I am not a fan of ISO 9000 nor do I want to improve it. I believe it to be totally o the mark as to the reality requirements of today and tomorrow.

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1 I m not fn of ISO 9000 nor do I wnt to improve it. I believe it to be totlly o the mrk s to the relity requirements of tody nd tomorrow. Richrd Buetow, Senior Vice President nd Director of Qulity for Motorol, quoted by Susn Avery (1995, p. 66). ISO 9000 Reects the Best in Stndrds. Title of n rticle by Roy Rd (1996, p. 17). In 1987, the Interntionl Orgniztion for Stndrdiztion relesed the ISO 9000 series of interntionl qulity ssurnce stndrds. 1 To some people these stndrds full useful function nd re well worth dopting. To others though, the stndrds re wste of time nd money. 2 Supporters of ISO 9000 hve emphsised severl benets from their widespred doption. It should be noted, however, tht not ll supporters gree with ll of the climed benets, nor does there seem to be cler consensus bout the rnking of them. Eqully, there re severl criticisms of ISO As is the cse with supporters of the series, not ll detrctors gree with ll of the criticisms leveled t ISO 9000, nor is there cler greement bout the reltive importnce of the criticisms. It turns out tht both the rguments for nd ginst the stndrds fll into one of three ctegories: tht of qulity nd qulity ssurnce, rguments bout brriers to trde nd ccess to mrkets, nd the level of (privte nd socil) costs nd benets. One clim is tht rms tht dopt ISO 9000 will experience increses in the qulity of wht they produce, or in the eciency of their production methods (equivlently, fll in production costs). These my occur becuse going through the processes needed to dopt ISO 9000 increses the informtion rms hve bout the production techniques they use, or becuse the doption of ISO 9000 fundmentlly chnges the wy n orgnistion is run. In ddition, it is rgued tht these rms will hve tken mjor step to hving systems in plce tht led to continuous improvements in the qulity of 1 ISO 9000 is series of generic stndrds which re intended to help sellers ssure the qulity of their goods to buyers, prticulrly in two-prty contrctul situtions. See Jcques (1990) for the views of someone who ws ctively involved in writing the originl versions of the ISO 9000 stndrds. The developers of the stndrds mde them generic in nture so tht they cn in principle be used by rm in ny industry, by government orgnistions, by schools, nd by multitude of other orgnistions. The stndrds re known by dierent nmes in dierent countries. In the Europen Community they re known s the EN series, lthough ech country in the Europen Community hs seprte nming convention for them. They re known s the ANSI/ASQC 90 series in the United Sttes nd s the JIS Z9900 series in Jpn. 2 For diering opinions bout the merits of ISO 9000 see Avery (1994b), Buetow (1994), Rd (1996), nd Hilry (1996). 1

2 wht they produce. It is lso rgued tht dopting ISO 9000 provides cler positive signl bout the qulity of rm's products to ctul nd potentil buyers. On the other hnd, critics rgue tht there is lck of cler connection between the ISO 9000 stndrds nd ny objective mesure of qulity. This is commonly expressed with the sttement tht \ISO 9000 is too vgue to be of ny prcticl use". In ddition, the critics re skepticl tht the mere ct of dopting ISO 9000 leds to continul improvements in the qulity of rms' products. Some critics re concerned tht orgnistions tht dopt ISO 9000 will mistkenly (in the view of the critics) believe tht they will produce high qulity products without hving to do nything else. In common prlnce this is fer tht orgnistions will fll for the \lure of the silver bullet"; the belief tht dopting ISO 9000 will solve ll of rm's problems relting to qulity improvement. Some supporters of ISO 9000 rgue not so much on issues of product qulity s on the belief tht rms need to dopt ISO 9000 to ensure tht they ccess to foreign mrkets, with emphsis plced on ensuring ccess to the Europen Community. Others rgue tht the widespred doption of ISO 9000 will led to reduced non-tri trde brriers, nd therefore to greter trde, since ISO 9000 is pplicble to ny orgnistion in ny country (or in ny industry) becuse it is generic series of stndrds. In contrst, some critics of ISO 9000 re concerned tht the stndrds will ctully led to incresed brriers to trde. They see the Europen Community using it s nontri brrier to hinder ccess of foreign rms to Europen mrkets under the guise of seemingly liberting mrkets in the move to closer economic integrtion. This concern is heightened by the potentil for certictes of registrtion issued in one country not to be recognised in nother country. This ltter problem highlights nother criticism of ISO 9000; the clim tht it is not s generl s it seems becuse of the lck of forml mechnisms to ensure interntionl cceptnce of n ISO 9000 certicte, regrdless of where it ws issued. Finlly, some supporters of ISO 9000 clim tht use of the stndrds will lower the privte nd socil costs incurred by individul buyers nd sellers in producing informtion bout the qulity of the products of the sellers. This is bsed on the belief tht the use of set of generic stndrds will led to fewer rm nd industry specic stndrds being developed s well s fewer udits being conducted by buyers, compred to sitution in which severl rm-specic stndrds re used. The response of the critics is tht dopting ISO 9000 is seen s being exorbitntly nd unnecessrily costly. There is no doubt tht there re conicting ssessments bout the worth of the ISO 9000 series of stndrds. Wht is more there hve lso been chnges in the ssessments 2

