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IJOPM 26,10

The effects of ISO 9001 on rms productive efciency

Dimitris Tzelepis, Kostas Tsekouras, Dimitris Skuras and Efthalia Dimara
Department of Economics, University of Patras, Patras, Greece
Abstract
Purpose This work sets out to explore the effects of ISO 9001 on productive efciency of rms. Design/methodology/approach A sample of 1,572 rms from three Greek manufacturing industries is used for empirical work. The rms are from the food and beverages industries, the machineries industries as well as from the electrical and electronics appliances manufacturing industries and include both adopters and non-adopters of ISO 9001. A stochastic frontier methodological approach is adopted and the effects of ISO 9001 can be modeled in four ways: as a managerial input alongside the conventional inputs of capital and labor, as a factor affecting technical inefciency, as an input and a factor affecting technical inefciency and as having no effect at all. Findings ISO 9001 operates as a factor affecting technical inefciency with non-neutral effects on capital and labor. The combined effect of ISO 9001 with capital increases the level of technical inefciency reecting adjustment costs incurred when ISO 9001 is adopted. The combined effect of ISO 9001 with labor decreases the level of technical inefciency reecting the positive result of ISO 9001 on reducing x-inefciency. Research limitations/implications The analysis isolates the effects of ISO 9001 on capital and labor but specic case studies are necessary in order to reveal managerial best practices that confront negative and support positive effects of ISO 9001 adoption within rms. Originality/value The paper illustrates that ISO 9001 is a managerial factor reducing productive inefciency. Keywords ISO 9000 series, Technology led strategy, Costs, Greece Paper type Research paper

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International Journal of Operations & Production Management Vol. 26 No. 10, 2006 pp. 1146-1165 q Emerald Group Publishing Limited 0144-3577 DOI 10.1108/01443570610691111

Introduction A quality system consists of a set of xed business procedures and rules aiming to ensure that a product, process or service meets a pre-determined and widely acknowledged set of standards (Vloeberghs and Bellens, 1996). Quality assurance, an industrial process designed to manage and update the quality system, is able to continuously guarantee and demonstrate that the system conforms to the agreed set of specic conditions and standards (Rothery, 1992). The ISO 9000 series or, more formally, quality management and quality assurance standards, outlines the requirements to be met by a producer, illustrating the producers competence to design, produce and deliver products or services with a consistent and coherent level of quality. In 2000, a wide range of modications were introduced to the ISO 9000 series producing the ISO 9001:2000 series which replaced ISO 9001, 9002 and 9003 that were introduced in 1994. Although ISO 9001:2000 is regarded as a cosmetic change to the older 1994 series, some profound changes are evident. ISO 9001:2000 is structured in
The authors are grateful to two referees and the editors of this journal for their very useful comments on an earlier draft of this work.

ve sections instead of the old 20-part structure. The new standard is oriented towards the achievement of higher levels of customer satisfaction. Product realization, i.e. the interconnected processes that are used to bring products into being, is central to the ISO 9001:2000 approach. ISO 9001:2000 is made up of at least 21 processes glued together by means of input-output relationships. These input-output relationships make up a single large process, the quality management system. Finally, the new ISO 9001:2000 series allows for greater exibility because a producer may ignore or exclude some requirements, if certain conditions are met. The importance of employing quality assurance schemes has been widely documented, not without criticism and controversy, in the academic management and economics literature. Supply and demand drivers may be behind the decision to adopt a quality assurance scheme and are extensively documented in the relevant literature (Tsekouras et al., 2002). Basically, the decision to adopt a quality assurance scheme may be the outcome of a complex push and pull process of simultaneously acting forces applied by external parties such as the nal consumers, the intermediate consumers (other rms down the supply chain) or by internal agents, mainly a rms own management. Research on the effects of adopting an ISO quality assurance scheme spans over a wide range of business performance indicators and frequently the results are contradictory (Tsekouras et al., 2002; Dimara et al., 2004). The early contributors (Deming, 1986; Juran, 1982; Inshikawa, 1986) viewed quality management as a holistic management strategy aiming to improve internal processes of companies and enhance the overall competitive performance (Yahya and Goh, 2001). Evidence shows that ISO 9000 registration can be leveraged into a competitive advantage when it is made consistent with a rms strategic direction (Curkovic and Pagell, 1999) and is related to expectations about its contribution to improved quality and especially to those factors perceived by the management of the rm as important to competitive success and competitive advantage (Escanciano et al., 2001; Withers and Ebrahimpour, 2000). For example, Forker et al. (1996) examined a sample of strategic business units and individual rms in the furniture industry and found that high quality leads to improved business performance. According to more moderate expectations regarding the effects of an ISO quality assurance scheme, it as a factor reducing internal inefciencies as well as a factor contributing towards the reduction of development times for new products, of start-up problems and of costs in general (Gotzamani and Tsiotras, 2002; Santos and Escanciano, 2002). For example, Reincheld and Sasser (1990), argue that the adoption of an ISO quality assurance scheme reduces the costs of scrap, rework or jammed machinery. Furthermore, certain studies argue that the ISO 9000 has the potential to reduce transaction costs by serving as the sellers guarantee of quality (Holleran et al., 1999). In a world survey with data collected from 977 business rms located in the major industrialized regions of the world, Adam et al. (1997) found that although the quality improvement approach successfully inuenced quality, the impact on nancial performance was somewhat weak. On the other hand, a growing number of researchers argue that the ISO 9000 series, being a paper-driven process of limited value, does not really have an impact on rm performance and that ISO 9000 certication is just another marketing cue (Curkovic and Pagell, 1999; Uzumeri, 1997; Terziovski et al., 1997; Curkovic and Handeld, 1996). Elsewhere empirical support for such a view is provided (Lima et al., 2000; Stashevsky and Elizur, 2000; Adams, 1999; Terziovski et al., 1997). Casadesus and Karapetrovic (2005) employ a longitudinal impact study and argue that ISO 9000 standards are

