Quality and Profitability and Dispels the Myth Essay

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quality and profitability and dispels the myth that better quality costs more. Management of existing capital is a critical aspect of business financial management due to its direct role in acting profitability of businesses. When a business manages working capital, it denotes the management of existing assets as well as existing liabilities. Researchers in working capital management suggests interest must be paid on the impact of optimal or proper inventory management. While others propose, focus on management of accounts receivables. Regardless of perspective, most agree that management of working capital has a major impact on a business's profitability.

The paper uses a simple survey asking several companies how they view quality and what aspects of quality measure do they apply to their own company. Results suggest that the companies adhere to these perceived measures and confirm quality leads to increased profitability. A study examined shows higher costs are not a way to measure quality, but rather how business manage resources and employees.

Method and Results

A small survey for the paper was conducted on American businesses. Several businesses were queried via email in their customer service section of their websites, and asked several questions. Of the five companies electronically queried, two responded: Google, and Microsoft. The questions were asked in a yes or no format.

The questions included in the email were:

1. Does the company invest their working capital on higher quality service?

2. Do you have a large inventory?

3. Does the company utilize trade credit?

4. If so, does trade credit stimulate sales?

5. Does the company delay payment of accounts payable?

The Answers were for Google and Microsoft:

1. Yes, Yes

2. Yes, No

3. No, Yes

4. No, Yes

5. Yes, Yes

Although the questions were simple and involved various aspects of management, the focus was on working capital management as this is a key indicator of a relationship between quality and profitability. The representatives of each company also explained some products are on demand in terms of inventory, meaning there is no large number of products available. Google for example, stated their apps are an online, on-demand product and are not tangible, however, their latest products like Google glass and Google Chromecast, do have some tangible pre-stocked inventory. The same can be said of Microsoft and their Xbox One consoles. Both companies have tangible and intangible products available for sale both on demand and pre-stocked.

This means that the companies can and do use things like trade credit, and accounts payable for some of their products. When discussed further (with follow up discussions with the representatives in relation to their answers), the representatives then discussed that quality services, in particular for Google Inc., means higher profitability. The representative stated higher quality customer service led to increased customer loyalty, better management of resources, and better working capital management. Quality also crossed into higher quality employees that know how to deal with product ordering and handling.

The Results of the short survey are shown on several graphs below:

Discussion

What did you find about the topic?

Quality improves profitability in many ways. It is not just simply higher quality product, more profit. Quality involves several aspects of business. This may include management, customer service, employee retention, employee recruitment, among other things. Like Blair-Loy et al., states, there employees provide the quality a business needs to create and sustain profitability. "The mission statements of firms recognized for their work -- life initiatives were more likely than those of competitors to emphasize the value of employees and less likely to stress shareholder value" (Blair-Loy, Wharton & Goodstein, 2011, p. 427). This could mean a business recruiting high quality employees that then perform well their job functions or retaining quality employees through comprehensive rewards packages.

One of the businesses that responded, Google, has a comprehensive rewards program for their employees. They specifically emphasize employee value and understand that quality employees need quality rewards and treatment in order to continue providing profitable output like excellent customer service and programming. Other things in research articles have mentioned an increase in profit due to strategies involving proper allocation of resources. "Although innovativeness and quality may intuitively appear to impact positively on a firm's performance-including growth, profitability, and market value-in a similar fashion, pursuing these strategies may involve some hard choices in allocating resources" (Cho & Pucik, 2005, p. 555). A quality business handles resources effectively. This is true for most successful companies.

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Without proper management of resources and services like employee pay and benefits, productivity and therefore profitability will decrease. This is another aspect of quality important to examine.

Cho & Pucik explains quality comprises of a business' ability to balance both profitability and innovativeness. "The innovativeness-quality-performance model, which describes how a firm's capability to balance innovativeness with quality drives growth and profitability, an in turn drives superior market value" (Cho & Pucik, 2005, p. 555). This means that businesses need to include innovative strategies and practices like augmenting rewards programs for employees, but also make practical decisions like making sure products and pieces for products are of excellent quality before buying and after producing. These decisions ultimately lead to higher quality within a business.

The article continues by explaining structural equation models in relation to quality and profitability. "Results of structural equation models indicate that innovativeness mediates the relationship between quality and growth, quality mediates the relationship between innovativeness and profitability, both innovativeness and quality have mediation effects on market value, and both growth and profitability have mediation effects on market value" (Cho & Pucik, 2005, p. 555). Profitability has an effect on quality because businesses will possess the finances to afford higher quality employee recruitment, improved rewards programs, and higher quality products. The same can be said of quality increasing profitability. Quality employees as mentioned earlier, generate customer loyalty. Quality products also generate customer loyalty. Customer loyalty is the biggest way to earn higher profits. Customer loyalty for a business can only be gained through quality.

Gill, Biger & Mathur, explain that a common way to measure quality and therefore profitability, is through a concept previously mentioned, working capital management. "A popular measure of working capital management is the cash conversion cycle, that is, the time span between the expenditure for the purchases of raw materials and the collection of sales of finished goods" (Gill, Biger & Mathur, 2010, p.1). Working capital management essentially means the processes occurring within a business like acquisition of raw materials and records of sales and purchases. Business rarely operate without constant management of various sources, processes, and operations. Employees through acquirement of quality raw materials first gather quality products. Then these quality products generate increased profits and increased profitability for the company. Management of such processes and resources are what lead to higher quality within the company.

The survey mentioned trade credit and large inventory. This is because in the Gill, Biger & Mathur article, companies have levels of working capital management that maximize their worth. "Firms may have an optimal level of working capital that maximizes their value. Large inventory and generous trade credit policy may lead to high sales. The larger inventory also reduces the risk of a stock-out. Trade credit may stimulate sales because it allows a firm to access product quality before paying" (Gill, Biger & Mathur, 2010, p.1). Trade credit lets business check out the product before buying, ensuring excellent management of resources and proper assessment of raw materials and purchased products/inventory. Without trade credit, business will not be able to know if the raw materials or products they acquire are of high quality or not without sacrificing capital and therefore business assets.

How did your results relate to the study?

The results explained in the survey compared to the study by Gill et al., show that effective management lends to higher quality, and higher profitability. The answers obtained helped confirm that things like large inventory, delay of accounts payable, can influence quality for a business and that quality is an expected action in relation to profitability. Companies equate quality to profitability.

This study underwrites to the literature on the connection between working capital management as well as the business's profitability in at minimum two means. First, it centers on American industrial businesses much like the survey (Google and Microsoft were founded and are based in America) where only incomplete research was conducted on such companies lately. Second, the study corroborates some of the conclusions of previous authors through testing the correlation between working capital management or quality and profitability of some chosen Thusly, the study adds body to the prevailing theory established by preceding authors.

What are the limits of this research?

The limits of such research are lack of company transparency and enough statistical information. The responses acquired from the companies in the survey were limited. Most of the firms contacted did not respond. Research on the.....

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