Getting Return on Quality: Revenue Expansion, Cost Reduction, or Both?

Abstract

Financial benefits from quality may be derived from revenue expansion, cost reduction, or both simultaneously. The literature on both market orientation and customer satisfaction provides considerable support for the effectiveness of the revenue expansion perspective, whereas the literature on both quality and operations provides equally impressive support for the effectiveness of the cost reduction perspective. There is, however, little evidence for the effectiveness of attempting both revenue expansion and cost reduction simultaneously, and some of what little empirical and theoretical literature is available suggests that emphasizing both simultaneously may not work. In a study of managers in firms seeking to obtain a financial return from quality improvements, the authors address the issue of which quality profitability emphasis (revenue expansion, cost reduction, or both) is most effective. The authors examine firm performance using managers' reports of firm performance and longitudinal secondary data on firm profitability and stock returns. Although it is clear that no company can neglect either revenue expansion or cost reduction, the empirical results suggest that firms that adopt primarily a revenue expansion emphasis perform better than firms that try to emphasize cost reduction and better than firms that try to emphasize both revenue expansion and cost reduction simultaneously. The results have implications with respect to how both theory and practice view organizational efforts to achieve financial returns from quality improvements.

Extent of managerial IT use, learning routines, and firm performance: A structural equation modeling of their relationship

“…Our findings support the view that IT applications affect firm performance by enabling other business processes and capabilities, which in turn may affect firm performance (Mithas et al, 2005, p. 206). The findings are also in support of the dual emphasis that argues that financial benefits accrue to firms from simultaneous cost reductions via efficiencies and revenue enhancements via customer satisfaction improvements (Rust et al, 2002). These findings are important given the widespread belief that successful firms must focus either on quality or low costs (Porter, 1980).…”

“…In fact, if the product market is price elastic, demand will increase which may mean that both margins and the absolute amount of profits increase (Porter, 1985;Hambrick, 1983;Porter and Millar, 1985;Miller and Friesen, 1986). Hence, cost improvement is expected to transfer businesses' savings directly to the bottom line (Rust et al, 2002). Therefore, H6.…”

Do managers know what their customers think and why?

“…Habel and Klarmann 2015). In this respect, our findings may also provide an explanation for overemphasis on cost-cutting and efficiency observed in firms' strategies relative to that on quality improvements or achieving differentiation (Mithas and Rust 2015;Rust, Moorman, and Dickson 2002). Where managers overestimate their own customers' perception of the firm's performance, cutbacks that undermine the delivery of service, for example, may seem less dangerous than they really are.…”

What service transition? Rethinking established assumptions about manufacturers' service-led growth strategies

“…System suppliers (managing and developing different types of roles and offerings) do not fit into the conventional services and goods dichotomy, in which goods are seen as standardized and services as customized. In addition, parallels can be drawn with the debate between service expansion and service efficiency, which has prevailed among service scholars (Rust et al, 2002). We also identify a difference in focus between different disciplines.…”