Quality Management and Value Creation in Business

Quality and value management for the company

The International Organization for Standardization (ISO) labels quality management to be a strategy based on several principles. Some of the most important of these principles are to be focused on customers, involvement of the people and correct leadership (“Quality management principles”, 2009). It is the kernel of quality management to make sure that all stakeholders’ perspectives are to be equally taken into consideration. But quality management does not require from the firm, or the organization, to just take into consideration these viewpoints, but also try to find a way to make all stakeholder groups benefit from the project. This is why the International organization for standardization has put ‘continual improvement’ and ‘mutual beneficence by part of the parties involved in the process’ as the final two criteria for the fulfilment of quality management. Thus, quality management is a sort of ‘standard ‘ toward which a company or an organization should head if they want to make quality and customer satisfaction their goals. But, if quality management is the ‘strategy’, or guiding system then it is value management that makes this possible.

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“Value management is concerned with improving and sustaining a desirable balance between the wants and needs of stakeholders and the resources needed to satisfy them. Stakeholder value judgments vary, and value management reconciles differing priorities to deliver best value for all stakeholders.” (Sefa, 2007)

Thus, we can understand that value management is the tool by which the requirements of quality management are employed and made practicable. This form of management is based on the above mentioned quality principles and it ads measurable value to them. Value management focuses on the objectives derived from these principles before the solutions, and concentrates on the various functions within, and outside, to the organization in order to enhance innovation.

This is certainly our case of the Taj Mahal Cycle project. Being an organization that deals with the environment, the focus is on the change for the better we can bring to the people of the Taj area, in particular, and the Agra city in general. For this reason we need to combine uniquely a management style with an integrated framework focused on value. We also need to develop a positive approach to all of the stakeholders; the people of the city, the tourists, the businesses and the city itself (Jeanne, 1994).

First we have to assess the conditions of the project. It is located in the city of Agra, Taj region (area). This is a region rich in cultural attractiveness and tourism is the basic form of income for many families. But, in regard to the cultural and tourism richness it possesses, the area has significantly low visits from foreign tourists. The major reasons for this are the social and environmental problems that Agra has. This is why many tourists prefer to make a one day trip to Agra from New Delhi and back. This way a major source of local business development and job creation are drained from Agra (Gomez-Mejia, 2008).

The quality objectives of the company are to increase the number of tourists in the region. By doing this it will help improve the economic and social conditions of the families living in the area. On the other hand, being an environmental organization, another primary objective is to harm the environment as less as possible. Instead, the cycle taxi improvement project intends to cut significantly the existing carbon emissions and pollution that is present in the region.

This project intends to encourage the replacement of many pollution contributing assets, like taxi cars, or two strike motorcycles, with environmentally friendly cycle rickshaws. The first value management concrete objectives are to make the use of cycle rickshaws more attractive to taxi drivers then two stroke motorcycles of cars. The second is to make these cycle rickshaws also cost friendly and a third is to give them a more attractive design than the actual produced ones. A final objective is to turn the cycle rickshaw taxi in a tourism attraction which will bring more employment as the number of foreign tourists increases. But, in order to achieve all of this there is the need for an innovation revolution among the cycle rickshaw production and a significant improvement regarding its costs. Also, there is the need for a social campaign to remove the stigma of cycle rickshaw drivers as pertaining to the lower categories of society. These are the main challenges and risks for the managing team of the project.

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Risk management and uncertainty

Smith & White has the advantage of being a multinational conglomerate. This situation has given the company the possibility of having dominant market positioning. The fact of having large shares in all the markets in which it operates is a major strength factor for Smith & White.

Another strength factor lies in the unified marketing strategy that the company pursues for all its product lines, power tool and non-power tool. There has also been an ongoing effort in creating and maintaining positive brand name recognition through massive advertising campaign through the national media. This has led to a “demand formation” strategy in which the company has influenced the market to generate demand for different products it offers. Up until the present moment this has been a strength factor that has led the company to keep higher prices than the market price. Also, it has helped the company with retailers who have ordered large stock quantities from its products and have given high profile shelf space due to the high-end consumer demands. But this can turn into a negative effect of which we will discuss below.

The fact of being so “big” as a company has its negative effects as well. First of all, the wide variety of products, comprising those for professional or consumer use, all in the same shelf space has brought confusion in the mind of the customers. They do not have a “clear idea” (different branding) for specific tools and their appliance, professional or customer use. Secondly, the company has reacted very slowly to the market innovations regarding wireless and new, innovative, technologies. This way the size has been a “time losing and bureaucratic” factor for the company. Another weakness factor is the fact of negative feeling from its distributors due to the perceived abuse of their dominant market position. The relationship a company has with its staff and relating human resources is critical to its health (Stroup, 2008). The negative feelings of the distributors can break the good management chain that brings the products from the production sites to the hands of the customer. This will have an effect on the brand recognition of the company from the public. In result, from a negative effect this situation can turn into a threat that can damage the market position of the company. Another weak point for Smith & White is its inability to meet market innovation standards. We have mentioned above that the big size of the company has led to inefficient reaction toward the sector on wireless device development. But the major factors affecting this lateness in reaction are the high costs of labor and old manufacturing technology in its plants.

