IMPACT OF TOTAL QUALITY MANAGEMENT PRACTICES ON INNOVATION

IN SERVICE ORGANIZATIONS

ESAM MOHAMED AHMED MUSTAFA

A thesis submitted in
fulfillment of the requirement for the award of the
Doctor of Philosophy

Faculty of Technology Management and Business

Universiti Tun Hussein Onn Malaysia

JANUARY 2015
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ABSTRACT

During the last two decades, service industries have contributed significantly to the
increase of Gross Domestic Products nationally and globally in developed and
developing economies. Innovation has significant role in adding the competitive
advantage in the scenario. Innovation in service organizations has become an important
subject in both theoretical and practical research agenda. The important of service
innovation is delineated from the importance of service in manufacturing organizations.
It has been proven that implementing Total Quality Management (TQM) system
enhances innovation and its process through its practices. Many studies have
investigated the relationship between TQM and innovation and mostly not in service
organizations context. This study investigates the impact of TQM on innovation in
service organizations. Most of those studies did not focus on the relationship between
TQM and innovation in services organizations. In addition, most of those studies did not
recommend specific TQM practices that may influence innovation more than the other
practices. This study aimed to examine the impact of TQM practices on innovation and
identify which practices may have more influence on innovation then to come out with a
model to be recommended in this relationship. Data were collected using survey
method from service organizations which operate in Malaysia under different service
subsectors. Confirmatory Factor Analysis technique was used to validate the constructs
included in the research model. The measurement model was validated using Goodness
of Fit indices, Standardized regression Weight, Convergent validity, Content validity,
Discriminant validity and Multicoleanarity assessment. Structural Equation Modeling
using Analysis of Moment Structures software AMOS was used to test the hypotheses.
Hypotheses testing revealed that practices of customer focus and people management
are the highest TQM practices that positively impact innovation in the surveyed
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organizations. It also appeared that Radical Process Innovation and Radical Service
Innovation are the most innovation types that positively influenced by TQM practices.
This study has contributed with novel results characterized by unique TQM practices in
service organizations. This study has come out with a model on the impact of TQM
practices on innovation in service. The study has added the perspective of service
organizations to the debate on the relationship between TQM and innovation. Results of
this study are applicable in both private and public service organizations. Managers and
practitioners in service organizations can use this study to employ TQM for innovation.
 vii

ABSTRAK

Dua dekad yang lalu, industri perkhidmatan telah menyumbang terhadap peningkatan
Keluaran Kasar Dalam Negeri secara signifikan tidak kira dalam negara mahupun global
dalam ekonomi yang maju dan juga membangun. Inovasi memainkan peranan yang
signifikan dalam menambah daya saing dalam senario ini. Inovasi dalam organisasi
perkhidmatan telah menjadi subjek penting agenda penyelidikan dari segi teori dan
praktikal. Kepentingan inovasi perkhidmatan dapat dilihat melalui kepentingan
perkhidmatan terhadap organisasi pembuatan. Tidak dapat dinafikan bahawa
implementasi sistem Pengurusan Kualiti Menyeluruh (TQM) meningkatkan inovasi dan
prosesnya melalui pengamalannnya seperti penambahbaikan secara berterusan dan fokus
terhadap pelanggan. Banyak kajian telah mengkaji hubung kait antara TQM dan inovasi
tetapi kebanyakannya tidak dalam konteks organisasi-organisasi perkhidmatan.
Penyelidikan ini mengkaji tentang impak Pengurusan Kualiti Menyeluruh terhadap
inovasi dalam organisasi perkhidmatan. Data telah dikutip melalui kaedah tinjauan
daripada organisai perkhidmatan yang beroperasi di Malaysia di bawah subsektor
perkhidmatan yang berlainan. Teknik “Confirmatory Factor Analysis” telah digunakan
untuk mengesahkan konstruk yang terlibat di dalam model kajian. Model pengukuran
telah disahkan menggunakan kaedah penilaian Goodness-of-fit indices, Convergent
validity, Content validity, and Discriminant validity dan Multicoleanarity
assessment.“Structural Equation Modeling” telah dibentuk dengan menggunakan
“Analysis of Moment Structures” atau AMOS untuk menguji hipotesis. Ujian terhadap
hipotesis telah mengesahkan bahawa fokus terhadap pelanggan dan pengurusan manusia
adalah amalan TQM yang memberi impak positif terhadap inovasi dalam organisasi-
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organisasi yang telah ditinjau. Selain dari itu, “Radical Process Innovation” dan
“Radical Service Innovation” adalah jenis inovasi yang paling memberi kesan positif
terhadap amalan TQM. Hasil dapatan boleh membantu organisasi perkhidmatan
mengaitkan antara implementasi TQM dengan inovasi secara positif. Penyelidikan ini
telah memberi sumbangan yang unik dari segi pengamalan TQM dalam organisasi-
organisasi perkhidmatan. Penyelidikan ini telah menambah perspektif organisasi-
organisasi perkhidmatan dalam perbahasan tentang hubung kait antara TQM dan
inovasi. Keputusan penyelidikan ini boleh diaplikasikan dalam organisasi-organisasi
perkhidmatan swasta dan awam. Pengurus-pengurus dan pengamal-pengamal dalam
organisasi-organisasi boleh memanfaatkan penyelidikan ini dengan mempraktikkan
TQM untuk inovasi.
 viii

CONTENTS

STUDENT’S DECLARATION ii
DEDICATION iii
ACKNOWLEDGEMENTS iv
ABSTRACT v
ABSTRAK vii
CONTENTS viii
LIST OF TABLES xi
LIST OF FIGURES xiv
LIST OF SYMBOLS AND ABBRIVIATIONS xv

