QUALITY INITIATIVES AND BUSINESS GROWTH IN AUSTRALIAN

MANUFACTURING SMEs: AN EXPLORATORY INVESTIGATION

Maria Xydias-Lobo
School of Commerce,
Flinders University,
maria.xydias@flinders.edu.au
Janice T Jones
School of Commerce,
Flinders University,
janice.jones@flinders.edu.au

School of Commerce
Research Paper Series: 03-3
ISSN 1441-3906

ABSTRACT
The principal objectives in this paper are to compare and contrast quality management initiatives for
a longitudinal sample of 871 small and medium-sized enterprises (SMEs) in the Australian
manufacturing sector that have embarked upon different growth development pathways. It also
examines possible connections between SME growth, and the implementation of quality-related
practices. Statistical analysis reveals highly significant differences in the implementation and use of
quality-related practices, across the low, moderate and high growth SME development pathways.
Keywords: small and medium-sized enterprises, quality management, quality assurance, TQM,
benchmarking, business growth.
Acknowledgement: Acknowledgement is made to Professor Richard McMahon upon whose work
this paper is built. The Manufacturing SME Growth and Method sections of this paper borrow
heavily (with permission) from Professor McMahons (2001) research.

INTRODUCTION
The relevance of formal quality management initiatives such as Total Quality Management (TQM),
quality certification, and Quality Awards to SMEs has been a highly contentious issue in the
Quality and SME literatures over the past decade. Besides the ubiquitous criticisms of these
initiatives based on the prohibitive costs of implementation (estimated to average between
$A55,000 and $A115,0001 for SME quality system certification); increased bureaucracy and
complexity, and managerial confusion over the different methods, there is little evidence to support
their pecuniary rewards to SMEs (Husband & Mandal, 1999).
Internationally, empirical research into the rate and success of implementation of these initiatives in
SMEs is largely considered to be inadequate (eg. Ramsey 1998; Kuratko, Goodale & Hornsby,
2001). Literature in this area is more often conceptual than empirical, and where empirical, it
sometimes suffers from methodological limitations (such as unclear or inconsistent definitions of
what constitutes an SME).
Of the limited research available, it appears that SMEs have been very slow to implement formal
quality models, and where they have, the outcomes are inconclusive (Husband & Mandal, 1999).
For example, Chittenden, Poutziouris & Mukhtar (1998, p. 85) found that only a tiny minority of
small firms in the UK had registered for ISO 9000, but the great majority of these found that the
benefits of doing so exceeded the costs. Reported benefits included marketing and competitive
advantage, and to a lesser extent improved internal operating efficiencies. On the other hand,
Terziovski, Samson & Dow (1997) surveyed over 900 manufacturing firms in Australia and New
Zealand and found that ISO 9000 certification is not shown to have a significantly positive effect
on organizational performance (p. 1), and that the rate of quality sytem adoption was lower in
smaller firms than in larger ones.
Research pointing to the effectiveness (or otherwise) of quality initiatives in SMEs is important to
the continued development and competitiveness of small business. This paper aims to address the
gap in research on the relationship between quality initiatives and SME business performance. It
examines empirically the possible association between the adoption of certain quality initiatives
(namely TQM, quality assurance and quality benchmarking) and the rate of business growth in
Australian manufacturing SMEs. This study builds upon research previously undertaken by
McMahon (2001) as part of an on-going research effort to derive, characterise and employ an

empirically-based development taxonomy for SMEs operating as proprietary companies in the