This weakness can easily turn into a major threat for the company. The threat is that it will gradually lose market share as the market moves constantly toward new technology-advanced tools. Combined with its high costs of labor and non-adequate manufacturing technology this situation could lead to financial stress and eventually disaster. This will make the company unattractive to investors as well as customers. In order to avoid these threats and explore future opportunities the company has to take drastic measures.

First, it has to cut its labor costs by moving its manufacturing plants to other places with low cost of labor. Another important aspect will be to introduce the use of informative technologies in work processes in order to help make them more efficient (Davenport, 1993). With an increase in efficiency the company will have the opportunity to respond more quickly to market changes. Another opportunity derives from the fact that it already has a dominant market share in its markets. The increase in efficiency will give it the opportunity to further consolidate that position. in turn, this will open up the opportunity for the company to attract investors in order to build capital to renovate its manufacturing technology. This renovation will give the opportunity in developing new technological tools, such as wireless ones. And a final aspect that the company should change is that it must become more specialized in what it produces. The fact that customers are confused in distinguishing its professional or consumer-base tools must end. The company should give priority to one of the forms, either professional or consumer-based tools, and put the majority of its efforts in this sector. This will give to the company the opportunity of becoming the leader on that aspect and then it will be easier to introduce new products.

Innovation issues

Makatume has a different position from Smith & White yet they are similar to each other as companies. The major strength for Makatume is that its brand name for professional tools is well known and has a positive recognition among consumers both in Japan and U.S. the fact of being the biggest market player in Japan and the second in the U.S is a proof of this. The second strength is the low cost of manufacturing due to its modern technology plants. This situation enabled Makatume to go first in new cordless technology tools and become the dominant player in this market sector. These are the three major strengths of this company from which it can derive its opportunities for the future (Lubka, 2002).

But the policy it has adopted the last years has had a weak point that can result fatal to the company. Due to favorable exchange rates it has gained good profits but now seems that the wind will change and dealing in yen (and not in the customer market currency, the US$) has become a weak point which can easily transform into a threat. And a last weakness of this company is that due to its early entrance into the cordless market sector it is now locked in producing low voltage battery tools in a time where the market is moving toward high voltage batteries. Thus, the threats for Makatume can be a financial stress due to the reverse in favor related to the exchange rates. The profits will decrease not because of product quality but to exchange rates.

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Also there are Chinese exporters which are favored by the low price of manufacture and the favorable Yuan/US$ exchange rates. This can become a major threat for Makatume. This way the Chinese appliances will gradually substitute Makatume’s products causing the contraction of its market share. Less market share combined with a non-favorable exchange rate will negatively affect Makatume’s revenues and brand image in the public. This is the second, and perhaps the biggest, threat for Makatume (Kulwant et al, 1993).

Thus the company has to react fast. The good brand recognition among the US consumers gives Makatume a big opportunity. It is appropriate for the company to gradually transfer part of its production line processes in the United States in order to avoid its yen-to-dollar exchange problem. Maybe it can transfer only part of its assembly processes. This will enable Makatume to sell directly in US$. The increase in cost can be managed because of its highly positive brand recognition. Another opportunity is the fact that it is a leader in cordless tools and professional tools markets. It is best that it begins gradually transferring from low-voltage to high-voltage batteries. First, only in new tools offered in the market, coexisting with low-voltage battery ones, and then gradually totally transfer all of its products into high-voltage battery ones. The considerable market share it has will give Makatume the opportunity of minimizing the negative effects of this transfer (no author, 2009).

Forecasting, cost and budget estimation and cash flow

Covington Building Supply is a company that deals with building repairing and remodeling. The company deals with people that want to remodel or repair their houses or with other business, public or private, buildings that need repairing. The main market for this company is the housing market along with the private business centers market, resorts, etc. but Covington Building does not only assist you in repairing your building after damage, it can offer you a remodeling option for your house, for example.

As mentioned above, its clients can range from individual home owners to big companies wanting to repair or remodel their property buildings. Since from the income statement we find that most of the revenues, sales, of the company are done in the second and third quarter, we can imagine that its clients see the services offered by this company as something they can use during the vacation season. For example, people tend to remodel their homes during summer when they can take a period off from their jobs. The same can be said for business companies wanting to repair their buildings. During spring and summer it is better to do that (Hill & Westbrook, 1997).

