Impact of ISO 9000 on Business Performance Galin Zhelyazkov Design, Manufacture & Engineering Management; Strathclyde University of Glasgow email: [email protected]

Abstract Purpose – This paper will summarize the research on ISO 9000 certification impact on business performance done during the last two decades and will group the results based on variables affecting it. Sources from case studies, statistical reports and empirical studies have been analysed in order to provide the best answer to the question: Does ISO 9000 affect business performance? Design/methodology/approach – An analysis on the most cited ISO 9000 sources was performed. All the hypothesis were extracted and the outcome of it was used to define variables affecting business performance of certified companies. Findings – After implementing the ISO 9000 standard companies have raised sales, which resulted in higher profit. For many of those companies, higher profit was the main goal. The targeted goal for implementing the standard plays a key role in the outcome of the certification. According to the results company size and post certified period does not affect ISO 9000 implementation and business performance. Research limitations/implications – Testing other researches analysis brings some limitations. The methods, data and approach taken differ from one research to another. The sample data is from different business area, region, period and years. These aspect variations may result in statistical error. On the other hand this study used limited number of research papers, which does not grasp all possible findings in the area. Originality/value – The paper identified the most common variables affecting business performance. It summarize findings from the last two decades and provide a nice overview of the current state of the art in respect to ISO 9000. Keywords ISO 9000, business performance, TQM, ISO 9000 hypothesis, ISO 9000 process variables Paper type Literature review 1. Introduction For the last two decades there were more than 1064785 ISO 9000 certified companies around the world (ISO, 2009). “Globalisation has radically changed the competitive landscape and process flows of business” (Chow-Chua et al.,2003).This proves the importance of standardization for the business world-wide. One way for achieving this is by implementing total quality management (TQM), such as ISO 9000 in all companies. Anyhow there are many

studies done on ISO 9000 impact on business and still the outcome is unclear (Chow-Chua et al.,2003; Dick et all, 2008). This paper will attempt to review the most acknowledged studies done in the area and to summarize their findings. ISO 9000 is a quality management framework developed by the International Organization for Standardization (ISO) in 1987. The standard is developed in such a way to be able to suit small and medium size companies as well as different businesses areas. Since its first draft, the standard has been revisited twice in 1994 and 2000. The 1994 version introduced ISO 9001, 9002 and 9003. The last improvements update the standard to the nowadays changes in the business world and the three parts of ISO 9000:1994 were merged into ISO 9001 in 2000 version. This was required because version 1994 was often criticized for moving the focus from quality improvement to process documentation (Emeka et al.,2008). ISO 9000 is “designed to provide a basis for establishing, documenting and maintaining a consistent and demonstrable quality assurance system” (Emeka et al., 2008). Another aspect of ISO 9000 is that it doesn’t guarantee final product quality, because it originated as a quality management framework applicable for organizations and not for products. In order to obtain ISO 9000, a company has to go through a heavy burdensome process, which is known to be expensive and time consuming. Corbett et al. (2005) said that price and time vary depending on the organization. On top of that bottom line, the standard requires yearly maintenance budget as well. The section two, following this introduction, will present related research work. Section three will list all variables affecting business performance identified. The outcome will be presented in the section four. Section five will discuss the findings and their origin. Finally, a conclusion will be drawn in section six, followed by section seven, cited sources. 2. Related Research There are many studies done around the world about impact of ISO 9000 on business performance and the results are still not the same. This paper will review studies done by different researchers. The methodologies used in the studies vary from one researcher to another. One is taking certified and non certified companies having the same business and measuring certain parameters. Other is measuring the same company parameters before and after certification. Third one is doing empirical analysis based on public companies data. The papers examined base their findings on companies from US, Canada, UK, Singapore, Spain, Greece, Australia, Japan and Denmark. The sources for this study on ISO 9000 impact on business are coming from case studies, statistical reports and empirical data analysis coming mainly from International Journal of Quality & Reliability Management. Other sources are Journal of Global Business Issues, International Journal of Operations & Production Management, British Journal of Management, Journal of Manufacturing Technology Management, Journal of Operations Management, European Journal of Operational Research and Journal of Managerial Issues. The table below present hypothesises from 15 papers examined in a literature review. They are marked as either green or red. The green correspond to true and red to false.