3 of vrious people nd orgnistions bout the merits of them. Ocil representtives of the Europen Community were initilly gret promoters of the stndrds, but they re now tking ctions to de-emphsise the importnce of the ISO 9000 stndrds. 3 On the other hnd, the big three utomkers initilly expressed their strong dislike for the ISO 9000 series of stndrds but ended up developing the uto industry-specic QS 9000 qulity ssurnce stndrd which is bsed on ISO So why re there these conicting nd chnging opinions? Importntly, is one view of the stndrds right nd the other wrong? The consequences of the nswers to these questions re not trivil given tht over 95,000 orgnistions worldwide hve lredy expended lrge mounts of resources dopting ISO 9000 nd there re now mny consultnts nd registrrs whose jobs depend on the continued doption of the stndrds. 5 This rticle evlutes the merits of the ISO 9000 stndrds. Ech of the rguments for nd ginst the stndrds will be exmined to see how they compre with the vilble evidence. The rst re of contention concerning ISO 9000 is bout the bsic function of the stndrds, tht is, wht ISO 9000 ctully does. Addressing this controversy depends, however, to which of the severl stndrds in this series you re referring. Contrry to populr impression there is no single ISO 9000 stndrd. ISO 9000 consists of series of eleven stndrds (see Tble 1 for list of the stndrds) with ech stndrd designed to do slightly dierent job but with common overriding purpose. 6 3 Boehling (1990), Zuckermn (1994), nd Zuckermn (1996). 4 Avery (1994b) nd Hrrison (1996). The North Americn uto industry hs typiclly used three qulity ssurnce stndrds: Trgets for Excellence developed by Generl Motors; the Q101 Qulity System stndrd developed by Ford; nd the Supplier Qulity Assurnce Mnul developed by Chrysler. See Avery (1995). These three stndrds hve been dopted by mny uto suppliers. Recently, common uto industry qulity ssurnce stndrd, QS 9000, hs been developed. This stndrd is bsed on the ISO 900 series of stndrds, but hs been hevily mended. It is speciclly imed t rms in the uto industry nd is fr more comprehensive thn is ISO The im of the stndrd is to ensure tht the qulity of the goods supplied consistently meet the specictions of ech of the big three utomkers. 5 See Rd (1996, p. 19). Over 9,000 orgnistions in North Americ hve dopted one of the ISO 9000 stndrds. 6 There re two further stndrds being developed: ISO concerning guidelines for qulity plns, nd ISO concerning guidelines for congurtion mngement. Another stndrd, ISO 8042, provides lists nd denitions of the vocbulry to do with qulity. 3

4 Designtion Tble 1: The ISO 9000 Series of Stndrds. Title ISO Qulity mngement nd qulity ssurnce stndrds Prt 1: Guidelines for selection nd use. ISO Qulity mngement nd qulity ssurnce stndrds. Prt 2: Generic guidelines for the ppliction of ISO 9001, ISO 9002 nd ISO ISO Qulity mngement nd qulity ssurnce stndrds Prt 3: Guidelines for the ppliction of ISO 9001 to the development, supply nd mintennce of softwre. ISO Qulity Mngement nd qulity ssurnce stndrds Prt 4: Guide to dependbility progrmme mngement. ISO 9001 Qulity systems Model for qulity ssurnce in design, development, production, instlltion nd servicing. ISO 9002 Qulity systems Model for qulity ssurnce in production, instlltion nd servicing. ISO 9003 Qulity systems Model for qulity ssurnce in nl inspection nd test. ISO Qulity mngement nd qulity system elements Prt 1: Guidelines. ISO Qulity mngement nd qulity system elements Prt 2: Guidelines for services. ISO Qulity mngement nd qulity system elements Prt 3: Guidelines for processed mterils. ISO Qulity mngement nd qulity system elements Prt 4: Guidelines for qulity improvement. The three most well known stndrds re ISO 9001, ISO 9002, nd ISO These re the stndrds to which rm cn be formlly registered by n independent uditor (clled registrr) s hving dopted, nd re usully wht is ment when someone refers to ISO The stndrds provide generic models which ny orgnistion in ny industry or country cn use to ssure the qulity of its production processes to externl prties. An orgnistion chooses which of the three stndrds to dopt on the bsis of wht it ctully does. For instnce, if compny designs s well s mkes products, s in the phrmceuticl industry, then the relevnt stndrd is ISO A rm tht does not design products, but insted produces good or service which involves post-production reltions with customers, such s trucking rm, will likely dopt ISO ISO 9003 is relevnt for rms tht mke products which only involves testing nd inspecting ctivities, such s n ssembler of commercilly stndrdised components. There re two other sets of stndrds in the ISO 9000 series. One set (ISO to ISO ) provides guidelines tht help orgnistions choose which model of qulity ssurnce (ISO 9001, ISO 9002, or ISO 9003) is most pproprite for their sitution. 4

5 The second set (ISO to ISO ) provides orgnistions with set of brod guidelines to help them develop nd implement qulity mngement systems. Tht dierent sectors of the economy cnnot be treted identiclly is the reson for these two sets of stndrds hving severl prts. Finlly, it must be noted tht there is no forml registrtion scheme for the ISO 9000 or ISO 9004 stndrds. The impliction of this discussion is tht when people re tlking bout ISO 9000 they re lmost lwys tlking bout one of ISO 9001 to ISO 9003 the qulity ssurnce stndrds which n orgnistion cn formlly dopt. For the rest of the rticle the mention of ISO 9000 refers to these stndrds unless specied otherwise. 1.1 The Need for Qulity Assurnce To understnd fully wht ISO 9000 does nd in wht situtions it will nd will not be useful, it will prove useful to review why sellers need to ssure the qulity of their goods to buyers. This is directly relted to the chrcteristics of the trnsctions between buyers nd sellers. There re two importnt spects of such trnsctions. First, most goods nd services hve mny ttributes nd rms within the sme industry produce goods with dierent bundles of them. 7 Second, sellers typiclly hve more informtion bout the chrcteristics of their goods thn the buyers. Tht is, n informtion symmetry exists between buyers nd sellers. This sitution increses the expected prots ccruing to sellers who choose to behve opportunisticlly nd misrepresent the qulity of wht they produce. As result, there is greter probbility tht buyers my get ripped o tht they my py more for good thn if they hd known the true qulity of wht they were buying. The presence of symmetric informtion between buyers nd sellers, which hs been widely studied in economics, is relted to the chrcteristics of good or service. 8 7 There re two types of chrcteristics. The rst re verticl spce chrcteristics in which the more of n ttribute good hs, the more vluble it is to business. Exmples would be the fuel eciency or freight cpcity of truck. Another exmple is durbility. Qulity in this cse is mesured by the time between the purchse of good nd its filure. Normlly business nds components with longer lifespns more vluble thn those with shorter lifespns. Exmples re computer hrd disks nd vehicle tires, both of which hve nite lifespns. The second re horizontl spce chrcteristics. In this cse there is rnge of possible vlues tht chrcteristic cn tke nd dierent rms prefer dierent vlues of the chrcteristic. For exmple, producers of yoghurt, soft cheeses, nd hrd cheeses require milk s n input but ech producer prefers dierent proportion of ft, protein, nd wter in n equivlent quntity of milk. See Tirole (1990, Chpter 2). 8 Nelson (1970) nd Tirole (1990, Chpter 2). 5

