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To cite this article: Rong-Ruey Duh , Audrey Wen-Hsin Hsu & Pei-Wen Huang (2012): Determinants
and performance effect of TQM practices: An integrated model approach, Total Quality
Management & Business Excellence, 23:5-6, 689-701
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Total Quality Management
Vol. 23, No. 6, June 2012, 689 –701
associated with the implementation of TQM, and that leverage and product diversity
are negatively associated with TQM implementation. We then find that TQM
implementation has a positive effect on non-financial performance (NFP), and NFP
and financial performance (FP) are also positively related. Our results suggest that
TQM’s direct effect on NFP mediates TQM’s indirect effect on FP.
Keywords: total quality management; product diversity; competition; non-financial
performance; financial performance
Introduction
Growing global competition is challenging firms to develop strategic initiatives to better
serve customers with higher quality products or services to gain a competitive market
advantage. Total quality management (TQM) is one such initiative that has attracted
much attention from both practitioners and researchers over the past two decades
(Cheng, 2009; Eklof & Westlund, 1998; Greising, 1994; Matthews, Ueno, Kekale,
Repka, & Lopez, 2001; Sohal, Ramsay, & Samson, 1993; Wayhan & Balderson, 2007).
TQM aims at enhancing firm performance and, thus, competitive advantage. Many empiri-
cal studies have found that the implementation of TQM practices can reduce rework and
waste, improve product quality, and have a positive impact on FP (Douglas & Judge, 2001;
Powell, 1995; Wayhan & Balderson, 2007). However, many studies that conduct multi-
variate analyses (Douglas & Judge, 2001) fail to consider the potential endogeneity in
the TQM adoption decisions and thus do not systematically explore the determinants of
TQM implementation. Furthermore, the literature on performance effects suggests that
non-financial performance (NFP) (e.g. customer satisfaction) often serves as an early indi-
cation of financial performance (FP) (e.g. profitability) and that NFP can mediate the
effects of strategic initiatives on FP (Ittner & Larcker, 1998; Kaplan & Norton, 1996,
2001). However, prior TQM studies tend to not treat NFP and FP as distinct, and do
not take into account the role of NFP as a conduit for the realisation of the FP effects
of TQM implementation, thus potentially leading to inaccurate estimation of the empirical
relationship between TQM implementation and FP.
∗
Corresponding author. Email: audrey.hsu@management.ntu.edu.tw
NFP, and FP. The first relationship portrayed in Figure 1 is the link between the proposed
determinants and the extent of TQM implementation, followed by the performance
impacts of TQM implementation, which includes the link between TQM implementation
and NFP, the link between TQM implementation and FP, and the mediating effect of NFP
on the relationship between TQM implementation and FP.
TQM determinants
In this study, we identify four important factors that are expected to affect the extent of
TQM implementation.
Size
According to organisational theory (Damanpour, 1992; Yusof & Aspinwall, 1999, 2000a,
2000b), size is an important organisational variable that can influence the way organis-
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ations design and use control systems for decision-making. Larger firms have more
slack resources available than smaller firms for the modification, upgrading, or replace-
ment of existing management systems. Larger organisations also have more resources
available for innovation, and therefore are better positioned to make changes to their man-
agement systems to stimulate intra- and inter-organisational information flows to promote
communication and monitoring effectiveness. In contrast, small firms have to deal with
several dimensions of uncertainty, which highlights the contingency perspective of
TQM implementation (Storey, 1994). As small firms are short of financial and human
resources required, training and education is one of the most important items on the
agenda for small businesses in adopting TQM (Yusof & Aspinwall, 2000a, 2000b).
Thus, size can affect the implementation framework of TQM control systems (Yusof &
Aspinwall, 1999, 2000b).
Further, the literature on strategic management also recognises that large firms have an
advantage in terms of resources, capabilities, and experience (Gale, 1972). The proper
implementation of TQM usually requires investments involved in the installation and con-
tinuous maintenance of quality assurance systems (Yusof & Aspinwall, 2000a). Aside
from hardware, the investments include quality training, employee empowerment, con-
tinuous business process improvement, development of closer supplier/customer relation-
ships, and the design of control and reward schemes (Matthews et al., 2001; Powell, 1995),
suggesting that TQM implementation requires a firm to invest substantial resources. To the
extent that larger firms are more capable of achieving economies of scale in their oper-
ations and typically have greater resources to absorb the costs of adopting new manage-
ment practices, larger firms are more likely to extensively adopt a new management
approach such as TQM. Thus, we expect a positive correlation between firm size and
the extent of TQM implementation.