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IJOPM 26,10

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limited in providing a set of concrete benets over time. The authors argue that their nding may be partly explained by the large increase in ISO 9000 registrations worldwide which reduces the ability to claim competitive advantage from ISO registration. To summarize, the literature identies that the adoption of a quality assurance scheme by a rm may have three major types of impacts on the rms efciency. The rst type of impacts is generated when ISO 9001 is regarded as a completely new managerial type of input that totally alters the operation and efciency of a rm. The second type of impacts is generated when ISO 9001 is regarded as an integrated quality assurance process that simply reduces inefciencies without altering the whole operation of a rm. The third type of impacts refers to the absence of any positive impact or to the presence of negative impacts on a rms efciency. This type of impact is generated when ISO 9001 is regarded as a paper-driven process of limited value that does not really affect the efciency of a rm although, in some cases, may increase inefciencies. In this paper, we extend current research and examine the effects that adopting an ISO 9001 quality assurance scheme may have on productive efciency of rms, an issue that, to the best of our knowledge, has not been addressed in the relevant literature up to the present. The methodology employed in this paper allows us to disentangle the three major types of possible impacts from the adoption of an ISO 9001 quality assurance scheme on a rms efciency. As such, we are able to test three alternative hypotheses. Firstly, that the adoption of an ISO 9001 quality assurance scheme is a new managerial input that expands a rms conventional bundle of inputs. Secondly, that the adoption of an ISO 9001 is a process that reduces inefciency. Thirdly, that the adoption of an ISO 9001 has no impacts on the rms efciency. Alternative econometric models are constructed and are empirically tested on a large sample of rms in three industries of the Greek manufacturing sector. Methodology Productive efciency: baseline concepts A production frontier represents the maximum output attainable for each input level. Firms operate either on the frontier (resulting in technical efciency) or below the frontier (resulting in technical inefciency). Figure 1 shows the notions of the

Figure 1. Production frontier and technical efciency

production frontier and technical efciency. The production frontier is dened by the F x production function and depicts the process under which inputs are converted to output or, in other words, the production technology that permits the input x to produce output Q. The rm operating at point A which lies on the production frontier is a technically efcient rm, while the rm operating at point B is a technically inefcient one. The efciency score (EFF) for the technically efcient rms is equal to one (1), while the corresponding score for the technically inefcient rm is Q A =Q B , 1: Production frontiers may be either deterministic or stochastic. In the case of a deterministic frontier, the maximum output attainable for a given input level is a scalar, while in the case of a stochastic frontier the maximum potential output consists of a distribution of outcomes or, in other words, is a random variable. In each of these output levels a probability of occurrence is attributed and this probability is a priori unknown since it depends on the state of the economic environment. The interested reader may nd a useful introduction to stochastic frontier analysis in Kumbhakar and Lovell (2000). The dominant approaches in the parametric efciency measurement are the error component model (ECM) of Battese and Coelli (1992) and the technical efciency effects model (TEEM) dened in Huang and Liu (1994) and Battese and Coelli (1995). In the following paragraphs, the theoretical underpinnings of these two models as well as an extension of the TEEM introduced by Battese and Broca (1997) are briey presented. The latter allows the estimation of non-neutral technical efciency effects. Let us consider the stochastic frontier production function model: Qi x0i a 1i 1

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where Qi is the output of the i-th rm i 1; 2; . . . ; N ; xi is a k 1 vector of values of known functions of production inputs and a is a k 1 vector of unknown parameters to be estimated. The error term is specied as: 1i vi 2 ui 2

The vi terms represent statistical noise, i.e. effects that cannot be controlled by the available observable variables, such as measurement errors, omitted variables, etc. and are assumed to be independently and identically distributed. The ui terms are non-negative random variables which represent technical efciency. Technical efciency reects the entrepreneurial ability to combine resources, i.e. to produce maximum output given the bundle of available inputs and the technological characteristics of the rm. Thus, technical efciency accounts for those factors that can be controlled by the rm, and can be dened as the discrepancy between the actual output of the rm and its potential output as it is determined by the frontier. When ui 0; a rms production lies on the stochastic frontier and the rm is fully technically efcient; when ui . 0; a rms production lies below the frontier and the rm is technically inefcient. Given that the actual production level is x0i a vi 2 ui ; while the efcient level is x0i a vi ; the technical efciency score for the i-th rm is given by Battese and Coelli (1992): EFFi exp2ui 3