6 There re three dierent types of goods bsed on the observbility of their qulity: credence; experience; nd serch. The severity of the problems ssocited with the presence of symmetric informtion depends on the type of good to which we re referring. The qulity of credence goods or services, such s softwre progrms or the services supplied by consultnts, re never fully lerned. The qulity of experience goods or services re lerned only fter their use. Exmples re tools like hmmers or wrenches, or mintennce services. The qulity of serch good is perfectly observble even before purchse, but typiclly there is cost to obtining such informtion. This implies tht buyers re still subject to limited informtion since it is optiml for them to look t only subset of the possible goods in order to economise on serch costs. An item of clothing such s uniform is relevnt exmple. In prctice most goods nd services combine more thn one of these chrcteristics. Typiclly, one chrcteristic my dominte the others nd it dicttes the clssiction of the good in question. The problems resulting from the presence of informtion symmetries re most severe in the cse of credence goods nd lest severe for serch goods. The nture of credence goods ensures tht sellers tht ct opportunisticlly hve low probbility of being cught. This increses the incentive for sellers to ct opportunisticlly. In contrst, low serch costs ensure tht sellers hve high probbility of being cught nd therefore hve little incentive to ct opportunisticlly for fer of losing potentil customers. Two further fctors ect the presence of symmetric informtion. The more complex good, such s fork-lift compred to sy trolley, the greter the potentil for qulity vrition. For exmple, there re more prts tht cn vry in qulity in fork-lift thn trolley. There re lso more interctions mong the prts of forklift compred to trolley. This increses the number of wys tht the qulity of n individul prt cn ect the overll qulity of the fork-lift. Furthermore, fork-lift hs greter possible rnge of performnce chrcteristics compred to trolley. The cost of ssessing the qulity of good lso increses with its complexity. For instnce, ssessing softwre progrms cn be exceedingly costly for business s it requires lrge ccumultion of humn cpitl to understnd the technology being used. The presence of symmetric informtion is lso relted to the stbility of both n industry nd the good produced. A good which is undergoing rpid technologicl chnge, such s computer, or is subject to high turnover of rms, s in resturnt mels, increses the potentil for informtion symmetries. If the denition of good is chnging rpidly it is more costly for buyers to scertin its qulity since knowledge bout it is less redily vilble. This lso implies tht knowledge ccumulted bout wht 6

7 computer is nd does, nd hence wht is ment by low nd high qulity computer, quickly deprecites. There is lso less certinty bout wht constitutes high nd low qulity good becuse there is uncertinty surrounding the performnce chrcteristics of the good, especilly if it is t n erly stge of development. A rpid turnover of sellers lowers the incentive for buyers to invest in scertining reputtions of sellers, since benets of such n investment only ow over short period. One of the clssic exmples which illumintes the potentil problems cused by symmetric informtion between buyers nd sellers is the used cr mrket. Typiclly the price of new cr drops by lrge mount once the cr leves deler's lot, even though the only mjor chnge hs been tht the cr hs new owner. A simple but illuminting model hs been developed by George Akerlof to highlight why this phenomenon occurs. 9 Consider sitution in which there re four types of crs: new or old, nd good or bd. Buyers know which crs re new nd old, but they do not know which re good or bd. They do know the probbility tht new cr is good or bd. Sellers of old crs re ssumed to know their own qulity. Since buyers cnnot ex-nte distinguish between good nd bd old crs, old crs sell for the sme price. This mens tht only bd old crs re oered for sle. Owners of good old crs re better o using them thn oering them for sle, since they cnnot get their full vlue due to the verging process determining prices. In this cse, only low qulity goods re oered for sle, which implies tht the price of used crs will be lot lower thn the price of new crs, which is socilly inecient. This is n extreme exmple of dverse selection on the prt of the sellers. The bove exmple shows how the presence of symmetric informtion hs the potentil to severely disrupt trding in mrket. In such sitution buyers will rightly be wry of the possibility of buying goods whose qulity is misrepresented by opportunistic sellers who produce low qulity goods but ttempt to pss themselves o s high qulity producers. Buyers, rtionlly believing the worst, will expect ll goods oered to be of low qulity. Without ny other ction vilble to buyers or sellers, only low qulity goods tend to be produced nd sold in the mrket becuse high qulity producers cnnot distinguish themselves from the low qulity producers. As result, mrkets my function poorly or even cese to function. Even if symmetric informtion is present in trnsctions, it is still possible tht prices my optimlly co-ordinte quntities supplied nd demnded of good. Un 9 The clssic rticle which discusses this problem is Akerlof (1970). A very ccessible discussion of this mteril is Milgrom nd Roberts (1992, Chpter 5). 7

8 der certin conditions dierences in prices cn signl dierences in qulities. 10 For instnce, buyers my be ble to identify sellers of low qulity goods if buyers receive signls tht contin little bit of informtion bout the qulity of the sellers when trnscting with them. An exmple of such signl my be the knowledge demonstrted by slespeople bout the products they sell. It my be seen tht rms tht trin their sles st well re less likely to sell poor qulity goods. This type of informtion llows prices to signl qulities, with higher qulity goods being sold for higher prices thn lower qulity goods. This result depends crucilly on the informtiveness of the signls. If they re too noisy then we re bck to the Akerlof sitution. Situtions where it is likely tht prices will signl qulities involve products which re not undergoing much innovtion nd where the industries producing them re stble. Studying the circumstnces under which prices cn signl qulities highlights two things. First, it shows tht symmetric informtion issues re relly questions bout signl extrction. Cn buyer drw enough informtion out of given sitution to void being \tricked", even if they do not know everything? If yes, then the resulting prices will be ble to co-ordinte the ctions of buyers nd sellers. If no, then we need other mechnisms to overcome the eects of the informtion symmetry. Second, the bsic underlying chrcteristics of the trnsctions between buyers nd sellers re importnt in determining whether or not mrkets will function nd the form the resulting trnsctions will tke. If buyers cn interct directly with sellers nd obtin useful informtion bout them when trnscting then it is more likely tht prices cn signl the qulities of goods. As result, mrkets will function eciently without buyers or sellers being required to tke ny other ctions. An exmple tht demonstrtes tht buyers my not know the full qulity of wht they re buying concerns Southern Pcic Ril Corportion's hiring of IBM Corportion in 1995 to hndle its computing needs for the following decde. A mnger of the rilrod compny ws reported s sying tht expecttions were not being met nd the reltionship ws not successful. At one stge ril-cr switching hd to be done by hnd becuse of computer system filures, which led to the costly mistke of ril-crs not connecting. 11 In this cse Southern Pcic Ril misjudged the bility of IBM to mnge its specilised computing needs. The bove exmple ppers to hve involved buyer misjudging the qulity of wht they were buying, rther thn the seller cting opportunisticlly nd delibertely 10 Wolinsky (1983). 11 The Wll Street Journl, (1995), 18 My, sec. A, pp. 1 nd 9. 8

