INTRODUCTION:

Quality ManagementHilton monitor its success in achieving quality by traditional responsibility-accounting systems focus primarily on the financial performance of an organizations subunits. However, nowadays it is crucial for organizations to monitor performance in many nonfinancial areas as well. For many companies, quality is at the forefront of the areas in which nonfinancial performance is critically important. The quality of the product or service that an organization provides can spell the difference between future profitability and disaster. Quality is equally important in the service and manufacturing industries. For Hilton Hotels and Resorts, the quality of service includes the comfort of the guest rooms, the amenities provided to guests, the friendliness of the staff, the quality of food served in the restaurant, and so forth. Hilton Hotel guests are ever more discriminating as they assess the overall quality of service and then select their accommodations accordingly. Similar comments apply to the airlines, long-distance telecommunications companies, banks, car rental firms, and financial investment firms.In the manufacturing industry, product quality has become a key factor in determining a firms success or failure in the global marketplace. Advanced, highly reliable manufacturing methods have made it possible to achieve very high standards of product quality. As a result, more and more firms are making product quality a keystone of their competitive strategy.

Q1: Total Quality ManagementHilton monitor its success in achieving quality by Monitoring product quality coupled with measuring and reporting quality costs helps companies maintain programs oftotal quality management,orTQM.This refers to the broad set of management and control processes designed to focus the entire organization and all of its employees on providing products or services that do the best possible job of satisfying the customer. Among the tools used in total quality management is theSix Sigmaprogram, an analytical method that aims at achieving near-perfect results in a production process.

Q2:Product QualityWhat is meant by a high-quality product? There are two concepts of quality that determine a products degree of excellence or the products ultimate fitness for its intended use in Hilton Hotel. A productsgraderefers to the extent of its capability in performing its intended purpose, in relation to other products with the same functional use. For example, a computer monitor that displays 65,536 colors is of a higher grade than a monitor that displays only 256 colors. A productsquality of designrefers to how well it is conceived or designed for its intended use. For example, a coffee mug designed with a handle that is too small for the users fingers is a poorly designed mug. Thequality of conformancerefers to the extent to which a product meets the specifications of its design. A coffee mug with an appropriately sized handle could be well designed, but if the handle breaks off due to shoddy manufacturing, it will be useless. This mug fails to conform to its design specifications. Both quality of design and quality of conformance are required in order to achieve a high-quality finished product.

Q3: Costs of QualityDue to the increasing importance of maintaining high product quality, many companies routinely measure and report the costs of ensuring high quality. Four types of costs are monitored.First areprevention costs,the costs of preventing defects. Second areappraisal costs,the costs of determining whether defects exist. The third type of costs areinternal failure costs,those costs of repairing defects found prior to product delivery. The last type of costs areexternal failure costs,those costs incurred after defective products have been delivered.

Observable versus Hidden Quality CostsThe quality costs discussed in the preceding section areobservable.They can be measured and reported, often on the basis of information in the accounting records. In addition to these observable quality costs, however, companies incurhiddenquality costs. When products of inferior quality make it to market, customers are dissatisfied. Their dissatisfaction can result in decreased sales and a tarnished reputation for the company. Not only does the company experience lost sales for the inferior products but it will also likely experience lost sales in its other product lines. The opportunity cost of these lost sales and decreased market share can represent a significant hidden cost. Such hidden costs are difficult to estimate or report.Traditional PerspectiveThe traditional viewpoint holds that finding the optimal level of product quality is a balancing act between incurring costs of prevention and appraisal on one hand and incurring costs of failure on the other. Panel A ofExhibit 12-9depicts this trade-off. As the percentage of defective products decreases, the costs of prevention and appraisal increase. However, the costs of internal and external failure decrease. Adding the costs of prevention, appraisal, and internal and external failure yields total quality costs. The optimal product quality level is the point that minimizes total quality costs.

Contemporary PerspectiveDue largely to the influence of Japanese product quality expert Genichi Taguchi, the contemporary viewpoint of optimal product quality differs from the traditional perspective. The contemporary view is that if both observable and hidden costs of quality are considered,anydeviation from a products target specifications results in the incurrence of increasing quality costs. Under the contemporary viewpoint, as depicted in Panel B ofExhibit 12-9, the optimal level of product quality occurs at thezero defect level.As Panel B shows, the observable and hidden costs of internal and external failure increase as the percentage of defective products increases. The observable and hidden costs of prevention and appraisal increase slightly and then decrease as the percentage of defects increases. The most important point, though, is that the total costs of quality are minimized at the zero defect level.Whether the traditional or contemporary view of optimal product quality is most accurate is still being debated by quality control experts. Moreover, the exact shape of the cost functions inExhibit 12-9is largely an empirical question, and the cost functions probably differ among industries and product types. One thing is certain, though. To compete successfully in todays global market, any company must pay very close attention to achieving a very high level of product quality.

