The impact of ISO 9001 implementation on

The TQM Journal The impact of ISO 9001 implementation on organizational performance in Kenya Jacqueline Ochieng David Muturi Samuel N. Njihia

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The impact of ISO 9001 implementation on organizational performance in Kenya Jacqueline Ochieng Department of Business Intelligence and Research, Kenya Institute of Management, Nairobi, Kenya, and

David Muturi and Samuel N. Njihia

Impact of ISO 9001

761 Received 4 June 2015 Revised 29 July 2015 Accepted 30 July 2015


Kenya Institute of Management, Nairobi, Kenya Abstract Purpose – The purpose of this paper is to establish the effect of ISO 9001 implementation on the performance of organizations in Kenya. It specifically targeted organizations listed on the Nairobi Securities Exchange (NSE) which is the leading securities exchange in East Africa. Design/methodology/approach – The survey made use of web content analysis to collect data from these organizations’ web sites. Data were collected on net profit, turnover and net assets over a four-year period (2010-2013). The research used statistical data analysis to investigate the association between ISO 9001 implementation and performance. Findings – Results of the survey reveal that ISO 9001 certification influenced return on net assets of the organizations thereby influencing their performance. There was significant differences in net asset value among organizations with ISO 9001 certification and those that did not possess the certification. On profit and revenue, there were no significant differences between the ISO 9001 certified and non-certified organizations. Research limitations/implications – The research findings are limited to those organizations listed in the NSE and may not be generalized to other organizations. The study is further limited by the number of organizations participating in the study which was 20. Practical implications – The findings of the study provide justification for adoption of ISO 9001 standard in organizations in all key sectors of the Kenyan economy for sustained quality management practices. The ISO 9001 certified companies will enhance their quality management practices to achieve the successes documented in this paper while those yet to embrace the standards will draw lessons from such successes which may offer them compelling arguments to adopt them. Originality/value – Since the adoption and uptake of ISO certification in Kenya over a decade ago, no study has been carried out that directly relates ISO certification to organizational performance. This study will thus be useful as a starting point in documenting the ISO standard’s impact. Keywords Quality management, ISO 9001, Organizational performance Paper type Research paper

1. Introduction In the current business environment there is increasing pressure on firms by both consumers and competitors alike to continually innovate in new products and to upgrade the quality of existing goods and services. According to Sharma et al. (2005), the main focus of a company should be the customer and it should consider their needs and demands so as to maintain a competitive edge and survive in the market. Consequently most of the firms in both the developed and developing world have embraced some form of ISO certification. ISO itself is not a certifying body but rather provider of standards against which organizations can assess their processes and systems. This gives an objective assessment mode for organizations and also a means through which they can benchmark themselves to others globally and see where they stand in comparison to similar organizations.

The TQM Journal Vol. 27 No. 6, 2015 pp. 761-771 © Emerald Group Publishing Limited 1754-2731 DOI 10.1108/TQM-06-2015-0071

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Standards are meant to improve efficiencies in an organization hence improve performance. There is therefore need for certain variables to be in place to determine how an organization is performing in order to establish if the standards are bringing about improvements in the organization. Establishing variables for measuring organizational performance needs to take cognizance of various attributes that contribute to organizational success. Bhattacharyya and Sanghamitra (2010) define organizational performance as a measure of how well organizations are managed and the value they deliver to customers and other stakeholders. Laihonen (2013) describes performance in an organization as the organizations’ ability to achieve its objectives. Organizations’ objectives are varied according to the sectors/businesses they represent but they have certain commonalities. Profit making organizations aim to increase turnover and net worth while the not for profit organizations aim at sustainability. Many years ago, Mahoney and Weiner (1981) developed a theory of organization performance relating it to profit level, profitability and stock prices. In this case profitability is measured as profit relative to assets and is a preferred measure of relative performance. Richard et al. (2009) aver that organizational performance encompasses three specific areas of firm outcomes, i.e. financial performance (profits, return on assets (ROA), return on investment, etc.); market performance (sales, market share, etc.); and shareholder return (total shareholder return, economic value added, etc.). Goncharuk and Monat (2009) found that the key performance indicators in a company may include parameters such as a customer satisfaction index, revenue growth, profit growth, total or partial measure productivity, percent on-time shipment or rate of new product introduction. This paper is arranged in six sections namely: Section 1 outlines the introduction and background to the study; Section 2 has the study objectives; Section 3 details the literature review; Section 4 outlines the methodology used; Section 5 has the findings and analysis of the study and Section 6 presents the conclusions. 2. Study objectives The purpose of this study is to investigate the effect of ISO 9001 certification on organization performance. The organization performance variables used are: revenue; net profit and net assets. The paper aims to establish the following: (1) the effect of implementation of the ISO 9001 standard on net profit gains in an organization; (2) the effect of implementation of the ISO 9001 standard on revenue in an organization; and (3) the effect of implementation of the ISO 9001 standard on net assets in an organization. 3. Literature review The necessity for organizational performance measurement cannot be over emphasized as performance measures, metrics and indicators give life to the stated organization vision, and strategy by providing specific measurable expectations that guide each employee in fulfilling their roles that contribute to the success of the company (Choong, 2013). Based on selected variables of profit, revenue and ROA, various authors have used these attributes as key measures in modeling organization performance


