Chapter 4: Business-Level Strategy 133
Total Quality Management Systems
Total quality management (TQM) is a managerial process that emphasizes an organi-
zation’s commitment to the customer and to continuous improvement of all processes
through problem-solving approaches based on empowerment of employees.^111 Firms
develop and use TQM systems to
- increase customer satisfaction,
- cut costs, and
- reduce the amount of time required to introduce innovative products to the marketplace.^112
Firms able to simultaneously reduce costs while enhancing their ability to develop
innovative products increase their flexibility, an outcome that is particularly helpful to
firms implementing the integrated cost leadership/differentiation strategy. Exceeding
customers’ expectations regarding quality is a differentiating feature and eliminating
process inefficiencies to cut costs allows the firm to offer that quality to customers at
a relatively low price. Thus, an effective TQM system helps the firm develop the flex-
ibility needed to identify opportunities to simultaneously increase differentiation and
reduce costs. Research has found that TQM systems facilitate cost leadership strategies
more effectively than they do differentiating strategies when the strategy is implemented
alone.^113 However, it facilitates the potential synergy between the two strategies when they
are integrated into one. TQM systems are available to all competitors so they may help
firms maintain competitive parity, but alone they rarely lead to a competitive advantage.^114
Competitive Risks of the Integrated Cost
Leadership/Differentiation Strategy
The potential to earn above-average returns by successfully using the integrated cost
leadership/differentiation strategy is appealing. However, it is a risky strategy because
firms find it difficult to perform primary value-chain activities and support functions in
ways that allow them to produce relatively inexpensive products with levels of differen-
tiation that create value for the target customer. Moreover, to properly use this strategy
across time, firms must be able to simultaneously reduce costs incurred to produce prod-
ucts (as required by the cost leadership strategy) while increasing product differentiation
(as required by the differentiation strategy).
Firms that fail to perform the value-chain activities and support functions in an opti-
mum manner become “stuck in the middle.”^115 Being stuck in the middle means that the
firm’s cost structure is not low enough to allow it to attractively price its products and
that its products are not sufficiently differentiated to create value for the target customer.
This appears to be the problem experienced by JCPenney, at least as perceived by the cus-
tomers. Its prices were not low enough and the differentiation not great enough to attract
the customers needed. In fact, its declining sales suggest that it lost many of its current
customers without attracting others to offset the loss. These firms will not earn above-
average returns and will earn average returns only when the structure of the industry in
which it competes is highly favorable.^116 Thus, companies implementing the integrated
cost leadership/differentiation strategy must be able to produce (or offer) products that
provide the target customer some differentiated features at a relatively low cost/price.
Firms can also become stuck in the middle when they fail to successfully implement
either the cost leadership or the differentiation strategy. In other words, industry-wide
competitors too can become stuck in the middle. Trying to use the integrated strategy is
costly in that firms must pursue both low costs and differentiation.
Firms may need to form alliances with other companies to achieve differentiation, yet
alliance partners may extract prices for the use of their resources that make it difficult
Total quality management
(TQM) is a managerial
process that emphasizes an
organization’s commitment
to the customer and to
continuous improvement
of all processes through
problem-solving approaches
based on empowerment of
employees.