55 Pages Posted: 29 Jan 1998
This article analyzes Total Quality Management as an innovation in organizational technology that can be used by companies to increase the productivity of both labor and capital. As an organizing technology, TQM has three distinguishing features:
(1) it is science-based in the sense that individuals at all levels of the organization are trained to use scientific method in everyday decision-making;
(2) it is non-hierarchical insofar as it provides a process for decentralizing decision-making in ways that do not correspond to the traditional corporate hierarchy;
(3) it is non-market-oriented in that it does not use prices or formal exchange mechanisms, such as transfer pricing systems, to motivate cooperation or the transfer of decision rights.
Despite the potential benefits of TQM, and the many TQM success stories, there is also considerable testimony to the difficulty of establishing and maintaining effective TQM programs. We suggest that one important source of TQM's implementation problems has been the failure to develop a systematic approach to identifying the entire set of organizational changes required by a comprehensive TQM program.
While typically arising out of a concern for product quality, the most successful TQM programs end up becoming efficiency improvement initiatives that involve organization-wide changes in decision-making authority and performance measures. For this reason, effective implementation of TQM requires major changes in all three components of what we refer to collectively as the organizational rules of the game--that is, not only (1) systems for allocating decision rights and (2) performance measurement systems, but also (3) reward and punishment systems. Unlike those quality advocates like Edward Deming who object to the use of monetary incentives to reinforce TQM initiatives, we argue that "the increased decentralization associated with TQM should be associated with a strengthening of the relation between performance and rewards of all types."
Note: This paper draws heavily on our Journal of Accounting and Economics paper of the same title, Volume 18, 1994, pp. 247-287. See the working paper version of this paper "Science, Specific Knowledge, and Total Quality Management".
JEL Classification: D23, L15, L22, M10, M14, O31
Suggested Citation: Suggested Citation
Wruck, Karen H. and Jensen, Michael C., Science, Specific Knowledge, and Total Quality Management. Michael C. Jensen, FOUNDATIONS OF ORGANIZATIONAL STRATEGY, Harvard University Press, 1998; Journal of Applied Corporate Finance, Vol. 10, No. 2, Summer 1997. Available at SSRN: https://ssrn.com/abstract=55993 or http://dx.doi.org/10.2139/ssrn.55993
By Mark Huselid