9 misrepresenting the qulity of wht they were selling. There re mny exmples, however, of sellers cting opportunisticlly. For instnce, in the erly 1990s there ws mjor problem with poorly mde fsteners in the United Sttes. Counterfeit bolts were found in M-60 tnks, ircrft crriers, nd nucler submrines in militry products, nd in freight vehicles, bridges, nucler power sttions, buildings, nd smll ircrft in civilin products. Severl deths, s well s mny ccidents nd much dmge, hve been ttributed to the substndrd bolts. Suppliers of the bolts used frudulent qulity certictes nd other misrepresenttions to sell them. 12 An exmple involving consumer goods occurred when Agriculture Cnd in 1994 discovered tht n importer hd been selling lower grde of olive oil thn tht displyed on the continer's lbel. 13 The importer received the higher price ssocited with the purported higher grde of olive oil but only incurred the lower costs of buying the ctul lower grde oil. Mny more historicl exmples re detiled in Hemenwy (1975). The presence of symmetric informtion cn cuse buyers to suer lrge unnticipted costs, s hppened with the cse of defective utomotive set-belts in North Americ. In 1995 over eight million vehicles in the United Sttes nd 900,000 vehicles in Cnd were reclled to x defective set-belts mde by Tkt Corportion of Jpn. Such move is very expensive in terms of ctully replcing the set-belts nd lso in dmge done to the reputtions of the compnies concerned. Even though supplier ws t fult consumers no doubt wondered bout the bility of the utomobile mnufcturers buying the set-belts to discriminte between suppliers of low nd high qulity inputs. 14 In theory it seems tht the presence of symmetric informtion bout product qulity between buyers nd sellers hs the potentil to disrupt trde, nd severely so in some cses. The bove exmples lso illustrte tht informtion symmetries do ctully occur nd tht sellers cn ttempt to prot from them. In such sitution buyers nd sellers my wnt to develop mechnisms to mitigte the ects of the informtion symmetries. Tht is, sellers my wnt to tke ctions to ssure buyers of the qulity of their products. It turns out tht such n ction my be to dopt qulity ssurnce stndrd such s ISO Qulity Progress, (1990), 23 (3), p. 13; nd Qulity Progress, (1990), 23 (7), p See the London Free Press, (1994), 27 April, sec. C, p The Wll Street Journl, (1995), 24 My, sec. A, p. 4; nd The Globe nd Mil, (1995), 24 My, sec. A, pp. 1 nd 7. At lest 90 injuries were trced to the defective set-belts. 9

10 1.2 Qulity Assurnce Stndrds nd ISO 9000 The function of qulity ssurnce stndrds such s ISO 9000 is to ssure buyers of the qulity of seller's product. Qulity ssurnce stndrds tke one of three routes to performing their bsic function: providing informtion bout production processes, specifying positive or negtive limits on permissible production processes, or specifying cceptble chrcteristics of products. First, they cn be used to produce informtion bout rm's production processes. Such stndrd typiclly contins list of common ctivities (or production processes) tht rms use to produce good or service. The stndrd is then used to check the extent to which the production techniques used by rm conforms to the listed ctivities. For instnce, n ctivity could be the testing of product for defects fter it hs been mnufctured. A stndrd my list likely techniques for product testing nd rm would be checked to see how its product testing ctivities conform to those listed in the stndrd. As n exmple consider the helth industry. The Cndin Council on Hospitl Accredittion in Cnd nd the Joint Commission on Accredittion of Helth Cre Fcilities in the United Sttes hve ech developed voluntry stndrds to which helth cre fcilities in the respective countries cn be ccredited. 15 Hospitls re checked on ctivities such s the keeping of ccurte nd complete ptient records nd tht the st hired re suitbly trined nd competent in their elds. If hospitl is found to stisfy ll of the required ctivities then it is ccredited. This ccredittion sttus gives buyers of hospitl services informtion bout the production processes used by the hospitls. The importnce of these qulity ssurnce stndrds is evident in the fct tht third-prty medicl pyers, such s Blue Cross in the United Sttes, re incresingly using the ccredittion sttus of hospitls in deciding pyment schedules. A qulity ssurnce stndrd my lso be used to plce restrictions on the set of technologies vilble to rms. A rm tht purchses inputs from mny suppliers my wnt to prohibit or require the use of specic technologies by suppliers. This hs the potentil of incresing the qulity of the rm's good by reducing exogenous or endogenous vrition in the inputs. For instnce, n uto mnufcturer my purchse steel from severl producers to llevite potentil hold-up problems or to increse price competition mong suppliers (these re exmples of contrcting hzrd problems). The mnufcturer would obviously like the steel to be of uniform qulity. One wy to ensure this is to hve the steel producers dhere to the sme production process. A specic exmple of this type of stndrd is the stndrd MoD-Std-0055 developed by 15 See Cndin Council on Hospitl Accredittion (1985), Grhm (1990), nd Roberts, Cole, nd Redmn (1987). 10