manufacturing sector.
QUALITY MANAGEMENT IN SMEs
Much has been written over the past couple of decades about various quality management models
and techniques that can be applied in any organisation to improve operational, managerial and
ultimately financial performance via the emphasis on quality products/services and processes. The
models and techniques prescribed have taken many forms and labels over the years, and to this day
continue to evolve in order to remain relevant in various organisational contexts, and in changing
business environments. In the last decade, the most prevalent of these models have been quality
assurance/certification and TQM. Quality assurance refers to the evaluation and certification by a
second (ie. customer) or third party (ie. an independent certification body) of an organisations
quality system, to demonstrate that a specific quality system standard has been met (Husband &
Mandal, 1999, p. 146). The international ISO 9000 quality system standards are often used in this
procedure, although industry-specific standards have also been developed in recent years2. Despite
the proposed benefits of certification, as mentioned earlier in the paper research indicates a very
modest level of adoption of quality assurance activities amongst SMEs.
The key distinction between quality assurance and TQM is that TQM focuses on the whole
organisation rather than on its quality system. TQM involves a holistic approach to quality and
espouses a quality culture that permeates the organisation from top-level management down to
shop-floor employees. Quality becomes everyones business and the customer is redefined to
include internal (as well as external) entities. TQM utilises a broader definition of quality than does
quality assurance, and has therefore been viewed as the logical next (and perhaps final) step for an
organisation on the quality journey. Nevertheless, there are many organisations that choose not to
proceed to the TQM level, even after obtaining system certification (eg. van der Wiele & Brown,
1998). Research shows that an even smaller percentage of SMEs have implemented formal TQM
compared with quality assurance practices. However, studies have also shown that organisations
often practice TQM activities without labelling them as such. Instead they are considered simply as
good management practices. Thus, often firms particularly small - employ informal quality
management techniques (van der Wiele & Brown, 1998).

1 Advanced Engineering Centre for Manufacturing (1995).

2 The Capability Maturity Model (CMM) for example, is used to certify software development firms at various stages of quality system capability.

The reported level of success enjoyed by SMEs with (formal and informal) quality initiatives varies.
The variables used to measure success also vary, with some studies focussing on financial
measures such as costs, profit, sales, ROE etc, while others use non-financial measures such as
levels of customer satisfaction and operational efficiencies. Not many studies were identified that
examined the relationship between quality practices and business growth. Chittenden, et al. (1998)
examined whether there are differences in SME business growth (measured by sales growth)
between users and non-users of ISO 9000. Their study looked at both historic and projected sales
growth percentages. It concluded there were no significant differences between users and non-users,
suggesting a lack of association between adoption of ISO 9000 and sales performance (p. 78).

MANUFACTURING SME GROWTH

In McMahons (2001) research, exploratory cluster analysis was used with key enterprise age, size
and growth variables to discover if there appear to be any stable development pathways evident in a
Business Longitudinal Study (BLS) panel of data. Each of four annual data collections for the
longitudinal panel of manufacturing SMEs was separately examined using cluster analysis.
Comparisons were then made of cluster analysis outcomes over time. Three relatively stable SME
development pathways were discernible in the longitudinal panel resultslow, moderate and high
growth. The low growth development pathway appears to account for approximately 70% of SMEs
in the panel. The moderate growth pathway seems to be followed by roughly 25% of the panel. And
around 5% of the panel look to lie on the high growth pathway, which is in accord with the
observed rarity of substantial growth amongst SMEs world-wide (McMahon, Holmes, Hutchinson
& Forsaith, 1993). Differences between the identified SME development pathways in terms of
enterprise age, size and growth variables are highly significant in a statistical sense, thus
underpinning confidence in the development taxonomy.
It would appear that the development pathways and the pace of SME development in the McMahon
(2001) study match well with those in earlier research of a similar nature undertaken by Hanks,
Watson, Jansen & Chandler (1993). Both development models lead towards the same range of SME
configurations that are widely recognised in the relevant research literature (McMahon, et al. 1993):
Traditional SMEs following the low growth development pathway generally have few, if any,
growth aspirations. They principally exist to provide their owner-managers with a source of
employment and income, and are frequently operated in a manner consistent with the lifestyle aspirations of their owner-managers.

 Capped growth SMEs following the moderate growth development pathway generally have
modest growth aspirations. Bounds to growth could be externally imposed by the nature of
their competitive environment; or may be intrinsic given the nature of their operations.
Frequently though, growth is deliberately capped by owner-managers to a rate that limits
dependence upon external financingthus minimising surrender of control and accountability
obligations this support would normally bring.
Entrepreneurial SMEs following the high growth development pathway generally have
ambitious growth aspirations. They are most often associated with entrepreneurial aptitude,
international outlook, technical and commercial innovation and other business qualities that
could see them eventually become large enterprises.