H1a: The extent of TQM implementation will increase with firm size.
Leverage
Following the resource perspective above, we argue that debt ratio can also affect a firm’s
implementation of TQM. Prior studies suggest that investment in product quality is
affected by financing constraints (Rose, 1990), and that all-equity firms will have higher
incentives to invest in high-quality products than firms with debt financing (Maksimovic
& Titman, 1991). Similarly, Maiga and Jacobs (2008) found that more leveraged firms are
692 R.-R. Duh et al.
less likely to engage in new management practices. Debt covenants arising from the debt
financing may constrain a firm’s freedom to engage in management initiatives that require
additional resources. Highly leveraged firms have fewer slack resources to allocate to
innovative management practices. We thus expect a negative correlation between a
firm’s degree of leverage and the implementation of TQM practices.
H1b: The extent of TQM implementation decreases with a firm’s financial leverage.
Product diversity
While many companies view product mix flexibility as a manufacturing capability crucial
for competitiveness, product variety can increase the cost of implementing TQM. It has
been argued that product diversity leads to increased complexity in production and oper-
ation processes and additional challenges in quality control and capacity balancing
(Cooper & Kaplan, 1987). A broader line of products require shorter and more frequent
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Competition
Competition is an important factor to which a firm must respond to survive and develop in
the market (Porter, 1980). Faced with stiff competition, firms must improve their existing
operations and manufacturing processes by introducing quality-enhancing programmes
(Banker, Khosla, & Sinha, 1998; Das, Handfield, Calantone, & Ghosh, 2000; Santos-
Vijande & Alvarez-Gonzalez, 2009). Increased market competition has led many compa-
nies to emphasise customer-focused product design and services to enhance customer sat-
isfaction and gain a competitive advantage.
TQM is a management practice that emphasises customer satisfaction by requiring a
firm to become more customer-oriented in its delivery of products and services. Thus,
we expect that firms faced with higher market competition will have a greater need for
TQM, and thus will be more motivated to ensure that TQM is extensively implemented.
H1d: The extent of TQM implementation increases with market competition.
1998; Hendricks & Singhal, 1997; Powell, 1995). Powell (1995) assessed the relationship
between the individual dimensions of TQM implementation and subsequent firm perform-
ance, and found that employment empowerment and executive commitment are important
factors that can lead to better FP.
As the general conclusion of prior studies is that TQM has a positive impact on NFP
and FP, we state these expectations as two hypotheses.
H2: Non-financial performance increases with the extent of TQM implementation.
H3: Financial performance increases with the extent of TQM implementation.
(e.g. quality, rework) are often mechanisms by which improved FP is realised (Kaplan
& Norton, 1996, 2001; Lakhal & Pasin, 2008). Several prior studies (Ittner & Larcker,
1998) considered the relationship between financial and NFP, but did so without linking
the analysis to specific management practices (e.g. TQM) and, in addition, their findings
are equivocal. Banker and Mashruwala (2007) found support for the incorporation of con-
textual factors in their study on the relationship between NFP and FP. Since TQM
implementation represents an important facet of a firm’s operational context, applying
Banker and Mashruwala’s (2007) theories suggests that it also may affect the existence
and nature of the relationship between NFP and FP.
Our preceding discussion provides the basis for two expectations: first that a positive
relation would exist between NFP and FP and second that TQM’s impact on NFP would
mediate its effect on FP. TQM’s NFP effects are generally held to encompass dimensions
such as employee satisfaction, customer satisfaction, and product quality (Chenhall, 1997;
Harrison & Poole, 1997). We expect that a positive correlation would exist between NFP
and FP and, furthermore, that TQM’s impact on NFP would mediate its effect on FP:
H4: There is a positive correlation between non-financial and financial performance.
H5: The positive association between TQM and financial performance is mediated through
non-financial performance.
Research methods
Sample description
We sent a total of 1367 questionnaires, together with a cover letter and prepaid self-
addressed envelope, to the chief executive officer (CEO) or general managers of all
listed companies in Taiwan. The survey was designed to collect specific information
about TQM implementation, NFP, and demographic information about the respondents
and their firms. To evaluate the survey instrument for readability, completeness, and
clarity, a pretest was conducted by soliciting feedback from nine senior managers of
companies not included in the sample. Appropriate changes were made based on their
comments and suggestions.