IJOPM 26,10

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where the ui terms are assumed to be i.i.d as truncations at zero of the N mu ; s2 u distribution. Battese and Coelli (1992) show that the best predictor of exp (2 ui) is obtained by using the conditional expectation of exp (2 ui) given 1i, as E exp2ui =1i : The imposition of one or more restrictions upon this model can provide a number of special cases. Setting mu 0 reduces the distribution of the technical inefciency term (ui) to the traditional half-normal model. The approach employed in the TEEM for efciency measurement is based on the extension of the ECM and assumes that the efciency term ui is described by the following linear relationship, the so-called inefciency model: ui d0 z0i d wi 4

where Zi is an 1 M vector of values of known functions of factors affecting EFF levels, and (d0, d) is a 1 M 1 vector of parameters to be estimated. In other words the Zi vector reects factors that, depending on their sign, reduce or increase managerial inefciency and as a result a rm locates closer or further to the frontier. The wi is an i.i.d. random variable, dened as a truncation of the normal distribution with mean zero and variance s2 w ; and as a result, at the point of truncation holds that wi $ 2d0 2 z0i d: Combining equations (2) and (4), the efciency level of the i-th rm in the case of the TEEM is dened as: 5 EFFi exp2ui exp 2 d0 z0i d wi The stochastic frontier presented in equation (1) and the inefciency model presented in equation (4) are jointly estimated by maximum likelihood algorithms. It is worthwhile noting that we utilise the parameterization of Battese and Corra (1977), 2 2 2 2 who replace s2 v and su with s sv su and so:

s2 u : 2 s2 v su

The parameter g lies between 0 and 1. A value of g 0 indicates that the deviation from the frontier is due entirely to noise, while a value of g 1 indicates that all deviations are due to technical inefciency. This specication allows us to test the null hypothesis that there are no technical inefciency effects in the model H 0 : g 0 versus the alternative hypothesis H 1 : g . 0: A similar hypothesis holds for the ECM model. The joint log-likelihood function of the stochastic frontier and inefciency 2 model, which is expressed in terms of the variance parameters s 2 s2 v su and 2 2 g su =s and of the vector a; d0 ; d; along with the respective partial derivatives, are presented in Battese and Coelli (1995). Regarding the nature of technical efciency scores (EFF), the general stochastic frontier model encompasses the following three sub-cases: In the rst one, when g d0 d1 . . . dM 0; there is no technical inefciency (deterministic or stochastic), and the model collapses to the traditional average production function. In the second one, when only g 0; technical efciency is deterministic and, the explanatory variables in equation (4) must be included in equation (1) along with inputs and other relevant variables. In the third one, when all d parameters, apart from the intercept term, are zero, the z variables do not affect the EFF levels and the model reduces to the kind of production function described in Stevenson (1980).

Hypotheses about the nature of technical inefciencies can be tested using the generalized likelihood ratio statistic, l, given by

Effects of ISO 9001

l 22ln LH 0 2 ln LH 1

where LH 0 and LH 1 denote the values of the likelihood function under the null and the alternative hypothesis, respectively. It should be noted that because g lies on the boundary of the parameter space, l has an asymptotic distribution which is a mixture 2 of chi-squared distributions 0:5x2 k21 0:5xk where k is the appropriate number of degrees of freedom which is equal to the number of restrictions involved in the null hypothesis. Theoretical values for a mixture of chi-squared distributions are provided in Kodde and Palm (1986). If we consider that the best approximation of the production frontier is achieved by a translog function, the baseline model of the production frontier without inefciency factors (IFs), i.e. the ECM, described in equations (1) and (2) may be written as: ln Q a0 X ai ln xi 1 X X aij ln xi ln xj v 2 u Model A 2 iK ;L jK ;L 7

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iK ;L

In the same way, the TEEM described by equation (4) may be written as: X 1 X X ai ln xi aij ln xi ln xj v 2 u ln Q a0 2 iK ;L jK ;L iK ;L u d0
10 X j1

Model C

d j zj w

In their extension of the aforementioned models, Battese and Broca (1997) introduced non-neutral specications of the stochastic frontier which nest the TEEM (Battese and Coelli, 1995) which, in turn, nests the error components model (ECM) (Battese and Coelli, 1992). More specically the inefciency term, u, may be approximated by: X 1 X X ai ln xi aij ln xi ln xj v 2 u ln Q a0 2 iK ;L jK ;L iK ;L u i d0
7 X j1

dj zji

7 X 3 X j1 k1

gkj zji xki wi

which is called the non-neutral TEEM. The specic model explicitly adopts the assumption that the inefciency effects are functions of all the input variables. All interactions between a specic technical inefciency effect and all inputs show the factor of production that is affected the most by the specic IF and the direction (negative or positive) in which this factor of production is affected. ISO 9001 as an input of production If we consider ISO 9001 to be a managerial input of production, in the sense that the adoption of the ISO 9001 requirements enhances the bundle of inputs such as capital

IJOPM 26,10

and labor with a new managerial input, the above described baseline models in equations (7), (8) and (9) are encompassing this new factor in their production function. The ECM becomes: ln Q a0 X 1 X X ai ln xi aij ln xi ln xj aISO xISO u 2 v Model B 10 2 iK ;L jK ;L iK ;L

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where xISO is a dummy variable which takes the value of 1 if the rm has adopted an ISO 9001 quality assurance scheme. Correspondingly, the TEEM with ISO 9001 as an input of production becomes: X 1 X X ai ln xi aij ln xi ln xj aISO xISO u 2 v ln Q a0 2 iK ;L jK ;L iK ;L v d0
10 X j1

Model D 11

d j zj w

and the non-neutral variant of the above model becomes: X 1 X X ai ln xi aij ln xi ln xj aISO xISO u 2 v ln Q a0 2 iK ;L jK ;L iK ;L v d0
10 X j2

d j zj

8 X j1

Model G 12

dISO;j xISO zj w

ISO 9001 as a factor affecting inefciency If ISO 9001 is not considered to be an input of production but is considered simply as a process that may assist rms to reduce production inefciencies or, as its opponents argue, a factor that aggravates inefciencies by adding more paperwork, then the TEEM becomes: X 1 X X ai ln xi aij ln xi ln xj u 2 v ln Q a0 2 iK ;L jK ;L iK ;L v d0 dISO zISO
10 X j1

