Profit Maximization through Customer Satisfaction by Imple…

Journal of Business Research, vol. 3, 2001

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Profit Maximization through Customer Satisfaction by
Implementing Total Quality Management

Md. Baktiar Rana*
Mohammad Nazmul Islam**

Shuddhasattwa Rafiq***

Abstract: Total Quality Management (TQM) is a management philosophy, which focuses on customer
driven quality and affects all spheres of an organization. Implementation of TQM in an organization requires
everybody's participation. Today, in a competitive global environment to become a successful marketer, it is
necessary to accept total quality philosophy, because a marketer's ultimate goal is to increase profitability
through customer satisfaction, which can be achieved by adopting TQM. This paper discusses a descriptive
model of TQM implementation for reaching quality mark and increasing profitability. A mathematical
model for validating the cost of quality improvement by the organization also discussed here.

Introduction
To be competitive a firm must be unique in its industry along some dimensions that are
widely valued by customers. It selects one or more attributes that customers perceive as
important and positions itself uniquely to meet those needs. Today's top executives view the
task of improving product and service quality to be their top priority. Companies today have
no choice but to adopt Total Quality Management (TQM), if they want to stay in the race. By
adopting TQM, organizations position themselves as higher quality providers and also ensure
the reduction in cost through process efficiency. As a result it can command premium prices,
reduce cost, and achieve higher profits.
Many global successes of Japanese companies are due to their building exceptional quality
into their products (Kano, 1996: 6). Most customers will no longer accept or tolerate average-
quality performance. As businesses move to make customers' satisfaction their top priority,
managers are changing the way they operate their business. A Total Quality Management
(TQM) philosophy helps to achieve that goal in a systematic way.

Definition of Quality
American National Standard Institute (ANSI) and the American Society for Quality Control
(ASQC) define quality as "the totality of features and characteristics of a product or service
that bears on its ability to satisfy stated or implied needs". The view of quality as the
satisfaction of customer needs was defined by Juran as "fitness for use". In highly
competitive markets, merely satisfying customer needs will not achieve success. To be
competitive, organization often must exceed customer expectations. Most progressive
organizations define quality as follows:
Quality is meeting or exceeding customer expectation (Oakland, 1993: 3-4).
_________________________________
*Lecturers, Department of Business Administration, Jahangirnagar University, Dhaka.

2 Profit Maximization Through Customer Satisfaction

Some other dimensions of quality is:
• ...... defined by the customers
• ......delighted customer
• ......continuous improvement
• ......conformance with requirement
• ......most economical, most useful & always satisfactory to the consumer.

Past definition of quality focused on compliance to standard as companies strived to create
products and services that fell within certain specification limit. Such definition of quality
assumed that if companies produce quality products and services, their performance standard
is correct regardless how those standards were met. This definition overlooks the fact that
performance standard may have been reached after considerable rework of specific part of
service.
Customer oriented strategies of business firms broaden the definition of quality to include
"economic value" and "practical utility" to both the company and the consumer, where
quality is a state in which value entitlement is realized for the customer and provider in every
aspects of the business relationship (Harry, 2000: 6). Entitlement means that companies have
a rightful level of expectation to produce quality products at the highest possible profit; for
customers, entitlement means that they have a rightful level of expectation to buy high
quality products at the lowest possible cost. "Value" represents economic worth, practical
utility and availability for both the consumer and the company that creates the product or
service. While practical utility for consumer means that the product or service must possess a
certain value, practical utility for companies refers to the fact that their processes must create
value for the company. In other word, company focus on process quality and consumers
focus on the final product or service quality.

Evolution of The Quality Concept
Before the industrial revolution, skilled craftspeople served both as manufacturers and
inspectors, building quality into their product thorough their expertise. Frederick W. Taylor's
concept of "scientific management" greatly influenced the nature of quality in manufacturing
organizations. By focusing on production efficiency and greater division of labor, the modern
assembly line destroyed the holistic nature of manufacturing. To ensure that products are
manufactured correctly, independent quality control department assumed the task of
inspection by separating of good from bad products. Deming & Juran introduced statistical
quality control to Japanese workers after World-War II. They convinced top Japanese
managers that quality improvement would open new world markets and was necessary for the
survival of the nation. Japanese were in an ideal position to embrace this philosophy due to
their devastated position from the War and the existence of few natural resources.
In the 1950s and 1960s, many companies directed their efforts to detecting defects during the
production process. This helped in detecting some of the problems during the production
process but did not extend to the design of either the product or the process. Suppliers were
also not included in the quality system, and were generally regarded as adversaries.
Companies usually used multiple suppliers and there was heavy emphasis on price. Workers
were regarded as machines just to perform a specific job. Decision making was the job of the
management and the workers had little input (Stevenson, 1993: 101).