To improve the response rate, we conducted telephone follow-ups to those respondents
who did not reply within 4 weeks of the questionnaires being posted. In the end, we
received 221 completed questionnaires, but dropped seven questionnaires due to large
694 R.-R. Duh et al.
numbers of missing answers, two questionnaires for firms that had been delisted, another
two firms for which we were unable to locate publicly available financial data, and one
firm whose identity could not be determined. Hence, the final sample contained 209 firms.
To test for non-response bias, we tested for differences between responding and non-
responding firms in terms of total assets, industry memberships, and return on total assets
(ROA). We did not find any statistically significant differences; hence, non-response bias
should not be a concern in our study. Respondents had titles equivalent to CEOs, general
managers, or senior executives/staff working in the CEO’s office. On average, the respon-
dents had worked in their current positions for almost five years and in their companies for
nearly 12 years. Panel A of Table 1 shows that the responding firms were rather evenly
distributed across industries, suggesting that our findings will not be driven by the charac-
teristics of a particular industry.
Measures of variables
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Determinants
While we used a survey as the primary data collection instrument, we also collected firm-
level publicly available financial data from the Taiwan Economic Journal database.
Specifically, we obtained the data for all the observed determinants (i.e. size, leverage,
competition, and product diversity). Size is defined as the natural logarithm of total
assets; leverage is total debt divided by total equity; competition is equal to one if the Her-
findahl index for a firm’s industry is below the median value of all sample firms, and zero
otherwise. The Herfindahl index for each industry is a measure of the size of a firm’s
market share in relation to the overall size of the industry and is defined as the sum of
the squares
of the proportion of market shares of each individual firm within the industry
(i.e. ni=1 (salei /total saleindustry )2 , where i is a firm indicator for each industry and n is the
number of firms in the industry). The index can range from 0 to 1, with higher values indi-
cating greater competition. Product diversity is the number of products that a firm sells.
Panel B of Table 1 presents the descriptive statistics for these variables. The mean
(median) value of ROA is 7.33% (6.61%), size is 14.67 (14.37), leverage is 80%
(62%), and product diversity is 3.36 (3.00).
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TQM implementation
We developed seven questions that capture the multiple facets of TQM implementation.
They are: (1) managers are rewarded for the commitment to quality management
(Powell, 1995), (2) employees are trained and rewarded for quality management
(Powell, 1995), (3) employees are empowered to inspect their own production and
output (Powell, 1995), (4) continuous efforts are made to eliminate waste and activities
that do not add value (Juran, 1981a), (5) continuous efforts are made to reduce delays
in product design and manufacturing (Juran, 1981b), (6) continuous efforts are made to
improve quality at all levels (Juran, 1981a, 1981b), and (7) continuous efforts are made
to improve supplier/customer relationships (Powell, 1995). A seven-point Likert-type
scale instrument was used in the survey, with 7 representing ‘very extensive implemen-
tation’ and 1 representing ‘no implementation’. We conducted a principal-component-
based exploratory factor analysis and found that only one factor with an eigenvalue .1
can be extracted. This factor has a Cronbach’s alpha of 0.86, which indicates that the
scale has satisfactory internal reliability.
Results of SEM
SEM provides simultaneous estimates of each construct, and indirect and direct effects
among the constructs, taking into account measurement error. It is therefore ideal for
testing our proposed integrated model for the determinants and performance impact of
TQM. We adopted SEM for analysis using the AMOS 5 software, and employed a two-
step procedure of analysis. The first step involves building the measurement model (i.e.
confirmatory factor analysis) to deal with reliability and validity in measuring the latent
696 R.-R. Duh et al.
constructs while the second step involves building the structural model that is concerned
with the direct and indirect relations among the latent constructs. Panel A of Table 2 shows
the measurement items and loadings. The loadings of all items are .0.50 and are all
significant at the 0.05 level. Average variance extracted (AVEs) of the measured con-
structs are all .0.50. Thus, our measurement for the constructs achieves an acceptable
convergent validity.1 Panel B of Table 2 indicates that the square root of AVE for each
construct is greater than its correlation with the other constructs, suggesting acceptable
discriminant validity (Hair, Anderson, Tatham, & Black, 1992). Second, the reliability
of the measurements is assessed using composite reliability. Panel A shows that the
values of composite reliabilities are 0.872 for TQM and 0.834 for NFP. Following
Kline’s (2005) recommendation, we adopted the following indices to measure model
goodness-of-fit index (GFI): Chi-square over degrees of freedom (CMIN/DF), compara-
tive fit index (CFI), and root mean square error of approximation (RMSEA).2 The
values of these indices (CMIN/DF ¼ 1.10, CFI ¼ 0.953, RMSEA ¼ 0.04) suggest that
our measurement has satisfactory model fit.
