Business Management Articles
/ Quality Management
HOW HIGH SALES HIDE BAD QUALITY
Rene T. Domingo
In a typical top management meeting - like
that of the executive committee or board of
directors - the first item in the agenda is
usually sales performance. Much time is allotted
to discussing sales increase or decrease over
the prior period, achievement of quotas or
targets, and improvement in market shares.
If the positive change in sales is accompanied
by an increase in profits, the discussion
ends with a euphoric high note. The remaining
time is probably devoted to finding out who
should get the credit or get promoted - vice
president and/or manager. The last few minutes
are hurriedly but unemotionally spent on self-congratulation
by the attendees, i.e., deciding how much
bonus each executive would partake as a result
of this fine corporate performance which is
none of their own doing. Usually left out
in this high-powered meetings are discussions
or even mentions of how the company fared
in product quality and customer service during
the last period. The omission is usually rationalized
by the prevalent executive attitude: "If
sales and profits are up, there should be
no problem with our quality and service. Our
customers must have loved us and our products."
Bad quality, like many other corporate diseases,
attacks and destroys like cancer -- without
warning or painful symptom that would signal
a crisis. Bad quality and bad service, if
left unnoticed and unattended for extended
periods, can annihilate even an industry leader.
The problem starts with a few dissatisfied
customers who would not affect projected sales
figures. As word of mouth spreads, the desertion
and mass exodus to competitors accelerate
rapidly and irreversibly. A healthy market,
as if without reason, suddenly dwindles. Executives
start pointing fingers not to themselves,
but downwards the hierarchy. Crisis management
ensues to no avail. The game is over. No industry
leader in the world which has lost its market
share to a competitor because of poor quality
has ever regained its original position.
The sacred corporate dipsticks of performance
like sales, market share, profits, return
on investment, or even price/earnings ratio
are totally inaccurate as indicators of quality
and service. In fact, there are very effective
in hiding problems in these critical areas
especially in their early stages as explained
above. In the long run, good quality and service
should result in increase in sales and profits.
But bad quality and service will not always
and immediately result in their decrease.
The response is always delayed and the time
lag is long. If bad quality eventually affect
sales and profits to be noticeable by top
management, the problem has become chronic
and may be irreversible. Studies have shown
that getting back the loyalty and patronage
of lost regular customers will involve the
same amount of time, money, and effort as
if your were wooing new customers.
In what ways can high sales hide bad quality?
An increase in the sales of a monopolist,
say an inefficient utility firm, may not come
an improvement in its service, but from an
increase in the population of dissatisfied
customers who have no other place to go to,
or from the company's unilateral price increases.
Similarly, growth in population and consumption
may explain the ever increasing sales of oligopolists
and government-regulated industries, like
petroleum companies, which sell practically
the same product, with the same quality standards,
at the same price. Unless threatened by outside
competitors or deregulation, these protected
and powerful companies can easily hit their
sales targets, without including "customer
service" in their vocabulary.
In countries where the local industries enjoy
high tariff protection from exports, companies,
which primarily cater to local markets and
need not fight world-class foreign competitors
in quality and service in the home country
or abroad to increase sales and market shares,
lull themselves into complacency. The local
market, not knowing quality any better, has
been used to their mediocre levels of domestic
quality and service. Customers have lowered
their quality expectation, consciously or
unwittingly, to the delight of these stagnant
local producers which rake in profits from
the customers' ignorance and naivete.
Not only protected and regulated industries
can get away with bad quality; freely competing
companies can also mask bad quality with high
sales. The only only difference is that the
former is more prone to complacency and less
prone to quality improvement. Sales figures
of all companies, whether in units or dollars,
do not show nor account for lost customers.
You can lose customers and increase sales
and market share at the same time by a) replacing
them with new, perhaps bigger, accounts or
b) selling more to the remaining customers.
(TABLE 1) If customers are lost because of
poor quality or service and not because of
reasons beyond the company's control like
relocation, high sales figures which meet
or exceed targets or forecast will hide the
problem from management. Yes, fat commissions
will be paid and people promoted. In the euphoria
generated by the increased market share, it
will not occur to anybody to ask the stupid
question "Have we lost a customer?".
The principle is, whether sales targets are
met or not, let your marketing people regularly
report on lost accounts, why they were lost,
and also on regular accounts which have reduced
their purchases. Remember that sales figures
are lump sums which hide a lot of critical
Sales growth can conceal bad customer service.
Sales will increase if the salesman push the
product to get his quota or commissions such
that the customer is pressured to get more
than what he needs or buy product types different
from what he wants. But this pressure selling
which is a form of bad service that cause
ill-feeling and deep regrets by the customer,
will backfire in the next period with reduced
purchases. Top management seldom see nor care
to see in the marketing vice president's presentation
how much of the sales were due to pressure
Bad service before and after sales are also
hidden by the sales figures. Long delivery
period, long customer order processing times,
and long customer queues are not reflected
nor measured by sales. The irritation, anger,
and lost accounts due to delayed deliveries
are not part of a regular sales report. If
sales figures are going up, these "complaints"
are dismissed as natural, liveable, and the
industry practice (Everybody else is doing
it.). To effectively measure sales performance,
split the figures into two: sales delivered
on time, and sales delivered late, and set
separate targets for each. Lumping them together
is intentionally and dangerously concealing
the delivery problems.
Poor after sales service is also not reflected
in market share reports. Slow or no response
to customer calls and complaints, unavailability
of spare parts or repair centers, and not
honoring warranty claims are a few example
of customer disservice which can affect future
sales from the complainant or his friends.
Many industry leaders with huge market shares
are also known for bad after sales service.
The reason: they care only for sales - not
before or after.
High sales can also hide poor product quality.
Sales can actually increase even with high
customer return rates of defects if sales
volume increases. (TABLE 2) Sales growth can
mask and include sales of seconds, downgrades,
scrap, in short defects, that should require
management attention. Few product variety
and short shelf or product life, indicators
of bad quality, are sold by monopolists everywhere.
Finally, increasing sales can conceal internal
quality problems such as high rework or recycling
rates of defects and rejects, and excessive
inspection (sorting) costs. If sales are growing,
management do not pay attention to these production
problems which may cause a crisis later on.
Finally, sales may be rosy even if there is
no product or process improvement, essential
in coping with world class competition.
company that embraces Total Quality Management
(TQM) sets standards that reflect quality
and service, not just financial performance.
TQM companies are agile, flexible and responsive
because they get immediate customers feedback
- positive or negative - from employees, management,
and the customers themselves. Anything not
measured cannot be improved, says a TQM dictum..
Measure the right things, and improvement
- or correction - is just a matter of time.
1 INCREASE IN SALES HIDING A LOST CUSTOMER
2 INCREASE IN SALES HIDING INCREASE IN PRODUCT