Journal of Business Research, Vol. 3, 2001 3

Total Quality Management (TQM)
Total Quality Management (TQM) is a comprehensive management approach that involves
building quality into every organizational process. Top managers who adopt the TQM
approach recognize that quality is the responsibility of every organization member and should
be built into all internal processes that directly or indirectly relate to the customer
satisfaction.
J. M. Juran defines TQM as three processes: quality planning, quality control, and quality
improvement. In his model, quality planning involves identifying organization's customers
and their needs, developing products to meet those needs and developing process that can
produce the products. Quality control is the process of comparing actual product performance
to desired performance and taking action on any discrepancies. Quality improvement aims to
continually raise performance through improving the organization's infrastructure so that it
can more easily produce quality results and diagnosing, then solving, recurring quality
problems (Juran, 1989: 20).

Awareness About Quality in Bangladesh
In our country quality is becoming a popular term to the customers as well as the business
organizations. Due to the gradual adoption of free market philosophy customers are getting
different products from different countries. And this one is a challenge for the local business
organizations. Beside the firms that are exporting their products to different countries are also
facing the increased competitive challenges. Considering all these factors some of the
business houses are emphasizing more on quality. Previously most of the organizations had
no separate quality department but currently separate quality departments are established by
some business organizations. Specially export oriented firms have already developed a lot in
this regard. Some of the firms have got the ISO certification who are operating in
pharmaceuticals, food, toiletries, real estate, and battery industry.
Our garment industries also bought some product quality awareness as a result of higher
quality demanded by the foreign buyers, but still investment in human resources are not
adequately considered.

Increasing Profitability Through Reaching Quality - A Descriptive Model for
Implementing TQM
Business Organization has to serve two types of customers. One is external customer (target
customer to whom the final product will be offered) and other is internal customer (all the
employees of the organization) (See EXHIBIT- I). Organization as to serve and satisfy those
two customer groups. In addition to identify the external customers, organizations must also
address the needs, requirements, experiences and expectations of their internal customers. An
organization cannot satisfactorily meet the needs of the external customers if it has problems
with its own workforce.
Initial task is to identify the expectation of the external customer regarding the total product
offering. Total product offering includes the product itself, price, package, store



Journal of Business Research, Vol. 3, 2001 5

surrounding, promotion, brand name, after sales service etc. Customers' expectations can be
determined by answering a set of questions For example:

What products/ service characteristics do customers want? What
performance level is needed to satisfy their expectations? What is the
relative importance of each characteristic?
And how satisfied are customers with performance at the current level? (Tenner and
DeToro, 1992: 234)
To answer these questions, a set of feature and characteristics that the customers might want
should be developed. This list of possible requirements should then be tested by directly
asking the customers.
And in this stage definitely there should be a marketing research to identify the expectations
of the customers. Simultaneously the organization has to identify the needs, wants,
expectations, and the motivational factors of its internal customers. Then by considering the
needs, wants, expectations and the motivational factors the organization has to design the
compensation package and as well as working environment of the organization. So that the
employees will be satisfied and ultimate outcome will be the inspired work force.
After the identification of the target customers needs, wants, and expectations the
organization can start the designing phase of the total product offer. This phase is very crucial
because all the next activities will depend upon the positive construction of this phase. Here
the organization can go for a participatory approach by involving all the departments as well
as the external expert if necessary. Definitely the previous phase that is identification of
customer expectations will guide the next activities.
After designing the total product offer according to the customers' expectations, it should be
communicated to the all spheres of organization. To achieve this, there should be a clear
guideline of standards. This communication process contains a series of group discussion and
general meeting which will provide the clear understanding of customers' expectation as well
as the organizational commitment. In this stage there will be an assessment study through
which the existing capacity can be measured. It will also provide the information as to the
extent of capacity required to meet the expected standard. Proper uniformity should be done
to reduce inefficiency and inadequacy.
After designing the total product offer and required capacity building, the ultimate
product/service should be fabricated. In this phase the organization should not only
concentrate on its employees but also the suppliers, distributors and the other relevant
stakeholders to produce the total product offer.
When the product is offered to the target customer, then the value of a product in the market
place is influenced by the quality of that product. Improvements in performance, features, and
reliability will differentiate the product from its competitors, improve a firm's quality
reputations, and improve the perceived value of the product. This allows the company to
command higher prices and achieve an increased market share. This, in turn, leads to
increased revenue that offset the added cost of product improvement. Improved conformance
in production leads to lower manufacturing and service cost through savings in rework,
scrape, and warranty expenses. The net effect of improved quality of product and
conformance is increased profit.
Many customers are basing their purchasing decisions on value. Value can be defined as
quality relative to price. When organizations provide more perceived value then their
customers would be more satisfied. Thus, firms must focus their effort at both improving

