IsO 9000 Certification - The Financial Performance Implications

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ISO 9000 certification:

The financial performance
implications
Victor B. Wayhan , Elias T. Kirche & Basheer M.
Khumawala
Published online: 25 Aug 2010.
To cite this article: Victor B. Wayhan , Elias T. Kirche & Basheer M. Khumawala
(2002) ISO 9000 certification: The financial performance implications, Total Quality
Management, 13:2, 217-231, DOI: 10.1080/09544120120102450
To link to this article: http://dx.doi.org/10.1080/09544120120102450
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TOTAL QUALITY MANAGEMENT, VOL. 13, NO. 2, 2002, 217 - 231
ISO 9000 certi® cation: The ® nancial

performance implications
Victor B. Wayhan, Elias T. Kirche &

Basheer M. Khumawala
Department of Decision and Information Sciences, College of Business Administration, University

of Houston, Houston, TX 77204-6282, USA
abstract ISO 9000 certi® cation has become an increasingly popular option for US ® rms seeking
to improve their internal operations and competitive positions. The current study explores the
relationship between ISO 9000 certi® cation and ® nancial performance. Most research in this area
has been anecdotal in nature. The empirical studies that have addressed this relationship have not
only been limited, but also have been largely contradictory. In an attempt to reconcile these con¯ icting
results, a multivariate, repeated measures research design was utilized. Our results indicate that ISO
9000 certi® cation has a very limited impact on ® nancial performance, as measured by return on
assets, however this eþ ect dissipates quickly over time.
Introduction
In an increasingly competitive global economy, long-term success is often contingent on a
® rm’s ability to reorganize aggressively and to improve their operations to match better new
environmental contingencies (Hitt et al., 1991). Often, in their attempts to remain competi-
tive, companies grasp at one management program after another, in the hopes that one will
prove eþ ective. When the latest program tried does not prove to be a panacea, it is soon
discarded and eventually branded a management fad. But, hope springs eternal. One of the
latest programs to oþ er renewed hope to US ® rms facing intense global competition is ISO
9000 (Elmuti, 1996; Joubert, 1998; Rao et al., 1997). However, much like its predecessors,
ISO 9000 has already begun to engender debate over whether it is destined to slip quietly
into oblivion, as just another fad, or whether it will become a business institution, having
stood the test of time (Lamprecht, 1999; Parr, 1999).
As is well known now, ISO 9000 is a set of ® ve international standards that establish
procedures and requirements for the management of quality (Elmuti & Kathawala, 1997).
This series of documents on quality assurance was written by the International Standards
Organization in 1987, primarily to harmonize the plethora of national and international
standards that were in eþ ect at the time (Zhu & Scheuermann, 1999). ISO 9000 certi® cation
does not guarantee a quality product, it merely ensures that a company has a set of procedures
Correspondence: V. B. Wayhan, Department of Decision and Information Sciences, College of Business Adminis-
tration, University of Houston, Houston, TX 77204-6282, USA. Tel: (713) 743 4817; Fax: (713) 743 4940;
E-mail: vwayhan@uh.edu
ISSN 0954-4127 print/ISSN 1360-0613 online/02/020217-15 © 2002 Taylor & Francis Ltd
DOI: 10.1080/09544120120102450
218 V. B. WAYHAN ET AL.
by which quality is managed (Hill, 1996; Zhu & Scheuermann, 1999). ISO 9000 was ® rst
embraced by Europe, which continues to lead the world in new certi® cations. Between 1987
and 1995, ISO 9000 was adopted by 101 countries as their national quality standard and
more than 125 000 certi® cates were issued worldwide (Anderson et al., 1999).
In the early years of the program, US companies approached ISO 9000 certi® cation
much more cautiously than the international business community, with certi® cations num-
bering well under 1000 ( Joubert, 1998). However, from 1992 onward, certi® cations in the
USA increased dramatically, from approximately 600 in 1992 to almost 22 000 by 1998
(Elmuti, 1996). The prominence that ISO 9000 has recently achieved in the USA is aptly
demonstrated by the fact that it now serves as the foundation for several industry-speci® c
standards, such as QS-9000 (automotive), AS9000 (aerospace) and TL9000 (telecommuni-
cations) (Gupta & Pongetti, 1998; Zuckerman, 1998). This recent meteoric rise of ISO 9000
to prominence in the USA raises an important concern. Is the phenomenal growth of ISO
9000 driven by bene® ts accrued by the participating companies, or is it simply a case of
mimetic behaviorÐ ® rms rushing to implement for fear that the program might work for their
competitors, placing them at a competitive disadvantage should they hesitate?
As with many other popular business programs (i.e. total quality management (TQM)
and business process reengineering), empirical research in this area has seriously lagged
practitioner interest. To a certain extent, the dearth of empirical work in this area is
understandable, given that ISO 9000 is still a new, albeit rapidly rising program in the USA,
thus severely limiting the data necessary for conducting meaningful research. Unfortunately,
this has left many important research questions concerning ISO 9000 certi® cation largely
unexploredÐ paramount of which is whether ISO 9000 certi® cation provides a ® rm with a
competitive advantage over non-certi® ed companies, as evidenced by superior ® nancial
performance (Elmuti, 1996; Hill, 1996; Skrabec et al., 1997). The current study seeks to ® ll
this gap in the ISO 9000 literature by determining whether ISO certi® cation actually
results in superior ® nancial performance. This research is carried out by utilizing a doubly
(multivariate) repeated measures design (Bergh, 1995).
The balance of this paper is organized as follows. The next section provides a review of
the relevant literature. The third section provides the hypotheses tested and the associated
dependent variables selected. The fourth section outlines the research methodology employed.
The ® fth section summarizes the results, while the sixth section discussion the implications
