Quality, Product

BIBLIOGRAPHY

The product quality concept is often surrounded by some vagueness. Sometimes it is associated with such imprecise notions as “goodness,” “expensiveness,” “having class,” and “satisfying” (Robson 1986, p. 69), albeit all these notions of quality point to the broad idea of customer satisfaction.

Quality is also sometimes defined as freedom from deficiencies or conforming to specifications, or predetermined standards that remain largely assumptive and imprecise. Because quality is perceived as “freedom from deficiencies,” the concept is often interpreted to mean quality control and thus the exclusive concern of a special unit of the organization that may be called the Quality Control Department.

In recent years, however, a new quality concept has emerged that appears to focus more on product aspects such as utility, functionality, brand, packaging, and aftersales service that meet the needs of customers in a wider way. Quality is perceived as “meeting the requirements of the customer, now and in the future” (Cole 1996, pp. 232, 237–238). The quality concept is therefore often related to the customer, and so in this sense we talk about not only quality of goods but also quality of services such as accounting, invoicing, and communication.

Customers also include internal customers, people in the production line who are supplied with or receive the product of another’s work. The inclusion of internal customers has meant that theoretically as well as practically the quality concept covers those things that affect not only end users, who may not even be seen or known, but everyone involved. Consequently, it becomes incumbent on every worker to meet the requirements of his or her own customer(s).

This new dimension to the quality concept underscores a shift in emphasis from quality control to quality of service, from the culture of “appraise and react” to the prevention of defects. Quality improvement and emphasis on quality concern everyone in the organization, and so reflect a realization of the real importance of quality.

The quality policy of a company that aims at defect-free performance would probably rest on deficiency-prevention programs. Investment in preventing errors involving costs in getting things done right the first time or preventing things going wrong in the first place through proper training of workers, planning ahead, and investing in appropriate tools, techniques, and technologies can significantly reduce total costs of failure and quality. Theoretically, the economics of quality would probably state that reduction in the number of errors through prevention would tend to lead to reduction in total costs. Consequently, quality as a policy option may be warranted by solid commercial and financial considerations.

Technological changes and innovations have the potential to improve techniques of work, and by preventing mistakes and increasing productivity, a better way of doing work assures product quality. Other prevention activities capable of changing quality include monitoring worker efforts and efforts aimed at improving managerial quality or skills. Because the organization depends on the skills, knowledge, innovativeness, and motivation of workers, improved managerial skills and quality can integrate and align employee contributions with organization strategy for achieving results, increase problem-solving capacity, provide understanding and use for information systems to support decision-making and evaluation processes, and develop paradigms to understand and direct all parts of the organizational system in the same direction to achieve quality objectives.

Another factor capable of affecting changes in product quality is market conditions, particularly market pricing. Generally, organizations sell and people want to acquire the benefits of products. Much as other aspects of the product, quality has benefits that potential buyers want, such as long product life, absence of faults and subsequent breakdown, reliability, and increase in value. However, for some types of products such as disposable goods (syringes or plastic cutlery) whose one-time benefits may be immediate, quality may take a backseat to such characteristics as hygiene, functionality, durability, or aesthetics. Quality may be emphasized because of the need to sell benefits. Prices can be raised if the product can offer added benefits, and generally, depending on what is important to buyers, price changes arising from improved product quality affect customer buying behavior. For instance, if price is not a major factor in the buyer’s analysis, a marginal increase in quality may prove more attractive.

Productivity studies tend to suggest that productivity increases improve quality, lower prices, and generally can affect society in significant ways. However, similar studies of the public sector show that there has been a lack of growth in the productivity in public services such as hospitals and public schools while, over time, the cost of providing public goods increases as a result of new technologies and better trained public service providers. Baumol’s cost disease is often used to describe this lack of growth in productivity and inflation in the cost of bureaucracy. Baumol (2003) argues that because many public administration activities are heavily labor-intensive and take place under relatively monopolistic market conditions, and because the demand for public goods is generally inelastic, there is little growth in productivity over time.

There is a widely held view that a high relative quality position (often incompatible with a low relative cost position) can be achieved through product differentiation. Product differentiation involves marketing or designing product that customers perceive as unique. Products may be differentiated along key features of the product or minor details, and at the market level, differentiation becomes the means by which the quality of goods is improved over time, mainly as a result of innovations such as introduction of new improved or better products. However, where goods presented in the market are ordered according to their objective quality so that one may be considered better than another, vertical differentiation occurs. This differentiation can be made along one definitive or decisive feature, along a few features each of which has a range of values, or across a large number of features each of which has only a presence or absence “lag.” It is possible with the last two to have a product that is better than another using one set of criteria but worse than the other using a different set of criteria. Common with supplied goods, vertical differentiation, which produces perceived differences in quality by different customers, may play a key role in customer buying behavior. Though advertising can influence or bias customer perceptions of these differentiating features, what makes the big difference in comparing widely different goods fulfilling the same needs is the nature of the need fulfilled, as often is the case with necessities or luxury goods.