indicators. These variables touch on the core functions of an organization especially a profit making organization. The variables are also preferred because of their quantitative, hence easily measured, aspects. In addition to this, they have qualitative sub factors that are contributory to their measurement of the variables, such as organization top leadership, decision making and efficiency of processes among others. The net profit variable is not a standalone variable but rather has other contributing factors like cost management (operating cost efficiency/inefficiency), leverage and liquidity in an organization. This means that its use as a performance measurement is implicit of all these sub indicators in an organization. The importance of profitability as a performance measure includes its characteristic of significantly affecting the organization’s achievement of other financial goals. Another factor explaining the importance of organization profitability is its effect on economic growth, employment, innovation and technological change (Yazdanfar, 2013). The profitability of an organization also carries with it other determinants like management decisions and factors that reflect the market, business and economic environment in which the organization operates. Ito and Fukao (2006) in their study on the determinants of organization profitability in Japan using a sample of 2,000 firms found that profitability was positively associated with size measured in terms of value of sales, age and local procurement. Stierwald (2010) in a similar study in Australia found that lagged profit, productivity and size play major roles in explaining profitability. On revenue generation in organizations, other sub factors have been found to be present in this variable hence contributory to the performance of the organization based on it. Helsel and Cullen (2006) aver that revenue management deals with segmentation, demand forecasting, revenue strategy, operational forecasting, interdepartmental integration, strategic pricing, inventory control strategies and internal performance analysis. Revenue/sales departments in organizations are given prominence because of their importance in enabling organizations to function and attain profitability. Sales is increasingly about process, rather than a series of separate transactions carried out by a specific function (Storbacka et al., 2009). Revenue generation in organizations being an important factor in determining stature of organization and measuring its growth is usually given top strategic priority. There is a move toward relationship and solution selling and a need for more customer-centric sales cultures (Trailer and Dickie, 2006). The ROA variable is another key indicator of organizational performance which is associated with profitability. ROA is frequently defined by net income after tax divided by total assets is a comparative measure and does not provide an absolute value ( Joo et al., 2011). There is an increased focus on sound asset management due to recognition of its value to an organization (El-Akruti and Dwight, 2013). Assets in an organization are guarded against misappropriation because of the resultant negative impact on the organization which affects the organization’s value and its corporate credibility (Song et al., 2013). Studies have shown that quality management is a substantive factor influencing all the variables of organization performance discussed above. Hendricks and Singhal (1999) explored the relationship between quality management and profitability. Quality management models by Garvin (1984) and Deming (1986) demonstrate that as quality (in an organization) improves, waste is eliminated, costs are reduced and financial performance improves. Dick (2009) in his research covering Denmark, Spain and the USA further concluded that better performing companies had opted to adopt quality certification. Quality certification genesis arose from organizations needing to