of our ® ndings, before the conclusion.
Literature review
Prior ISO 9000 research has been primarily anecdotal in nature. Early survey work focused
primarily on two aspects of ISO 9000: (1) the many reasons why ® rms decided to become
ISO 9000 certi® ed; and (2) the perceived bene® ts that these ® rms received from being ISO
9000 certi® ed. The results of one such survey indicate that 77% of the respondents cited
improved quality as the number one reason for implementing the program, while market
advantage was cited by 73.4% can customer expectations by 68.3% (Litsikas, 1997). In
general, other survey results echoed the results obtained above (Gupta & Pongetti, 1998;
Skrabec et al., 1997). These ® ndings are not surprising because the lack of ISO certi® cation
has increasingly become a major hindrance to US companies attempting to do business in
Europe. Therefore, major US multinational companies now view ISO 9000 certi® cation as
not only a means to improve their quality levels, but also as a threshold that must be crossed
to do business in Europe.
ISO 9000 CERTIFICATION 219
A few other surveys have attempted to ascertain the perceived bene® ts of implementing
ISO 9000. In a review of several of these surveys, Elmuti (1996) notes that a British government
survey indicates that 89% of respondent companies reported greater operational eý ciency,
48% reported increased pro® tability, 76% reported improvements in marketing and 26%
reported increased sales. The British Standards Institution (a British ISO 9000 Registrar)
estimates that registered companies reduce operating costs by an average of 10%. In a Grant
Thorton survey, also reviewed by Elmuti, US manufacturers cited increased international
competitiveness, improved quality and a strategic advantage over non-certi® ed competitors as
the primary bene® ts of ISO 9000. A survey conducted by Quality Systems Update and Dun &
Bradstreet indicates that approximately 95% of the responding companies reported internal
bene® ts from implementing ISO 9000, while approximately 85% reported external bene® ts.
The top external bene® ts were: higher perceived quality (83%); competitive advantage (70%);
reduced customer quality audits (56%); and improved customer demand (29%). The top
internal bene® ts were: better documentation (88%); greater quality awareness by employees
(83%); enhanced internal communication (53%); and increased operational eý ciency (40%)
(Sissell, 1996). In general, the surveys done in this area have almost uniformly found that ISO
9000 certi® cation has a positive impact on operational performance across a broad array of
measures. In addition, the respondents believe emphatically that certi® cation will eventually
lead to a competitive advantage over non-certi® ed companies (Skrabec et al., 1997).
Recent empirical work on why ® rms seek ISO 9000 certi® cation found that managers
obtain certi® cation primarily to provide a credible signal of quality assurance to external
parties. For the most part, complying with customer or regulatory requirements was found
to be a secondary consideration (Anderson et al., 1999). We are aware of only two published
empirical studies to date which speci® cally address the ® nancial performance implications of
ISO 9000 certi® cation and only one of these utilizes US ® rms. Terziovski et al. (1997) studied
the relationship between ISO 9000 certi® cation and company performance in the presence
or absence of a TQM program. The authors assessed diþ erences between a large panel
(n 5 858) of certi® ed and non-certi® ed companies from Australia and New Zealand across
13 ® nancial and operational measures. Terziovski et al. found no signi® cant relationship
between ISO certi® cation and these performance measures, except for an improvement in
cash ¯ ow. However, the research was limited by the cross-sectional nature of the analysis and
the fact that the data were self-reported by the companies instead of being obtained from
archival sources (Podsakoþ & Organ, 1986). As part of their recommendations for future
research, the authors suggested that a longitudinal research design would be better suited for
determining whether a causal link exists between ISO 9000 certi® cation and ® nancial
performance.
Puderbach and Brown (1998) is the only study that focused on how ISO 9000
certi® cation impacts the subsequent ® nancial performance of US manufacturers. Unfortu-
nately, this study had a very small sample size (n 5 11), perhaps compromising the generaliz-
ability of the results. The authors tested whether ISO 9000 certi® cation has any impact on
net income and revenue growth rates. They found that mean revenue and mean net income
improved at a faster rate after certi® cation than before certi® cation. The researchers did
employ a longitudinal research design (pre-test/post-test), utilizing Spearman’ s rho to decide
whether the pre-certi® cation and post-certi® cation trends were signi® cantly diþ erent. How-
ever, the research was limited by the fact that they did not test their hypotheses against a
control sample (as was done in the Terziovski et al. study). Since the sample ® rms were
certi® ed during an economic recession (1991- 92), the failure to use a control sample makes
it diý cult to determine whether the trend diþ erences found in the study were due to ISO
9000 certi® cation or macroeconomic forces (i.e. the US economy emerging from a recession).
Formulation of hypotheses
The ® nancial performance of an organization is most often viewed as a multidimensional
construct (Law et al., 1998), comprised of several distinct, but interrelated dimensions
(Venkatraman & Ramanujam, 1986). Although the construct space has not been de® nitely
speci® ed, two of its dimensions appear to have the requisite support of prior theory and
research to warrant inclusion in the construct space at this time. These two performance
dimensions are ® nancial growth and pro® tability (Campbell et al., 1974; Murphy et al., 1996;
Steers, 1975). Each of these performance dimensions is not only viewed as a fundamental
economic goal of any pro® t-seeking business organization (Mott, 1972), but has also served
as a criterion in empirical studies (Aaker & Jacobson, 1987; Eisenhardt & Schoonhoven,
1990).
ISO 9000 and ® nancial growth

