Where is the Quality Fear Factor?

Guest Post by James Kline (first posted on CERM ® RISK INSIGHTS – reposted here with permission)

The title is based on a comment: “The quality fear factor is gone.”  The assumption behind the comment is that fear often motivates behavioral change.  This was certainly true for the quality movement. But, if the movement was driven by fear, what happens when the fear is no longer there?  Does anything replace it? This piece looks at these questions.

The Quality Movement and Fear

Perhaps the clearest presentation of the fear that propelled the quality movement is stated in the first two findings in the Malcolm Baldrige National Improvement Act of 1987.  This act established the United State’s national quality award.  The findings are:

1. “The leadership of the United States in product and process quality has been challenged strongly (and sometimes successfully) by foreign competition, and our Nation’s productivity growth has improved less than our competitors over the last two decades;
2. American business and industry are beginning to understand that poor quality cost companies as much as 20 percent of sales revenues nationally, and that improved quality of goods and services goes hand in hand with improved productivity, lower costs, and increased profitability.” (1)

The fear is apparent in the findings.  American industry was losing ground to foreign competition.  The competition was the Japanese.  Japanese companies using Lean Management dominated the electronics, camera and auto industries.  The award was a response to the Japanese industrial juggernaut. It was expected to “help improve quality and productivity” by encouraging U.S. companies to focus on quality management.

States jumped on the quality bandwagon and implemented quality awards.  Other counties followed by implementing their own quality awards.  Concern about quality was everywhere.

The fear lessens

If one looks at the quality landscape today, it has changed.  While quality management system certifications (ISO 9001) are common in most industries and quality management techniques such as Lean Six Sigma and Lean Management are also in use, there are fewer state quality awards.  Nor is there the emphasis on quality.  The Baldrige National Quality Award has become the Baldrige Excellence Program.  The Australian Quality Award has become the Australian Business Excellence Award. While the European Foundation for Quality administers the European Award, it is an “Excellence Award”.

The perceived relationship between quality management and excellent business practices has changed. Quality management is not considered as important as it was in the 1980’s and 90’s.  The fear factor is less. The clearest example of the lessening of the quality fear factor can be seen in a review of the North Carolina State University risk survey entitled “Executive Perspectives on Top Risks”.

North Carolina State University Risk Survey

The survey has been conducted annually since at least 2013.  It is a survey of members of the C-Suite from companies worldwide. The survey seeks to identify the major risks that organizations face. Thirty risks are listed in the survey.  The risks fall into three categories.  These are: Macroeconomic Risk Issues, Strategic Risk Issues and Operational Risk Issues. (The term risk is used, but the issues can also be considered fears.)

There are ten risks listed under each category. One of the Operational Risks is: “Our existing operations may not be able to meet performance expectations related to quality, time to market, cost and innovation as well as our competitors.” (Italics added) (2)

In 2013, this risk was ranked number ten. The comment related to this rating was “Improving quality, time, innovation and cost performance is as importent today as it has ever been.”  In the 2016 survey, this risk was considered one of the top five decreasing risks. By 2019, the risk description had been change to: “Our existing operations and legacy IT infrastructure may not be able to meet performance expectations related to quality, time to market, cost and innovation as well as our competitors, especially new competitors that are “born digital” and with a low-cost base for their operations, or established competitors with superior operations.” (3)

Multiple Organizational Concerns

This new definition indicates a concern for more than quality, time and cost.  In 2018, this redefined risk was rated 10.  In 2019, it was the number one risk. The ranking reflects the concern with the ability of the organization to “adjust existing operations to meet performance expectations.” More specifically: “Hyperscalability of digital business models and lack of entry barriers enable new competitors to emerge and scale very quickly in defining the customer experience, making it difficult for incumbents to see it coming at all, much less react in a timely manner to preserve customer loyalty.” (4)

The expanded definition expresses concern (fear) about quality, time and cost, as well as, other aspects of the operation.  The other fears are:

1. Legacy IT structure may not be capable of meeting performance expectations.
2. Organization may not have the ability to adjust rapidly enough.
3. Speed with which competitors can enter a market may not be sufficiently understood.
4. May have limited ability of preserve customer loyalty in face of hyper-scalable competition.

More broadly, if the organization cannot adequately manage these fears, market share and profits will be lost. Thus, these fears must be managed.  Further, the fears contained in this definition, represent just one set of fears.

The fear that poor quality and a lack of quality management will cost customers has all but gone. On the other hand, as the morphing of the definition indicates, management has recognized that other fears put an organization’s ability to stay competitive and make a profit, at risk. These risks, just like quality need to be managed.

Risk Management

The acceptance of the idea that an organization needs to assess the risks it faces and manage them can be seen in two recent actions.  First, in 2015, ISO added Risk Based Thinking (RBT) to its quality management system certification standard 9001:2015. RBT requires management to assess the risk the organization faces and take actions which will reduce any adverse impact.  Since 2015, ISO has added a risk component to all certification updates. This is a clear indication that ISO believes that risk management is a necessary management requirement regardless of industrial sector or activity.

This idea is reinforced by the second action.  This is the inclusion of risk management in the 2017-18 Baldrige Excellence Framework. In discussing the inclusion of risk management, it is noted: “No organization is risk free. Intelligent risk management requires an enterprise to decide when and how risks should be taken and managed. Such management can mean the difference between extinction, survival, or role-model performance.” (5)

Where product quality and the use of quality management systems was once considered the key to profitability and success, now risk management is.

Conclusion

The quality movement was driven by fear of the Japanese and their use of Lean Management.  Quality Management became Job #1.  In response to the Japanese dominance in numerous industrial sectors, national and state quality awards were established.  The purpose of these awards was to encourage the adoption of quality management techniques and improve product quality.  Today, ISO 9001 certifications, Lean Management and Lean Six Sigma are relatively commonplace.  In many respects, quality management has become an integral part of business practices.

But relative success has also meant that the quality fear factor has diminished.  The outward signs are the reduction of the number of state quality awards and the removal of quality from award titles.  The change in organizational attitude can be seen in the ranking of risks in the North Carolina State University Risk Survey and the expansion of the risk definition, which originally focused on quality, time and cost, to include other concerns.  Concerns which have propelled its ranking from number ten in 2018 to number one in 2019.

This attitudinal shift has resulted in a focus on a different management practice. This can be seen in the inclusion of RBT in ISO 9001:2015 and risk management in the Baldrige Excellence Framework.

The quality fear is gone.  The new fear is that an organization may fail to address the multiple risks it faces in an adequate manner. This fear is driving the movement to adopt enterprise risk management.