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distinguish themselves from others and give an external and formal evidence of their organizational efforts toward quality application (Sampaio et al., 2011). Total Quality Management has informed various quality management advancements and practices, for example it substantially addresses the criteria of the Malcolm Baldrige National Quality Award which is an excellence model award. It advocates for: process factors; systematic improvement; companywide emphasis; customer focus; management by fact; employee development and involvement; cross-functional management; supplier performance and relationships and recognition of TQM as a competitive strategy (Easton and Jarrell, 1998). Excellence models have been found to effect organizational performance and competitiveness (Prajogo, 2005). Research by Pipan et al. (2012) shows that if companies institutionalize the requirements of excellence models like the European Foundation for Quality Management model that advocate total quality management practices, they benefit mainly in the non-financial results, e.g. the use of approaches for stimulating knowledge sharing and innovativeness, measurement of proposals for improvement. Although these also have a bearing on financial performance. Zatzick et al. (2012) found that if TQM is utilized in its proper “fit” in organizations then it has a bearing on the performance of the organization. The point of emphasis is utilization within a strategic fit otherwise it ends up as a liability. TQM thus was found to positively influence organizational performance for cost leaders, but negatively related to performance for differentiators. Uncertainty concerning the correct use of TQM was highlighted by Sureshchandar et al. (2010) who avered that although TQM promised to provide a potential solution to many business-related problems, corporations still struggled with reaping its benefits. Many of them have nonetheless set out on this never-ending odyssey and many others have started exploring what is required in order to embark on a TQM journey. TQM is hence being adopted by world class organizations that are placing emphasis on its implementation and continually seeking to enhance their business by using various quality tools ( Jimenez and Costa, 2009). TQM has the distinct advantage of providing organizations with self-assessment tools and techniques they can use for quality improvements. These tools and techniques include statistical process control, 5S, Kaizen and Lean Six Sigma among others that have a holistic company approach at correcting inefficiencies in an organization and affecting business performance positively. As such, a fit of TQM practices in mediating the relationship between organization strategy and organization performance has become evident and subject to interrogation by researchers (Prajogo and Sohal, 2006). 3.1 ISO certification Within the quality management paradigm, the ISO 9001 standard has arguably made one of the most influential contributions to date (Heras-Saizarbitoria, 2011). Tari et al. (2013) found that with greater internalization of ISO 9001 utilization of standards, organizations prospered. ISO is the world’s largest developer and publisher of international standards. The ISO 9001 standard is a quality management standard that embraces principles of TQM and which merges organizational concerns with customer satisfaction, shareholder satisfaction, process efficiency and employee well-being (Lakhal, 2014). ISO 9001 encompasses organizational practices across sectors with its application being relevant to organizations regardless of the business they are in. This has made this particular certification relevant to most organizations thus gaining most popularity compared to other ISO standards.


ISO 9001 has been adopted by organizations both large and small world wide which want to claim a documented quality system that is implemented and followed, ensuring that products are made to exacting specifications (Franceschini et al., 2010). The successful diffusion of ISO 9001 has stimulated new standards that have been launched. These new standards cover the standardization of a very wide range of aspects of business activity, such as environmental management (Tari et al., 2013). Marimon et al. (2010) found that the leading nations in ISO 9001 and ISO 14001 certifications have a common spreading pattern. All of them are increasing in both standards, not only in absolute number of certifications, but also in its certification intensity. According to ISO, “International Standards are an important source of technological know-how. Developing countries can use International Standards to access knowledge in areas where they may lack expertise and/or resources.” A 2012 survey of certifications (International Standards Organisation, 2013) showed that Kenya has the highest number of organizations in East Africa achieving ISO certification. In 2012 there were 460 organizations with ISO 9001 certification (quality); 32 organizations with ISO 14001 certification (environment) and 118 organizations with ISO 22000 certification (food safety). ISO 9001 leads the pack and also has highest rate of conversion from non-certified to certified organizations over the last ten years. Evidence of ISO 9001 having a direct impact to organization performance has been documented by several authors. Starke et al. (2012) found that ISO 9001 certification is associated with an increase in sales revenues, decrease in value of goods sold, increase in sales revenue and increase in the asset turnover ratios of the certified organizations. Tari and Molina (2002) in their study concluded that organizations achieved greater customer satisfaction, employee satisfaction, social impact and heightened business performance due to their application of the ISO 9001 standard. Starke et al. (2012) in their study also concluded that companies large or small, irrespective of their capital structure (i.e. debt/equity) and cutting across industries will benefit from the adoption of the ISO 9001 standard. This was to pre-empt the perception that larger companies implement ISO standards due to their resource capacity to do so. Dick (2009) found that from an analysis of longitudinal studies, a strong selection-mechanism is found where more profitable organizations have a greater propensity to adopt ISO 9001 accreditation than less profitable organizations. Psomas and Kafetzopoulos (2014) contends that the ISO 9001 certified manufacturing organizations significantly outperform non-certified organizations with regard to product quality, customer satisfaction, operational, market and financial performance. This is evident in a business environment where an economic downturn and financial crisis dominates. Psomas and Kafetzopoulos (2014) further avers that the purpose of organizations implementing a quality management system (QMS) is to improve operational and financial performance, and then get competitive superiority in a climate of intense competition. Linkage between TQM and ISO certification provides an important base for enhancing organizational performance. Punnakitikashem et al. (2010) found that organizations that have been certified to ISO series standards are significantly more likely to go further and implement a full blown TQM program. Benefits of the usage of TQM tools and the implementation of the ISO standards are hence accrued to the organization to enhance its performance. The TQM approach emphasizes the qualitative issues that would in effect lead to quantifiable improvements. According to Steyn (2014), TQM elements such as the role of top management commitment, customer