Q4: Identifying Quality Control ProblemsAn effective TQM program includes methods for identifying quality control problems. One method of identifying quality problems is the cause-and-effect diagram (also called an Ishikawa diagram or a fishbone diagram).Exhibit 12-10displays a cause-and-effect diagram used byHilton Hotelto identify the causes of errors in its customer billing process. As the diagram shows, the quality improvement team has identified a wide range of possible causes for billing errors. After identifying possible causes for billing errors, the Hilton team, nicknamed the Billing Bloopers Team, could take systematic steps to eliminate the root causes of the error.Exhibit 12-10 Cause-and-Effect Diagram: Billing Quality at Hilton Hotels.Another helpful tool in quality improvement programs is the Pareto diagram. Depicted inExhibit 12-11, the Pareto diagram shows graphically the frequency with which various quality control problems are observed for a particular model of cordless telephone. The Pareto diagram helps the TQM team visualize and communicate to others what the most serious types of defects are. Steps can be taken then to attack the most serious and most frequent problems first.

Q5: Customer Satisfaction

A common subject of case studies describing exceptional customer satisfaction is the Ritz-Carlton chain of Hilton hotels. This companys policy of encouraging all employees to do whatever it takes to satisfy every need of its guests is well known -- right down to the two-thousand-dollar authority carried by every employee (even low-paid, hourly workers) for making customers happy. What is less well known, however, is the impact this approach has on the profitability of the business.The owner of the Ritz-Carlton brand is Host Marriott Corporation, which doesnt report on profits separately by brand. But, such reporting wouldnt help much, anyway, because that company doesnt own the hotels it manages them for individual owners. Host Marriotts profits come from management fees so that, as one observer offered recently, Ritz-Carlton can make money even if its hotels dont.Individual real estate owners dont usually report their profits publicly, of course, but there has been a continual stream of very public disputes between Ritz-Carlton and its hotel-owning clients -- with the owners charging that Ritz-Carlton caters to guests without regard to profits. In addition to several high-profile, big-dollar lawsuits, there have also been a number of bankruptcies and conversions of properties to other brands and management companies. Of course, these kinds of things happen all the time for many different reasons -- so no conclusions about the success of the Ritz-Carlton customer satisfaction strategy should be inferred from them, neither good nor bad. Despite what many observers have claimed, however, there are no facts provided by this case study which link customer satisfaction with profitability.There are plenty of other examples, however, of a disconnect between customer satisfaction and profitability. Nordstrom department stores rank right up there along with Ritz-Carlton for the number of impressive customer satisfaction legends fostered, but shareholder earnings have come no easier for that company than any of the other major retailers. Although it is difficult to find anyone who will criticize the services offered by Amazon.com, that company is still searching for a way to make money at it.The Cadillac division of General Motors always rates near the top of the American Customer Satisfaction Index, but its market share continues to decline.The Source of ProfitsAlthough it is intuitively pleasing to suggest that improving customer satisfaction will lead to improved profitability, the facts dont support it. A more careful analysis would suggest that profits come only from sales to customers and, therefore, more sales (at a sufficient price) mean more profits. More sales (at a sufficient price) are, therefore, the primary objective of every business. All of that is clear enough.

Customer Perceived ValueFundamentally, the reason customer satisfaction is irrelevant to the quest for profits is that it is based on the customers reaction to the last purchase of goods or services and traditionally reflects on only the features of that offering as they existed at that time. All of that is ancient history and provides few clues for the seller to increase its odds of winning the next sale. Customer perceived value, on the other hand, describes how the prospect will choose between alternatives the next time a purchase is made and gets to the prospects unmet needs, instead of only the product features. These differences are profound.

Customer Satisfaction Isnt EnoughHans Schulze, the originator and spiritual driver of the Ritz-Carlton approach to customer satisfaction, referred to it as Ladies and gentlemen serving ladies and gentlemen. Thats impressive, and Host Marriott paid a lot of money to acquire the famous brand that resulted from that philosophy. But, it certainly isnt enough to generate superior growth and profitability.

Conclusion:

Ladies and gentlemen serving ladies and gentlemen is good business only if customers are willing to pay more for it. When thats the case, it becomes customer perceived value and, that is good business! It is a holistic management approach that seeks to understand the customer and to produce processes to deliver on that understanding consistently. Its effective implementation -- e.g., using event-history statistical models -- can create a substantial competitive advantage, even where margins are slim as Dell and Toyota have shown. Although some quality management systems have been known to be cumbersome, they do not have to be. In fact, even some high-schools and universities have wisely followed that path.