From a normative perspective, determining the direction that a company should take is a
primary function of the strategic management process. The most popular directional strategies
are those designed to achieve corporate ® nancial growth, whether measured by variables such
as revenue, market capitalization and stockholders’ equity. Two variablesÐ growth in revenue
(REV) and stockholder equity (STEQUITY )Ð were chosen to tap into the ® nancial growth
domain of the ® nancial performance construct.
Growth in revenue was chosen as a measure because: (1) it was used in both Terziovski
et al. (1997) and Puderbach and Brown (1998); (2) it is a prevalent measure in the ® nancial
performance literature (Venkatraman & Ramanujam, 1986); and (3) it is a fundamental
objective in competitive strategic management (Porter, 1980). ISO 9000 certi® cation is
posited to improve revenue growth in a number of ways (Lorge, 1998):
(a) First, it appears that many companies are beginning to insist that their suppliers be
ISO 9000 certi® ed as part of their ongoing supplier certi® cation programs (Curkovic
& Hand® eld, 1996; Elmuti & Kathawala, 1997; Zucherman, 1998). Thus, ® rms
that obtain ISO 9000 certi® cation are expected to have a competitive advantage over
their non-certi® ed rivals, particularly as ® rms reduce the number of vendors in their
supply chains (Elmuti, 1996).
(b) Second, ISO 9000 certi® cation is viewed as an independent aý rmation that a
particular company has an established quality management program in place.
Although this certi® cation does not guarantee a high-quality product (Zhu &
Scheuermann, 1999), better quality management procedures are expected to lead
to higher quality on average, all things being equal. This higher quality then is
expected to lead to enhanced customer satisfaction and loyalty ( Joubert, 1998). The
net result should be increased revenue growth from both existing and new business
sources (Anderson et al., 1999; Elmuti, 1996).
(c) Third, ISO 9000 certi® cation may allow US ® rms to penetrate certain markets and
sectors more successfully, particularly where certi® cation is viewed as a minimum
entrance requirement (Barnes, 1998; Goodman, 1998).
Growth in stockholder equity was chosen as a measure because it can indicate whether the
strategies of top managers are building the value of the ® rm (Brealey et al., 1995). As agents
for stockholders, top managers of for-pro® t corporations should seek to implement strategies
that increase the value of the ® rm and the wealth of these important stakeholders. Although
the interests of top managers and their shareholders sometimes con¯ ict (Fama, 1980; Jensen
& Meckling, 1976), this agency problem (Eisenhardt, 1989) may have been partially
addressed by the recent proliferation of stock options and incentive-based contracts for top
managers. By aligning the ® nancial interests of top management with those of shareholders
in this manner, top managers should now have a vested interest in maximizing shareholder
wealth. ISO 9000 certi® cation is expected to enhance shareholder wealth through pro® table
revenue growth that increases the ® rm’s retained earnings. The ability of a ® rm to generate
additional ® nancial resources internally can then be used to ® nance continued expansion.
This can reduce the ® rm’ s reliance on external debt (liability) to fund capital expenditures
(assets), which should all eventually lead to an increase in shareholder equity. In addition,
improved ® nancial performance, in general should improve the value of a ® rm’s common
stock, thus increasing stockholder equity as well.
The relationship between ISO 9000 certi® cation and ® nancial growth, as measured by
both growth in revenue and stockholder equity, is tested formally through the following
hypotheses:
H1a: ISO 9000 certi® cation will have a positive impact on ® nancial growth, as measured by
revenue growth.
H1b: ISO 9000 certi® cation will have a positive impact on ® nancial growth, as measured by
growth in stockholder equity.
ISO 9000 and pro® tability

