INTRODUCTION:

Quality Management
Hilton monitor its success in achieving quality by traditional responsibility-accounting systems focus
primarily on the financial performance of an organizations subunits. However, nowadays it is crucial for
organizations to monitor performance in many nonfinancial areas as well. For many companies, quality
is at the forefront of the areas in which nonfinancial performance is critically important. The quality of
the product or service that an organization provides can spell the difference between future profitability
and disaster. Quality is equally important in the service and manufacturing industries. For Hilton Hotels
and Resorts, the quality of service includes the comfort of the guest rooms, the amenities provided to
guests, the friendliness of the staff, the quality of food served in the restaurant, and so forth. Hilton
Hotel guests are ever more discriminating as they assess the overall quality of service and then select
their accommodations accordingly. Similar comments apply to the airlines, long-distance
telecommunications companies, banks, car rental firms, and financial investment firms.
In the manufacturing industry, product quality has become a key factor in determining a firms
success or failure in the global marketplace. Advanced, highly reliable manufacturing methods have
made it possible to achieve very high standards of product quality. As a result, more and more firms
are making product quality a keystone of their competitive strategy.

Q1: Total Quality Management

Hilton monitor its success in achieving quality by Monitoring product quality coupled with measuring
and reporting quality costs helps companies maintain programs of total quality
management, or TQM. This refers to the broad set of management and control processes designed to
focus the entire organization and all of its employees on providing products or services that do the best
possible job of satisfying the customer. Among the tools used in total quality management is the Six
Sigma program, an analytical method that aims at achieving near-perfect results in a production
process.

Q2:Product Quality
What is meant by a high-quality product? There are two concepts of quality that determine a products
degree of excellence or the products ultimate fitness for its intended use in Hilton Hotel. A
products grade refers to the extent of its capability in performing its intended purpose, in relation to
other products with the same functional use. For example, a computer monitor that displays 65,536
colors is of a higher grade than a monitor that displays only 256 colors. A products quality of
design refers to how well it is conceived or designed for its intended use. For example, a coffee mug
designed with a handle that is too small for the users fingers is a poorly designed mug. The quality of
conformance refers to the extent to which a product meets the specifications of its design. A coffee
mug with an appropriately sized handle could be well designed, but if the handle breaks off due to

shoddy manufacturing, it will be useless. This mug fails to conform to its design specifications. Both
quality of design and quality of conformance are required in order to achieve a high-quality finished
product.

Q3: Costs of Quality

Due to the increasing importance of maintaining high product quality, many companies routinely
measure and report the costs of ensuring high quality. Four types of costs are monitored.
First are prevention costs, the costs of preventing defects. Second are appraisal costs, the
costs of determining whether defects exist. The third type of costs are internal failure costs, those
costs of repairing defects found prior to product delivery. The last type of costs are external failure
costs, those costs incurred after defective products have been delivered.
Observable versus Hidden Quality Costs
The quality costs discussed in the preceding section are observable. They can be measured and
reported, often on the basis of information in the accounting records. In addition to these observable
quality costs, however, companies incur hidden quality costs. When products of inferior quality make it
to market, customers are dissatisfied. Their dissatisfaction can result in decreased sales and a
tarnished reputation for the company. Not only does the company experience lost sales for the inferior
products but it will also likely experience lost sales in its other product lines. The opportunity cost of
these lost sales and decreased market share can represent a significant hidden cost. Such hidden
costs are difficult to estimate or report.
Traditional Perspective
The traditional viewpoint holds that finding the optimal level of product quality is a balancing act
between incurring costs of prevention and appraisal on one hand and incurring costs of failure on the
other. Panel A of Exhibit 12-9 depicts this trade-off. As the percentage of defective products decreases,
the costs of prevention and appraisal increase. However, the costs of internal and external failure
decrease. Adding the costs of prevention, appraisal, and internal and external failure yields total quality
costs. The optimal product quality level is the point that minimizes total quality costs.

Contemporary Perspective
Due largely to the influence of Japanese product quality expert Genichi Taguchi, the contemporary
viewpoint of optimal product quality differs from the traditional perspective. The contemporary view is
that if both observable and hidden costs of quality are considered, any deviation from a products target
specifications results in the incurrence of increasing quality costs. Under the contemporary viewpoint,
as depicted in Panel B of Exhibit 12-9, the optimal level of product quality occurs at the zero defect
level.As Panel B shows, the observable and hidden costs of internal and external failure increase as
the percentage of defective products increases. The observable and hidden costs of prevention and
appraisal increase slightly and then decrease as the percentage of defects increases. The most
important point, though, is that the total costs of quality are minimized at the zero defect level.
Whether the traditional or contemporary view of optimal product quality is most accurate is still
being debated by quality control experts. Moreover, the exact shape of the cost functions in Exhibit 129 is largely an empirical question, and the cost functions probably differ among industries and product
types. One thing is certain, though. To compete successfully in todays global market, any company
must pay very close attention to achieving a very high level of product quality.

