How do quality management systems impact on revenue in the hospitality industry - Research Paper Example

?RUNNING HEAD: QUALITY Development of a Research Design 2 Table of content INTRODUCTION 1. Background Quality management systems have always been considered as the tools to achieve the organizational goal of profit maximization. Manufacturing organizations have achieved immense improvements by implementing quality management systems. The key elements of quality management as defined in BS EN ISO9000 (2000) are – “customer focus, leadership, involvement of people, process approach, system approach, continual improvement, factual approach to decision making and mutually beneficial supplier relationships” (Dale, 2003). All these elements together form an environment conducive to reducing wastage and application of minimum resources to produce maximum outputs resulting in improved productivity and hence revenues. In 1997 Letz et al conducted a study of nine performance measures of 29 UK companies associated with TQM practices and found all of them at levels which were 62-81% above industry averages of those firms (Dale, 2003). Companies like Motorolla, DuPont and GE applied Six Sigma to achieve higher profitability. (Pande et al., 2000). Though the quality concept started with the manufacturing segment, it has also slowly spread to the service industry. Though the service industry has been late in entering this domain, sectors like hospitality, healthcare and insurance have seen the importance of this methodology to achieve increased revenues as per a study by Hasan and Kerr in 2003 (Yasin et al., 2004). The focus of our study here is the hospitality industry. The purpose of this study is to understand the application of these concepts in the hospitality industry and to see how these have actually helped in achieving revenue generation for this industry. The basic characteristic of hospitality is that it is highly dependent on perceived quality to achieve customer delight which translates into revenues. How quality management systems help in achieving this is what needs to be seen in this study. 1.2. Context of study Hospitality is a very competitive and environment (both physical and economic) sensitive industry. Its profitability is highly dependent of the perceived quality of services and products. Hence, it becomes imperative to understand ways of achieving differentiation of services as well as sustainable quality standards for growth and revenue generation. It has been prophesied time and again by various scholars through various studies what Roberts found in 1996 “businesses who know and understand customers’ priorities for quality improvements can achieve a threefold increase in profitability” (Dale, 2003).This study has been carried out from the revenue generation context of quality systems implementation for hospitality industry. How the various elements of quality help in achieving the increased profitability needs to be analyzed. It is also important to see whether the concepts that help achieve visible improvements in manufacturing sector also produce profitability improvement worth the effort they involve in the hospitality sector or not. 2. RESEARCH QUESTIONS, AIMS AND OBJECTIVES 2.1. Research questions identified The major questions which this research aims to answer are - What is the impact of implementing quality management systems in hospitality industry? How do these systems impact the revenues? What are the efforts involved in implementing these systems and are the resources required to implement quality systems justified by the value of the revenues generated? 2.2. Research Aims and Research Objectives The aim of this study is to see how quality management systems impact revenue in the hospitality industry. Study objectives are as follows: 1. To study how quality management systems are implemented in hospitality industry – a general study of the companies. 2. To understand how the quality management systems impacted the parameters of financial performance (a study of the various parameters they impact as well as the means of this impact). 3. To measure the impact of implementation of these systems on various performance parameters of the companies. 4. To compare the outcomes with either industry standards or other companies which have not implemented them or with parameters before implementation of the systems in the company under study. 3. LITERATURE REVIEW 3.1. Linking of Quality management systems to the firms performance Quality management systems have been found to provide financial benefits to the organizations which implement them. These systems are expected to improve the performance of various departments and processes within a business and in the process improve profitability. There are two ways of improving profitability – increase volumes or margins and decrease costs. Quality management systems impact both. By improving quality of products and service sales volumes (room occupancy) are increased and at the same time customers are willing to pay more for the services which increases the margins. Costs are reduced because of reduction in non-value added procedures. Studies showed that when quality management systems are implemented in small and medium hotels it was found that there was a positive impact on their operations and brand value (Almeida et al., 2009). The study found that there is an increase in the “image enterprise improvement” because the customers experienced an improvement in the services. This happened because following the quality paradigm, all processes were standardized. Because of this standardization employees could know beforehand about how to react to a contingency situation. This resulted in better and prompt problem resolution. The customers also felt that they were getting better attention as employees were better aware of customer needs. Reduction in errors was also observed. One of the elements of quality management systems implementation is the systems approach as per as per ISO9000. Automated systems are used in hotels to carry out favorable yield/revenue management. Without a systems approach this would be next to impossible. Using the various computerized mathematical models the management can use “pricing and inventory control” to maximize profits (Bardi, 2010). These systems also help management predict future demand and supply and accordingly price the various products and services. Technology utilization is an important aspect of systems approach to quality implementation. A study conducted on service organizations to see