The theory of the ® rmÐ the most basic model of businessÐ posits that ® rms have pro® t
maximization as their primary objective. Although this model is overly simplistic and has
been modi® ed or replaced in the ® nancial and economic literature by other theories, the fact
remains that sustained pro® tability is an important indicator of a healthy and well-run ® rm.
Two variablesÐ gross pro® t (GRPROFIT ) and return on assets (ROA)Ð were chosen to tap
into the pro® tability domain of the ® nancial performance construct.
Gross pro® t was chosen as a dependent variable because it directly measures the cash
generated by operations before selling, administrative and tax-related expenses are deducted
(cf. Hendricks & Singhal, 1997). Thus, this measure should re¯ ect the ability of the ® rm to
reduce the direct costs associated with producing their products (cost of goods sold). ROA
was chosen as a dependent variable because it should partially re¯ ect (through net income)
the interaction between revenue growth and cost reductions across the entire expense
category. In addition, this variable should indicate how eý ciently a ® rm uses its assets to
generate pro® ts. Finally, ROA is one of the most widely used measures in the literature for
assessing the ® nancial impact of various corporate strategies (Bergh, 1995; Hoskisson et al.,
1994; Robbins & Wiersema, 1995).
ISO 9000 certi® cation is expected to impact ® rm pro® tability in several ways. An
eþ ectively run quality management program, with its anticipated process improvements, is
expected eventually to lead to reduced defects, rework and waste (Anderson et al., 1999).
Second, if ISO 9000 certi® cation enhances sales growth as anticipated, this will allow the
company to take advantage of economies of scale and experience curve eþ ects, which can
lead to a reduction in per-unit costs of products sold. These, in turn, can lead directly to
increased pro® tability (Barney, 1997). Finally, as was noted earlier, ISO 9000 certi® cation is
expected to lead to internal bene® ts (e.g. enhanced communication between employees) and
external bene® ts (e.g. reduced number of customer audits) that can reduce the ® rm’s sales
and administrative expenses, thus improving the ® rm’ s pro® tability.
The relationship between ISO 9000 certi® cation and ® rm pro® tability, as measured by
both gross pro® t and ROA, is tested formally through the following hypotheses:
H2a: ISO 9000 certi® cation will have a positive impact on pro® tability, as measured by
gross pro® t.
H2b: ISO 9000 certi® cation will have a positive impact on pro® tability, as measured by return
on assets.
Research methodology
ISO 9000 panel selection
The test sample of ISO 9000-certi® ed companies was chosen with extreme care in order to
isolate, as much as possible, the impact of ISO 9000 certi® cation on ® nancial performance.
Information on ISO 9000 certi® cations was obtained from the 1996 edition of the ISO 9000
Registered Company DirectoryÐ North America. The initial phase of the selection process began
by identifying all ® rms/facilities that had received ISO 9000 certi® cation in the years
1993 - 94. Because the study relies upon archival ® nancial data, the sample was further
reduced, in phase two of the selection process, to those companies that were publicly traded
and had complete data for the entire time period covered by the study (i.e. from 1990 to
1998). Given that ISO 9000 certi® cations are awarded for individual production sites and
not for the entire corporation (Anderson et al., 1999), Fortune 500-type companies were
excluded from the test sample. A second reason for excluding these large ® rms is that they
have numerous facilities that can become certi® ed at diþ erent times (Anderson et al., 1999).
For these types of ® rms, it would be practically impossible to isolate a de® nitive time when
ISO 9000 certi® cation actually took placeÐ a prerequisite for longitudinal data analysis.
Finally, because these ® rms have such diversi® ed holdings, an attempt to link the ISO 9000
certi® cation of a plant with the ® nancial performance of the overall corporation would be
tenuous at best. Thus, the sample set included only small to medium size ® rmsÐ ® rms where
an individual ISO 9000 certi® cation would cover a substantial amount of the ® rm’s production
capacity and revenue stream. Interestingly, after an initial rush of ISO 9000 certi® cations
among large, multinational conglomerates, the second wave of certi® cations have occurred
among companies classi® ed as small to medium in size, with assets less than US$500 million
(Rao et al., 1997). In fact, studies show that more than 50% of all US companies with ISO
9000 registration have fewer than 500 employees, and 25% have less than 150 (Goodman,
1998). Our ® nal sample set consisted of 48 companies. This size compares favorably with
other matched sample studies (Bergh, 1995).
Control sample
This sample set was then matched with a control sample of ® rms. The initial list of potential
matching ® rms came from the four-digit SIC code of the corresponding panel ® rms, as
provided by the FIS-Online database. The ® rms in the panel set represent 29 four-digit SIC
codes, 20 three-digit codes and nine two-digit codes. The vast majority of ® rms (43 out of
48) were from the 3200 - 3800 SIC codes. The lists of potential matching ® rms were then
further reduced by excluding ® rms that were not of comparable size as measured by 1993
total assets. Total assets had to be within a factor of three for a ® rm to be considered of
comparable size (Hendricks & Singhal, 1997). To be included in the ® nal list, the potential
® rms also had to have ® nancial data covering the entire period of the study. The ® nal
criterion for inclusion in the matched sample was that the ® rms, if possible, not be ISO 9000
certi® ed by 31 December 1996 (not in the ISO 9000 directory). The control sample ® rms
were then selected randomly from the ® nal list of potential matching ® rms.
Unfortunately, in nine out of the 48 cases (18%), a suitable match could not be found
that satis® ed all of the criteria. In seven cases, the four-digit SIC code was not broad enough
to generate a suitable match. In ® ve cases, this parameter was loosened to the three-digit SIC
code level, and in two cases it was loosened to the two-digit level (Werner & Tosi, 1995). In
two additional cases, the potential matches were all certi® ed before 31 December 1996. In
these two cases, the ® rm that was ISO 9000 certi® ed last (thus providing the largest competi-
tive diþ erential) was selected as the match. In these two cases, the minimum acceptable ISO
9000 certi® cation diþ erential was 24 months. This ® gure matches the minimum `known’
diþ erential that would exist between a panel ® rm certi® ed in December 1994 (end of the
focal period) and a ® rm not found to be certi® ed in the ISO 9000 directory (December
1996). The maximum `known’ diþ erential was 48 months ( January 1993 - December 1996).
In all cases, the matching ® rms were of comparable size at the start of the focal period. In
summary, the priorities in this three-step matching process were as follows: (1) an ISO
diþ erential of at least 24 months; (2) comparable size (within a factor of three), as measured
by 1993 total assets; and (3) a matching or related SIC code.
Analytical model
The analytical model tests for diþ erences in the four dependent measures over the time period
1990 - 98, utilizing multivariate analysis of variance (MANOVA) with repeated measures. This
multivariate model tests all four of the dependent measures simultaneously (Bergh, 1995),
while conducting an omnibus test of main and interaction eþ ects. In addition, the interaction
eþ ects are deconstructed into separate univariate tests, so that the individual eþ ects of each
dependent variable, over time, can be speci® ed. The time period of analysis allows the model
to consider both pre-certi® cation (1990 - 92) and post-certi® cation ® nancial performance
(1995- 98), when determining longitudinal eþ ects. A between-groups design was utilized,
with companies in the test sample (coded 1) paired with the matched sample (coded 0). This
between-groups variable is labeled (ISO93). The within-groups factor is PERFORM, with
the four repeated measures (dependent variables) nested under this factor for each of nine
time frames (i.e. the dependent variables are tested simultaneously).
Since the analytical model tests for diþ erences in the dependent variables over time
(repeated measures), certain data analysis concerns must be addressed. Although repeated
measures research designs have grown increasingly popular over the last decade (Bergh,
1993), many longitudinal studies in the management literature are potentially ¯ awed due to
this failure to satisfy certain analytical assumptions (Bergh, 1995). In a longitudinal research
design, the repeated measures are rarely independentÐ a critical assumption in regular
analysis of variance (ANOVA). This lack of independence precludes proper analysis until
strict analytical assumptions are met and speci® c techniques are employed (O’ Brien &
Kaiser, 1985). These analytical assumptions are referred to as the symmetry conditions or
multisample sphericity (Girden, 1992; Huynh, 1978). When data are found to violate the
symmetry conditions, speci® c analytical techniques must be employed that adjust for this
lack of independence. Without the proper adjustment (orthonormalization), in¯ ated F-statistics
may be produced for both omnibus tests of main eþ ects and interactions involving the within-
subjects factors (Boik, 1981). Since MANOVA for repeated measures was the principle
analytical technique used in this study, the necessary adjustments to account for any lack of
multisample sphericity were made automatically.
Statistical analysis and results