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focus, people management, supplier quality management, continuous improvement and process management are utilized to conceptualize the TQM philosophy of management. Such elements when aligned, work to improve the state of any organization. 4. Research methodology, data and analysis The research data were collected through web content analysis of the targeted organizations’ web sites. Data were collected on profits, turnover and net assets over a five year period (2010-2013). The research used statistical data analysis to investigate the association between ISO 9001 implementation and performance. An Independent t-test was performed to determine whether ISO 9001 certified companies have higher performance than their non-ISO certified counterparts. Then the econometric model was regressed to investigate associations between performance, net assets and profit margins. The regression also shows whether there is a significant relationship between ISO implementation and performance. The study hypothesized that there is a significant relationship between ISO 9001 certification and organizational performance and hence tested the null hypothesis that there is no difference in organizational performance between ISO 9001 certified and non-certified organizations. The study focussed on how ISO 9001 has influenced organizational performance through defined variables of profit, turnover and asset base. The aim was to compare organizations possessing ISO 9001 certification with those that did not. The research targeted organizations listed in the Nairobi Securities Exchange (NSE) which is the largest stock market in East Africa. The study targeted companies listed in the NSE because they represent corporate organizations that have achieved certain levels of success in order to qualify for listing in the stock market. The research therefore gauged if among such organizations, there would be noted differences in performance that can be attributed to ISO 9001 certification. 5. Key findings 5.1 Influence of ISO 9001 on organization performance Percentage change in net profit, turnover and net assets were calculated over the period of 2010-2013. Table I presents group statistics analysis of significance of variation of change. The group means (financial performance) are not significantly different between companies that are ISO 9001 certified and those that are not because all the values in the “Sig. (2-tailed)” column are greater than 0.05 ( ρW 0.05). In addition to above analysis, the results were also analyzed using an independent t-test with the variables: annual change in net profits, revenue and net assets. Table II illustrates the results of the test of significance for variability of the dependent variables (KPI’s) as a result of varying the independent variable (ISO 9001 certification). 5.2 Influence of ISO 9001 on ROA Further analysis was carried out on ROA variable to discern certain variations that were noted in the change in assets noted among the organizations over the four years. An independent t-test was thus used for this analysis. Table III illustrates results of the test of significance for variability of the dependent variables (ROA) resulting from varying the independent variable (ISO 9001 certification). Results from the above analysis show that three of the four group means (ROA) are significantly different between companies that are ISO 9001 certified and those that are

KPI Profit

Year Year 1 Year 2 Year 3

Revenue

Year 1


Year 2 Year 3 Asset

Year 1 Year 2 Year 3

Group statistics ISO QMS certification

n

Mean

SD

ISO 9001 certified Not certified ISO 9001 certified Not certified ISO 9001 certified Not certified ISO 9001 certified Not certified ISO 9001 certified Not certified ISO 9001 certified Not certified ISO 9001 certified Not certified ISO 9001 certified Not certified ISO 9001 certified Not certified

11 8 11 8 11 8 11 8 11 8 11 8 11 8 11 8 11 8

0.0763636 −1.0112500 0.3409091 −0.1237500 −0.5636364 −0.5425000 0.2300000 0.2487500 0.2536364 0.3837500 0.0554545 0.0562500 0.2854545 0.1387500 0.0890909 0.1425000 0.1900000 0.1700000

0.47649287 5.94568616 0.56958677 0.64783017 2.33765811 2.11744961 0.15588457 0.19533396 0.31629963 0.22398581 0.12785645 0.11338147 0.37566910 0.15532799 0.10857758 0.09254343 0.15767054 0.21560546

Impact of ISO 9001

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Table I. Financial results by certification by group statistics

Independent samples test t-Test for equality of means 95% Confidence interval of the difference t df Sig. (2-tailed) Lower Upper Net profit Equal Equal Equal Equal Equal Equal Revenue Equal Equal Equal Equal Equal Equal Asset Equal Equal Equal Equal Equal Equal

variances variances variances variances variances variances variances variances variances variances variances variances variances variances variances variances variances variances

assumed not assumed assumed not assumed assumed not assumed assumed not assumed assumed not assumed assumed not assumed assumed not assumed assumed not assumed assumed not assumed

0.611 0.516 1.658 1.623 −0.020 −0.021 −0.233 −0.224 −0.993 −1.050 −0.014 −0.014 1.036 1.165 −1.124 −1.154 0.234 0.223