11 the United Kingdom Ministry of Defence. This stndrd prohibits the use of ssembly lnguges, s well s requiring sttic nlysis (forml proof tht the specictions of progrm re consistent with its requirements), by producers of sfety criticl softwre in n ttempt to reduce the vribility of some of the chrcteristics of the softwre purchsed. 16 Finlly, qulity ssurnce stndrds my specify minimum level of qulity tht good must meet. Typiclly, this is chieved through specifying types of chrcteristics tht good is required to hve, or by specifying minimum or mximum levels of certin chrcteristics tht good must meet. An exmple is the Americn Softwood Lumber stndrd PS developed by the Americn Lumber Stndrds Committee (ALSC). 17 Buyers of wood produced by mills tht re certied to the stndrd know tht the moisture content of the wood tht they buy does not exceed certin level (s lower levels of moisture re ssocited with higher levels of qulity). The rst type of qulity ssurnce stndrd tht ws mentioned cn, in principle, be very generl in nture. The production processes followed in mny industries hve common elements, such s purchsing inputs, designing products, or testing products. This mens tht specics bout technologies used, or bout the fetures of the goods produced, do not need to be prt of the stndrd. The second type of stndrd tends to be more specic. While generl fetures of production processes in mny industries my be similr, specic technologies re likely to be very dierent. Thus to plce restrictions on specic production technologies requires stndrd to be industry-specic in nture. Stndrds tht pertin to specic chrcteristics of specic goods re the lest generl of ll nd re invribly industry or rm specic. ISO 9000 is qulity ssurnce stndrd of the rst nd most generl type. It is designed to increse the informtion buyer hs bout the production processes used by seller. The ISO 9000 stndrds require tht n orgnistion write down wht it does nd then prove (by being udited) tht it does wht it sys it does. There is no \you shll do this" (other thn the required documenttion bout wht the orgnistion does) bout purchsing of mterils, employment of st, testing of the end-product, nd the mny other ctivities tht n orgnistion cn undertke. Nor re there requirements tht the goods or services produced by n orgnistion must meet 16 IEEE Softwre, (1989), 6 (15), p See Epley (1982, p. 17). 11

12 minimum qulity level. ISO 9000 is simply n informtion genertion device. 18 Since ISO 9000 is generic stndrd which cn in principle be used by rm in ny industry, by government orgnistions, by schools, nd by multitude of other orgnistions, it cnnot delve into detils tht pply to industry-specic technologies or products. As such it cnnot plce restrictions on specic technologies, nor cn it describe minimum qulity levels tht good must ttin. To do either of these things would men tht ISO 9000 is not generic in nture, or tht it is document equivlent in length to n encyclopedi. Neither is the cse. 19 As consequence it is possible, in principle t lest, for rm, sy, tht produces bots with holes in their bottoms to be registered to ISO 9000, s long s they sy tht they re doing this nd this is indeed wht they do. Of course the fct tht they do mke bots with holes in their bottoms would be included in the documenttion they would need to chieve ISO 9000, nd this would be vilble to potentil buyers. 1.3 Qulity, Eciency, nd ISO 9000 While the sole intention of the developers of ISO 9000 ws for it to be n informtion genertion device, some rms hve found tht dopting ISO 9000 hs led to benets of improved product qulity (where qulity is brodly dened) or lower production costs. These include things such s reductions in delivery times nd in defects. For instnce, Edgecomb Metls, United Sttes subsidiry of French steelmker Usinor Scilor, reported thirty percent reduction in customer clims nd ninety-ve percent improvement in delivery time fter dopting ISO Groupe Gro Plus, furniture mnufcturer in Quebec, Cnd, estimted tht mnufcturing defects fell from three to ve percent to 0.5 percent fter hving dopted ISO Squre D, United Sttes mnufcturer, experienced twenty percent increse in on-time delivery nd forty percent reduction in their product cycle time. 22 These sorts of benets cn occur if by dopting ISO 9000 rms lern more bout their production processes, nd s result improve them. 18 It is true tht ISO does provide guidelines for mnging qulity improvement in n orgnistion, but none of the other stndrds in the ISO 9000 series hve this in their title. And using ISO does not gurntee qulity improvement; it just gives guidelines bout how to mnge the processes used by n orgnistion improving the qulity of its products. 19 The originl 1987 version of ISO 9001, for exmple, ws in fct less thn twenty pges in length. 20 Avery (1994c). 21 Report on Business Mgzine, (1995), 11 (7), p Avery (1994). Other exmples cn be found in Avery (1994b), Pech (1992, Chpter 11), nd Clrk nd Strkwether (1993). 12

13 While evidence exists tht the doption of ISO 9000 leds to rm-specic benets not intended by its developers, it is hrdly unequivocl. For strt while some rms do report experiencing such benets, mny do not. For instnce, survey of 620 rms in the United Sttes tht dopted ISO 9000 found tht only 97 (or 15.6 percent) of them listed lower production costs s the most importnt internl (tht is ignoring the eects on customers or mrkets) benet of its doption. 23 Higher product qulity ws not even mentioned by the rms. In nother survey, this time of mngers of 40 rms from Colordo, lower production costs nd higher product qulity were not mentioned t ll s primry benets from dopting ISO The min benets reported were the cretion of forml system, better documenttion, nd better understnding of the production processes used by the rms. Similr results were found in survey of 290 Belgin compnies tht dopted ISO As result, ny ssertion bout sizeble, or even positive, rm-specic benets from dopting ISO 9000 is uncertin nd only prtilly supported by the vilble evidence. At best, strong supporters of ISO 9000 on these grounds should moderte their expecttions of benets, while strong skeptics might revise their expected beliefs upwrd, but the bounds of uncertinty bout product-specic benets re still lrge. There re lso other fctors tht we hve to llow for in weighing up the evidence. It is likely tht the doption of ISO 9000 is only one chnge tht is ecting the rms in question. Mny other chnges my be ecting them s well. This suggests tht the rms my be flsely ssigning positive (or negtive) benets from the doption of ISO 9000 when they my be due to the other chnges ecting them. Furthermore, the reported benets re bsed on surveys or necdotl exmples which suggests tht we hve to be creful in interpreting their ndings. First, using such sources of dt only highlights the fct tht the reported results from dopting ISO 9000 my be contminted with the ects of other events becuse of lck of systemtic sttisticl nlysis of the eects of dopting ISO Second, the results reported my simply reect mngers trying to rtionlise the doption of ISO 9000 fter the fct, or in the cse of necdotl exmples, tht the mngers re trying to promote their rm with fvourble reports bout wht they do. Wht these points suggest is tht without creful empiricl work (sttisticl nlysis of rm level dt, or the presence of control rms for survey or cse study dt) tht the vilble dt my severely mismesure the benets ssocited with dopting ISO CEEM Informtion Services (1993, p. 2). 24 This survey consisted of 40 rms in Colordo tht dopted ISO The respondents could choose more thn one option s n nswer nd the questions were open ended. See Weston (1995). 25 Vloeberghs nd Bellens (1996). 13