Model E

13

d j zj w

and the non-neutral variant of the same model becomes: X 1 X X aij ln xi ln xj u 2 v 2 iK ;L jK ;L

ln Q a0

ai ln xi

iK ;L

v d0 dISO zISO

10 X j2

d j zj

Model F

14

dISO;j xj zISO w

jK ;L

ISO 9001 as an input of production and a factor affecting inefciency If the adoption of ISO 9001 process acts as both a new input of production and a factor affecting production inefciency the TEEM becomes: ln Q a0 X 1 X X ai ln xi aij ln xi ln xj aISO xISO u 2 v 2 iK ;L jK ;L iK ;L v d0 dISO xISO and its non-neutral variant becomes: ln Q a0 X ai ln xi
10 X j2 10 X j2

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Model H 15

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d j zj w

iK ;L

1 X X aij ln xi ln xj aISO xISO u 2 v 2 iK ;L jK ;L

8 X j1

v d0 dISO zISO

d j zj

dISO;j xISO zj

X dISO;j zISO xj w

Model I 16

jK ;L

Hypotheses To make our reasoning concerning hypotheses testing easier for the reader to follow, we have devised Figure 2. This gure contains four vertical ow charts. Each ow chart follows one of the three hypotheses about the nature of the effects of ISO 9001 on efciency of rms plus the hypothesis of no effects. Within each one of the four vertical ow charts, all the possible model formulations are explored.

Figure 2. Model selection decision process

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More specically, if ISO 9001 is considered to be an input (denoted as NI in Figure 2), the rst vertical ow chart on the far left of Figure 2 shows that this may be approximated under an ECM specication (model B) or under a TEEM specication. The latter may be modeled with neutral (model D) or non-neutral (model G) effects of the inefciency terms. Accordingly, if ISO 9001 is considered as a simple IF (Figure 2), the second from the left vertical ow chart of Figure 2 shows that this may be approximated only by a TEEM specication with neutral (model E) or non-neutral (model F) effects of the inefciency terms. If ISO 9001 acts both as an input (NI) and an IF, the third from the left vertical ow chart of Figure 2 shows that this may be approximated only by a TEEM specication with neutral (model H) or non-neutral (model I) effects of the inefciency terms. Finally, if ISO 9001 has nothing to do with efciency of rms and is, therefore, considered neither as an input nor as an inefciency term of the production process, the ECM specication (model A) and the TEEM specication (model C) without non-neutral effects are estimated. All the above models are nested and their differences are in the number of restrictions employed in their estimation. Thus, hypotheses about the nature of technical inefciencies can be tested using the generalized likelihood ratio statistic, l, given in equation (6). However, the possible combinations of the large number of models estimated in this work, complicates the testing of hypotheses. For this reason, we identied the best four models, one for each of the four vertical ow charts shown in Figure 2. In other words, we nd the best model under each one of the four major assumptions concerning the effects of ISO 9001 on productive efciency of rms. Then we compare these four models with each other in order to nd the model that best describes the effects of ISO 9001 on productive efciency of rms and also shows the exact nature of the effects exercised by ISO 9001 on productive efciency of rms. Data Data for this work came from the business database maintained by the private nancial and business information service company which in Greece is called ICAP. The annual ICAP directories provide key elements from the published balance sheets of almost all Plc. and Ltd rms operating in all sectors of economic activity in Greece. From the annual directories of ICAP we devised a database of rms operating in three industries of the manufacturing sector, representing a low-tech industry (the food and drinks industry), a medium-tech industry (the machineries industry) and a high-tech industry (the electrical and electronics industry) and for 1998-2000, the latest available period of published data. Firms in these three industries have adopted the ISO 9001 procedures from as early as 1989 and, as a result, the effects of adopting ISO 9001 have had a considerable time (through 2000) to materialize. As was discussed in the introduction of this work, it is very difcult to deduce a set of stylized facts concerning the effects of ISO 9001 adoption on rm efciency. This difculty should be attributed rstly, to the contradicting evidence provided by international literature and secondly, to the lack of an appropriate number of case studies focusing on the effects of ISO 9001 on specic manufacturing industries. The food industry, however, is the only single manufacturing sector for which evidence from international literature reveals an overall positive effect of ISOs adoption on rm efciency (Efstratiadis et al., 2000; Grigg and McAlinden, 2001).