CHAPTER 1 INTRODUCTION 1
1.1 Background 1
1.2 Problem Statement 5
1.3 Research questions 7
1.4 Objectives of the study 7
1.5 Scope of the study 8
1.6 Significance of the study 8
1.7 Structure of the thesis 9

CHAPTER 2 LITERATURE REVIEW 11

2.1 Introduction 11
2.2 Definition of service 11
2.2.1 Categories of services 12
2.2.2 Definition of service sector 12
2.2.3 Service sector in Malaysia 13
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2.3 Total Quality Management 18

2.3.1 Definition of Total Quality Management 18
2.3.2 Origin and Evolution of TQM 19
2.3.4 Implementation and Benefits of TQM 20
2.3.5 TQM Practices 21
2.3.6 Comparison of TQM in service organizations
and manufacturing organizations manufacturing
organizations 24
2.3.7 TQM Practices in Service organizations in
Malaysia 41
2.4 Definition and theories of Innovation 46
2.4.1 Types of Innovation 49
2.4.2 Innovation Measurements 57
2.5 The Relationship between TQM and Innovation 58

CHAPTER 3 THEORETICAL FRAMEWORK AND HYPOTHESES 65

3.1 Introduction 65
3.2 Theory of management and multidimensional 67
relationship between TQM and innovation
3.3 Practices of TQM 67
3.4 Types of Innovation 72
3.5 Developing the Hypotheses 73
3.2.1 Management leadership (ML) and innovation 73
3.2.2 Customer focus (CF) and innovation 75
3.2.3 Information Analysis (IA) and innovation 76
3.2.4 People management (PM) and innovation 76
3.2.5 Continuous improvement (CI) and innovation 78
3.3 Framework Model of the study 79
3.4 Conclusion 80

CHAPTER 4 RESEARCH METHODOLOGY 81

4.1 Introduction 81
4.2 Research Design 82
4.2.1 Why quantitative research 85
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4.2.2. Survey research strategy 85

4.2.3 Why cross-sectional 86
4.3 Scale Development 88
4.3.1 TQM practices measurements 89
4.3.2 Innovation measurements 91
4.3.3 Pilot test 93
4.3.4 The final questionnaire 99
4.4 Population and Sampling 100
4.4.1 Sampling procedures 101
4.5 Data collection 103
4.6 Data analysis 104
4.6.1 Preliminary statistical analysis using SPSS 104
4.6.2 Common method bias test 105
4.6.2 Structural Equation Modelling (SEM) 109
4.6.3 Reliability and validity of the constructs 115
4.7 Research ethics 119

CHAPTER 5 ANALYSIS, FINDINGS AND DISCUSSION 120

5.1 Data screening 120
5.1.1 Missing data and outliers 120
5.2 Descriptive statistics and Normality test 121
5.2.1 Descriptive statistics for TQM Practices 122
5.2.2 Descriptive statistics for Innovation types 129
5.3 Reliability analysis 134
5.5 Respondents Profiles 136
5.6 SEM analysis 138
5.6.1 Measurement model 138
5.6.2 Adjusted Measurement model 142
5.6.3 Assessing constructs reliability and validity 145
5.6.4 Structural Model 147
5.7 Results and discussion 150
5.8 Assessing research objectives 162
5.8.1 The first objective 163
5.8.2 The second objective 163
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5.8.3 The third objective 164

5.8.4 The fourth objective 164
5.9 Summary 165

CHAPTER 6 CONCLUSION 166

6.1 Introduction 166
6.2 Summary of the findings 167
6.3 Contribution of the study 168
6.4 Implications 170
6.5 Theoretical implication 170
6.6 Practical implications 171
6.7 Limitations 172
6.8 Recommendation for future studies 172
REFERENCES 174
APPENDIX 196
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LIST OF TABLES

1.1 Studies on the impact of TQM on innovation 6

2.1 Actual, estimated, and predicted share of service sector in
GDP comparing with other sectors 13
2.2 Share of services Subsectors in Malaysian GDP in 2011 16
2.3 Number of establishments by service subsectors by 2010 17
2.4 Comparing earlier frameworks of TQM practices 22
2.5 Comparing TQM practices between service and
manufacturing organizations 24
2.6 Comparing responsive and proactive customer orientation
from perspective of innovation 31
2.7 Arguments and findings on positive relationship between
customer focus and innovation 32
2.8 Arguments and findings on negative relationship between
customer focus and innovation 34
2.9 Summary of the studies on TQM practices in service
organizations in Malaysia 44
2.10 Different perspectives in investigating TQM practices in
service organizations in Malaysia 46
2.11 Management innovation definitions 50
2.12 Organizational innovation definitions 51
2.13 Administrative innovation definitions 51
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2.14 OECD innovation types 52

2.15 Summary of studies on innovation in service organizations 56
Prajogo and Sohal’s TQM-innovation relationship
2.16 controversy 60
2.17 Summary of the most recent studies on TQM-innovation
relationship 63
3.1 TQM practices that related to service organizations business
nature 69
3.2 Comparing TQM practices between some key studies and
Kim et al., (2012) framework. 71
3.3 Kim et al., (2012) framework and framework of this study 73
4.1 TQM measurements items and sources 90
4.2 Innovation measurements items and sources 92
4.3 Modified and reworded TQM practices measurements items 94
4.4 Modified and reworded innovation measurements 97
4.5 Establishments in subsectors of service sector 101
4.6 Sample according to subsector 102
4.7 Harman‟s single factor test for TQM practices items 106
4.8 Harman’s single factor test for innovation items 107
4.9 Harman‟s single factor test for all items 108
4.10 Thump of Goodness-of-fit indices 113
5.1 Descriptive statistics for ML items 123
5.2 Descriptive statistics for CF items 124
5.3 Descriptive statistics for IA items 125
5.4 Descriptive statistics for TR items 126
5.5 Descriptive statistics for EE items 127
5.6 Descriptive statistics for EI items 128
5.7 Descriptive statistics for CI items 129
5.8 Descriptive statistics for RSI items 130
5.9 Descriptive statistics for ISI items 131
5.10 Descriptive statistics for RPI items 132
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5.11 Descriptive statistics for IPI items 133