Paper by

Hypothesis / Theoretical framework

Robert Jones, Guenter Arndt, Richard Kustin, (1997)

H1.That those companies which seek ISO QCert for non-developmental reasons perceive that they obtain fewer beneficial outcomes from the exercise than those companies which seek ISO QCert for developmental reasons. H2. That longer-certified companies perceive to have experienced greater benefits from QCert than recently-certified companies.

White, Margaret A. (1999)

H1: ISO 9000 companies experience higher levels of operational performance than nonISO 9000 companies in their industry. H2: ISO 9000 companies experience higher levels of foreign sales than non-ISO companies in their industry. H3: ISO 9000 companies are more profitable than non-ISO 9000 companies in their industry.

Hongyi Sun, (2000)

H1. TQM has a positive impact on the improvement of business performance. H2. ISO 9000 certification has a positive impact on the improvement of business performance. H3. ISO certification has a positive impact on the implementation of TQM.

Tord Häversjö, (2000)

H1. ISO 9000 registered companies are more profitable than other companies.

Shams-ur Rahman, (2001)

H1. TQM impact on organizational performance is greater for SMEs with ISO 9000 than for SMEs without ISO 9000.

Iñaki Heras, Gavin P.M. Dick, Martí Casadesús, (2002)

H1. ISO 9000 registration’s impact on sales and profitability.

Mile Terziovski, Damien Power, Amrik S. Sohal (2003)

H1. There is a significant and positive relationship between the quality culture of an ISO certified organization and the benefits derived from the certification process. H2. The motivation for ISO 9000 certification is a significant and positive predictor of the benefits derived from certification. H3. A facilitation style of the quality auditor, has a significant and positive relationship with the ben- efits derived from ISO 9000 certification. H4. The covariates company size, and the number of years an organization has been certified have an impact on the strength of the relationship in H1, H2, and H3.

Clare Chow-Chua, Mark Goh, Tan Boon Wan, (2003)

H1. Listed firms that are ISO 9000 certified experience greater benefits than non-listed ones. H2. ISO 9000 certification has a positive impact on the financial performance of listed firms. H3. Listed and non-listed firms encounter the same barriers with ISO 9000 certification.

Efthalia Dimara, Dimitris Skuras, Kostas Tsekouras, Stavros Goutsos, (2004)

H1. Firms pursuing a cost leadership strategy will adopt ISO 9000 due to latent (unobserved) cost reduction reasons and the effect of adoption will be reflected on financial performance indicators marking increased profitability. Whether such increased profitability is also reflected on other financial indicators of performance is inconclusive.

H2. Firms pursuing a market differentiation strategy will adopt ISO 9000 due to latent (unobserved) marketing reasons and the effect of adoption will be reflected on financial performance indicators marking increased growth of sales. Whether such increase of the firm’s market is also reflected on other financial indicators of performance such as profitability is inconclusive. H3. Firms pursuing a focus strategy will adopt ISO 9000 due to latent (unobserved) focused marketing reasons and the effects of adoption will be reflected on financial performance indicators marking increased growth of sales. If the focus strategy has a strong element of cost leadership, the firm may also show improvement in profitability or other indices of financial performance. Charles J. Corbett, María J. Montes-Sancho, David A. Kirsch (2005)

H1. ISO 9000 certification leads to an increase in return on assets (ROA) and in return on sales (ROS). H2. ISO 9000 certification leads to an increase in Tobin’s Q. H3. ISO 9000 certification leads to lower COGS/SALES ratios. H4. ISO 9000 certification leads to higher relative SALES growth and to increased asset turnover (SALES/ASSETS).

