operations.
 
Profitability ratios are calculated for every year, prior to
the implementation of ISO 9000 and after implementation of ISO
9000. Mean values of ratios before implementation and after
implementation are also calculated, for each individual
company.
 
ANALYSIS OF THE RESULTS
 
Hypothesis One, H1
 
The first hypothesis that we are testing is,
 
H1: Companies which have successfully implemented ISO 9000
have managed to increase company profitability.
 
This is tested using three profitability ratios namely, NPM,
ROA and ROE.
 
Since we are studying the differences of means between the
same group of sample, the t test : paired two sample for means
was used to test H1.
 
The first hypothesis that we are suggesting is:
 
H1: Companies which have successfully implemented ISO 9000
have managed to increase company profitability.  The null
Hypothesis for H1, that is, H0 would postulate the following:
 
H0: Companies which have successfully implemented ISO 9000 do
not show any significant increase in company profitability.
 
Given our earlier review of literature, we would expect to
accept the null hypothesis.
 
Table 1 shows that for: Net Profit Margin (NPM), Return on
Asset (ROA) and Return on Equity (ROE), H0 is accepted at
confidence levels of 99%, 95% and 90%.
 
Having found that for all three profitability ratios, i.e.
NPM, ROA and ROE, tstat is less than tcrit, at confidence
levels of 99%, 95% and 90%, we can conclude that companies
which have successfully implemented ISO 9000 do not show any
significant increase in company profitability. An interesting
observation is that the mean values for NPM and ROA are lower
after implementation of ISO 9000. This is, however, not the
case for ROE, which is higher after implementation of ISO 9000
(Table 1).
 
Hypothesis Two, H2
 
The second hypothesis that we are testing is,
 
H2: Companies which implemented ISO 9000 in addition to other
TQM programmes have shown more profitability than companies
which implemented ISO 9000 in isolation.
 
Since we are studying the differences of means between two
groups of sample, the t test : two samples assuming unequal
variances was used to test H2.
 
The second hypothesis that we are suggesting is:
 
H2: Companies which implemented ISO 9000 in addition to other
TQM programmes have shown more profitability than companies
which implemented ISO 9000 in isolation.
 
The null Hypothesis for H2, that is, H0 would postulate the
following:
 
H0:  Companies which implemented ISO 9000 in addition to other
TQM programmes do not show any significant difference in
profitability, compared to companies which implemented ISO
9000 in isolation.
 
Given our earlier review of literature, we would expect to
accept the alternative hypothesis, that is, H2 to be true.
 
If H0 holds true, then mean profitability is the same in both
populations.
 
Having found that for all three profitability ratios, i.e.
NPM, ROA and ROE, tstat is less than tcrit, at confidence
levels of 99%, 95% and 90%, we can conclude that companies
which have implemented ISO 9000 in addition to other TQM
programmes do not show any significant difference in
profitability, compared to companies which have implemented
ISO 9000 in isolation. This is in contradiction with the
perception that implementation of TQM programmes leads to an
increase in firm profitability. An interesting observation is
that the mean values for NPM and ROA are higher for non-TQM
companies. This is however not the case for ROE, which is
lower for non-TQM companies (Table 2).
 
CONCLUSION
 
The objective of this study is to assess the impact of ISO
9000 on firm profitability of manufacturing companies in
Malaysia. One-tailed t-tests were used to compare between
profitability before and after implementation of ISO 9000 and
between TQM and non-TQM companies.
 
This study indicates that firms which have successfully
implemented ISO 9000 do not show any significant increase in
company profitability. The changes in profitability ratios
before implementation of ISO 9000 and after implementation of
ISO 9000 are insignificant. This contradicts the common
perception that many people have that ISO 9000 can lead to an
increase in firm profitability. As mentioned earlier, a
company that had won the Malcolm Baldridge National Quality
Award (MBNQA), Wallace Company filed for chapter 11 Bankruptcy
Protection. This shows that successful implementation of a
quality management system does not guarantee an increase in
firm profit.
 
This study also indicates that companies which have
implemented ISO 9000 in addition to other TQM programmes do
not show any significant difference in profitability, compared
to companies which have implemented ISO 9000 in isolation.
Based on the profitability ratios, the impact of TQM on firm
profitability seems to be insignificant. TQM programmes might,
however, take a long time before they actually produce results
that can lead to an increase in firm profitability.
 
The study found that 22 out of 30 firms implement TQM
programmes. From the findings of this study, it is recommended
that firms implementing ISO 9000 and TQM programmes evaluate
the contribution of such programmes to the level of customer
satisfaction, product quality and firm profitability.
Recently, it has become a trend in Malaysian companies to
implement Quality Improvement programmes for the sake of
implementing it and telling their customers that they are
serious about quality. That is not going to benefit the firm
in the long run. What is important is to increase the level of
customer satisfaction by improving product quality. Quality
improvements will lead to reduced waste cost and increased
productivity, which will automatically reduce manufacturing
cost. This will ultimately increase firm profitability.
 
Observations in the area of Quality Manage-ment show that, in
many organizations, ISO 9000 is perceived as a job for the
Quality Control department. Even the top management of the
firms view ISO 9000 as a separate entity, which is not related
to firm profitability. Therefore, they seldom or never get
involved in the implementation of ISO 9000. Lack of commitment
from the top management does not motivate the employees to go
all out and improve quality, to increase firm profitability.
They tend to work very hard to implement ISO 9000 during the
pre-certification period. After obtaining certification this
momentum slows down and things get back to square one. The
only improvement would be a well-written quality manual and
set of procedures. Top management of a firm should extend
continuous support in implementing ISO 9000 and TQM programmes
and make them result oriented in order to enhance quality and
increase firm profitability.
 
REFERENCES
 
Ahire, S L and D Golhar (1996). "Quality Management in Large
vs. Small Firms", Journal of Small Business Management, April
1996, 1-13.
 
Christensen, J S (1995). "Efficiency to Total Quality
Management", Quality Management Journal, February, Vol. 2,
No.2, p 5.
 
Crosby, P (1979). "Quality is Free", New York, McGraw-Hill.
 
Cunningham, J Barton and Ho, Janice (1996). "Assessing the
Impact of Total Quality Management-Related Programmes: A
Singaporean Case", Quality Management Journal, July Vol. 3,
No.4, p 51-65.
 
Economic Report, 1996/97.
 
Edward E Lawler III, Susan Albers Mohrman and Gerald E
Ledford, Jr (1995). "Creating High Performance Organisations:
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FMM Directory of Malaysian Manufacturers and Exporters,
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Opara, Emmanuel Uzoma (1996). "The Empirical Test of Total
Quality Management: An Application of TQM at Chevron and Its
Impact on Productivity", Quality Management Journal, October,
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Schaffer, R H and H Thompson (1992). "Successful Change
Programs Begin with Results", Harvard Business Review,
September/October, 80-89.
 
Tatikonda, L U and Tatikonda, R J (1996). "Measuring and
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SIRIM Directory of Certified Products and Companies, SIRIM
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