The mean 1993 total assets for the panel set was US$128 246 and US$111 057 for the
control sample, mean diþ erences that were not signi® cant (t 5 2 0.46, n.s.). In addition, the
panel set enjoyed, on average, a known competitive advantage of 34 months over the control
sample, with respect to ISO 9000 certi® cation.
Before the data were analyzed and interpreted, the analytical assumptions associated with
longitudinal data research were tested. The Box M homogeneity test for between-subjects
(W 5 3160.97563, v 2 5 1934.48436 , df 5 666, p< 0.001) showed that the variance homo-
geneity assumption had indeed been violated. MANOVA for repeated measures was employed
to orthonormalize the data to allow proper analysis. Table 1 reports mean diþ erences between
the two groups, for all four dependent variables, across the nine time periods.
Omnibus test and interaction eþ ects

Table 2 reports the results of the omnibus test. The omnibus test indicates that the main
eþ ect of ISO certi® cation (ISO93) was insigni® cant over the entire nine time periods
(F 5 0.62865, p 5 0.643). In addition, the eþ ect size (multivariate) of (ISO93) was extremely
small (0.027). However, the power of the model was also very small (0.20). PERFORM, the
second main eþ ect, was signi® cant over time, although this is expected of most ® nancial
performance data and is of little theoretical importance (F 5 2.48737, p< 0.001). The
interaction eþ ect (PERFORM 3 ISO93) was not signi® cant (F 5 0.74545, p 5 0.816), indicat-
ing that contrasts between cell means did not diþ er across any of the four dependent variables
(Girden, 1992).
Post hoc power analysis