Mei Feng, Milé Terziovski, Danny Samson, (2007)

H1. There is a significant and positive relationship between implementing procedures of ISO 9000 certification and operational performance. H2. There is a significant and positive relationship between implementing procedures of ISO 9000 certification and business performance. H3. There is a significant and positive relationship between organizational commitment to implementing ISO 9000 certification and operational performance. H4. There is a significant and positive relationship between organizational commitment to implementing ISO 9000 and business performance. H5. There is a significant and positive relationship between planning for ISO 9000 certification and operational performance. H6. There is a significant and positive relationship between planning for ISO 9000 certification and business performance. H7. The relationship between implementation of ISO 9000 and organizational performance strengthens when covaried for company size.

Emeka S. Dunu, Michael F. Ayokanmbi (2008)

H1. ISO 9000 certification will increase revenues. Since changes in revenues did not control for acquisitions and divestitures, we also examined the changes in the ratio of revenues to the firm's total assets. H2. ISO 9000 certification will increase the ratio of revenues to firm's total assets. H3. ISO 9000 certification will increase the operating income of the firm. H4. ISO 9000 certification will increase the ratio of operating income to firm's total assets.

Micaela Martinez-Costa, Thomas Y. Choi, Jose A. Martinez, Angel R. Martinez-Lorente (2009)

H1. ISO 9001/2000 certified companies perform better than ISO 9000/1994 certified or non-ISO companies. H2. ISO 9001/2000 certified companies show a higher level of improvements in TQM practices compared to ISO 9000/1994 certified or non-ISO companies.

Lafuente, E., Bayo-Moriones, A. and García-Cestona, M. (2010)

H1a: Firms with higher rates of permanent employees are more likely to adopt ISO-9000 certification. H1b: Less labour-intense firms are more likely to adopt ISO-9000 certification. H2: Firms participating in foreign markets are more likely to adopt ISO-9000 certification. H3: Firms producing intermediate goods are more likely to adopt ISO-9000 certification. H4a: Firms with a more standardized production process are more likely to adopt ISO9000 certification. H4b: Firms that have incorporated JIT practices are more likely to adopt ISO-9000 certification. H5a: Poor performance increases the probability of adopting ISO-9000 certification. H5b: The adoption of ISO-9000 certification positively impacts firm performance. H6: Firms controlled by multinational firms are more likely to adopt ISO-9000 certification. H7a: Ownership concentration positively impacts firm performance. H7b: The relationship between ownership concentration and performance is stronger for those firms where the main shareholder is a multinational firm.

Milena Alic, Borut Rusjan, (2010)

H1. Internal audits contribute to the achievement of a company’s business goals and thus to business efficiency. H2. Internal audits have more positive than negative effects on business performance.

3. ISO

9000 aspects influencing business performance

ISO 9000 adoption reason Jones et al. (1997) did a study in the US, which output showed that companies trying to obtain ISO 9000 for non-development purposes obtained less benefits from it, than those who seek it for development reasons. Another study by Dimara et al. (2004) provides more evidence to support that fact. According to them companies should be examined separately and categorized according to their objectives. The results shows that ISO 9000 certified companies pursuing a cost leadership strategy results in profit increase, while pursuing a market differentiation strategy results in sales increase. Terziovski et al. (2003) also mentions in his study that the motivation for ISO 9000 certification is a significant and positive predictor of the benefits derived from certification.