the level and impact of TQM in service industry showed that the extent of technological sophistication in restaurant, fast food and gaming industry were quite high (Yasin et al., 2004). These entire sectors also felt that implementing quality systems was very effective for their organizations. Another important element of this system is training. From revenue management perspective training is vital for improving profitability. Training leads to better employee performs which in turn reduces the cost of errors and leads to enhanced employee experience (Hayes and Miller, 2010). This is directly responsible for better employee morale and reduced turnover. High turnover is a huge cost to any organization which eats into the bottom line. Continuous improvement and innovation achieved through quality management system implementation helps in keeping differentiation in service which is a key element to accomplishing customer loyalty. Both these elements were observed to be on a higher side for restaurants, fast food and gaming sectors by Yasin et al., (2004). They found that those outlets which implemented quality management found more innovations and continuous improvement in their operations. 3.2. Impact of quality management systems on financial performance of firms Though above discussion shows that quality management systems help improve processes, various empirical studies have shown that there is no link between quality management implementation and improved profitability. A study was conducted by Heras, Dick and Casadesus (2002) which studied the financial performance of 400 companies (including hospitality companies) which were quality management system certified. The study found that the companies which were certified (implying that they had implemented quality management systems) had much better financial performance than those which were not certified. However, the study did not find any change in performance in pre and post implementation period of quality systems. However, this study does confirm the fact that companies which had quality certification (indicating that they followed the quality management systems) had much better performance than those which did not have one. However the study by Almeida et al. (2009) showed improved financial performance of the hotels they studied after they implemented quality management systems. This happened because the standardization of procedures led to better response by employees (as discusses in section 3.1) which led repeat customers. This improved occupancy. Error rates were reduced which resulted in cost reduction as well as customer dissatisfaction. All these are reflected in their improved financial ratios. Yasin et al. (2004) found that implementing quality systems had a very positive impact on market share, ROI and competitive positioning of restaurants, fast food and gaming industries. The major contributor to increased market share was estimated to be increased customer satisfaction. The study also found that the impact of quality management systems is not homogeneous across all industries. It was observed that those industries which have higher dependence on technology and systems turn out to show better gains from the implementation of quality management systems. The hospitality industry is dependent on systems especially for reservations and revenue management. Their restaurant and gaming operations are also highly technology dependent. Hence, it is inevitable that quality management will show improved financial performance for this industry. However, this industry was found to gain less operational efficiencies as they were found to be reluctant or slow in implementing quality management. Hence, they were found to show negative impact of quality process implementation on operational efficiency. This shows that they were not able to show cost benefits. This was mainly because firms in this industry were not able to implement quality effectively. Another reason for this could be the focus of quality efforts. Quality efforts can be made in two directions – revenue enhancement or/and cost reduction. Research has found a positive impact in both manufacturing and service industries when focus of quality implementation efforts is revenue generation (Rust, Moorman and Dickson, 2002). However, cost reduction did not show any significant impact on measures of performance (Rust, Moorman and Dickson, 2002). Small firms of the industry under study have also been found to gain financial benefits by implementing quality. However, these firms find the cost of implementation of quality management systems to be very high. Church and Lincoln (1998) argued that these firms can gain substantial financial advantage of quality but through “preventive systems of quality control” (Morrison and Thomas, 1999). They recommend two main methods for preventive control – Hazard Analysis Critical Control Point (HACCP) and Failure Mode Effect Analysis (FMEA). They suggest that “if the various stages of product or service delivery are controlled, there is no need of testing the final service” (Morrison and Thomas, 1999). With partial implementation of quality measures, Church and Lincoln aim to achieve full revenues benefits of quality management systems. However, these approaches have not been tested in the actual situation. They also argued that quality measures like ISO 9000, benchmarking and TQM will not yield desired results without the preventive control mechanisms of HACCP and FMEA (Morrison and Thomas, 1999). 3.3. Achieving profitability through Six Sigma quality initiatives Hotels have achieved revenue enhancement through Six Sigma initiatives also. As per C.H. Deutsch “Six sigma is a statistical quality control method that combines the art of the efficiency expert with the science of the computer geek” (Enz, 2009). Westin Chicago is a hotel which has used this concept to improve its profitability to a great extent. One of the projects it implemented was called “Unwind” (Enz, 2009). The hotel started a “lobby chair massage program” which was a part of the unwind project. It was an innovative program which provided a sample massage in the hotel lobby to the customers. This resulted in an increase in the customer visits to the hotel’s spa. The total spa revenues generated were 30% higher than the revenues when the program was not launched. The analysts rigorously followed the performance metrics which were set before the program launch. Thus, quality (in this case Six Sigma) was used to set metrics to monitor the financial impact of the program and make the services measurable which is an important aspect of quality. 