A wide range of economic and nancial variables was recorded for all rms for the period 1998 to 2000. In order to avoid the well-recorded uctuations of nancial data due to business cycles, the mean of each nancial and economic variable for the period 1998 to 2000 was constructed. However, one should take into account that avoidance of nancial data uctuation is gained at the expense of information lost by collapsing the panel structure of our data set to a cross-section structure. In principle, it would be possible to construct a panel data set for a ten-year period. This would have considerable econometric advantages and shortcomings. The estimation of technical efciency change is the major advantage of the panel stochastic frontier estimation. As a result, we would be able to estimate the effects of ISO 9001 adoption on technical efciency change. The major shortcoming of a panel data structure would be the many zero values for the variable indicating ISO adoption and for the rms that would have not adopted ISO 9001 in the starting years of the panel period. Table I provides denitions for all variables used in the estimation of the various models either as inputs or IFs. Table II provides descriptive statistics for all inputs, and Table III provides descriptive statistics for all variables used as IFs. The database consists of 1,572 rms of which 1,093 are active in the food industry, 279 in the electrical and electronics industry and 200 in the machineries industry. Table II shows that the rates of ISO 9001 adoption in the present sample of rms range from 26.9 percent in the electrical and electronics industry to 14.8 percent in the food industry. Surveys examining the rates of ISO 9000 adoption in Greece report very similar penetration rates for the sectors under consideration (Lagodimos et al., 2005). As expected, ISO 9001 adopters are larger rms in terms of turnover, invested capital and labor (Tsekouras et al., 2002). The correlation coefcient matrix of the IFs does not reveal any signicant correlations among them. Results All the models shown in Figure 2 were estimated using maximum likelihood techniques (Battese and Coelli, 1992, 1995). We looked for the best model under each one of the four assumptions made as far as the operation of ISO 9001 is concerned. The models found
Variable name Output Inputs IFs Q xK xL xISO zISO LOC EXP DBOA CAP FIX DBTA PRMG ROA FDD MCD Denition Total value of shipments in Euros Total value of assets in Euros Number of employees Dummy variable, 1 indicates ISO 9001certication, 0 otherwise Dummy variable, 1 indicates ISO 9001certication, 0 otherwise Dummy variable, 1 indicates rms location in Athens, 0 otherwise Dummy variable, 1 if rm exports, 0 otherwise The ratio of total DBTAs The ratio of xed assets to the number of employees The ratio of xed to total assets The ratio of total debt to equity The ratio of net prots to total sales The ratio of net prots to total assets Dummy variable, 1 if active in the food industry, 0 otherwise Dummy variable, 1 if active in the machines industry, 0 otherwise

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Table I. Denition of variables

IJOPM 26,10
Q

Food and beverages Adopters Non-adopters Mean 42,406,411 (SD) (200,323,929) K Mean 34,618,971 (SD) (143,604,578) L Mean 198 (SD) (313) ISO Number of cases 162 Percent within sector 14.8 4,459,948 (13,982,044) 4,503,711 (10,030,018) 41 (86) 931 85.2

All

Machineries Adopters Non-adopters 4,808,743 (6,607,796) 5,999,507 (8,248,881) 61 (78) 35 17.5 1,505,825 (1,993,750) 1,836,107 (2,831,921) 22 (27) 165 82.5 All sectors Non-adopters 3,677,899 (11,973,965) 3,791,624 (8,679,482) 35.9922 74.79364 1,300 82.7

All 2,083,836 (3,509,823) 2,564,702 (4,555,221) 28 (43) 200

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10,084,218 (79,151,786) 8,967,272 (56,927,527) 64 (154) 1,093

Electrical and electronics Adopters Non-adopters All Q Mean 7,633,024 (SD) (11,503,916) K Mean 10,165,544 (SD) (19,862,611) L Mean 83.8933 (SD) 100.75632 ISO Number of cases 75 Percent within sector 26.9 1,865,667 (2,946,761) 2,123,526 (2,543,221) 25.6340 26.65486 204 73.1

Adopters

All 7,882,882 (66,151,873) 7,321,745 (47,784,346) 556 (133) 1,572

3,416,032 27,980,226 (6,937,533) (155,533,993) 4,285,359 24,193,647 (11,067,869) (111,937,760) 41 148.6541 (62) 255.28467 279 272 17.3

Table II. Descriptive statistics of production frontier variables

are shown in the four vertical ow charts of Figure 2. In other words we searched for the best models under the assumptions that ISO 9001 behaves rstly, as an additional input, secondly, as a factor affecting inefciency, thirdly, as both a factor of production and a factor affecting inefciency and, nally, as a factor that does not affect the production frontier in any way. Table IV shows the results of the nested tests shown in equation (6) that reveal the best model under each one of the four assumptions. The tests revealed that in the case where ISO 9001 is considered as an input of production, the most preferable specication is model (D), i.e. the TEEM; in the case where ISO9001 is considered a factor affecting managerial inefciency, the most preferable specication is model (F), i.e. the TEEM; in the case where ISO 9001 is considered as both an input and a factor affecting managerial inefciency, the most preferable specication is model (I), i.e. the non-neutral TEEM and nally, in the baseline case where ISO does not affect the frontier in any way, the most preferable specication is model (C), i.e. the TEEM. Estimated coefcients for these four models are presented in Table V. The estimated coefcients of the four stochastic frontiers are quite similar, but this does not hold true for the estimated coefcients of the four inefciency models. All estimated production frontiers satisfy the usual theoretical conditions, i.e. they are non-decreasing with respect to inputs and are locally concave, or, in other words, the matrix of second derivatives of the production frontier with respect to inputs is negative semi-denite.