ISO 9000:2000 and ISO 9000:1994 The newer version of ISO 9000:2000 was released to update the standard, mainly due to the critics that ISO 9000:1994 was a bureaucratic process focused on documentation and not that much on quality improvements (Emeka et al., 2008). A recent research by Martinez-Costa (2009) prove that ISO 9001:2000 certified companies show a higher level of improvements in TQM practices compared to ISO 9000:1994 certified or even non-ISO companies. On the other hand the same study did not prove ISO 9001:2000 certified companies to perform better than ISO 9000:1994 certified. This fact questions if the new standard succeeded to fulfil its objective. Company post-certified period Another aspect of ISO 9000 certification is the time. Companies certified for longer time has shown better TQM improvements results. On the other hand companies with longrer ISO 9000 tradition did not experience greater benefits from the certification compared to recently-certified companies (Jones et al., 1997; Terziovski et al., 2003). Controversy Corbett (2005) evidence that, when analyzing ISO 9000 companies data, its important to use the 3 to 5 year postcertified period, to actually see the business performance improvement. Company size ISO 9000 has been adopted by small, medium and big size companies. Anyhow the company size does not influence the process of ISO 9000 adoption and its impact on business performance (Terziovski et al., 2003; Lafuente et al., 2010). Even more, there is no evidence that companies with a higher rate of employees are more likely to get certified. Feng (2007) confirms that company size does not affect the relationship between implementation of ISO 9000 and organizational performance. Internal audit Internal audit can contribute to an improvement in business performance. This statement derives from the following “companies are internally motivated for the introduction and for efficient performance of the ISO 9000, the quality objectives are connected to the business objectives and consequentially the internal audit’s objectives can also be connected to the business objectives through quality objectives” (Alic and Rusjan, 2010). In contrast to it Terziovski et al. (2003) argues that “a facilitation style of the quality auditor, has not a significant and positive relationship with the benefits derived from ISO 9000 certification." Higher profit Certified companies have higher profit than non-certified (White, 1999; Torn, 2000; Chow-Chua, 2003; Corbett, 2005). White (1999) is supporting the believe that “because of the potentially high certification costs, firms that have slack resources may be more likely to add ISO 9000 to their repertoire than firms without slack resources” and therefore the higher profit is not linked with the standardization. Emeka (2008) confirms that certified companies have higher profit than non-certified, but still cannot conclude this is result of ISO 9000 certification. Heras et al.(2002) saw a progressive increase in sales and profitability for certified companies, but also confirmed that those companies were performing better before certification compared to non-certified

ones. Operational performance According to Feng (2007) ISO 9000 certification has a positive and significant effect on operational performance, however just by itself it does not lead to improvement in business performance. What he also finds true is that management commitment and planning for ISO 9000 certification have positive impact on operational performance. Lafuente (2010) also supports the view that ISO-9000 certification positively impacts firm performance.Controversy White (1999) concluded in her study that ISO 9000 does not have impact on operational performance. Her thesis is supported by Rahman (2001), who found out that impact on organizational performance does not differ between certified and non-certified firms. Higher sales Lloyd’s Register Quality Assurance (LRQA, 1993) concluded ISO 9000 certification brings mainly external benefits to an organization, e.g. it enabled companies to improve their business performance by allowing them to bid for tenders (Terziovski et al, 2003). Tord’s study (2003), on certified Danish companies, confirms better business performance based on increased sales. Another study conducted by Heras (2003) supports the fact that ISO 9000 implementation have a positive impact on sales and profitability. The opposite outcome comes from White (1999), who evidences that ISO 9000 have no impact on operational performance and foreign sales. Business performance Does ISO 9000 has positive impact on business performance? All listed above has affect ISO 9000 adoption and consequently have impact on business performance. Anyhow there are not many researchers, who testes that hypothesis. Sun (2000) and Chow-Chua (2003) did not found ISO 9000 certification to have positive impact on the improvement of business performance. Opposite to them Feng (2007) found a significant and positive relationship between ISO 9000 certification and business performance. His study also found relationship between organization commitment and planning for ISO 9000 and business performance. 4. Results The summary of the findings is presented in the table below.