3.4. Conclusion The above discussion shows that quality management systems have positive impact on revenues of hospitality industry. It has been observed that this has been achieved by improved market share, brand image, ROI and competitive positioning (Yasin et al., 2004). However, some concerns regarding the impact of these systems on overall performance of the firms have been highlighted. One of the concerns is the sincerity of implementation of quality management systems within the firms. The industry leaders need to understand that they are the main drivers of change which these systems propose to bring about. Hence, a commitment of words or even documented commitment is not sufficient. The leadership team needs to be thoroughly involved in its implementation. They need to have a quality vision to help firms achieve both revenue and cost benefits. Half hearted efforts, especially in the industry of our study, have found to have a negative impact on operational performance (Yasin et al., 2004). Our literature review has analyzed all the aspects related to the questions set out in the beginning of our study. Hospitality organizations implement quality management systems by applying for certifications like ISO 9000, etc. or by internal process improvement programs. Some companies in this sector were seen to implement Six Sigma methodologies to reap revenue benefits. Most of the successful organizations in this sector have implemented full computerization which helps the management in analyzing revenue versus cost factors. The literature review looked at the various parameters that quality management systems impact. Some of them analyzed in the above review are – Return on investment, market share, technology, computerization, levels of innovation achieved, training, competitive positioning, client satisfaction and operational outcomes like administrative costs, employee requirement etc. Studies revealed how each of these parameters are inter-related and are impacted by quality system implementation. For example, higher the level of computerization, better the revenue management which results in better ROI. Similarly focus on training (through standardization of procedures) leads to better staff utilization which results in customer delight leading to better occupancy and revenues. A general comparison of the impact was done between service and manufacturing industries. 4. RESEARCH METHODOLOGY 4.1. Introduction The research has been based on secondary data available in journals, books and other reliable internet sources. Literature covering broad and specific topics was reviewed and analysis was made to understand the link with the chosen topic. 4.2 Data Used Since most of the data used in the study is secondary, the variables for analysis in the study are limited. For example, most of the literature has analyzed ROI and market share without much emphasis on other financial aspects like debt equity ratio or return on equity etc. Some studies that have been included in the discussion were conducted in specific countries (like UK which is a developed country). Hence, the data may not be a true representative sample for hospitality industry of other regions like Asian and East Asian countries which have now become hot tourist destinations. 4.3 Data collection techniques All the data has been gathered through reviews of journal articles and books. These authors have used both primary and secondary data collection tools. For example, Yasin et al. (2004) have gathered data through research instruments mailed out to relevant people. These instruments were first authenticated by academicians. Similarly Rust, Moorman and Dickson (2002) shortlisted 100 US firms (most of them Fortune 500) and contacted their personnel to answer survey questions. They also used the firms’ annual reports for secondary financial data. 5. PROPOSAL SUMMARY 5.1 Main research approaches The research aims to understand how the quality management systems impact revenues in hospitality industry. For this, the study looks at the various companies which have applied these systems and then looks at the link between application of the system and the impact on revenues. It looks at how quality improves the way of working and eventually results in financial improvements. It also analyses the circumstances under which the desired results are not achieved. 5.2 Ethical considerations All care has been taken to present data with full integrity. All relevant references have been made to ensure that there is a reliable source for every data being presented. However, since all the data is secondary, its authenticity is also dependent on the author whose literature is being referred to for the study. The study of quality management system implications on revenues of hospitality industry cannot be limited by the few parameters and companies analyzed in this analysis. There is still a scope of further improvisation and analysis. References Almeida, M. M. A, Anton, J. M. R, Andrada, L. R and Pedroche, M. C. (2009). “Organizational impacts of quality certification on business services: An analysis of SMEs Hotels.” POMS 20th Annual conference, Orlando, Florida, USA. Retrieved from: http://www.pomsmeetings.org/ConfProceedings/011/FullPapers/011-0365.pdf Bardi, J. A. (2010). Hotel Front Office Management. New York: John-Wiley and Sons. Dale, B. G (2003). Managing Quality. New York: Wiley-Blackwell Enz, C. A. (2009). Hospitality Strategic Management: Concepts and Cases. New York: John Wiley and Sons Hayes, D. K and Miller, A. (2010). Revenue Management for the Hospitality Industry. New York: John-Wiley and Sons Heras, I., Dick G. P. M and Casadesus, M. (2002). ISO 9000 registration’s impact on sales and profitability – A longitudinal analysis of performance before and after accreditation. International Journal of Quality and Reliability Management, 19 (6): 774-791 Morrison, A and Thomas, R. (1999). The future of small firms in the hospitality industry. International Journal of Contemporary Hospitality Management, 11(4) 148-154 Pande, P. S, Robert P. N and Ronald R. C. (2000). The Six Sigma Way: How GE, Motorola and other top companies are honing their performance. New York: McGraw-Hill Rust, R.T., Moorman, C and Dickson, P. R. (2002). Getting return on quality: Revenue expansion, cost reduction, or both? Journal of marketing. 66: 7-24 Yasin, M. M., Alavi, J., Kunt, M and Zimmerer, T. W. (2004).TQM practices in service organizations. Managing service quality. 14 (5): 377-389 Read More