14 Finlly, mny of the surveyed rms tht dopt ISO 9000 indicted tht they believed tht the primry benet of dopting ISO 9000 would be n increse in product qulity, but in fct most of the sme rms do not give this s benet fter hving ctully dopted it. This lso seems to imply tht dopting ISO 9000 hs little impct on product qulity. The recent ctions of ocils from the Europen Community seems to support this interprettion. Initilly, the ocils dvocted tht Europen rms should dopt ISO 9000 en msse s wy of improving the qulity of wht rms produce, nd hence the interntionl competitiveness of Europen rms. 26 The position of the Europen Community regrding ISO 9000 s qulity improvement tool now ppers to hve chnged with the relistion tht ISO 9000 is qulity ssurnce stndrd nd not product qulity stndrd. Underlying this chnge in perception ws the lck of evidence of n increse in the qulity of products mde by rms in the Europen Union tht hd dopted ISO In conclusion, while there exists evidence tht dopting ISO 9000 cn ect qulity nd eciency, the evidence to dte ppers to support the critics of ISO The bsic function of ISO 9000 is to generte informtion, not to ect product qulity or production technologies directly. In ddition, it is fr too generl stndrd for its doption to be used s wy of incresing qulity or lowering production costs even if tht hd been the intention of its developers. It is possible tht side-benet from dopting ISO 9000 is tht rms my gin extr informtion bout how they mke their products, which my help them to increse qulity or eciency. But, nd with doubts bout the ccurcy of the vilble dt, the evidence to dte suggests tht mny more rms tht dopt ISO 9000 do not experience increses in product qulity or lower production costs thn do. Furthermore, even if dopting ISO 9000 did led to such ects, this type of benet would occur whether or not rm formlly dopts ISO The creful detiling of the production processes tht occur within rm is not dependent on the rm dopting stndrd. Thus rm could rep such benets without incurring the (non-trivil) costs of formlly dopting ISO Finlly, since ISO 9000 does not pper to ect product qulity then the criticism tht ISO 9000 is mistkenly seen s \silver bullet" tht will result in continul im 26 See Zuckermn (1996) nd Qulity Progress, (1997), 30 (1), pp The notion underlying the policy tht ntions s whole compete ginst one nother is incorrect. Trde between countries is bsed on comprtive dvntge s ws explined by Dvid Riccrdo in the nineteenth century. Note tht this does not men tht individul rms from dierent countries do not compete ginst one nother they obviously do simply tht ntions s whole do not compete ginst one nother. This is subtle, importnt, nd frequently overlooked, distinction. Pul Krugmn hs been vocl critic of the notion tht countries compete ginst one nother for mny yers. See, for instnce, Krugmn (1996, Introduction nd Chpter 1). 14

15 provements in the qulity of goods produced by rms tht dopt it seems well-founded. But, while such misperceptions bout the true function of ISO 9000 seem to exist, it is unlikely tht they will hve permnent eect on retrding innovtion in product qulity s rgued by the critics. Lerning is obviously going on bout the true function of ISO 9000 s seen with chnges to government policies. Such lerning is evident in the move by the Europen Community to de-emphsise the use of ISO 9000 s qulity improvement strtegy. More importntly, there is evidence tht buyers seem to relise the true function of ISO 9000 which mens sellers re likely to lern from their mistkes. 27 A rm tht does not improve the qulity of its products while its competitors do, is likely to lose business nd eventully fil nncilly. 1.4 Signlling nd Screening The core function of ISO 9000 is to generte informtion, however, there is debte bout the mount nd usefulness of the informtion tht dopting ISO 9000 ctully produces. Such concerns centre on the bility of ISO 9000 to ssure the qulity of sellers' goods to buyers. As hs been rgued, the potentil for dverse selection bsed on n informtion symmetry between buyers nd sellers suggests tht ISO 9000 my be useful tool for buyers, even if its doption does not directly ect the qulity of product or the eciency of production processes. This possibility occurs becuse ISO 9000 my be used by buyers to screen low from high qulity sellers, or sellers my use ISO 9000 to signl their qulity. Either wy, buyers cn identify sellers by their qulity, which llows mrkets to work more eciently. It is importnt to relise tht the denition of eciency in this cse includes the presence nd eects of the informtion symmetry. This is importnt since without considering the presence of symmetric informtion, the use of tools like ISO 9000 by individuls seems wsteful from socil point of view. Whether or not ISO 9000 cts s screening device or signlling mechnism depends crucilly on the informtion produced by its doption. There re two possibilities: when the informtion produced by ISO 9000 is strongly correlted with the qulity of the dopter's product, nd when the correltion is wek. Consider wht hppens when the correltion is suciently strong. High qulity rms tht dopt ISO 9000 incur the doption costs nd the informtion generted will show them to be high qulity rms. They will, therefore, receive prices commensurte with producing high 27 See Guerin nd Rice (1996) nd Qulity Progress, (1997), 30 (1), pp