5.12 Descriptive for AD items 134
5.13 Reliability analysis 135
5.17 Respondents Profile 137
5.18 Items loadings in measurement model 141
5.19 Items loadings in the respecified model 144
5.20 Convergent validity assessment, AVEs, CRs and correlation
matrix 146
5.21 Discriminant validity, AVEs compared to their SIC 147
5.22 Comparing GOF indices between measurement and structural
models 150
5.23 Summary of hypotheses testing results 150
5.24 Testing the hypothesized relationships between ML and
innovation 153
5.25 Testing the hypothesized relationships between CF and
innovation 155
5.26 Testing the hypothesized relationships between IA and
innovation 157
5.27 Testing the hypothesized relationships between PM and
innovation 160
5.28 Testing the hypothesized relationships between CI and
innovation 162
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LIST OF FIGURES

1.1 Shares of service sector in GDP of some countries 2

1.2 Shares of service sector in GDP of Malaysia 3
2.1 Percentage of establishments by subsector (% of the whole
sector) 17
2.2 Henderson – Clark innovation model 48
2.3 Disruptive innovation creates new markets 49
2.4 Types of innovation 53
3.1 Developing conceptual framework 66
Model of Kim et al., (2012) 70
3.2 Framework model of the study 79
4.1 Methodology followed to achieve the objectives 84
4.2 Path diagram 112
5.1 Measurement model 140
5.2 Re specified measurement model 143
5.3 Hypotheses testing in the structural model 149
5.4 Revised model based on SEM analysis results 165
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LIST OF SYMBOLS AND ABBRIVIATIONS

AD - Administrative Innovation
AMOS - Analysis of Moment Structures
AVE - Average Variance Extracted
CFA - Confirmatory Factor Analysis
DF - Degree of Freedom
CF - Customer Focus
CFI - Comparative Fit Index
CI - Continuous Improvement
CR - Construct Reliability
CMIN - Minimum Discrepancy
EFA - Exploratory Factor Analysis
EI - Employee Empowerment
EFQM - European Foundation for Quality Management
EM - Employee Involvement
FMM - Federation of Malaysian Manufacturers
GDP - Gross Domestic Product
GFI - Goodness of Fit Index
GOF - Goodness of Fit
HRM - Human Resource Management
IA - Information Analysis
IPI - Incremental Process Innovation
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ISI - Incremental Servie Innovation

ISO - International Standard Organization
OECD - Organization for Economic Co-operation and Development
ML - Management Leadership
MIDA - Malaysian Investment Development Authority
MITI - Ministry of International Trade and industry
MSIC - Malaysia Standard Industrial Classification
NFI - Normed Fit Index
NNFI - None Normed Fit Index
PM - People Management
QMEA - Quality Management Excellency Award
RPI - Radical Process Innovation
RSI - Radical Service Innovation
RSI - Radical Service Innovation
SEM - Structural Equation Modeling
SMEs - Small and Medium Sized Enterprises
SPSS - Statistical Package for Social Science
SRMR - Standardized Root Mean Square Residual
TQM - Total Quality Management
TLI - Tuker-Lewis Index
TR - Training
WEF - Geneva-based World Economic Forum
WTO - World Trade Organization
HR-TQM - Human Resource Based TQM Practices
RMSEA - Root Mean Square Error of Approximation
MBNQA - Malcolm Baldrige National Quality Award
 CHAPTER 1

INTRODUCTION

1.1 Background

Importance of service industry is significantly increasing in national and global

economics. During the last two decades, contribution of service sector to the Gross
Domestic Product (GDP) has been significantly increasing in both developed and
developing economics. According to Directorate for Science, Technology and Industry
(STI) of Organization for Economic Co-operation and Development (OECD), in 2008
service sector shared in some countries more than 70% of the GDP for example
Luxembourg 82%, Greece 78%, and USA 77% (OECD, 2008). Figure 1.1 shows shares
of service sector in GDP of some countries.
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90
80
70
60
50
40
30
20
10
0

Figure 1. 1: Shares of service sector in % of GDP in some countries

(OECD, 2008)

Service sector in Malaysia, the country of interest in this study, plays a

significant role in its economic. According to Malaysian Investment Development
Authority (MIDA), in 2009 the Malaysian services industry share was 55% of the GDP,
refer to figure 1.2. It has the largest share of GDP and higher actual, estimated and
predicted growth rate comparing with other sectors such as manufacturing and
agriculture (Statistics, 2013; Treasury-Malaysia, 2013). In 2011, the sector contribution
increased to be 58.6% of the GDP and recorded growth rate of 6.8 percent. It provides
an employment to 6.5 million persons which is 53.3% of the total employment in
2011(Malaysian investment performance report, 2011).
 3

60
59
58
57
56
55
54
53
52
51
50
49
2002 2004 2006 2008 2010 2012

Figure 1. 2: Share of service sector % of GDP of Malaysia

(Statistics-Malaysia, 2011)

