STRATEGIC ASPECTS OF QUALITY: A THEORETICAL ANALYSIS

This paper investigates the relationship between aspects of quality and long run profitability and growth of a firm. The paper first determines whether a stable relationship among price, aspects of quality, and the sales rate exists, by examining the equilibrium properties of a dynamic model. Then, we use the derived equilibrium expressions to develop insights into the strategic nature of “quality reputation” and, how to integrate marketing (i.e., pricing) and quality related decisions. The paper shows under certain conditions it might be more advantageous to manipulate “quality reputation” through advertising and product innovations than to increase product quality. We comment on quality based strategic options a firm must consider to ensure long run growth and profitability. (QUALITY; QUALITY REPUTATION; SALES RATE; EQUILIBRIUM ANALYSIS; DYNAMIC MODELS) There is little dispute as to the importance of quality for gaining competitive advantage. Surveys indicate that both American and European managers rank improving product and process quality among their top priorities (Fortuna 1990; Kim 1994). While research addressing the effect of quality on sales performance has been examined recently in the literature (Flynn, Schroeder, and Sakakibara 1995), this research does not consider the strategic effect of quality on long run sales growth and profitability of a firm. Most of the research in this area uses cross-sectional data analysis to identify correlation between quality and market performance, ignoring the feedback between quality improvements and the market response to such improvements. The relationship between quality and market performance is essentially dynamic. The market reacts not only to the tangible aspects of a product’s quality, but also to the “quality reputation” that is perceptual and based on the tangible aspects of quality. This contention accords well with the integrative theory of strategic quality management and the model of “evaluative judgment,” discussed by Wacker (1989). Wacker’s conceptualization, utilizing an integrative model of evaluative judgment, proposes that specific features of the product (the objective aspects of quality) are perceived over time by consumers leading to an overall perception of product quality. Wacker states that “The hypothesis suggested here is that quality of a product is related not only to the

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