Whenever non-signi® cant results are obtained in a study, it is appropriate to question the
ability (power) of the model to detect eþ ects (Hoskisson et al., 1994). Although the model
has a reasonable sample size (n 5 96), it is readily apparent that the model does not have
suý cient power to detect an eþ ect size this small. Table 3 provides a summary of the post
hoc power analysis, indicating the results that would be obtained if the original sample size
were increased to enhance the power of the model. When the original sample size is doubled
to 192, the interaction eþ ect becomes signi® cant (F 5 1.881, p< 0.05). A review of the
univariate tests indicates that ROA is driving much of the post hoc results, being the only
statistically signi® cant dependent measure (F 5 2.00976, p< 0.05) in the study. When the
original sample size is tripled to 288, the only change in the results is that the ROA variables
becomes statistically signi® cant at a higher level (F 5 3.02521, p< 0.01). Finally, when the
original sample size is increased by a factor of four (n 5 384), the main eþ ect of (ISO93)
becomes signi® cant (F 5 2.618, p< 0.01). However, a review of the univariate tests indicates
that the ROA measure is still the only dependent variable that is signi® cant (F 5 4.04067,
p< 0.01). Thus, the three dependent measuresÐ growth in revenue, stockholder equity and
gross pro® tÐ appear to have no practical signi® cance, as well as no statistical signi® cance,
whereas ROA is both practically signi® cant and statistically signi® cant at a reasonable sample
size of (n 5 192) and power level of (0.40).
Given that ISO 9000 certi® cation is statistically linked to ROA, given a modest increase
in sample size and power level, a second `custom’ model (Norusis/SPSS, 1994, p. 140) was
employed, utilizing a simple eþ ects analysis, to specify the form and stability of the empirical
relationship over time. This analysis provides a test for diþ erences in ROA between the two
groups, for each of the nine time periods, in a series of one-degree-of-freedom tests (O’ Brien
& Kaiser, 1985). Table 1 indicates that the mean diþ erences between the two groups
approached signi® cance (F 5 2.61, p 5 0.109) in 1991, and became signi® cant in 1992
(F 5 3.26, p 5 0.074) and 1993 (F 5 4.84, p 5 0.03). However, these statistically signi® cant
diþ erences dissipated in 1994 and were not signi® cant in subsequent years.
Table 1. ISO 9000 certi® cation and ® nancial performance: mean diþ erences
Pre-certi® cation Post-certi® cation
ISO93 Variable 1990 1991 1992 1993 1994 1995 1996 1997 1998
(millions)
1 REV 119.125 137.053 153.177 184.363 214.641 262.724 304.703 336.855 366.026
0 REV 119.069 123.834 133.417 162.959 192.494 247.011 282.728 324.861 386.368
Mean diþ erences: 0.056 13.219 19.760 21.404 22.147 15.713 21.975 11.994 2 20.342
(millions)
1 STEQUITY 33.273 41.458 42.472 55.582 71.956 96.602 121.047 135.067 133.248
0 STEQUITY 17.264 20.182 31.362 33.362 49.578 70.414 87.598 103.564 119.536
Mean diþ erences: 16.009 21.276 11.110 22.252 22.378 26.188 33.449 31.503 13.712
(millions)
1 GRPROFIT 36.662 42.674 45.182 52.841 61.910 74.270 85.512 90.753 93.973
0 GRPROFIT 34.415 33.846 38.317 43.311 50.457 63.062 70.839 78.505 88.179
Mean diþ erences: 2.247 8.828 6.865 9.530 11.453 11.208 14.673 12.248 5.794
(%)
1 ROA 2 0.0014 5.4935 7.2245 8.6437 6.5335 5.8962 5.7902 2 2.0756 2 2.4697
0 ROA 2 4.4739 2 0.9531 2.3020 2 1.1318 3.5966 3.9577 1.3883 2 0.9287 1.4845
Mean diþ erences: 4.4753 4.5404 4.9225 9.7755 2.9369 1.9385 4.4019 2 1.1469 2 3.9542
Signi® cance (p): 0.455 0.109 0.074 0.030 0.341 0.546 0.374 0.852 0.431
N 5 96.
ISO 9000 CERTIFICATION
225
Table 2. ISO 9000 certi® cation (ISO93) and ® nancial performance multivariate
analysis of variance: omnibus test
Source of variation Wilks value df F
Between subjects:
ISO93 0.97311 4, 91 0.643
Within subjects:
PERFORM 0.44181 32, 63 2.48737**
PERFORM 3 ISO93 0.72535 32, 63 0.816
Univariate results:
REV 0.05263
STEQUITY 0.31870
GRPROFIT 0.23065
ROA 0.99430
N 5 96; eþ ect size: 0.027; power: 0.20; **p < 0.01.
Table 3. ISO 9000 certi® cation (ISO93) and ® nancial performance post hoc power
analysis
Sample size: n 5 96 n 5 192 n 5 288 n 5 384