Food and beverages Adopters Non-adopters LOC 0 102 (63.0) 1 60 (37.0) EXP 0 25 (15.4 1 137 (84.6) DBOA Mean 0.55 (SD) 0.21 CAP Mean 86,940.79 (SD) 240,787.48 FIX Mean 0.43 (SD) 0.19 DBTA Mean 1.19 (SD) 6.71 PRMG Mean 0.04 (SD) 0.10 ROA Mean 0.05 (SD) 0.08 FDD 0 0 (0) 1 162 (100) MCD 0 162 (100) 1 0 (0) (66.5) (33.5) (43.9) (56.1) 0.59 0.36 64,387.48 107,257.61 0.41 0.24 2.64 11.72 0.00 6.71 0.02 0.10 0 (0) 931 (100) 931 (100) 0 (0) 619 312 409 522

All 721 372 434 659

Adopters 10 (28.6) 25 (71.4) 2 (5.7) 33 (94.3) 0.52 0.15 647,609.81 931,175.28 0.34 0.18 1.60 1.59 0.10 0.12 0.10 0.11 35 (100) 0 (0) 0 (0) 35 (100)

Machineries Non-adopters (45.5) (54.5) (37.0) (63.0) 0.58 0.24 258,811.42 494,056.45 0.29 0.21 2.34 3.61 0.00 0.59 0.07 0.18 165 (100) 0 (0) 0 (0) 165 (100) All sectors Non-adopters (61.2) (38.8) (42.3) (57.7) 0.59 0.33 85,782.71 210,950.23 0.39 0.24 2.59 10.17 0.00 5.69 0.03 0.12 369 (28.4) 931 (71.6) 237 (87.1) 165 (12.7) 796 504 550 750 75 90 61 104

All (42.5) (57.5) (31.5) (68.5) 0.57 0.22 326,851.14 609,295.20 0.30 0.20 2.21 3.35 0.02 0.54 0.08 0.17 200 (100) 0 (0) 0 (0) 200 (100) 85 115 63 137

Effects of ISO 9001

(66.0) (34.0) (39.7) (60.3) 0.58 0.34 67,730.24 135,683.20 0.42 0.23 2.42 11.13 0.00 6.20 0.03 0.10 0 (0) 1,093 (100) 1093 (100) 0 (0)

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Electrical and electronics Adopters Non-adopters All LOC 0 25 (33.3) 1 50 (66.7) EXP 0 10 (13.3) 1 65 (86.7) DBOA Mean 0.51 (SD) 0.18 CAP Mean 53,825.97 (SD) 50,787.60 FIX Mean 0.43 (SD) 0.18 DBTA Mean 1.50 (SD) 1.30 PRMG Mean 0.05 (SD) 0.13 ROA Mean 0.06 (SD) 0.09 FDD 0 75 (100) 1 0 (0) MCD 0 75 (100) 1 0 (0) (50.0) (50.0) (39.2) (60.8) 0.58 0.23 43,474.98 81,376.86 0.39 0.24 2.57 4.75 0.01 0.26 0.05 0.09 204 (100) 0 (0) 204 (100) 0 (0) 102 102 80 124 127 152 90 189

Adopters

All (59.4) (40.6) (37.3) (62.7) 0.58 0.31 96,886.27 261,882.04 0.40 0.23 2.37 9.52 0.00 5.17 0.04 0.11 479 (30.5) 1,093 (69.5) 1,372 (87.3) 200 (12.7) 933 639 587 985

(45.5) 137 (50.4) (54.5) 135 (49.6) (32.3) 37 (13.6) (67.7) 235 (86.4) 0.56 0.54 0.22 0.20 46,257.51 149,954.78 74,453.77 425,266.75 0.40 0.42 0.23 0.19 2.28 1.33 4.14 5.25 0.02 0.05 0.23 0.11 0.05 0.06 0.09 0.09 279 (100) 110 (40.4) 0 (0) 162 (59.6) 279 (100) 1,135 (87.3) 0 (0) 35 (12.9)

Note: Figures in parentheses are percentages

Table III. Descriptive statistics of IFs

Nested model tests among these four models revealed that model F is the most preferable one (Table IV horizontal decisions). In this model (F), all the estimated coefcients of the production frontier are statistically signicant, and their signs are as expected (Table V). In the inefciency model associated with model (F), nine out of the fourteen estimated coefcients are statistically different from zero. Firstly, we will

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H0 hypothesis

ISO as an input The ECM is a valid assumption d1 . . . d10 0 The neutral TEEM is a valid assumption dISO;1 . . . dISO;8 0 ISO as an IF The neutral TEEM is a valid assumption dISO;K dISO;L 0 ISO as both an input and an IF The neutral TEEM is a valid assumption dISO;1 . . . dISO;8 dISO;K dISO;L 0 ISO as neither an input nor an IF The ECM is a valid assumption d1 . . . d10 0 The neutral TEEM is a valid assumption dK ;1 . . . dK ;8 dL;1 . . . dL;8 0 The ECM is a valid assumption d1 . . . d10 0 Horizontal decisions dISO dISO;1 . . . dISO;8 dISO;K dISO;L 0 aISO dISO dISO;1 . . . dISO;8 dISO;K dISO;L 0 aISO dISO;1 . . . dISO;8 0 (B) (D) (E) (H) (A) (C) (A) (D) (C) (F) (I) (I) (I) (C) (H) 2 1,344.059 (C) (I) 2 1,319.269 2 1,306.542 (F) 2 1,331.942 2 1,308.002 47.880 25.454 (G) 2 1,344.028 2 1,344.668 2 1.280 (D) 2 1,517.658 2 1,344.028 347.260 10 8 2 10 10 1334.703 18.712 16 10 2 1,344.028 2 1,306.542 2 1,344.059 2 1,306.542 2 1,308.002 2 1,306.542 74.972 75.034 2.920 11 11 9 2 1,516.616 2 1,344.059 345.114 2 1,516.616 2 1,344.059 345.114

Table IV. Model selection decisions Vertical decisions Restricted Unrestricted model model L (H0) L (H1)