Service organizations are part from the high growing Malaysian economic.
Malaysian economic indication shows high levels of performance. In 2011, Malaysia
economic was ranked 19th out of 153 for the fastest economic in the world. In 2012,
Malaysian economic was ranked 24th out of 144 countries in the Global
Competitiveness Ranking report published by Geneva-based World Economic Forum
(WEF). WEF’s report also placed Malaysia the 24th out of 133 in global trade-enabled
economies. In the same report and within Asia-Pacific region, Malaysia placed was at
the 6th position, ahead of Taiwan and South Korea at 7th and 8th positions respectively.
Malaysia was also ranked the 4th amongst 13 best investment destinations in Asia (Asia
Business Outlook Survey by the Economist Corporate Network 2013; Bank Negara
Malaysia BNM, 2012).
These economic activities involve various service business organizations. For
example: health care, transportation, education, government service, hotels and
restaurants, telecommunication, financial services, social and personal services, retail
and wholesale organizations. To compete in the market and to increase their competitive
advantage, service business organizations need to provide high quality and innovative
services. Implementing Total Quality Management (TQM) system has positive impact
 4

on innovation process in organizations due to TQM elements such as continual

improvement and customer focus (Baldwin & Johnson, 1996; Flynn et al., 1994; Kim, et
al., 2012; Martínez-Costa & Martínez-Lorente, 2008; Prajogo & Sohal, 2001).
Within the context of the high economic activities in the market, the intensified
competition has determined the importance of innovation in service organizations as a
source of competitive advantage growth (OECD). OECD stated “the importance of
service innovation is well-established but many firms are seeking new ways to develop
the type of service innovation necessary for success in global value chains.”
Innovation in service has become important subject in both developed and
developing economics. (Bitner & Brown, 2008; Chae, 2012; Ettlie & Rosenthal, 2011;
OECD, 2008). Topics of service innovation are becoming basic issues in both practical
and theoretical research agenda (Chae, 2012; Oke, 2007). In addition to the intensive
market competition, importance of innovation in services emerged from the growing
importance of service in manufacturing industry. Terms like “servitisation” (Santamaría
et al., 2012; Vandermerwe & Rada, 1988) and service-product (Miles, 2008) are used to
empathize the significance of service in manufacturing industry.
TQM has the same impact in local and global economics. Both TQM and
innovation seek to incorporate organization objectives and functions to provide services
satisfy customers. They involve all employees to be apart from the management process
of quality and innovation. Furthermore, both provide a continual improvement in
process and services (Oke, 2007; Singh & Smith, 2004; Faisal et al., 2012). Continuous
improvement, achieving customer satisfaction and open service culture are main goals
of both TQM and innovation. Thus, the link between TQM and innovation is important
indicator for organization performance.
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1.2 Problem Statement

As explained in the previous section regarding the role of TQM and innovation in
business organizations, in the context of competitive economics and business
excellence, TQM and Innovation became core elements in increasing the competitive
advantage (Abrunhosa & Moura E Sá, 2008; Hurmelinna-Laukkanen et al., 2008;
Mushtaq et al., 2011). TQM and innovation have vital role in service business success.,
the importance of the relationship between TQM practices and innovation emerges from
the importance of TQM and innovation in creating and strengthening the competitive
advantage. TQM and innovation affect customer satisfaction that top-targeted goal of
service organizations’ business (Mushtaq, et al., 2011; Pekovic & Galia, 2009).
The importance of TQM and innovation in business organization competitive
advantage derived academicians and researchers to investigate the link between them,
specifically, the impact of TQM on innovation. The existing literature has provided
different views and various approaches from different prospective on the linkage
between TQM and innovation..
However, gap remains. The gap in general description is about the relationship
between TQM practices and innovation in service organizations regarding the nature of
TQM practices in service organizations compared to organizations from other sectors
such as manufacturing organizations. This gap can be described in details in four
shortcomings as follow:
First, most of empirical studies on the impact of TQM on innovation conducted
completely or partially in manufacturing industry (Jitpaiboon & Rao, 2007; Teh, Yong,
Arumugam, & Ooi, 2009). There is a need for more studies on this field in services
industries (Ang et al., 2011; Juneja et al., 2011; Sit et al., 2011), examples of those
studies focused on manufacturing shown in table 1.1.
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Table 1.1: Studies on the impact of TQM on innovation in manufacturing organizations

Study
Hoang et al., (2006)
Martinez -Costa and Martinez-Lorente (2008)
Abrunhosa and Moura E Sa (2008)
Santos -Vijande and Alvarez-Gonzalez (2007)
Sadikoglu and Zehir (2010)
Perdomo-Ortiz et al., (2009)
Ooi et al., (2012)
Data source
204 manufacturing and service firms in Vietnam
451 manufacturing and nonmanufacturing
firms in Spain
20 footwear manufacturing firms in Portugal
93 ISO 9000 certified firms (manufacturing
and service) in Spain
373 firms from different industries in Turkey
102 machinery and instruments firms in Spain; 106
Spanish industrial firms in Spain
206 manufacturing companies in Malaysia