Statistical power: 0.20 0.40 0.59 0.73
Eþ ect size: 0.27 0.27 0.27 0.27
Source of variation
Between subjects:
ISO93 0.643 1.292 1.955 2.618*
Within subjects:
PERFORM 2.487** 6.278** 10.068** 13.858**
PERFORM 3 ISO93 0.816 1.881** 3.017** 4.153**
Univariate results:
REV 0.05263 0.10638 0.16013 0.21389
STEQUITY 0.31870 0.64418 0.96966 1.29514
GRPROFIT 0.23065 0.46621 0.70177 0.93734
ROA 0.99430 2.00976* 3.02521** 4.04067**
Note: F-statistics are reported; *p< 0.05; **p< 0.01.
Discussion of results
This study was undertaken in an eþ ort to test empirically the following research question:
Do ® rms that are ISO 9000 certi® ed have a competitive advantage over non-certi® ed
companies, as evidenced by superior ® nancial performance? Two hypotheses were tested to
determine whether ISO 9000 certi® cation has a positive impact on ® nancial growth (as
measured by revenue and stockholder equity) and pro® tability (as measured by gross pro® t
and ROA). Both of the formalized hypotheses [H1a and H1b] are rejected, which implies
that ISO 9000 certi® cation does not impact ® nancial growth.
The results indicate that during the period of analysis, ISO 9000 certi® cation did not
result in additional sales. Although sales did increase for ® rms in the test sample, for most of
the period of analysis ® rms in the matched sample largely equaled this increase. This lack of
impact in the area of sales improvement may be due to the fact that US companies have only
recently begun to require their suppliers to be ISO 9000 certi® ed, which would tend to
reduce the eþ ect size of certi® cation. In addition, the panel set was comprised of small to
medium size companies that may be less likely than large multinational ® rms to export to
EuropeÐ where supplier restrictions concerning ISO 9000 certi® cation are often the most
stringent. Without the in¯ uence of these restrictive European supplier requirements, new
sales gained at the expense of non-certi® ed companies are expected to be minimal. Continued
tightening of supplier requirements in the USA and increased export activity may eventually
cause ISO 9000 certi® cation to be a source of competitive advantage with respect to revenue
growth.
The results also indicate that companies desiring to implement strategies that will
materially enhance the value of the ® rm and the wealth of stockholders should search
elsewhere. Given that ISO 9000 certi® cation did not enhance pro® table revenue growth, the
® nding that stockholder equity was also not signi® cantly impacted is not unexpected. This
lack of impact on stockholder equity may also indicate that the stock-market places very little
value (as re¯ ected in the common stock component of stockholder equity) on ISO 9000
certi® cation.
The results indicate that ISO 9000 has a positive impact on pro® tability, however this
link is somewhat tenuous. ISO 9000 did not impact gross pro® t, but was positively linked to
ROA, after a modest increase in sample size and power level. Therefore, hypothesis two
receives only partial support (H2a is rejected and H2b is accepted). Apparently, the costs
directly associated with a company’ s operations were not impacted by ISO 9000 certi® cation,
given that mean diþ erences in pro® tability, at the gross pro® t level, were not statistically
signi® cant throughout the period of analysis. This may suggest that the improvements in
quality management record keeping, due to ISO 9000 certi® cation, have not yet translated
into concrete improvements in actual operations that would result in a lower cost structure
(Barnes, 1998).
The signi® cant link between ISO 9000 and ROA suggests that certi® ed companies
improved pro® tability by reducing indirect costs, primarily in the sales and administrative
expense categories, which were re¯ ected in the increased diþ erences in net income. Interest-
ingly, the subsequent test of simple contrasts indicates that ISO 9000 had a positive impact
on mean diþ erences in ROA starting in approximately 1991. Since obtaining ISO 9000
certi® cation can take anywhere from 9 to 28 months of preparation before certi® cation is
achieved (Anderson et al., 1999), these improvements in ROA mean diþ erences appear to
have begun at approximately the time when the certi® ed companies began their initial
preparation work. These positive bene® ts, however, appear to have dissipated quickly, at
approximately the time when ISO 9000 certi® cation was achieved (see Table 1). In fact, the
positive mean diþ erences in ROA eventually turned negative by 1997, although these last
two diþ erences were not statistically signi® cant (a disquieting trend none the less).
One of the chief criticisms of ISO 9000 is that once certi® cation is achieved, the program
provides little or no motivation for additional improvement (Anderson et al., 1999). Unlike
TQM and other quality management programs, ISO 9000 does not focus on continuous
improvement, but instead focuses on achieving certi® cation ( Joubert, 1998; Zhu & Scheuer-
mann, 1999). Thus, ISO 9000 certi® cation may be interpreted by a company as an indication
that the ® rm has `arrived’ , which may lull the company into a false sense of securityÐ a
mindset that may keep the ® rm from zealously protecting its competitive advantage. Over
time, it appears that this small competitive advantage gained during the preparation for
certi® cation phase eroded quickly once certi® cation was achieved. Thus, the parabolic
orientation of the mean diþ erences in the ROA (Fig. 1) may indicate that the ISO 9000 ® rms
were satis® ed merely to attain certi® cation, while the ® rms in the matched panel perhaps
continuously improved through other means.
Figure 1. Mean diþ erences (ROA).
Link with previous research studies

As discussed in the literature review section, the only two empirical studies to investigate this
speci® c research question arrived at contradictory conclusions, perhaps due to methodological
diþ erences between the two studies and the limitations inherent in both research designs. We
utilized a doubly multivariate, repeated measures, research design in our research to address
these limitations and to provide a robust, longitudinal test of the hypotheses. Our results do
not provide support for the Puderbach and Brown (1998) study that concluded that ISO
9000 certi® cation improved revenue growth. This may suggest that the lack of a control
group and the fortuitous choice of a focal period (the recession of 1991 - 92) contributed
substantially to the positive link found between ISO 9000 certi® cation and revenue growth
in the Puderbach and Brown (1998) work. The second variable in the Puderbach and Brown
study (net income) was not tested directly, although it was the numerator in the ROA ratio
employed in the current study. Given that we have found ISO 9000 certi® cation to be
statistically linked to ROA, at least in the short run, this result may provide tentative support
for the Puderbach and Brown study with respect to this particular variable.
Our results appear to provide support for the study of Terziovski et al. (1997), which
found that ISO 9000 did not provide certi® ed companies with a competitive advantage, as
evidenced by superior ® nancial performance, across a broad array of ® nancial performance
measures. The only exception was in the case of increased cash ¯ owÐ a ® nding that our
study did not support. The common conclusion drawn from the Terziovski et al. study and
our own work is that there is, at best, a very limited link between ISO 9000 certi® cation and
subsequent ® nancial performance. This conclusion, however, raises the troublesome issue of
why there is such a disconnect between surveys, which almost uniformly report that ISO
9000 certi® cation has a positive impact on ® nancial performance, and empirical research,
which arrives at almost the exact opposite conclusion. This may indicate that the self-
reported data are somewhat biased, perhaps due to the fact that the respondents often have
a vested interest in the eventual success of the ISO 9000 initiative (Podsakoþ & Organ,
1986).
Future research
Given the prevalence of ISO 9000 and the limited amount of research done in the area,
additional empirical work is a must. Research should continue to explore the possible link
between ISO 9000 certi® cation and other domains of the ® nancial performance construct.
Given that our work focused exclusively on accountingÐ based ® nancial performance mea-
sures, it would be advisable for a future study to explore the impact of ISO 9000 certi® cation
on market-based measures of ® nancial performance such as growth in market capitalization

