Causation or covariation: an empirical re‐examination of the link between TQM and financial performance

Abstract

Abstract Total Quality Management (TQM) is an integrated management system designed to focus an organization’s resources on increasing the quality of a firm’s products/services, satisfying customer needs and improving the efficiency of the processes that produce the firm’s products/services. Advocates of TQM have suggested that there should be a positive relationship between implementing TQM practices and financial performance measures. The empirical evidence supporting this assertion, however, is limited at best. Most of the research has been limited to surveys of managers’ perceptions of the effect of TQM on financial performance. A few empirical studies using financial performance measures have been done, and have shown that TQM firms have better financial performance than other firms. However, better performing companies may be more likely to adopt TQM, so that rather than being a path to improved financial success (causation), TQM merely “comes along for the ride” (covariation). This study examined the relationship between TQM and financial performance, using a sample of Baldrige Award winners and replicated with a second sample of state quality award winning companies, and three different sets of financial performance measures. Both Baldrige and state quality award winners generally had better financial performance than their peers after winning a quality award, and before.