The Holy Grail?

by Ken Snyder

A few months ago, I spoke with an investment fund manager who invests in companies that practice Lean operational excellence. Both this fund manager and I shared our belief that Lean companies will outperform the general market, and will provide a better return to investors. This fund manager made the comment that if we could prove in an indisputable way that Lean improves the bottom line, then we will have discovered “the Holy Grail.”

Since that conversation, I have followed up with several related conversations on how to prove that Lean organizations really do outperform the general market – mainly with research academics. These conversations led to various discussions about what might amount to “proof,” and how to set up experiments that would be sufficient to provide such proof.

A few weeks ago, I had a similar conversation with some academics from Europe who were visiting the Shingo offices. When I posed the question as to how we can prove this, one of the academics responded by saying, “That’s already been proven.” He then referred me to four articles by Vinod R. Singhal and Kevin B. Hendricks:

  • “Does Implementing an Effective TQM Program Actually Improve Operating Performance? Empirical Evidence from Firms That Have Won Quality Awards,” Management Science, September 1977
  • “The Financial Justification of TQM,” Center for Quality of Management Journal, Spring 1999
  • “Firm Characteristics, Total Quality Management, and Financial Performance,” Journal of Operations Management, 2000
  • “The Long-Run Stock Price Performance of Firms with Effective TQM Programs,” Management Science, March 2001

Let me give a brief summary of the methodology. The data set analyzed was created by looking at companies that won international (Shingo Prize), national (Baldrige Award), and/or state (24 US states) quality awards. For each winner, the researchers identified the year when the organization won their first quality award. They assumed that award recipients had an effective implementation of TQM, and that the effective implementation of TQM occurred one year prior to the first award. They then looked at the next five years after receiving the award and compared that to the performance of the firm during the five years prior to receiving the award, as well as against comparable (matched-pair) firms (same industry, same size) over the same time periods.

There are two major findings from this research:

  • The firms with effective implementation of TQM outperformed comparable firms in their same industry; and
  • The firms with effective implementation of TQM improved their own internal results.

These findings are huge! They are, as my fund manager friend noted, “the Holy Grail!”

Somehow, I missed these articles when they were published. Perhaps it is because I was a C-Suite executive at the time and didn’t have time to read academic articles.

Let me conclude with a question and an answer:

Q. How can we convince skeptical Wall Street analysts and reluctant C-Suite executives that Lean will improve company financial performance?

A. Share this data with them. Let them know we’ve found the Holy Grail!

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4 thoughts on “The Holy Grail?”

  1. Q. How can we convince skeptical Wall Street analysts and reluctant C-Suite executives that Lean will improve company financial performance?

    Let the C Suite Exe’s get beat badly enough by Lean organizations, and the VC’s and bankers that back them will “help” them see the light. Having participated in multiple Lean events and having directed others in Kaizen processes that literally moved our company, and subsequently our industry on new pathways of increased profitability, I was truly surprised by who really took notice. When investors are asking on the quarterly calls why their top competitor is 15% more profitable… they start digging in earnest for the real answers. They always seem to find them in a Lean/TQM cultures and it’s not the quick a fix they hope for.

  2. Happy to see this evidence of success.
    It seems to me that the key word is “effective” implementation. So many companies try to implement Lean, TQM, JIT, Six Sigma, etc. programs– often at quite a lot of expense– and fail. Figures I’ve read estimate a 95% failure rate. So if I were all Wall Street investor, which I’m not, I would not want to invest in a company just because it says it has a Lean program– I’ve got a 95% chance of losing my money! I would only want to want to invest once they’ve proven they’ve effectively implemented (say, by winning the Shingo Prize or Baldridge Award). I don’t doubt the findings of the articles, but I doubt, sadly, these will influence Wall Street.

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