October 28, 2003
Do Baldrige winners make more money?
Chatting with a CEO last week, the conversation turned towards the topic of the Malcom Baldrige National Quality Award criteria as a tool for business performance improvement. This award was established in 1987 to encourage American companies to become more competitive through the consistent application of Total Quality. The seven criteria articulated in the Baldrige Award are frequently used by businesses as a checklist for self-assessment, and performance improvement, even if that organization has no intention of applying for the actual award.
As we talked, my CEO friend made an interesting comment, “While the principles articulated in the Baldrige Award process are definitely useful, it seems that Baldrige winners have a nasty habit of going belly-up.” In other words, he has seen organizations pour millions of dollars and thousands of man-hours into the award process only to lose sight of the real goal, which is to serve customers and make money.
Never being one to shrink from a challenge, I suggested that I work on that topic for my next column. So here goes.
Do Baldrige Award
winners make more money?
According to data published in the annual Baldrige Index Stock Study, the answer depends on the time frame which you choose to study. Beginning in 1995, researchers constructed model stock portfolios to measure the financial performance of publicly traded Baldrige winners versus the larger market. For the first nine years of the study, the “Baldrige Index” consistently outperformed the S&P 500 by a large margin. For example, in 2001 the “Baldrige Index” outperformed the S&P 500 by 3:1. But in 2002, those results changed for the first time, with Baldrige winners under-performing the S&P.
Why the change? For starters, the S&P 500 dropped 12.1% in 2001 as tech-weary investors punished companies that failed to deliver earnings promises. Many Baldrige winners shined by comparison.
But in 2002 a different dynamic prevailed. The Baldrige model portfolios, weighted heavily towards the two “whole company” award recipients Eastman Chemical and Solectron, were hit particularly hard by declines in those two securities. The whole company model portfolio actually declined by 34.19% during a period when an investment in the S&P would have yielded a 48.02% return. But even if you invested strictly in the 19 companies that had subunit winners, you would have lost 23.74% compared to a 45.16% gain on the S&P. Those are some pretty frightening numbers.
Results in
perspective.
So is my CEO friend correct that the accolades afforded Baldrige winners do not translate into financial performance? Before you throw the baby out with the bath water, consider two mitigating factors. First, not every Baldrige winner is publicly traded. The outstanding performance of non-publicly traded winners is not reflected in the model portfolios. Second, 19 of 21 publicly traded winners of the Baldrige were subunits of a larger company. The model portfolios do not account for the performance of an outstanding operating unit, only the stock price of the whole firm. Therefore, a superbly performing unit of a company would be lost in the portfolio if the stock of the parent company declined during the measurement period.
Implications of the
Baldrige stock study results.
From a leadership perspective, we would do well to remember that winning a Baldrige Award does not guarantee future success for an enterprise. Focusing on customers and quality guarantees future success for an enterprise. Therefore, when considering the Baldrige Award criteria, put first things first. Use the criteria as a tool to assess the effectiveness of your organization and business processes with a single-minded focus on improving business results for the long-term, not just winning an award.
From an investor’s perspective, we would probably do better using more traditional measures of company value other than if the company happens to be a Baldrige winner. But given that Baldrige winners have outstripped the S&P 500 for 9 out of 10 measuring periods since 1992, award winners are certainly worth a look. For more information on the Baldrige Stock Study, visit http://www.quality.nist.gov/Stock_Studies.htm.
Next week we will look at how the Baldrige criteria stack up against the principles in best selling author Jim Collin’s Good to Great.
Got a business or leadership challenge? Ask Syndicated Columnist Gene C. Mage at
www.makingitwork.com.