Second, with respect to the importance of TQM and innovation in business

organizations and based on the literature review, the relationship between TQM and
innovation in service organizations in Malaysia may need more investigation. Third,
results of previous studies concluded different and contradicted results (Kim, et al.,
2012). Some have found TQM has positive impact on innovation (Abrunhosa & Moura
E Sá, 2008; López-Mielgo et al., 2009; Martínez-Costa & Martínez-Lorente, 2008;
Prajogo & Hong, 2008; Sarkees & Hulland, 2009). Whereas others found TQM has no
impact on innovation (Moura E Sá & Abrunhosa, 2007; Pekovic & Galia, 2009; Santos-
Vijande & Álvarez-González, 2007; Singh & Smith, 2004). Therefore, the debate
remains because there is no approving regarding that TQM have positive or negative
impact on innovation.
Fourth, Results and conclusions are not specific about which TQM practice that
lead to achieve both quality and innovation together in service organizations. Each study
used different TQM practices frameworks to examine their impact on innovation. Most
of those frameworks were basically developed for manufacturing operation. For
instance, study of Abrunhosa and Moura E Sá (2008) involved investigating the impact
of TQM practices of autonomy, consultation, supporting people management and
communication on technological innovation. Other example is the study of Ooi et al.,
(2012) used leadership human resource focus, strategic planning, information &
analysis, customer focus and process management to examine its impact on innovation
performance.
Fifth, the previous empirical studies on the relationship between TQM practices
and innovation addressed a specific type of innovation focusing on manufacturing
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industries. For instance, study of Abrunhosa and Sa (2008) dealt with technological
innovation and study of Prajogo and Sohal (2004) dealt with product innovation. Studies
targeted the linkage between TQM practices with all types of innovation in services
industries are scarce.

1.3 Research Questions

From the context of the problem statement in the previous section, research questions
emerged as follow:
i. What are is relationship between TQM practices and innovation in service
organizations?
ii. Are TQM practices having positive influence innovation more than the other
practices in services organizations?
iii. Are there any differences between innovation types regarding their relationship
with TQM in service organizations?
iv. Is there any model can be presented and recommended on the impact of TQM
practices on innovation in service organizations?

1.4 Objectives of the study

To address research questions, objectives of this study were:

i. To examine the impact of different TQM practices on different types of innovation
in services organizations.
ii. To identify which TQM practices have more impact on innovation in service
organizations.
iii. To identify which types of innovation influenced more by which TQM practices in
service organizations.
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iv. To develop a model on the relationship between TQM and innovation in service
organizations.

1.5 Scope of the study

This study has addressed the impact of TQM practices on innovation in service
organizations in Malaysia. The scope involved service organizations that are ISO
9001:2000 certified, Quality Management Excellence Award (QMEA) winners, any
other local or international business quality management and business excellence
winner, and/or applied TQM and operate in Malaysia.
The study has empirically examined the impact of TQM practices that relate to
the nature of service organization operation on five holistic types of innovation. Those
TQM practices are Management Leadership, People Management, Customer Focus,
Information Analysis and Continuous improvement. Types of innovation are: Radical
Process Innovation, Incremental Process Innovation, Radical Service Innovation,
Incremental Service Innovation and Administrative Innovation.

1.6 Significance of the study

The significance of this study emerged from the significant role of service sector in
economics, refer to section 1.1 for the details of the significance of service sector in the
global and local economics and also the role of Malaysian Service sector.
Significance of this study is also delineated from the perspective of service
organizations regarding the relationship between TQM and innovation in service
organizations. The literature has not presented or showed many studies on this
relationship in the scope of service industry.
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The significance of this study is also drawn from its contribution to the body of
knowledge though presenting a new theory in the relationship between TQM and
innovation. The theory is characterized by the perspectives of service organizations
compared to the existing theories which developed on this relationship mostly in
manufacturing organizations context. From methodological perspectives, the study
added to the body of knowledge a holistic service sector context and service-related
TQM practices study. This study involved service organizations from different sub
sectors included in the main service sector.
For practitioners and managers of service organizations this study has presented
insightful views on the linkage between TQM practices and innovation. For example,
focusing on customers and people management are the most useful managerial practices
that influence innovation under TQM implementation. This presents the results of this
study to be useful in the level of public organizations too.
By understanding the relationship between TQM and innovation, organizations
in service industry can identify the innovation factors that driven by TQM. By
identifying the innovation factors that driven by TQM, service organizations can apply
TQM to be leading to innovation.

1.7 Structure of the thesis

This thesis comprises six chapters as follow:

Chapter 1 introduces the study. It gives an overview on the importance of service
industries organizations in an economic, significance of TQM and innovation in
competitive advantage of service organizations, significance of the relationship between
TQM and innovation, problem statement, objectives of the study and research
methodology.
Chapter 2 provides a comprehensive review on the literature related to the subjects of
the study including TQM practices, innovation and the relationship between the two
subjects, and innovation measurements.
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Chapter 3 develops and discusses the theoretical framework grounded the study. Then
the chapter applies this theoretical framework to the relationships between variables
involved in the proposed model to formulate the conceptual model of the study.
Chapter 4 details the methodology employed in this study. It covers design of the
study, scale development, scale validation, population and sampling techniques, data
collection, questionnaire structure, and data analysis techniques.
Chapter 5 presents details of the analysis and discusses the findings. It covers the
preliminary analysis, descriptive statistics, characteristic of the respondents,
Confirmatory Factor Analysis (CFA) procedures and SEM analysis procedures.
Chapter 6 summarizes the findings, explains implications, presents limitations,
recommends potential research extensions for this study and draws conclusion of the
study.
 CHAPTER 2

LITERATURE REVIEW

2.1 Introduction

Main topics reviewed and discussed in this chapter are: definition of service, definition
of TQM, historical evolution of TQM, TQM implementation and benefits, TQM and its
practices in service sector, definition of innovation, innovation theories, innovation
typologies, innovation measurements, and the relationship between TQM and
innovation.