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Table 3 shows the results of hypothesis testing of the structural relationships among
determinants, TQM, NFP, and FP (ROA). We also provide the results for the indirect
effects of TQM and FP via NFP. Figure 2 presents the results with a standardised
coefficient for each hypothesised path. The insignificant Chi-square value shows that
the model has satisfactory fit. All of these fit statistics show that the path model fits the
sample data at a more than satisfactory level: CMIN/DF ¼ 1.66, CFI ¼ 0.92, RMSEA
¼ 0.05, and GFI ¼ 0.91. Good structural model fit such as CFI and GFI exists when
there is reasonably high explanatory power (measured by R2), indicating the ability of
the proposed model to explain variation in the endogenous variables. The proposed
model achieves a fairly good fit.
H1 pertains to the linkage between the proposed determinants (i.e. size in H1a, finan-
cial leverage in H1b, product diversity in H1c, and competition in H1d) and the extent of
TQM implementation. The standardised coefficients for size, financial leverage, product
diversity, and competition are 0.221 (p , 1%), 20.195 (p , 1%), 20.218 (p , 1%),
and 0.184 (p , 10%), respectively. The results support H1a to H1d.
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Furthermore, H2 and H3, respectively, posit that there is a positive effect from TQM
implementation on NFP and FP. The prediction of H2 is supported, as indicated by the
standardised path coefficient of 0.360 (p , 1%). However, we do not find any direct
impact of TQM implementation on ROA (H3), as the standardised path coefficient is insig-
nificant. Our results support H4, that NFP and FP (ROA) are positively related, as the stan-
dardised coefficient for this path is 0.171 (p , 1%). Support for H5, that NFP mediates the
effect of TQM implementation on FP, is evidenced by the significant indirect effect.
Specifically, the standardised coefficient between NFP and FP (H4) is 0.171 and signifi-
cant at 1%. This coefficient (0.171) multiplied by the standardised coefficient between
TQM and NFP (0.360) is the indirect effect of TQM on FP through NFP (0.360 ×
0.171 ¼ 0.062). Since this indirect effect is statistically significant (p , 5%), and there is
no direct effect of TQM on FP, NFP acts as a full mediator between TQM and ROA. The
results thus support our H5, that NFP mediates the effect of TQM on FP.
conducted might account for the difference in findings. Further, our study considers endo-
geneity in the implementation of TQM while previous studies do not. The decision to
implementing TQM practices is determined endogenously rather than exogenously.
Failure to consider this issue may bias the effect of TQM implementation on firm perform-
ance. Finally, previous studies do not take into account the mediating role of NFP
measures. Focusing only on the direct effect of TQM implementation on FP may overes-
timate the direct effect of FP, overlook the possible indirect effect via NFP, and lead to an
inappropriate conclusion. Our results do not find a direct effect on FP, consistent with the
notion that NFP measures are leading indicators of or serve as a conduit for FP effects to
arise from TQM implementation (Kaplan & Norton, 1996, 2001). Thus, caution should be
exercised when interpreting the FP effects of TQM implementation in prior studies.
Our study also suggests that using TQM implementation as a context for analysis
allows for the relationship between NFP and FP to be discerned. This indicates the impor-
tance of considering context in examining the association between NFP and FP.
Two important limitations of this study should be noted. First, our sample only
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includes 209 listed firms in Taiwan. While the nature of manufacturing and operations
practices probably do not vary substantially across national boundaries, other aspects of
operations may differ cross-nationally. Extending the analysis to other countries will
shed light on the generalisability of our findings. Another caveat worth noting is that
our study has used cross-sectional analysis. While such an approach is suitable for disco-
vering relationships, it lacks power to establish causal effects. An analysis of longitudinal
data is recommended to further examine the robustness of our findings.
Notes
1. Hair et al. (1992) have suggested that loadings exceeding 0.50 are acceptable.
2. Suggested values to attain reasonable fit: CMIN/DF ¼ up to 3 or even up to 5; CFI . 0.95 (or
0.90); RMSEA , 0.05.
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