METHOD
The panel data employed in this research are drawn from the BLS conducted by the Australian
Bureau of Statistics (ABS) on behalf of the Australian federal government over the four financial
years 1994-95 to 1997-98. The BLS was designed to provide information on the growth and
performance of Australian employing businesses, and to identify selected economic and structural
characteristics of these businesses.
Data collection in the BLS was achieved through self-administered, structured questionnaires
containing essentially closed questions. Response rates were very high by conventional research
standardstypically exceeding 90%.
The specific BLS data used in this study involves business units employing fewer than 200 persons
broadly representing SMEs in the Australian context.
This research is concerned only with the manufacturing sector of the BLS as, over the last few
decades, the performance of the Australian manufacturing sector has been a major preoccupation of
policy-makers and government departments dealing with industry and trade. The sector has been
characterised as non-competitive by international standards, and is considered to have failed in
countering Australias growing trade imbalance with the rest of the world (Pappas, Carter, Evans &
Koop/Telesis, 1990).

Furthermore, only manufacturing SMEs legally organised as proprietary companies are considered.
As Freedman & Godwin (1994, p. 234) note:
the limited liability company is of more interest to the small business research community than
are unincorporated firms; limited liability companies and entrepreneurship have become
equated, or at least associated.

The size of the final data set identified by McMahon (2001) and used in the current study is 871
manufacturing SMEs legally organised as proprietary companies.
The research question addressed in this paper is whether there is a statistically significant
association between the adoption of quality initiatives and the rate of business growth in Australian
manufacturing SMEs. Data is extracted from the BLS, as detailed above, to test this association.
The variables denoting quality initiatives (hereafter referred to as QI variables) used were:
Business Improvement Programs, TQM, Quality Assurance, and Business Comparisons (Quality
Benchmarking). The rates of growth are denoted by McMahons (2001) three SME development
pathways low, moderate and high growth.
The QI variables used in this research are either categorical in nature or, if metric, have irregular
distributional properties (that is, they are non-normally distributed). Transformation of metric
variables to produce normal distributions is avoided because of difficulties of interpretation often
created by such procedures. Thus, non-parametric/distribution free techniques of statistical analysis
are employed exclusively. Frequency distributions for QI variables across the low, moderate and
high growth SME development pathways are initially presented. Further evidence of the statistical
significance of apparent relationships between SME growth and QI variables are examined using
Chi-square tests.
RESULTS
Business Improvement ProgramsTQM and QA
Forty one per cent of workplaces in the panel introduced business improvement programs. Table 1
presents frequency distributions for business improvement programs introduced in low, moderate
and high growth SMEs. It reveals that approximately one third of workplaces on the low growth
SME development pathway introduced a business improvement program (ie. either TQM or QA).
This compares with about half of the businesses on the moderate growth development pathway, and
around three quarters of those on the high growth development pathway. Hence, the introduction of

business improvement programs appears to be higher amongst SMEs that are growing more rapidly.
Business improvement programs are significantly more likely amongst high than moderate or low
growth manufacturing SMEs (p<0.001). (See Table 1)
Table 1 shows the frequency of SMEs on each of the growth development pathways that introduced
TQM or quality assurance programs, as well as whether the program was informal, formal
(developed in-house), or formal (externally assisted).
Twenty-eight per cent of low growth SMEs introduced a TQM program, compared to forty-five and
forty-four per cent respectively of moderate and high growth firms. Almost half of the SMEs
following the low growth development pathway introduced a quality assurance program, compared
to three quarters of moderate growth SMEs and two thirds of high growth firms. A series of Chi
square tests reveal statistically significant differences between the introduction of these programs
and the variable indicating SME growth development pathways. Low growth SMEs are less likely
than their higher growth counterparts to introduce TQM programs, or quality assurance programs
(p<0.001).
Table 1: SME Growth Development Pathway Differences:
Results of Chi Square Tests for Business Improvement Programs
% (frequency) of SMEs
Low Mod. High
Introduced Business
35
52.7 76.9***
Improvement Program (220) (107)
(30)
Introduced:
Total Quality
Management
-Informal program
-Formal, in-house
program
-Externally assisted
program
Quality Assurance

