August 1997 • Volume 7 • Number 8
TQM Goes To Wall Street
By Tom Wallace
Many knowledgeable customers like to buy products
from companies that practice total quality management (TQM).
One reason why is based on the process principle that I've
cited in prior columns: Better processes yield better
results. TQM is a superior process (actually a collection of
processes), the intelligent use of which results in superior
products and services.
Mutual funds comprise one type of product (and/or service — I'm not sure which and it really doesn't matter) and many of us buy them. Therefore, the processes that mutual fund managers use in picking stocks should be of substantial interest to the investor.
I'd like to tell you about a fund I bought recently called General Securities. Mutual fund evaluator Morningstar has rated it the top fund in its class for the past 10-year period. General Securities got there via a unique investment approach: It buys only companies that adhere to the principles of TQM. Mutual Funds Magazine in December 1996 stated: "TQM became a key tool for the fund in 1988, and since 1990, (fund manager Jack) Robinson has invested exclusively in companies committed to this or similar management philosophies. The fund is up 130 percent over this period, versus 98 percent for its peer group." And, by the way, General Securities achieves these results with substantially less risk than its peers.
The article, which awarded General Securities with a five-star rating (its highest), continues: "Robinson surmises he's probably the only fund manager who calls on CEOs to question them about their TQM programs instead of business trends. During company visits, if he sees an obsequious middle manager constantly eyeing his boss for approval, Robinson gets nervous. When he sees a line worker correcting her manager's explanation of company operations, he relaxes."
Isn't this terrific! This guy, who has a financial — not operational — background, apparently knows the nuts and bolts of TQM. He understands that telling the boss what he wants to hear is a bad practice, that constructively correcting another's error is a good one, and that people should be empowered to do so even if the other person is one's boss.
Among General Securities' holdings are manufacturing companies that will be familiar to people who keep track of who wins the Baldrige Award and other measures of operational excellence: Merck, Xerox, Dana, Eastman Chemical, Intel, Hewlett Packard, Corning, Ford, and, until recently, IBM. Robinson's reasons for selling IBM (at $160) are instructive. First, IBM had an enormous run-up over the past year, and was somewhat in the stratosphere; that's the financial reason. But perhaps more important, according to a recent Smart Money magazine article, "(Robinson) noticed that the company wasn't instituting the TQM principles it had professed to adopt a few years ago, and that none of the TQM managers who had been imported early in the company's turnaround worked for Big Blue anymore."
Another interesting aspect of the Jack Robinson/General Securities story is that he's been the manager of this mutual fund since 1951. He's 75 years old and here's a key point: Robinson "got religion" on the value of TQM in his mid-60s. That's an age when many people have either switched off totally or, at a minimum, are highly resistant to new ideas. Jack Robinson took to TQM like a duck takes to water, because it helps him to do his job better. His job is to find and invest in companies that will provide superior financial returns for his shareholders. TQM helps him do his job better, because companies who use it will be more profitable.
Why? It's simple, and it all revolves around the customer. Since virtually all aspects of total quality help a company to focus on the customer, companies proficient in TQM are able to provide superior levels of customer satisfaction. And further, companies that provide superior customer satisfaction are more profitable.
Want proof? Here it is, from the PIMS people in Cambridge, Mass. PIMS (Profit Impact of Market Strategy) is an amazingly robust database which has covered thousands of companies for more than 25 years. One of the conclusions: The top 20 percent of companies in creating high customer satisfaction are almost twice as profitable as the bottom 20 percent. The PIMS group lists the benefits that accrue to companies that deliver superior customer satisfaction: stronger customer loyalty, more repeat purchases, less vulnerability to price wars, ability to command higher relative price without affecting market share, lower marketing costs, and market share improvements. Is it any wonder that such companies are more profitable over the long run? Could it conceivably be otherwise, given those kinds of benefits?
Well, so what? Does higher profitability necessarily make the stock price go up? I believe it does, and let me submit two pieces of proof, one anecdotal and the other based on statistics. The first concerns Peter Lynch, one of the greatest stock pickers of all time during his tenure at the Fidelity Magellan fund. Lynch states that over the long run, profitability is the sole determiner of a stock's price.
Secondly, a study several years ago of Baldrige Award winners showed that a hypothetical $1,000 investment in each of the publicly traded whole company winners — companies like Motorola and Eastman Chemical which won the award corporately — outperformed the S&P 500 by a margin of 6.5 to 1. Another hypothetical $1,000 was invested in companies whose divisions had won the Baldrige (IBM and Xerox are two), and they outperformed the S&P 500 by almost 3 to 1. A third hypothetical $1,000 was invested, not in companies who won the Baldrige, but rather applicants who were good enough to get a site visit by Baldrige examiners. These 32 companies outperformed the S&P 500 by 2 to 1.
So there it is. These are the reasons why I'm pleased to have a piece of my pension plan in General Securities (ticker: GFECX). TQM's a better process; better processes yield better results; and that applies to investments. I only wish there would be another dozen or so funds out there with the same investment approach but — who knows? — maybe in a few years there will be.
Tom Wallace is an independent consultant based in Cincinnati. He is the author of "Customer Driven Strategy: Winning Through Operational Excellence" (1992) and editor/author of "The Instant Access Guide to World Class Manufacturing" (1994). Tom is co-director and a Distinguished Fellow of the Ohio State University's Center for Excellence in Manufacturing Management.
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