This model of vertical product differentiation regards buyers in competitive market situations basically as price insensitive, for customers without their own opinion or means of judging quality will often rely on price to make their calculations of quality, so the quality-price relationship is often upwardly sloped. This model has been used to study the market structures that emerge from differentiation and to demonstrate that better production has a higher price and more expected benefits for consumers. However, a neoclassical model of product differentiation has been developed to explain the probable exploitation of market situations where customers exhibit bounded rationality because they lack knowledge and information-processing capability for market choices they make so that not all highly priced goods are of high quality (Piana 2003). This neoclassical model shows that the customer, a hyperrational agent, maximizes utility by choosing an optimal collection of things and thus exhausts his or her budget.

In contrast, when products are differentiated by minor details or features that cannot be ordered, horizontal differentiation occurs. A model of horizontal product differentiation captures consumer behavior for various versions of the market. For instance, ice cream flavors or a product with different colors or styles presents different versions of the same product. While consumers may have consistent preferences for one version or the other, it is common for a supplier of many versions of the same product to determine a unique price for all of them. Nevertheless, the rating of a product according to different measures of quality or taste depends on its physical and immaterial features. Manez and Waterson (2001) reviewed the implication of horizontal and vertical product differentiation on market structure under the assumption of single-product firms and also examined the major results of multiproduct firm models.

On the effects on product market and consumer behavior, Christou and Vettas (2003), in their study of advertising within a random-utility, nonlocalized competitive model of product differentiation, maintain that in a symmetric equilibrium, advertising is suboptional when product differentiation is small and excessive otherwise. They believe that increasing the number of firms may increase or decrease the market price. They believe that in a quasi-concavity, profits may fall because firms may prefer price deviation as they target only those customers who are informed about their product.

Differentiation by quality protects a business from competitive rivalry, for it creates customer loyalty, lowers sensitivity to price, and protects the business from other competitive forces that reduce price-cost margins (Phillips, Chang, and Buzzell 1983). Competition may exist in the context of product rivalry where differentiation is achieved by both quality and brand or from some specific product characteristics or brand. Ford and General Motors both sell lines of automobiles having specific product features such as economy compacts, luxury cars, and so forth, and within these limits both companies provide similar offers, but then customers typically remain aligned to each depending on their valuation of quality or other perceived product benefits.

In a relatively free competitive market, vertical differentiation may permit businesses to increase profits by offering products that appeal to different types of customers, though cutthroat or head-on rivalry may result if customers perceive these products as good substitutes. Where, however, the market is open but monopolistic—what is often described as a “contestable market”—transient or opportunistic firms may not worry about quality as they may move in, exploit the gains, and leave before market conditions turn sour. Quality of goods and services enables an organization to achieve excellence and engage in profitable activities. Harold Greneer of ITT once remarked that quality was their most profitable product line, whereas IBM’s policy on quality has been one that seeks complete defect-free performance. In fact, IBM and ITT have in recent years invested millions of dollars on quality to reap immense benefits, which include cost reduction, increased profitability, and a reputation for excellence.

In spite of these apparent gains of quality, however, there appears to be inherent difficulties in measuring product/service quality. Quality is often perceived in relative terms and so presents the problem of determining how much good is “good,” what level of satisfying is “satisfactory,” or how high enough in the hierarchy of classes a product has to be before it is considered “classy.” These difficulties of assessment have given rise to many companies establishing acceptable quality levels (AQLs) for their products and services, a level determined by what each company considers appropriate.

SEE ALSO Competition, Monopolistic

BIBLIOGRAPHY

Baumol, William J. 1986. On Contestable Market Analysis. The Conference Board Research Bulletin No. 195, Antitrust and New View of Microeconomics.

Baumol, William. J. 2003. Baumol’s Disease: No Cure As Yet, But It Isn’t Fatal. Harvard Business Review (July): 112–113.

Baumol, William J., and Hilda Baumol. 1985. On the Cost Disease and Its True Policy Implications for the Arts. In Public Choice, Public Finance, and Public Policy, ed. David Greenaway and G. K. Shaw, 67–77. London: Basil Blackwell.

Baumol, William J., and Alan S. Blinder. 1999. Economics: Principles and Policy. 8th ed. Fort Worth, TX: Dryden Press.

Cole, G. A. 1996. Management Theory and Practice, 5th ed. London: Continuum.

Christuo, Charalambos, and Nikolaos Vettas. 2003. Informative Advertising and Product Differentiation. Working Paper No. 3953, CEPR.

Manez, J. A., and M. Waterson. 2001. Multiproduct Firms and Product Differentiation: A Survey. The Warwick Economics Research Paper Series (TWERPS), 594, University of Warwick, Dept. of Economics.

Phillips, Lynn W., Dae R. Chang, and Robert D. Buzzell. 1983. Product Quality, Cost Position and Business Performance: A Test of Some Key Hypotheses. Journal of Marketing 47 (2): 26–43.

Piana, Valentino. 2003. Consumer Microdata: Incomes, Preferences, Purchase Timing. http://www.economicsewbinstitute.org/.

Robson, M. 1984. Quality Circles in Action. Aldershot, U.K.: Gower.

Robson, M. 1986. Journey to Excellence. Chichester, U.K.: John Wiley.

Triplett, Jack E., and Barry P. Bosworth. 2003. Productivity Management Issues in Services Industries: Baumol’s Disease Has Been Cured. Federal Reserve Bank of New York Economic Policy Review (September): 23–33.

Fred Ozor