Harvard Business School Professor Discusses Importance of ISO Standards

ISO 9001 adopters realized faster sales, employment growth, and are more likely to survive

Published: Wednesday, February 1, 2012 - 11:37

BusinessAssurance.com, the world’s first online management systems community, which is sponsored by Lloyd’s Register Quality Assurance Inc., brings to you an interview with Mike Toffel, a leading management systems expert and an associate professor of business administration at Harvard Business School. Toffel discusses some of the outputs of his research into corporate environmental sustainability and specifically discusses the importance and benefits of ISO 9001, ISO 14001, and SA8000.

Within his research, Toffel examines companies’ environmental, safety, and quality programs. His work seeks to identify which voluntary programs and management standards actually distinguish participating companies as having superior environmental, safety, or quality management or performance, and which of these programs help companies improve their performance in these areas. His work ranges from academic articles based on econometric analyses of large datasets to case studies of individual companies.

The interview opens with Toffel talking about the organizational drivers and benefits for certified management systems as a whole.

Mike Toffel: Most managers have told me their primary motivation to adopt certified management systems is to meet customer requirements, either to maintain or to acquire supplier relationships. That seems to be the major driver, especially for quality management systems like ISO 9001 and AS9100. In other domains such as environmental management and labor practices, many companies are adopting independent, third-party-certified management standards in an attempt to distinguish themselves. Compared to the quality domain, companies are much less often requiring their suppliers to adopt particular environmental and labor standards, which is one reason fewer companies have adopted them. But this also provides an opportunity for standards like the ISO 14001 environmental management standard and the SA8000 labor standard to differentiate adopters.

LRQA interviewer: How does an environmental management system standard such as ISO 14001 address continual improvement?

Toffel: A key feature of ISO 14001 that addresses continuous improvement is that the standard requires organizations to set objectives and targets, to measure progress against these targets, and to have senior management periodically review this progress. And these objectives and targets themselves have to be reviewed periodically. The whole idea is that as you achieve these goals, you set new goals, and that’s the continuous improvement process that’s built into the ISO 14001 environmental management system standard. To me, that’s the key reason why we might expect environmental performance to improve after organizations adopt this standard. The standard contains a lot of provisions to help organizations ensure that procedures are documented and that staff are well trained, but if that were all it had, then you wouldn’t necessarily expect improvement. The very idea of having objectives and targets that require periodic review and revision is meant to drive continuous improvement.

Interviewer: What do you perceive the benefits of ISO 14001 certification to be?

Toffel: It seems to me there are two types of benefits. First, ISO 14001 can help companies organize their environmental management processes within their plant or across their organization. It requires you to have an environmental policy, to document your procedures and training programs, to keep training records, and to keep internal quality audit records. So it’s a way of organizing all these activities that might otherwise be conducted in a more ad-hoc manner. It can also help organizations harmonize their approach across their various plants, which some managers have noted is particularly helpful after acquisitions when they are trying to harmonize approaches across a wide array of plants. So ISO 14001 can provide a consistent, structured approach to managing your environmental affairs.

This structure can lead to a second type of benefit, which is in terms of outcomes. In some cases, adoption can earn suppliers points in a supplier scorecard where ISO 14001 is a criterion desired by a buyer. In terms of processes, some academic research has shown that ISO 14001 adopters experienced faster reductions in pollution and greater improvements in compliance with environmental regulations, compared to a similar set of nonadopters. But these studies were conducted in the U.S. context, and these types of studies need to be replicated in different countries and across different industries.

Interviewer: Can management systems certification lead to improved business performance?

Toffel: There are really two types of academic studies that have addressed this question. One type, and there are many of these, asks organizations, “Do you perceive that your business performance has improved after you’ve adopted these certified management systems?” Most of those studies indicate that, yes, those who have adopted these programs believe they have benefited in a number of ways, whether it be through increased sales or through other types of indicators. But one has to be careful interpreting these results. For one thing, those who decided to adopt these standards might have a vested interest in emphasizing the benefits and deemphasizing their costs. For another, one has to wonder about selection bias, since it’s possible that managers with good news to tell about their experience might be more willing to answer a survey than those who haven’t seen many benefits.

There’s a whole other set of research and that takes a more robust approach to this question. In this second type, the research design compares performance metrics over time, including prior to and after the adoption decision, and compares these organizations to set of nonadopters that serves as a quasi-control group. This has been done just a few times now for third-party-certified management standards. A few studies have shown that organizations that adopted ISO 14001 experience fewer regulatory compliance problems and reduced pollution levels, compared to their control groups. These studies took place in the U.S. context. In a different study, which I co-authored with David Levine, we looked at ISO 9001, again comparing adopters to nonadopters over time. We looked at single-plant firms in California, and found that the ISO 9001 adopters realized faster sales growth, employment growth, and were more likely to survive several years later—all compared to the control group over the same period. We also found some evidence that ISO 9001 adopters were subsequently more likely to report zero injuries through their worker compensation system. This is particularly interesting to me because it reveals that adopting the ISO 9001 quality management system appears to have some spill-over benefits in terms of improving workplace safety.