No. of restrictions X 2 0:05

Decision with Preferable respect to H0 model

18.307 Not accepted 15.507 Not rejected 5.991 Not accepted 18.307 Not accepted 18.307 Not accepted 26.296 Not rejected 18.307 Not accepted 19.675 Not accepted 19.675 Not accepted 16.919 Not rejected

(D) (D) (F) (I) (I) (C) (I) (I) (I) (F)

Model C Variable Constant ln K ln L (ln K)2 (ln L)2 (ln K) (ln L) xISO Constant zISO LOC EXP DBOA CAP FIX DBTA PRMG ROA 2 2.716 (2 5.358) 2 0.110 (2 1.000) 0.233 (2.142) 2 2.400 (2 20.797) 0.000 * (3.524) 4.296 (10.939) 2 0.003 (2 0.331) 2 0.033 (2 6.427) 2 5.810 (10.664) 2 2.834 (2 5.294) 2 0.099 (2 0.818) 0.250 (2.017) 2 2.407 (2 24.023) 0.000 * (3.526) 4.375 (10.385) 2 0.003 (2 0.426) 2 0.032 (2 6.462) 2 5.930 (2 9.537) 2 2.544 (2 5.671) 2 2.112 (2 7.333) 0.014 (0.0142) 0.354 (3.662) 2 2.402 (2 23.088) 0.000 * (3.421) 4.126 (10.396) 2 0.010 (2 1.387) 2 0.031 (2 6.107) 2 5.344 (2 11.088) 0.801 (22.925) 0.912 (21.511) 0.130 (3.203) 0.092 (7.268) 0.083 (5.231) 2 0.126 (2 5.406) 0.802 (21.137) 0.912 (21.496) 0.132 (3.231) 0.092 (7.190) 0.083 (5.227) 2 0.125 (2 5.341) 2 0.003 (2 0.083) 0.748 (21.228) 0.907 (22.216) 0.126 (3.262) 0.085 (7.606) 0.082 (5.415) 2 0.127 (2 5.549) 2 0.003 (2 0.091)

Model F 0.742 (18.995) 0.909 (21.547) 0.088 (2.455) 0.094 (7.517) 0.079 (5.071) 2 0.132 (2 5.536) 2 2.200 (2 5.611) 2 2.110 (2 4.131) 0.035 (0.304) 0.340 (3.313) 2 2.382 (2 23.689) 0.000 * (2.663) 4.089 (12.589) 0.000 * (2 0.076) 2 0.031 (2 6.092) 2 5.422 (2 12.107) (continued )

Coef-cient

Coefcient estimates and t-values for: Model D Model I Production frontier

a0 aK aL aKK aLL aKL aISO Inefciency model d0 dISO d1 d2 d3 d4 d5 d6 d7 d8

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Table V. Maximum likelihood estimates for models C, D, I and F

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Coef-cient FDD MCD xISOLOC xISOEXP xISODBOA xISOCAP xISOFIX xISODBTA xISOPRMG xISOROA zISOK zISOL 2 0.434 (2 3.338) 0.170 (0.830) 2 1,344.059 1.661 (10.142) 0.903 (84.488) 685.023 1,572 682.751 1,572 2 0.447 (2 3.305) 0.120 (0.473) 2 1,344.028 1.690 (11.089) 0.905 (87.753)

d9 d10 dISO;1 dISO;2 dISO;3 dISO;4 dISO;5 dISO;6 dISO;7 dISO;8 dISO;K dISO;L LogL s2 g LR test of the one-sided error N

Note: *Actually smaller than 0.001

Table V. Model C Variable Coefcient estimates and t-values for: Model D Model I Production frontier 2 0.677 (2 4.201) 2 0.113 (2 0.447) 2 0.032 (0.766) 0.095 (1.762) 0.004 (0.552) 0.000 * (1.032) 1.433 (2.887) 2 0.012 (2 0.212) 0.012 (0.118) 2 2.012 (1.113) 1.3844 (8.072) 2 2.212 (2 9.003) 2 1,306.542 1.718 (12.042) 0.907 (81.008) 712.562 1,572 Model F 2 0.675 (2 4.135) 0.192 (0.779) 2 1.450 (9.377) 2 2.024 (2 8.909) 2 1,308.002 1.536 (11.633) 0.892 (79.298) 735.136 1,572