From the very nature of the business explains to us that the main suppliers for Covington Building Supply are companies that provide raw materials needed to the repair works. Covington Building Supply is in a comfortable position for the moment because the correctness of Mr. Covington in doing business with them has formed a positive image. This has helped build confidence and now Covington Building can rely on high quality suppliers. This situation will ultimately benefit the Covington Company itself.

Change management

The main concern of a bank when it credits a company is the ability that this last has to repay the debt. Banks primarily want to know if you are capable of generating enough income to repay their debt on time. The second thing they look for is if you will be so successful as to require more credit to expand your business, so that they can finance you again. Thus it is imperative in our case to see some key parameters of Covington Building Supply. The first is their debt-to-equity ratio. That is the contrasting of their total liabilities with their total assets. But what is important is the value of the long-term debt that a company has.

This is because long-term debts can harm companies in the future. A high debt-to-equity ratio means that the company is being aggressive in investing through borrowed liquidity. if income is going to remain at a level above that required to repay the cost of debt (its interest), then the company will benefit form it. Thus we have to go to the financial data of the company and see its revenues for the past years, its operational costs and its net profit after taxation. If the costs of Covington Building Supply are decreasing over time, or the company manages to keep them as low as possible, this is a good start (Groth & Kinney, 1994).

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If, also, the revenues, the sales, of the company are increasing year after year, that is also very positive. The decreasing value of company’s expenses, operational costs, combined with the increasing value of its sales, revenues, will give as a result an increasing value of gross profit before taxes. Of course this will result in an increase in profit after taxes, the net profit.

It is this net profit that should be contrasted then with the interest rate value the company has to pay to the bank. If this profit value is greater than that of the interest to be paid, and with a growth tendency, then the company is in excellent health and it is worth crediting it. In this case, Covington Building Supply has been gradually increasing their revenues the last three fiscal years. In Section 3 we will deal with it in details demonstrating the data backing this claim.

A final consideration could be made about the fact that MR. Covington is not taking advantage of the 2% discount offered by its suppliers if the invoices are paid within 10 days. This is due to the fact that he wants to have some liquidity in the company. He has to pay the loan already part of company’s expenses and the fee of the purchase of the shares from his brother-in-law. If he pays the invoices immediately he will leave the company almost “dry” of liquidity. To be more precise, the number of days he is taking to pay is determined by the ratio: accounts payable/average purchases per day.

By looking at the financial data (in thousand $) we see that for 2004 this was: 575 / (5964/365) = 35.2 days. For 2005 we have: 918 / (7368/365) = 45.4 days. For 2006: 1015 / (9663/365) = 38.3 days.

The earned value of the project

The major risk factor for the company would be the increase in cost of supply materials and the decrease in demand in the market. Since the services offered by the company tend to be viewed as ‘luxury’ expenses, as is the remodeling of the homes for example, in difficult times many people tend not to remodel their homes due to financial difficulties. This would have a negative impact on the company’s revenues, sales, and thus decrease its profits. And if the profits are decreased it will be less able to repay the loan to the bank.

The business strategy of MR. Covington is to gradually expand his business from a local level to a state level. The first factor demonstrating this is the fact that he built his building facilities near an interstate highway. This will help the company significantly reduce transportation costs. By forming a very good relationship with its suppliers, MR. Covington has assured his company of fast and high quality supply materials. This will have a positive impact on creating a brand image among consumers. The backing of his business by well known and established banks is a further positive factor for Covington Building Supply. All of the above mentioned factors do help the company gain a sustainable competitive advantage.

Reference List

Davenport, Th. 1993. Process Innovation: Reengineering work through information technology. Harvard Business School Press, Boston.

Gomez- Mejia, R. 2008. Management: People, performance, change. Chicago: University of Chicago Press.

Groth, J. C. & Kinney, M. R. 1994. Cost management and value creation. Management Decisions, vol. 32, no. 4.

Hill, T. & R. Westbrook. 1997. SWOT Analysis: It’s Time for a Product Recall. Long Range Planning Journal, vol. 30, no. 1. Pg. 46–52.

Jeanne, A. 1994. Quality management and the process of change. Journal of Organizational Change Management. Vol. 7, issue no. 2.

Kulwant, P. Paul, F. & John, G. 1993. Value Analysis: Integrating Product-Process Design. Integrated Manufacturing Systems. Vol. 4, Issue No. 3.

Lubka, T. 2002. Risk Identification. Environmental Management and Health Journal. Vol. 13, issue no. 3.

No Author. 2009. Quality management and its principles. The International Organization for standardization (ISO). Web.

Sefa, E. 2007. Value Management. The Institute for Value Management. Web.

Stroup, J. 2008. Organizational leadership. The Managing Leadership Journal. Web.

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