2.2 Definition of service

Oxford dictionary defines the word Service as “the action of helping or doing work for
someone.” Another definition is “service is deeds, process and performance” by
(Zeithaml et al., 2006). This definition looks to service from perspective of
organizational management systems. Another definition of service as economic activity
is “Service is an economic activity that creates values and provides benefits for
customers at specific time and places” (Talib et al., 2012). This definition looks to
service from the broader theory of the economic. Therefore, this definition in considered
is this study because it broader which suits the scope of this study regarding service
sector share in the economics.
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2.1.1 Categories of services

OECD categorized services industry into four main categories: goods services such as
logistics services, information services such as call centers, knowledge-based services
for example such as financial services, and people services such as health care service
(OECD, 2005). Zeithaml (2006) sorted services into four groups: service industries,
derived service, intangible products, and customer service. Service industries are the
companies with service as main product such as hotels and transportation companies.
The intangible product is the unphysical products such as training services and
consulting services. Derived services are the services from physical product such as
computers provide data processing service. Customer service is the supporting services
for the goods products such maintenance services and setting up machines (Talib et
al.,2012).

2.1.2 Definition of service sector

Based on the definitions and classifications of services in the literature, there are two
definitions for service sector: narrow definition and broader definition. Narrow service
sector definition includes all economics activities other than manufacturing, mining,
forestry, agriculture, fishing and hunting, quarrying and construction, public
administration and defense and utilities. While the broader definition includes
construction, public administration and defense, and utilities (Kanapathy, 2003).
Because this study aimed to examine the impact of TQM practice in all service sectors,
the broader service industry definition will be considered.
 13
2.1.3 Service sector in Malaysia

Service sector in Malaysia plays a significant role in the economy. In 2009, Malaysian
service sector share was 55% of GDP presenting the largest share of GDP and higher
estimated and predicted growth rate compared to other sectors such as manufacturing
and agriculture sectors (Statistics-Malaysia, 2012; Treasury-Malaysia, 2013), refer to
table 2.1. In 2011, service sector contribution increased to be 58.6% of the GDP and the
recorded growth rate of 6.8%. It provides employment to 6.5 million persons which is
53.3% of total employment in Malaysia in 2011 (Statistics-Malaysia, 2012).

Table 2.1: Actual, estimated, and predicted share of service sector in GDP comparing
with other sectors
(Department of Statistics Malaysia, 2012)
Share of GDP (%) Contribution to GDP
growth (%)
Year 2010 2011 2012 2012 2011 2012
Service sector 57.7 58.4 58.9 3.9 3.7 3.8
Manufacturing sector 27.6 27.5 27.2 3.0 1.3 1.2
Agriculture sector 7.3 7.3 7.2 0.2 0.3 0.3

As the service sector targeted to be key of economic growth in the Malaysia’s

Third Industrial Master Plan (IMP3) (Alejandro et al., 2010), in 2009, government of
Malaysia liberalized most of its subsector in order to support service sector. Those
sub sectors included:
a) Computer & Related Services, such as
i. Consultancy services related to the installation of computer hardware
ii. Software implementation services
iii. Data processing services
iv. Data base services
v. Maintenance & repair services of computers
vi. Other services – data preparation, training, data
vii. recovery & development of creative content
b) Health & Social Services, such as
i. All veterinary services
 14
ii. Welfare services delivered through residential institutions to old person & the
handicapped
i. Welfare services delivered through residential institutions to children
ii. Child day-care services including day-care services for the handicapped
iii. Vocational rehabilitation services for handicapped
c) Tourism Services
i. Theme park
ii. Convention and exhibition center
iii. Travel agencies & tour operator services
iv. Hotel & restaurant services
v. Food serving services
vi. Beverage serving services for consumption on the premise
d) Transport Services
e) Sporting & Other Recreational Services
f) Business Services
i. Regional Distribution Centre
ii. International Procurement Centre
iii. Technical testing & analysis services
iv. Management consulting services
g) Rental/Leasing Services
h) Supporting & Auxiliary Transport Services
The Goals of the liberalizing service sector were to increase the sector
competitive advantage globally and regionally, create employment opportunities, help in
increasing the growth of the sector. Beside the liberalization, the government has
continued to support and strength the service sector through strategies and targeting
large foreign service investments to the country (MIDA, 2012).
 15
2.1.3.1 Classifications of Malaysian Service industries

According to the Ministry of International Trade and industry (MITI) and with reference
to the World Trade Organization (WTO) classification, service in Malaysia includes 12
subsectors namely:
i. Distributive Trade
ii. Transport and Storage
iii. Accommodation
iv. Food and Beverages
v. Information and Communication
vi. Financial Services
vii. Business Services
viii. Education
ix. Construction & Related Engineering
x. Health and Social Work
xi. Arts, Entertainment and Recreation
xii. Other Services
Treasury Malaysia in the Economic Report of 2012/2013 divided the service
sector into three divisions: intermediate, final, and government services. Intermediate
services include finance and insurance; transportation and storage; communication; and
real estate and business services. Final services include hotels and restaurants; wholesale
and retail trade; utilities; and other services. While the Government services recorded
separately.
The Malaysia Standard Industrial Classification 2008 (MSIC 2008), which is
based on the International Standard Industrial Classification of All Economic Activities
(ISIC) of United Nations, provides the definition of each subsector as follow:
i. Distributive Trade Services refers to Wholesale Trade and Retail Trade
ii. Transportation and storage refers to provision of passengers or freight transport.
iii. Accommodation Services refers to provision of short-stay for visitors and other
travelers.
iv. Food and Beverage refers to providing meals and drinks fit for immediate
consumption.
 16
v. Information and Communication refers to production and distribution of information
and cultural products, the provision of the means to transmit or distribute these
products, as well as data or communications, information technology activities and
the processing of data and other information services activities.
vi. Financial Services refers to all activities of financial intermediation
vii. Business refers to all activities under Real Estate Services, Professional, Scientific
and Technical Services and Administrative and Support Services.
viii. Education Services includes education at any level or for any profession, oral or
written as well as by radio and television or other means of communication.
ix. Health and Social Work Services refers to activities starting from health care
provided by trained medical professionals in hospitals and other facilities, over
residential care activities that still involve a degree of health care activities to social
work activities without any involvement of health care professionals.
x. Art, Entertainment and Recreation Services includes a wide range of activities to
meet varied cultural, entertainment and recreational interests of the general public,
including live performances, operation of museum sites, gambling, sport and
recreation activities.
Based on Malaysian Economic Census Report 2011 of service sector,
Department of Statistics Malaysia, the most active subsector is the Distributive Trade
achieved revenue of RM 687.3 billion or 53.2% of the total service sector revenue and
13.6 of GDP. Then the financial services with revenue of RM270.1 billion or 20.9% of
the total service sector revenue and 11.7 of GDP. Then the Information and
Communication sector with revenue of RM85.4 billion or 6.6% of the total service
sector revenue as shown in table 2.2.