16 qulity goods. Low qulity rms tht dopt ISO 9000 incur the doption costs nd will be shown to be low qulity rms. They will, therefore receive prices commensurte with producing low qulity goods. But the low qulity rms would hve received the lower prices in ny event, given the wy mrkets work with symmetric informtion, so it mkes no sense for them to dopt ISO Thus only high qulity rms dopt ISO This conclusion holds even if the informtion produced by ISO 9000 is not perfectly correlted with the qulity of the dopter's product. All tht mtters is tht the correltion is suciently strong. In this cse ISO 9000 works s screening device, similr in nture to inspections of products. 28 Consider wht hppens now if the correltion is wek nd, in ddition, tht the qulity of the good produced by the rm is only lernt fter it hs been bought nd used. In ddition, ssume tht buyers hve n ongoing demnd for the good. If the rm produces high qulity good then it is likely to be willing to undertke expenditures to induce buyers to mke initil purchses. Once the buyers hve bought nd used the good they will nd tht it is of high qulity nd will mke repet purchses. Adopting ISO 9000 my, for instnce, be wy of inducing buyers to mke such n initil purchse. On the other hnd, if the rm produces low qulity good nd undertkes equivlent expenditures dierent result rises. Buyers mke the initil purchses, discover tht the rm produces low qulity goods, nd do not mke ny repet purchses. But the low qulity rm could hve chieved similr sort of result without incurring the costs of tking the ction, nd so it does not py the low qulity rm to undertke the costly expenditures. It is possible tht dopting ISO 9000 will increse the number of initil purchses of the low qulity rm's good, even if the buyers do not mke repet purchses, if the popultion of buyers chnges over time. As long s the benet of the extr initil purchses is less thn the costs of dopting ISO 9000 then low qulity rms will not dopt ISO 9000 nd it cn still be used by rms to signl their qulity. As result, high qulity rms my undertke costly ctions such s dopting ISO 9000 to signl their level of qulity, even though the ction they tke is not directly relted to the qulity of their product. In this cse ISO 9000 cts s signlling device, similr in nture to some forms of dvertising or wrrnties. 29 The previous discussion highlights three immedite issues which need ddressing: whether or not ISO 900 cn be used to distinguish sellers by qulity, conditionl on positive nswer to the rst issue, how it does so, nd nlly, its eectiveness t doing 28 The economics of testing mechnisms is discussed by Heinkel (1981). 29 See Grossmn (1981) nd Horstmnn nd McDonld (1995). 16

17 so. The second issue concerns the strength of the correltion of informtion produced from dopting ISO 9000 with product qulity. The evidence to dte suggests tht t lest some buyers use ISO 9000 to help distinguish sellers by qulity nd comes in two forms. The rst piece of evidence hs to do with the substitution of ISO 9000 for nother type of qulity ssurnce mechnism rm-specic udits. These re udits by specic buyers of specic sellers nd involve buyers gthering informtion bout the specic technologies used by rms, s well s bout their generl production processes. The buyers use the udits s screening mechnism to reduce the probbility of their buying from low qulity rm. If ISO 9000 produces useful informtion bout the qulity type of rm, nd it is lower cost mechnism, then its doption should result in fewer rm-specic udits (note tht it my not eliminte such udits if there is not complete overlp between the informtion produced by the two types of mechnisms). It turns out tht some rms tht hve dopted ISO 9000 hve experienced reduction in such udits. 30 For exmple, Westvco's Chemicl Division experienced decline in the number of customer udits, from twelve to two per yer, fter dopting ISO AMP hs lso experienced decline in the number of udits by its customers. Generl Electric Plstics, Du Pont, nd Phillips 66 hve ll reduced the number of udits they perform on their suppliers who hve dopted ISO The previous piece of evidence suggested tht ISO 9000 is reltively less expensive thn one other type of mechnism nd therefore ws used insted of it, t lest in some instnces. It my be the cse though tht insted of being substituted for other mechnisms tht ISO 9000 llows more trnsctions to occur in totl becuse of lower costs of ssuring qulity for certin clsses of trnsctions. In the business press this is referred to s n \opening up" of sles opportunities tht hd previously been closed to rms becuse the costs of ssuring the qulity of their products to potentil buyers were prohibitively lrge. Two possibilities come to mind. First, one reson for such n opening up of sles opportunities hs to do with the possibility tht the cost of producing informtion increses with the distnce of the buyer from the seller nd tht this cost is higher for mechnisms other thn ISO In this sitution rm dopting ISO 9000 my not experience reduction in rm-specic udits if it is geogrphiclly close to its seller. The rm-specic udit my be the better option becuse it produces more informtion t little extr cost. On the other hnd, if the buyer nd seller re fr prt geogrphiclly, sy they re in dierent countries, then dopting ISO 9000 my signicntly reduce the cost of cquiring informtion bout the seller if it is used s 30 See Avery (1994). Additionl exmples re presented in Pech (1992, Chpter 11). 17

18 screening device, or s credible (tht is, informtive) signl of the seller's qulity. 31 In this sitution insted of being udited less, rm my experience the sme number of udits, or even n increse in the number of udits, but be ble to sell to more customers, prticulrly foreign customers, thn it did previously. This would led to incresed trde, nd fcilittion of trde between countries ws one of the min resons ISO 9000 ws developed in the rst plce. The second clss of trnsctions for which ISO 9000 my result in comprtively lower qulity ssurnce costs is not bsed on the loction of the sellers reltive to the buyers but is insted bsed on the size or ge of the sellers. It is possible tht smll or young rms my nd the benet of dopting ISO 9000 reltively higher thn lrge or old rms. This my occur, for instnce, if the reputtions of rms re relted to their sizes, or in prticulr, to their ges. Consider dvertising tht is used to signl the qulity of rms. If lrger rms hve existed for mny yers then this fct my itself be used s signl tht lrger rms produce goods of t lest resonble qulity. 32 Thus, buyers my nd dvertising bout product qulity done by lrger rm more credible, tht is, it is more informtive, thn tht done by smller rm. In ddition, much more informtion is probbly known bout rm tht hs been trding for mny yers thn one which ws recently formed, or bout rm tht is lrge rther thn smll. Thus, buyers will hve lot of condence in using the (informtive) reputtions of lrge or old rms to mke purchsing decisions reltive to the (uninformtive) reputtions of smll or young rms. 33 The fct tht ISO 9000 is forml universl stndrd my give more 31 The ltter possibility implies tht rms my use screening devices such s rm-specic udits to ssess the qulity of locl suppliers nd signlling devices (in this instnce ISO 9000), or even combintion of signlling nd screening devices, to ssess the qulity of distnt suppliers. The importnt fctor is how the cost of the dierent types of devices vries with distnce. 32 Dunne, Roberts, nd Smuelson (1988) nd Troske (1996) report tht rm ge nd size pper to be positively correlted. Theories on the evolution of industries such s Jovnovic (1982) predict tht rms lern bout their eciency nd those tht re ecient grow, while those tht re not ecient decline nd exit the relevnt industries. This would suggest tht on verge older rms should be lrger thn younger rms. Ericson nd Pkes (1995) look t situtions where rms cn tke ctions to improve their eciency. Although ll rms eventully exit in their model, it is possible tht older rms re lso lrger thn younger rms on verge. The ndings of Dunne nd Hughes (1994), Evns (1987), nd Troske (1996) re consistent with these theories. 33 Mrtinelli (1997) shows how such phenomenon my rise in credit mrkets due to the presence of morl hzrd nd dverse selection. He rgues tht little is likely known bout young rms nd tht s consequence they fce higher interest rtes nd borrowing constrints thn older rms (which constrins their size) to induce them to repy their lons. Older rms on the other hnd hve well developed credit history nd thus restrictions on their borrowing re relxed, which llows them to grow in size, in ddition to their fcing lower interest rtes compred to the young rms. As result, the old rms hve no incentive to defult on their lons becuse they would lose the benet of their fvourble reputtions. These rguments re consistent with empiricl results tht show tht smll rms fce higher interest rtes thn old rms nd lso experience credit constrints not fced by old rms. See, for instnce, Berger nd Udell (1995). 18