Paper Charles J. Corbett, María J. Montes-Sancho, David A. Kirsch (2005)

ISO 9000 adot ion reaso n

ISO 9000: 2000 vs. 1994

Postcertifie d period

Yes

Com pany size

Inter nal audit

High er profit

Yes

Oper ation al perfo rman ce

High er sale s

Clare Chow-Chua, Mark Goh, Tan Boon Wan, (2003) Efthalia Dimara, Dimitris Skuras, Kostas Tsekouras, Stavros Goutsos, (2004)

Yes

Yes

Emeka S. Dunu, Michael F. Ayokanmbi (2008)

No

Yes

Gavin P.M. Dick, Iñaki Heras, Martí Casadesús, (2008) Hongyi Sun, (2000) Iñaki Heras, Gavin P.M. Dick, Martí Casadesús, (2002)

Yes

Yes

Lafuente, E., Bayo-Moriones, A. and García-Cestona, M. (2010)

No

Yes

Mei Feng, Milé Terziovski, Danny Samson (2007)

No

Yes

Micaela Martinez-Costa, Thomas Y. Choi, Jose A. Martinez, Angel R. Martinez-Lorente (2009) Mile Terziovski, Damien Power, Amrik S. Sohal (2003)

Yes

Yes

No

No

Milena Alic, Borut Rusjan, (2010) Robert Jones, Guenter Arndt, Richard Kustin, (1997)

No

Yes

Yes

Yes

No

Shams-ur Rahman, (2001)

No

Tord Häversjö, (2000)

Yes

Yes

White, Margaret A. (1999)

Yes

No

No

Yes

3

1

1

0

1

6

2

3

No

0

1

2

3

1

0

2

1

5. Discussion The certification process leads to change management. Change management is probably the most difficult, time and money consuming operation in a company, so only strong arguments can push the staff to accept it faster and smoother. This requires solid prove that ISO 9000 implementation can bring certain benefits, which are the targeted goal of that particular organization. It can be increasing sales, improving product quality or customer satisfaction. In

any case those goals are to be obtained only by continuous senior management involvement. The organizations using ISO 9000 for non-organization goals, e.g. marketing purposes, do not benefit from the certification. The reason for this can be that such a change in organization can happen only if the whole company employees are focused in that direction. To do so, a clear understanding is needed and direct positive effect on their daily work should be visible. The ISO 9000 standard was questioned from its origin and even nowadays. Anyhow the newer version of its seems to resolve the found issues. That can be clearly result of the vast amount of companies data. How the standard was implemented is still another aspect which should be taken into consideration, as well as post certification period. We can expect that the longer certification tradition a company has, the better quality output it gives. However this does not apply for ISO 9000 certified companies. One reason could be that companies understand ISO 9000 as a target goal and not as a continuous process. Another is that the certification criteria does not not evolve as fast as the business in our days. An aspect this study eliminated is certified company size impact on business performance. ISO 9000 aims to be a flexible standard, that can be applied in both small, medium and large size companies. The main distinctions are budget, time and effort for those organizations to get certified. It is known that well performing companies get ISO 9000 certified and afterwards their business performance continues to raise. While companies with bad performance aim to obtain the certification as a saving mechanism, but they do not show distinctive improvements. Main hope is not only the profit increase, but also the operational performance raise. Nevertheless ISO 9000 does not seem to fulfill this goal. One reason could be that when measured, the organization’s targeted goals were not taken into consideration. On the other hand operational performance is difficult to measure in different organizations. 6. Conclusion Based on the research outcome in the field we can conclude that ISO 9000 gives opportunities for company internationalization, penetrating foreign markets and gaining market share, consequently increasing sales, but it does not affect product quality. This paper proves that company size does not play a role when measuring the business performance of companies implementing ISO 9000. Next proof is that certified companies have higher profit than non-certified companies, nevertheless most of those had higher profit prior to the implementation process, so this is not a result of the certification. There are various reasons for a company to get certified, but it got proven that if the intention is non-development the overall organization benefits less than if the certification was used for company development purposes. There were some traces found that post certified period does not affect business performance, but data is insufficient to draw such a conclusion. Future research The study presented in this paper is statistical analysis on research done about ISO 9000 in the last two decades. The methodology, region, aspects measured and many other variables differ from one study to another. In order to minimize error percentage, all studies should be conducted again using the same methodology. Only then we can conclude 100 % truly the