Table 2.2: Share of services Subsectors in Malaysian GDP in 2011

(Department of Statistics Malaysia, 2011; Treasury Malaysia, 2012)
Subsector Share of GDP %
Distributive Trade (Wholesale Trade, Retail Trade) 13.6
Financial Services 11.7
Business Services 5.5
Information and Communication 4.2
Transport and Storage 3.8
construction 3.2
Accommodation, Food and Beverages 2.4
All other services 9.5
 17
Statistics of the census showed wholesale subsector the highest number of
establishments (50% of the total number of service sector establishments) followed
by food and beverage (24.6%) then transportation and storage (6.9%), refer to figure
2.1 and table 2.3.

Figure 2.1: Percentage of establishments by subsector (% of the whole sector)

(Department of Statistics Malaysia, 2011)

Table 2.3: Number of establishments by service subsectors by 2010

Subsector Number of establishments
Distributive trade 295,431
Transport and storage 40,599
Accommodation 3,129
Food and beverages 145,320
Information and communication 2,379
Financial 5,653
Business services 38,260
Education 8,178
Health and social work 9,152
Arts, entertainment and recreation 6,307
Other services 36,729
Total 591,137
 18
2.2 Total Quality Management

2.2.1 Definition of Total Quality Management

Reeves and Bender (1994) proposed four definitions of quality. The first definition is
“quality is conformance to specifications”; the second definition is “quality is satisfying
or exceeding customers’ expectations”; the third definition is “quality is achieving
excellence standards”; and the fourth definition is “quality is creating value of products,
services and process”.
Kanji (1990) defines TQM as the continuous way of being committed to
continuous improvement to satisfy customers’ needs. Besterfield, Besterfield-Michna,
and Besterfield (2003) define TQM from the same approach which is as philosophy and
principles aim to ground the continuous improvement process in an organization.
Wolkins (1996) also followed the same approach and defined TQM as a combination of
managerial techniques and technical tools focused on organizational continuous
improvement.
Ahire and Ravichandran (2001) added to continuous improvement customer
satisfaction and define TQM as a philosophy of management seeking to improve process
and product quality that lead to customer satisfaction. The same approach followed by
Dean and Bowen (1994). They defined TQM as management philosophy characterized
by techniques, principles, and practices.
Steingrad and Fitzgibbons (1993) define TQM from manufacturing and
production approach. Their definition describes TQM as procedures and techniques aim
to reduce defects of a production process/service delivery.
Evans and Lindsay (2008) defined TQM as a management philosophy that leads
the success of organization through meeting customers’ expectation. And Zheng and
Zhao (2009) described TQM as a system based on continuous feedback in order to
improve the quality of services products using comprehensive techniques and methods.
From this review, many definitions were provided. Those definitions can be
summarized in Garvin (1984) argument. Garvin argues that TQM definitions have five
major approaches: (i) product-based approach; (ii) marketing, and operations
 19
management approach; (iii) manufacturing-based approach; (iv) operation management
value-based approach; and (v) user-based approach.

2.2.2 Origin and Evolution of TQM

Quality concepts first appeared with inspection methods in manufacturing, “then to

quality control, quality assurance, quality management, Total Quality and currently
Total Quality Management” (Flores-Molina, 2011). Works of TQM gurus like Deming,
(1986) and Crosby (1979) provide evidences that the TQM evolution started with
Japanese and American earlier manufacturing principles, philosophies and strategies
(Lee et al., 2010)
Deming promoted the concept of “total quality” based on his participation and
practical experience with Japanese companies (Flores-Molina, 2011). The main
characteristics of this concept are:
i. Quality must be involved all process phases.
ii. Reducing the quality cost most involve all employees
iii. Continuous training.
iv. Aligning employee’s goals with organization business goals.
v. Employee commitment.
vi. Effective communication between leaders and employee.
vii. Continue development.
The next phase of TQM evolution was impacted by the significant growth of
global free trade. In this phase, TQM became a competitive advantage for business
organizations to survive in intensive market competition (Soltani et al., 2008). TQM in
this phase focused and centered on continuous improvement at all levels business
organization (Slack et al., 2004).
The next phase of TQM is phase focused on business excellence standardized
awards frameworks. The most well-known three standardized awards are: The Malcolm
Baldrige National Quality Award (MBNQA); The Deming Prize; and European
Foundation for Quality Management (EFQM) (Soltani et al., 2008).
 20
2.2.3 Implementation and Benefits of TQM