53.5***
(336)

45.3
(92)
22.7
(46)
15.3
(31)
7.4
(15)
74.4
(151)

43.6
(17)
20.5
(8)
12.8
(5)
10.3
(4)
66.7
(26)

25.9
(163)
15.3
(96)
12.2
(77)

23.6
(48)
32
(65)
18.7
(38)

7.7
(3)
28.2
(11)
30.8
(12)

629

203

39

28.3***
(178)
20.2
(127)
5.9
(37)
2.2
(14)

-Informal program
-Formal, in-house
program
-Externally assisted
program
TOTAL
* p<.05, ** p<.01, *** p<.001

In terms of the type of program introduced, low, moderate and high growth SMEs are most likely to
have an informal TQM program in place, and least likely to have externally assisted programs.
However, externally assisted programs are more likely amongst SMEs that are growing more
rapidly.
With respect to quality assurance programs, low growth SMEs are most likely to have an informal
program, and least likely to utilise external assistance with the program. In contrast, high growth
SMEs are most likely to have an externally assisted program, and least likely to have an informal
program. In addition, externally assisted quality assurance programs are more likely, and informal
programs less likely, amongst concerns that are growing more rapidly.
Business Comparisons and Quality Benchmarking
Twenty eight per cent of SMEs in the panel compared their business performance with other
businesses. Table 2 displays frequency distributions for business comparisons (benchmarking)
made by SMEs following each of the growth development pathways. Business comparisons made
with competing or other like businesses appear to be more likely amongst SMEs that are growing
more rapidly. A series of Chi-Square tests indicate that there are significant differences between
low, moderate and high growth SMEs, with the incidence of SMEs comparing performance with
other businesses significantly greater amongst high than moderate or low growth SMEs (p<0.05).
With respect to the type of comparisons made, twenty-five per cent of the panel compared THE
quality of products or services. Twenty-three, thirty, and thirty-nine per cent of low, moderate and
high growth manufacturing SMEs respectively made such comparisons. Thus comparing
product/service quality appears to be more prevalent amongst concerns that are growing more
rapidly. Chi square statistics reveal that these differences are significant (p<0.05). Table 2 also
shows that low, moderate and high growth SMEs are more likely to make these comparisons on an
informal rather than a formal basis. Furthermore, the incidence of both formal, documented and
informal comparisons of product/service quality increase with SME growth.
Twenty one per cent of the panel compared quality of client services. Nineteen, twenty-five and
thirty-six per cent of low, moderate and high growth manufacturing SMEs respectively compared
client service quality.

Table 2 SME Growth Development Pathway Differences:

Results of Chi Square Tests For Business Comparisons (Benchmarking)
% (Frequency) of SMEs
Low

Moderate

High

Business compared
performance with
other businesses
Type of comparison
made:
Quality of
products/services
-Formal
comparison
-Informal
comparison

25.4
(160)

33
(67)

43.5*
(17)

23.2
(146)
2.5
(16)
20.7
(130)

29.6
(60)
4.9
(10)
24.6
(50)

38.5*
(15)
7.7
(3)
30.8
(12)

Quality of client
services
-Formal
comparison

19.2
(121)
1.2
(8)

24.6
(50)
1.5
(3)

35.9*
(14)
12.8
(5)

-Informal
comparison

18
(113)

23.2
(47)

23.1
(9)

p<.05, ** p<.01, *** p<.001

As with product/service quality comparisons, comparing client service quality appears to be more
prevalent amongst concerns that are growing more rapidly. Chi square statistics reveal that these
differences are statistically significant (p<.05). Again, these comparisons are more likely to be
informal rather than formal, although the incidence of formal, documented comparisons increase
with SME growth (Table 2).
DISCUSSION AND CONCLUSIONS
The findings of this study differ from past research on the extent of adoption of quality-related
practices by manufacturing SMEs.