Q4: Identifying Quality Control Problems

An effective TQM program includes methods for identifying quality control problems. One method of
identifying quality problems is the cause-and-effect diagram (also called an Ishikawa diagram or a
fishbone diagram). Exhibit 12-10displays a cause-and-effect diagram used by Hilton Hotel to identify
the causes of errors in its customer billing process. As the diagram shows, the quality improvement
team has identified a wide range of possible causes for billing errors. After identifying possible causes
for billing errors, the Hilton team, nicknamed the Billing Bloopers Team, could take systematic steps to
eliminate the root causes of the error.

Exhibit 12-10 Cause-and-Effect Diagram: Billing Quality at Hilton Hotels.

Another helpful tool in quality improvement programs is the Pareto diagram. Depicted in Exhibit 12-11,
the Pareto diagram shows graphically the frequency with which various quality control problems are
observed for a particular model of cordless telephone. The Pareto diagram helps the TQM team
visualize and communicate to others what the most serious types of defects are. Steps can be taken
then to attack the most serious and most frequent problems first.

Q5: Customer Satisfaction

A common subject of case studies describing exceptional customer satisfaction is the Ritz-Carlton
chain of Hilton hotels. This companys policy of encouraging all employees to do whatever it takes to
satisfy every need of its guests is well known -- right down to the two-thousand-dollar authority carried
by every employee (even low-paid, hourly workers) for making customers happy. What is less well
known, however, is the impact this approach has on the profitability of the business.
The owner of the Ritz-Carlton brand is Host Marriott Corporation, which doesnt report on profits
separately by brand. But, such reporting wouldnt help much, anyway, because that company doesnt
own the hotels it manages them for individual owners. Host Marriotts profits come from management
fees so that, as one observer offered recently, Ritz-Carlton can make money even if its hotels dont.
Individual real estate owners dont usually report their profits publicly, of course, but there has been a
continual stream of very public disputes between Ritz-Carlton and its hotel-owning clients -- with the
owners charging that Ritz-Carlton caters to guests without regard to profits. In addition to several
high-profile, big-dollar lawsuits, there have also been a number of bankruptcies and conversions of
properties to other brands and management companies. Of course, these kinds of things happen all
the time for many different reasons -- so no conclusions about the success of the Ritz-Carlton
customer satisfaction strategy should be inferred from them, neither good nor bad. Despite what many
observers have claimed, however, there are no facts provided by this case study which link customer
satisfaction with profitability.
There are plenty of other examples, however, of a disconnect between customer satisfaction and
profitability. Nordstrom department stores rank right up there along with Ritz-Carlton for the number of
impressive customer satisfaction legends fostered, but shareholder earnings have come no easier for
that company than any of the other major retailers. Although it is difficult to find anyone who will
criticize the services offered by Amazon.com, that company is still searching for a way to make money
at it.
The Cadillac division of General Motors always rates near the top of the American Customer
Satisfaction Index, but its market share continues to decline.
The Source of Profits
Although it is intuitively pleasing to suggest that improving customer satisfaction will lead to improved
profitability, the facts dont support it. A more careful analysis would suggest that profits come only from
sales to customers and, therefore, more sales (at a sufficient price) mean more profits. More sales (at
a sufficient price) are, therefore, the primary objective of every business. All of that is clear enough.

Customer Perceived Value

Fundamentally, the reason customer satisfaction is irrelevant to the quest for profits is that it is based
on the customers reaction to the last purchase of goods or services and traditionally reflects on only
the features of that offering as they existed at that time. All of that is ancient history and provides few
clues for the seller to increase its odds of winning the next sale. Customer perceived value, on the
other hand, describes how the prospect will choose between alternatives the next time a purchase is
made and gets to the prospects unmet needs, instead of only the product features. These differences
are profound.

Customer Satisfaction Isnt Enough

Hans Schulze, the originator and spiritual driver of the Ritz-Carlton approach to customer satisfaction,
referred to it as Ladies and gentlemen serving ladies and gentlemen. Thats impressive, and Host
Marriott paid a lot of money to acquire the famous brand that resulted from that philosophy. But, it
certainly isnt enough to generate superior growth and profitability.

Conclusion:
Ladies and gentlemen serving ladies and gentlemen is good business only if customers are willing to
pay more for it. When thats the case, it becomes customer perceived value and, that is good
business! It is a holistic management approach that seeks to understand the customer and to produce
processes to deliver on that understanding consistently. Its effective implementation -- e.g., using
event-history statistical models -- can create a substantial competitive advantage, even where margins
are slim as Dell and Toyota have shown. Although some quality management systems have been
known to be cumbersome, they do not have to be. In fact, even some high-schools and universities
have wisely followed that path.