Based on four excellent models of TQM awards, Abdullah et al., (2009) categorized
practices of TQM into two categories: soft TQM practices and hard TQM factors. They
argued that the soft practices play much more important role on the implementation and
results of TQM. Soft practices are: leadership, organizational learning, teamwork,
process management, training, communication.
Lewis et al., (2006) examined TQM factors in the criteria of ISO 9001:2000
certification. Based on deeper analysis applied on data collected from eight countries,
they pointed out 12 practices to be the most critical practices for TQM implementation
and success. Those practices are: quality data and reporting, customer satisfaction,
human resource utilization, management of process control, training and education,
management commitment, continuous improvement, leadership, strategic quality
planning, performance measurement, customer focus, and contact with suppliers and
professional associates.
TQM has an optimistic results and outcomes on organization performance and
operation (Zakuan et al., 2008; Abdullah et al., 2009; Kaynak 2003; Samson and
Tersioviski 1999), especially in service organizations (Bon et al., 2012). Based on the
literature review, trends of TQM implementation show that organizations would be
subject to one of two main categories: those implementing TQM and those out of
business market (Hoang et al., 2010). Hoang and his colleagues further argue that large
firms with TQM implementation developed more innovations and gained higher
competitive level compared to smaller firms in Asian region. They also found that firms
using TQM systems achieved better innovations and higher market share.
TQM has significant positive impact on organizational performance (Zakuan et
al., 2008). Their results indicated that organizations winner of MBNQA have developed
and achieved high financial performance.
 21
2.2.4 TQM Practices

Earlier studies on Quality Management (QM) practices investigated their criticality on

business performance and business competitive advantages. Studies of Saraph et al.,
(1989) and Flynn et al., (1994) developed frameworks involved eight measurable eight
QM practices. Many recent studies on the impact of QM on innovation (Kim et al.,2012)
have followed those two frameworks.
Many frameworks of TQM practices were empirically developed ( Ahire et al.,
1996; Black & Porter, 1996; Kaynak, 2003; Motwani, 2001; Powell, 1995; Samson &
Terziovski, 1999; Zeitz et al., 1997). Those studies investigated different relationships
involved TQM. Examples, relationship between TQM practices and: operational
performance (Samson & Terziovski, 1999), firm performance (Kaynak, 2003) and firm
competitive advantage (Powell, 1995). Table 2.4 compares some of those earlier TQM
practices frameworks. They all shared practices of leadership, people management,
customer focus, continuous improvement and data and information usage.
 22

Table 2.4: Comparing earlier frameworks of TQM practices

Study Powell (1995) Ahire et al.,(1996) Black & Porter, (1996) Zeitz et Samson & Motwani, (2001) Kaynak,
al.,(1997) Terziovski, (2003)
(1999)
Practices/ Executive Top management Corporate quality culture, Management Leadership, Top management Management
factors commitment, commitment, Strategic quality support People commitment Leadership,
Adapting the Customer focus management, Use of data management, Quality Training,
philosophy, Closer to Supplier's Quality improvement Suppliers Customer focus, measurement and Supplier
customers, quality measurement systems, People relationship Planning, benchmarking; quality
Closer to suppliers management and customer management, Supervision Process Process management,
Benchmarking, Design quality Operational quality planning, Improvement management, management; Employee
Training, management External interface customers Information and Product design; Relations,
Open organizations, Benchmarking management, analysis, Employee training Quality
Employee Statistical process Supplier partnerships, Organisational and empowerment; and data
empowerment, control usage Teamwork structures, performance Supplier quality reporting,
Zero defect Internal quality Customer satisfaction management Process
mentality, information usage orientation, Customer management,
Flexible Employee Communication of involvement and Product/service
manufacturing, empowerment improvement information satisfaction design
Process Employee
improvement, involvement
Measurement
 23

Table 2.4 (continued)

Perspective Relationship Identifying critical Measuring TQM Relationship Identifying critical Relationship
of the study between TQM and factors of TQM practices and between TQM and factors and between TQM
competitive organizational operation performance and firm
advantage culture performance measures of TQM performance
Respondents 371 manufacturing 54 respondents 204 respondents from 886 respondents 1024 respondents Literature review 382
and Industry firms from manufacturing 61 manufacturing and from manufacturing from manufacturing respondents
and service firms service organizations and service organizations from 1884
organizations business units
including
manufacturing
and service.
 24
2.2.5 Comparison of TQM in service organizations and manufacturing
organizations

Earlier evolution of TQM focused on manufacturing operation and did not involve
operation in service organizations (Yasin, Alavi, Kunt, & Zimmerer, 2004). Two factors
have increased the need for TQM in service industry: significant growth of service
industries and intensive market competition (Talib & Rahman, 2012).
Empirical studies have showed contradicted results regarding implementation of
TQM in service industries compared to manufacturing industries (Rönnbäck & Witell,
2008). Some studies found positive relationship between TQM and innovation and some
found negative relationship between the two. The contradition emerges from two causes:
first, from the difference in perspectives when studying TQM. For instance, one
perspective is studying TQM as holistic management system. Other perspective is
studying TQM as operation tool or method. Second, the inconsistency emerges from the
unique characteristics of services compared to goods. For instance intangibility creates
measurement problem (Lenka, Suar, & Mohapatra, 2010). Table 2.5 shows comparison
of TQM practices between service and manufacturing organizations.

Table 2.5: Comparing TQM practices between service and manufacturing

organizations
(Lenka et al., 2010)
TQM Practices in Service Organizations TQM Practices in Manufacturing organizations
Human focus Product/technology focus
Focus on top management commitment and Focus on top management commitment and
visionary leadership visionary leadership
Continuous improvement Continuous improvement
Emphasis is on interpersonal relationship In recruitment and selection, emphasis is on
and communication skills technical skills
Statistical process control is inappropriate in Statistical process control is prescribed
professional services universally
Checks customer defections Elimination of product defects
Quality measurement through customer Quality measurement by statistical techniques
satisfaction
 174

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