IJOPM 26,10

discuss briey the effects of non-ISO-related IFs, and then we will provide a brief exposition of the ISO-related factor. Three variables capturing nancial characteristics of a rm, namely the ratio of debt to total assets (DBTA), the prot margins (PRMG), and the returns on assets (ROA) affect the inefciency level. The inuence of DBTA on the technical inefciency of rms is negative. The negative effect means that rms which use nancial resources, increasing in this way the ratio of the DBTA, undertake hard or soft investment projects that improve the level of the rms technical efciency. The positive inuence of PRMG on technical efciency scores may be attributed to the existence of some form of market power that the rms possess and exert through innovation activities which, in turn, improve the rms technical efciency. The ROA variable exercises the same effects on technical inefciency as the PRMG variable. On the other hand, technical efciency of rms is negatively affected by exporting activities (EXP), capital intensity (CAP) and the ratio of xed to total assets (FIX). It has been shown, especially for Greek manufacturing rms (Tsekouras and Skuras, 2005), that rms which exhibit intensive exporting activities may be either highly efcient or inefcient. In the present case study, inefcient rms attempt to reduce inefciency by acquiring knowledge from foreign markets. The interpretation of the negative inuence of the capital to labor ratio (CAP) and of the xed to total assets ratio (FIX) on technical efciency rms may be explained by the xed- or quasi-xed inuence of the inputs on exibility of a rm to adjust its input mix in exogenous changes. In other words, this effect captures the cost of adjustment, in terms of loss of production, which the quasi-xed inputs, such as the capital input, may impose on a rms efciency level when exogenous changes take place (Coelli et al., 2002). The adoption of ISO 9001 affects inefciency autonomously (through the dISO coefcient) and in combination with capital dISO;K and labor dISO;L separately. The highly signicant and negative sign of the dISO coefcient implies an autonomous reduction of managerial inefciency due to ISO 9001 adoption. In the same model, the positive and statistically signicant dISO;K coefcient implies that the effect of ISO 9001 adoption combined with capital increases managerial inefciency. Thus, the larger the size of the rm in terms of capital, the larger the managerial inefciency when ISO 9001 is adopted. This negative result may be due to the costs imposed by the ISO 9001 norms and the concern with capital asset maintenance. In other words, the adoption of ISO 9001 demands that specic maintenance and repairing works take place more frequently than before the introduction of ISO 9001. More frequent capital maintenance increases the cost in terms of output loss and, in a sense, is directly analogous to adjustment costs when new processes are introduced in rms with large invested capital (Callan, 1987). In contrast to the positive signicant coefcient dISO;K ; the negative and statistically signicant coefcient dISO;L implies that the combined effect of ISO 9001 adoption in relation to labor reduces managerial inefciency. Thus, the larger the size of the rm in terms of labor, the higher the reduction in terms of managerial inefciency that is achieved when ISO 9001 is adopted. Leibenstein (1966) coined the term x-inefciency for the situation in which more labor time is being used in a given production process than is actually necessary. One of the greatest challenges for both employers and managers is to reduce x-inefciency by making operations more efcient. Here, we provide a clear indication of the adoption of ISO 9001 working towards reducing

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x-inefciency by having signicant non-neutral effects on labor, i.e. effects as a factor reducing managerial inefciency when combined with labor of a rm. Conclusions and managerial policy implications In the present work we attempted to look into the exact effects of ISO 9001 adoption in a production frontier framework. The adoption of ISO 9001 as a form of managerial organization can have either three distinct effects or no effect on the production process. Firstly, the adoption of ISO 9001 may affect the production process as a managerial input to the production process just like capital and labor. Secondly, the adoption of ISO 9001 may affect the production process as a factor reducing managerial inefciency. Thirdly, the adoption of ISO 9001 may affect the production process as a managerial input to the production process and, at the same time, as a factor reducing managerial inefciency. When the adoption of ISO 9001 operates as a factor reducing inefciency, our methodology allows ISO 9001 to exercise non-neutral effects on the factors of production. Our research results provide a clear rejection of the arguments put forth by ISOs opponents. All models with ISO, i.e. ISO as a factor of production or as a factor affecting inefciency, are statistically superior to the models without ISO, leading us to accept that the ISO/on position models the production process better than the ISO/off position. Furthermore, we nd that ISO is really a factor affecting managerial inefciency and not a completely new managerial factor of production. Moreover, the overall ISOs effects on managerial inefciency are negative indicating that the adoption of ISO reduces managerial inefciency. Speaking in terms of a production frontier graph, the effects of ISO 9001 as a factor affecting inefciency may be captured by the re-position of a single rm closer to the frontier, if ISO reduces inefciency, or, away from the frontier if ISO is a paper-driven process increasing inefciency. Going deeper into the exact effects of ISOs adoption on managerial inefciency we nd that ISO exerts differential effects on capital and labor. In rms depending largely on capital assets, ISOs adoption increases managerial inefciency, a nding indicating that the adoption of the ISO process increases adjustment costs. In rms depending more on labour, ISOs adoption reduces managerial inefciency, a nding indicating, in the most denitive way to date, that the adoption of ISO is a form of managerial organization reducing x-inefciencies. The work of Molina et al. (2004) stressed the importance of ISO 9000 effects on knowledge transferability and knowledge transfers. A recent study by Naveh et al. (2004) revealed that learning is a more important factor than timing in explaining ISO 9000 performance. High levels of rm performance are due to learning from own experience or from the experience of others (Naveh et al., 2004). Thus, knowledge transfer and learning may be one very important factor reducing x-inefciency and a very important path of future research. If the adoption of ISO 9001 is considered as a new input, then the implications of ISO adoption are equivalent to the implications caused by reengineering a rms operation. Reengineering a rms operation would imply a different use of input mix, and the subsequent improvement of the rms production performance. Speaking in terms of a production frontier graph, the adoption of ISO 9001 as a new production input, would cause the parallel outward movement of the frontier in the case ISOs adoption had neutral effects (neutral technical change) and the non-parallel outward movement in the case ISOs adoption had non-neutral effects (biased technical change).

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In other words, total technical change may be decomposed in two parts from which one owns to the adoption of ISO as a new production input. Future research in the framework of the present work may examine two issues. Firstly, there is evidence that the adoption of ISO does not really operate as a factor of production, i.e. a managerial input, because the processes of ISO are not a coherent and integrated TQM form of organization. Secondly, future research should be directed into mapping the exact effects of ISOs adoption as a factor increasing adjustment costs and reducing x-inefciencies. In this respect we think that detailed case study analysis will provide best practice examples of rms and management which have successfully confronted adjustment costs and have maximized the positive effects on x-inefciency.
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