Interviewer: It has been said that both cost and time are two of the barriers that organizations list as stopping them from implementing management systems and having those systems certified. What are your views on those concerns?

Toffel: I think there are really two camps in this domain. There are some who have seen first-hand the benefits that environmental management systems or quality management systems have brought to organizations, and others are quite skeptical. And it turns out that we don’t have a lot of robust research to point to, to reveal systematically the benefits that these standards bring. At the same time, the implementation costs are much more visible, both in terms of hours and funds.

As a result, we see many companies around the world imposing requirements on suppliers based largely on the premise that becoming certified to quality standards will yield superior performance, whether that be through process control or product quality. Some believe that adopting these standards can lead to fewer problems like process disruptions or product defects. And some think that these standards can enhance organizations in other ways. For example, if these standards lead organizations to create structured processes for employees to offer improvement suggestions and for managers to review them and decide which to implement, then adopting these standards could lead to improvements in employee engagement. But meanwhile, I’ve not seen any rigorous studies that actually reveal these relationships, and this is something that my colleagues Bill Schmidt, David Simchi-Levi, and I are trying to investigate. Does becoming certified to quality management standards actually lead to better process control, higher quality products, and a more engaged workforce? We don’t know, but we’d like to find out.

A key reason why rigorous studies haven’t been conducted yet to investigate these questions, despite more than a million organizations adopting ISO 9001 and other industry-specific standards, is that it’s challenging for academic researchers to obtain data. And this is why we are looking to work with organizations who share a commitment to try and reveal whether these relationships are real, and under what circumstances these relationships are strongest. Organizations have the data needed for this type of study—process and product metrics that track performance of their own facilities or on their suppliers, over time, before and after these standards were adopted.

For example, we’d love to do a study that explores whether adopting these standards leads to fewer product defects, improved on-time delivery rates, and fewer or less intensive process disruptions. And under what circumstances does adopting these standards improve worker engagement and productivity?

Improving these types of outcomes is the very premise behind why some companies are adopting these standards, and why some are requiring their suppliers to adopt them. And these are some of the questions we are hoping to explore. So we’re looking for companies interested in these questions, and who are willing to work with us by sharing data.

Interviewer: What type of organizations can benefit from the implementation and certification of ISO 9001?

Toffel: My prior study found that, at least on some indicators, smaller companies experienced greater benefits from adopting ISO 9001 than larger companies. Specifically, we found that smaller firms grew faster in terms of sales and employment. This suggests that maybe more is learned by smaller firms, or that ISO 9001 might be particularly helpful for smaller firms in terms of signaling quality. It’s an open question about which other types of organizations are most—or least—likely to benefit, and this is something that we would like to explore in our future research.

For example, it’s possible that organizations in less regulated industries might gain more from adopting quality standards, compared to organizations where quality is already heavily regulated by the government, such as in the pharmaceutical industry. And perhaps the benefits from adopting ISO 14001 are stronger in countries where regulatory enforcement is weaker because on average companies might be performing at a low level, but then adopting these standards to meet independent third-party certification sparks an investment in managerial attention that can substantially enhance operational effectiveness and efficiency.

Interviewer: Do organizations that adopt ISO 9001 have higher rates of survival than those that don’t, and if so why?

Toffel: In our study of single-plant firms in California, David Levine and I found that ISO 9001 adopters were more likely to have survived several years later, compared to a matched set of nonadopters. There are several possible explanations for this finding. First, many believe that ISO 9001 is a proxy for other good management practices, and that better-run companies are more likely to survive. Second, because ISO 9001 is so often adopted to qualify for more tenders, one might expect sales to increase among adopters, which we also found in our study. And it could be that it’s this sales growth that’s enhancing survival.

This interview is part of the LRQA Business Assurance Podcast Series and can be downloaded here.  For further interviews on the key issues that are at the heart of the business world, visit http://businessassurance.com/interviews.

About The Author

Jonathan Chowdhury

Jonathan Chowdhury is the digital communications manager at Lloyd’s Register Quality Assurance (LRQA) in Coventry, United Kingdom. Chowdhury is responsible for the digital strategy of LRQA and works closely with LRQA’s global offices to create a web presence that works in region and globally. Chowdhury received his master of arts in web journalism from The University of Sheffield and his bachelor of science in information and computing from Loughborough University.