A high percentage of the panel (forty-one per cent) had

introduced a business improvement program ie. either TQM or QA. This compares with relatively
lower percentages reported by other studies 17.5 per cent of manufacturing SMEs, including 4 per
cent of the small business (less than 5 employees) population (Department of Industry, Science &
Tourism, 1997). One possible explanation for this divergence in results may be the high incidence
of use of informal quality practices in this study.

Also contrary to previous research (eg. Chittenden, et al., 1998), the results of this study clearly
point to a statistically significant association between the implementation of quality initiatives,
TQM, QA and quality benchmarking, and the rate of manufacturing SME growth. The study reveals
that the implementation of business improvement, TQM, and QA programs are more likely amongst
high growth SMEs than they are amongst moderate and low growth SMEs. Similarly, the incidence
of SMEs comparing their quality-related performance with other businesses is significantly higher
amongst high growth as compared to moderate or low growth SMEs. Thus, quality initiatives are
more likely to be present in high growth SMEs than in moderate or low growth SMEs.
Although an association between quality initiatives and SME growth can clearly be established, the
direction of this relationship and causation cannot be determined without further research. That is, is
the use of quality initiatives driving the rate of SME growth, or conversely, are higher growth SMEs
just more likely to adopt sophisticated management practices and techniques than lower growth
SMEs? Even if the direction of the relationship could have been established with this data,
causation would have been difficult to determine. This is a common limitation with quantitative
studies such as this, however, further qualitative research could shed more light on the issue.
Nevertheless, the study does show a positive relationship between quality initiatives and the rate of
SME growth for Australian manufacturing SMEs, and this is a good starting point for further, indepth research.

10

REFERENCES
Advanced Engineering Centre for Manufacturing (1995). ISO 9000 Survey Report. Quality
Certification News, Special Report, 2(2), 1-8.
Chittenden, F., Poutziouris, P., & Mukhtar, S-M. (1998). Small Firms and the ISO 9000 Approach
to Quality Management. International Small Business Journal, 17(1), 73-88.
Department of Industry, Science & Tourism (1997). A Portrait of Australian Business: Results of
the 1995 Business Longitudinal Survey Small Business Research Program, Joint
Productivity Commission and Department of Science and Technology Publication, Canberra,
Australia.
Freedman, J., & Godwin. M. (1994). Incorporating the micro business: Perceptions and
misperceptions. In Finance and the small firm eds A., Hughes & Storey, D. 232-283.
Routledge, London.
Hanks, S.H., Watson, C., Jansen, E., & Chandler, G. (1993). Tightening the life-cycle construct: A
taxonomic study of growth stage configurations in high-technology organisations.
Entrepreneurship Theory and Practice 18(2), 5-29.
Husband, S., & Mandal, P. (1999). Perceptions and Realities of Quality Methods in Australian
Small- to Medium-sized Enterprises. Proceedings of the 12th Annual SEAANZ Conference,
Victoria University of Technology, May, 143-157.
Kuratko, D.F., Goodale, J.C., & Hornsby, J.S. (2001). Quality Practices for a Competitive
Advantage in Smaller Firms. Journal of Small Business Management, 39(4), 293-311.
McMahon, R.G.P. (2001). Deriving an empirical development taxonomy for manufacturing SMEs
using data from Australias business longitudinal survey. Small Business Economics 17(3),
197-212.
McMahon, R.G.P., Holmes, S., Hutchinson, P., & Forsaith, D. (1993). Small enterprise financial
management: Theory and practice. Harcourt Brace, Sydney, New South Wales.
Pappas, Carter, Evans & Koop/Telesis. (1990). The global challenge: Australian manufacturing in
the 1990s. Australian Manufacturing Council, Melbourne.
Ramsey, J. (1998). The Value of ISO 9000 Certification to a Small Business, Proceedings: Second
International and Fifth National Research Conference on Quality Management, February,
145-156.
Terziovski, M., Samson, D. & Dow, D. (1997). The Business Value of Quality Management
Systems Certification: Evidence from Australia and New Zealand. Journal of Operations
Management, 15(1), pp.1-18.
Wiele van der, T., & Brown, A. (1998). Venturing Down the TQM Path for SMEs. International
Small Business Journal, 16(2), 50-68.

11