(Venkatraman & Ramanujam, 1986). In addition, researchers should investigate whether
ISO 9000 certi® cation impacts non-® nancial measures such as productivity, market share
and product quality, particularly since surveys indicate that certi® ed ® rms anticipate bene® ts
in these areas ( Joubert, 1998; Litsikas, 1997). Fortunately, the potential link between ISO
9000 and product quality is already drawing the attention of researchers (Rao et al., 1997).
However, more research in this area is needed since critics of the program insist that this link
(direct or indirect) is non-existent (Hill, 1996; Joubert, 1998; Skrabec et al., 1997).
Surveys indicate that one of the major bene® ts of ISO 9000 certi® cation is that it can
provide an entreÂe into foreign markets, particularly Europe (Goodman, 1998). Researchers
should investigate whether ISO 9000 certi® cation has a positive impact on export sales. This
research may have to be conducted at the industry level to reduce potential confounding. An
interesting corollary would be to determine empirically whether the export orientation of a
particular industry is an indicator of how many ® rms are certi® ed. In addition, researchers
could determine whether this level of export orientation moderates the relationship between
ISO 9000 certi® cation and ® nancial performance.
Yet another potential productive research stream would be to explore the eþ ects of ISO
9000 on workers at the plant level. The work of Elmuti and Kathawala (1997) in the area of
employee attitudes and job performance after implementation of ISO 9000 is an excellent
start in this direction. Another welcome addition to the literature is the work by Anderson
et al. (1999), which explores the decision-making process behind ISO 9000 implementation.
Besides the potential export-orientation eþ ect noted above, researchers should extend this
work by focusing on other potential antecedents of ISO 9000 certi® cation. These could
include ® rm-speci® c attributes such as ® rm size and age, market share position and quality
reputation (i.e. previous quality awards, if any). In addition, industry-speci® c criteria could
be included, such as the level of competition (i.e. number and strength of competitors), the
market share held by foreign companies (globalization of the industry) and the technological
orientation of the industry.
Conclusion
Survey results indicate that ISO 9000-certi® ed companies expected to gain a competitive
advantage over their non-certi® ed rivals, as evidenced by superior ® nancial performance.
Although the panel set enjoyed a known 34 months head-start on the ® rms in the matched
sample, these ® rst mover advantages did not result in the competitive advantages that these
companies apparently expected at the onset of implementation. The current study did
establish a link between ISO 9000 certi® cation and ROA, but this ® nding must be tempered
by the fact that the eþ ect size was extremely small and that the eþ ect dissipated quickly. Even
more importantly, a link with just one ® nancial performance variable does not establish a
competitive advantage. This suggests that ISO 9000 certi® cation should only be implemented
when a compelling reason for certi® cation is evident (i.e. doing business in Europe). When
this is the case, ISO 9000 should only be viewed as a very limited component of a ® rm’s
quality management program, not as a miracle panacea that will remedy all competitive
disadvantages that a company must overcome in the market-place.
It must be stressed that ISO 9000 certi® cation is not intended to be either a quality or
a ® nancial performance improvement program. It simply certi® es the existence and adherence
to a set of quality procedures. The test sample’s poor relative ® nancial performance after
certi® cation may suggest that these ® rms unwittingly placed more expectations on ISO 9000
than the program was able to bear.
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IsO 9000 Certification - The Financial Performance Implications

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Total Quality Management

ISO 9000 certification:

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ISO 9000 certi® cation: The ® nancial

Victor B. Wayhan, Elias T. Kirche &

Department of Decision and Information Sciences, College of Business Administration, University

ISO 9000 and ® nancial growth

ISO 9000 and pro® tability

Statistical analysis and results

Omnibus test and interaction eþ ects

Post hoc power analysis

Pre-certi® cation Post-certi® cation

Source of variation Wilks value df F

N 5 96; eþ ect size: 0.027; power: 0.20; **p < 0.01.

Sample size: n 5 96 n 5 192 n 5 288 n 5 384

Note: F-statistics are reported; *p< 0.05; **p< 0.01.

Figure 1. Mean diþ erences (ROA).

Link with previous research studies

on market-based measures of ® nancial performance such as growth in market capitalization

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