17 7.065 17 13.988 17 16.071 17 13.030 17 16.999 17 16.222 17 14.138 17 16.474 17 12.211

0.549 0.621 0.116 0.127 0.984 0.984 0.819 0.826 0.335 0.309 0.989 0.989 0.315 0.263 0.277 0.265 0.818 0.828

−2.66980654 −3.88536072 −0.12652502 −0.14938990 −2.22652184 −2.20008425 −0.18856570 −0.19918017 −0.40654438 −0.39164888 −0.12049994 −0.11856300 −0.15218179 −0.12303290 −0.15367916 −0.15129935 −0.16014053 −0.17536389

4.84503381 6.06058799 1.05584320 1.07870808 2.18424911 2.15781152 0.15106570 0.16168017 0.14631711 0.13142160 0.11890903 0.11697209 0.44559088 0.41644199 0.04686098 0.04448117 0.20014053 0.21536389

not, because the values of the three time series (ROA 2010, ROA 2011, ROA 2013) in the “Sig. (2-tailed)” column are less than 0.05 ( ρo 0.05). This means that there is significant difference on performance among companies that are ISO 9001 certified against those that are not. Net asset value is important in an organization to demonstrate its worth

Table II. Results of test of significance using annual change in net profits, revenue and asset

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Table III. Results of test of significance using ROA

Independent samples test t-Test for equality 95% Confidence interval of means of the difference t df Sig. (2-tailed) Lower Upper ROA 2010 Equal Equal ROA 2011 Equal Equal ROA 2012 Equal Equal ROA 2013 Equal Equal

variances variances variances variances variances variances variances variances

2.459 17 assumed not assumed 2.873 10.973 assumed 1.939 17 not assumed 2.086 16.72 assumed −0.894 17 not assumed −0.873 13.837 assumed 1.952 17 not assumed 2.165 15.197

0.025 0.015 0.049 0.043 0.384 0.398 0.048 0.047

0.011429 0.018803 −0.006674 −0.000943 −0.183135 −0.188582 −0.004950 0.001026

0.149574 0.142199 0.157829 0.152098 0.074125 0.079572 0.127198 0.121221

hence focus by organizations in managing their assets (El-Akruti and Dwight, 2013). It is hence inferred that the application of the ISO 9001 standard has resulted in improved net asset performance in the surveyed organizations. 6. Conclusion The study has revealed the extent to which ISO 9001 certification has influenced certain attributes of organizational performance among the organizations surveyed. Differences are noted when it comes to net profit change and turnover change but the analysis reveals that the variations are not significant. Net profit and revenue are interrelated and have other external factors that may influence them that is beyond control of the organization. However, when it comes to ROA, there are significant differences. It can therefore be concluded that ISO 9001 certification has had a positive influence on the organizations’ ROA thus improving its performance. There were no significant differences across sectors that the organizations represented. This can however be attributed to minimal representation of certain sectors among surveyed organizations. Researchers have argued reasons for and against the impact of ISO on performance of organizations and while many conclude that there is a definite impact (Tari and Molina, 2002; Psomas and Kafetzopoulos, 2014; Starke et al., 2012), others failed to find a direct correlation. This study has established a correlation between performance of organizations and ISO 9001 certification as far as net asset value of organization is concerned. As observed there are various factors that contribute to the performance of organizations and within each there are sub factors that are also contributory. References Bhattacharyya, S. and Sanghamitra, J.P.A. (2010), “Measuring organizational performance and organizational excellence of SMEs – part 2: an empirical study on SMEs in India”, Measuring Business Excellence, Vol. 14 No. 3, pp. 42-52. Choong, K.K. (2013), “Understanding the features of performance measurement system: a literature review”, Measuring Business Excellence, Vol. 17 No. 4, pp. 102-121. Deming, W.E. (1986), Out of the Crisis, MIT Center for Advanced Engineering Studies, Cambridge, MA. Dick, G.P.M. (2009), “Exploring performance attribution. The case of quality management standards adoption and business performance”, International Journal of Productivity and Performance Management, Vol. 58 No. 4, pp. 311-328.

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Further reading ISO website (2013), “ISO 9001 Africa data set”, available at: www.iso.org/iso/iso_9000; www.iso. org/iso/home/about/iso-and-developing-countries.htm (accessed March 13, 2015 and May 26, 2015). NSE Website (2015), “Historical data of listed companies”, available at : www.nse.co.ke/listedcompanies/list.html (accessed March 13, 2015).

Corresponding author Jacqueline Ochieng can be contacted at: [email protected]

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Impact of ISO 9001

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