19 credibility to the dvertisements of the smller rms thn would hve been the cse if they hd not dopted ISO As result, the benets to using signlling devices such s dvertising my increse for smller rms if they re used in combintion with ISO The vilble suggests tht n opening up of sles opportunities from dopting ISO 9000 hs indeed occurred. For exmple, over sixty-nine percent of dopters of ISO 9000 gve their min reson for dopting it s the bility to bid for tenders from which they were otherwise excluded. 34 In ddition, over thirty-three percent of rms in 1993 survey reported tht their most importnt externl benet ws higher perceived qulity. 35 Other surveys contin results tht lso seem to support increses in trding opportunities from dopting ISO Unfortuntely, none of this evidence looks t the geogrphic chrcteristics of the tenders which were opened up or t the dierent results experienced by rms of dierent sizes. Thus, the evidence hints t the possibility, but does not conrm, tht ISO 9000 my be performing these roles but it is not of sucient detil with which to conrm or reject the importnce of these possibilities. It is worth emphsising tht the evidence presented is lso likely to understte the impct of ISO 9000, since it is conceivble tht the informtion generted by ISO 9000 relting to product qulity my not be reected in the number of rm-specic udits conducted. It is possible tht doption of ISO 9000 does not reduce the number of rm-specic udits, nd it my even increse them if the informtion from them is complementry, but it decreses the costs ssocited with using other mechnisms such s product inspections or dvertising. There ppers to be no informtion concerning this type of eect. The evidence presented does suggest tht ISO 9000 cn be useful in llowing buyers to distinguish between high nd low qulity sellers, t lest in some cses. The next issue is whether ISO 9000 cts s signlling or screening device. This, s hs been rgued, depends upon the strength of the correltion between the informtion produced nd product qulity. It is likely tht the strength of this correltion uctutes mrkedly between products nd industries given the dierent types of goods tht re produced nd the dierences in the complexity of the processes used to produce them. For instnce, knowing the bsic production processes used to produce reltively simple good like pencil my tell buyer lot bout the qulity of the good. On the other hnd 34 De Crlo (1993). 35 CEEM Informtion Services (1992, p. 2). 36 See Vloeberghs nd Bellens (1996) nd Weston (1995). 19

20 informtion produced by ISO 9000 bout reltively complex good such s medicl imging equipment my tell buyer very little bout the qulity of the good. As such, in the situtions in which ISO 9000 is eective we would expect industries which produce simple goods to use it s screening device nd industries tht produce complex goods to use it s signlling device. 37 Tht the correltion my dier between industries nd products seems to be supported by the recent relese by the ISO of publiction in which they show the correct nd incorrect wys of dvertising ISO The ISO emphticlly emphsise tht \ISO 9000 is not product qulity lbel: ::" nd tht \\Certied to ISO 9000" is often ssumed to men tht the product of the compny is of topmost qulity. Little eort is mde to correct this mistken belief." 38 Tht the ISO hs tken this ction indictes tht the informtion produced by dopting ISO 9000 is not lwys perfectly correlted with the qulity of the products of the dopters, nd in some cses tht the correltion my be low. As hs been rgued the nture of the good in question inuences how nd if ISO 9000 will be used to ssure qulity. We would lso expect the use of ISO 9000 to depend on the nture of the trnsctions being undertken. In prticulr, the frequency of the trnsctions will inuence whether ISO 9000 is used s signlling or screening device s hs been discussed previously. For instnce, ISO 9000 could be used s signlling device for goods which buyers purchse repetedly. But, if buyers mke once-o purchses or infrequent purchses of some types of goods then ISO 9000 is more likely to be used s screening device. Some of the vilble evidence points to ISO 9000 being used s signlling device. For instnce, one of the min benets scribed to the doption of ISO 9000 is its use s mrketing tool. In such cse ISO 9000 is eectively used s form of dvertising, nd of form which likely benets smller rms reltive to lrger rms. Other evidence, however, rises the possibility tht ISO 9000 my lso be used s screening device, t lest in some circumstnces. One possible piece of evidence is the requirement by some buyers, such s Generl Electric, tht rms selling to them hve to hve dopted ISO If the suppliers re selling credence goods, or experience goods for which it tkes long period of time to discover their qulity, then this policy of Generl Electric would only mke sense if it ws using ISO 9000 to screen sellers by their qulity. The nture of the goods mens tht it would be very dicult for the buyer to 37 It seems likely tht we cn chrcterise simple goods s serch goods or experience goods whose qulity buyers lern quickly, nd complex goods s credence goods or experience goods whose qulity buyers lern very slowly. 38 Interntionl Orgniztion for Stndrdiztion (1997) nd Dodd (1996, p. 23). 39 Murkmi (1994). 20