6 Profit Maximization Through Customer Satisfaction

the product quality as well as reducing cost. And the whole process will go on in a continuous
basis because quality means an endless journey.

Substantiating the Quality Improvement Requirement
By using the time value of money concept, we can validate the quality improvement thrust of
business firms. If a company wants to implement TQM by increasing its investment in
quality planning, process planning, process control and training - it will help the company to
reduce certain types of cost. These costs can be classified into three broad categories.
1) Cost of internal failure

• Scrap/wastage
• Cost of rework.

2) Cost of external failure
• Cost to customer
• Warranty cost
• Complaint adjustment cost
• Cost of returned material

3) Cost of appraisal
• Inspection
• Testing
• Quality audit
• Initial cost and maintenance of test equipment.

If quality improvement scheme is taken by adopting TQM, then the cost of internal failure,
cost of external failure and cost of appraisal will decline. It is not impossible for management
to measure the cost savings. If present value of these cost savings is greater than the present
value of TQM implementation cost (incremental preservation cost), then the worth of the
company will be increased.

n

PV of TQM implementation cost = ∑ FV of TQM Implementation cost/(1+k)n
t =1
n
∑Vi = Ci /(1 + k)n
t =1
n

PV of cost savings = ∑ FV of cost savings/(1+k)n
t =1
n
∑Vt = Ct /(1 + k)n
t =1

Journal of Business Research, Vol. 3, 2001 7

Where, PV = Present value, FV= Future value, t= time period, k= opportunity discount rate,
Vi =PV of TQM implementation cost, and Vt= PV of cost savings.

To increase the worth of a company, the PV of cost savings must be greater than the PV of
TQM implementation cost. That is,

nn

∑ ∑Ci /(1 + k)n - Ct /(1 + k)n

t =1 t =1

or, Vt − Vi ≥ 0

By using this equation, a company can easily measure the impact of quality improvement to
the worth of the company. If the NPV is negative, then company will review the costly TQM
implementation plan.

Benefits of Implementing TQM
The benefits of implementing TQM in our country is not available due to the unavailability of
empirical study but in United States from different survey and study reports conducted by
different US firms found that among all ISO certified companies (BASC,1998).
1. More than 80% report that they have "improved control".
2. Less than 70% report that they have "improved productivity".
3. 40% report that they have "reduced cost".
4. More than 50% report that they have "reduced waste".
5. ISO is found as a good long-term investment as well.

The above mentioned facts reveal that quality is not a cost for an organization; it is free and
also provides some cost reduction benefit, which ultimately leads to the profitability.

Conclusion
Total Quality Management is seen at this time as a major means to provide customer
satisfaction and organizational profitability. Organizations must realize how their customers
perceive quality and how much quality they expect. Organizations must then strive to offer
relatively higher quality than their rivals. This comprises total management and employee
commitment as well as measurement and reward systems. Marketers play an especially
critical role in their organizations' drive toward higher quality.

8 Profit Maximization Through Customer Satisfaction

References
1. Harry Mikel and Schroeder Richard. (2000). Six Sigma-the breakthrough management strategy

revolutionizing the World's top corporations. Currency. New York.
2. Stevenson, W. J. (1993). Production/Operations Management. Irwin, Illinois.
3. Juran, J. M. (1989). Juran on Leadership for Quality: An Executive Handbook. Free Press, New York.
4. Termer, A. R. & DeToro, 1. J. (1992). Total Quality Management: Three Steps to Continuous

Improvement. Addison Wesley, Massachusetts.
5. Business Advisory Service Center (BASC). (1998). Total Quality Management and ISO 9000

Certification. Dhaka.
6. Noriaki Kano. (1996). Guide to TQM in Service Industries. Asian Productivity Organization. 7. Oakland,
S. Johan. (1993). Total Quality Management - The Route to Improving
Performance. Butterworth Heinemann, London, Second Edition.