results shown above. Topics, which benefit from further research are: Does ISO 9000:1994 has better impact on business performance than ISO 9000:2000?, Does internal audit facilitates better certification implementation, which results in better business performance?, Does ISO 9000 increases operational performance?. 7. References 1. Charles J. Corbett, María J. Montes-Sancho, David A. Kirsch (2005), “The Financial Impact of ISO 9000 Certification in the United States: An Empirical Analyzis”, MANAGEMENT SCIENCE, Vol. 51, No. 7, pp.1046-1059 2. Clare Chow-Chua, Mark Goh, Tan Boon Wan, (2003) "Does ISO 9000 certification improve business performance?", International Journal of Quality & Reliability Management, Vol. 20, No. 8, pp.936 - 953 3. Efthalia Dimara, Dimitris Skuras, Kostas Tsekouras, Stavros Goutsos, (2004) "Strategic orientation and financial performance of firms implementing ISO 9000", International Journal of Quality & Reliability Management, Vol. 21, No. 1, pp.72 - 89 4. Emeka S. Dunu, Michael F. Ayokanmbi (2008), “The Impact of ISO 9000 Certification on the Financial Performance of Organizations”, Journal of Global Business Issues, Vol. 146, No. 3, pp.580-595 5. Gavin P.M. Dick, Iñaki Heras, Martí Casadesús, (2008) "Shedding light on causation between ISO 9001 and improved business performance", International Journal of Operations & Production Management, Vol. 28, No. 7, pp.687 - 708 6. Hongyi Sun, (2000) "Total quality management, ISO 9000 certification and performance improvement", International Journal of Quality & Reliability Management, Vol. 17, No. 2, pp.168 - 179 7. Iñaki Heras, Gavin P.M. Dick, Martí Casadesús, (2002) "ISO 9000 registration’s impact on sales and profitability: A longitudinal analyzis of performance before and after accreditation", International Journal of Quality & Reliability Management, Vol. 19 Iss: 6, pp.774 - 791 8. Lafuente, E., Bayo-Moriones, A. and García-Cestona, M. (2010), “ISO-9000 Certification and Ownership Structure: Effects upon Firm Performance”, British Journal of Management, Vol. 21, No. 3, pp. 649–665 9. Mei Feng, Milé Terziovski, Danny Samson, (2007) "Relationship of ISO 9001:2000 quality system certification with operational and business performance: A survey in Australia and New Zealand-based manufacturing and service companies", Journal of Manufacturing Technology Management, Vol. 19, No. 1, pp.22 - 37 10. Micaela Martinez-Costa, Thomas Y. Choi, Jose A. Martinez, Angel R. Martinez-Lorente (2009), “ISO 9000/1994, ISO 9001/2000 and TQM: The performance debate revisited”, Journal of Operations Management, Volume 27, No. 6, pp.495-511 11. Mile Terziovski, Damien Power, Amrik S. Sohal (2003), “The longitudinal effects of the ISO 9000 certification process on business performance”, European Journal of Operational Research, Vol. 146, No. 3, pp.580-595 12. Milena Alic, Borut Rusjan, (2010) "Contribution of the ISO 9001 internal audit to business performance", International Journal of Quality & Reliability Management, Vol. 27, No. 8,

pp.916 - 937

13. Robert Jones, Guenter Arndt, Richard Kustin, (1997) "ISO 9000 among Australian companies: impact of time and reasons for seeking certification on perceptions of benefits received", International Journal of Quality & Reliability Management, Vol. 14, No. 7, pp.650 - 660 14. Shams-ur Rahman, (2001) "A comparative study of TQM practice and organizational performance of SMEs with and without ISO 9000 certification", International Journal of Quality & Reliability Management, Vol. 18, No. 1, pp.35 - 49 15. Tord Häversjö, (2000) "The financial effects of ISO 9000 registration for Danish companies", Managerial Auditing Journal, Vol. 15, No. 1/2, pp.47 - 52 16. White, Margaret A. (1999), “The relationship between ISO 9000 and business performance: does registration really matter?”, Journal of Managerial Issues, Vol. 146, No. 3, pp.580-595