Foster v14 i4 9/20/07 10:10 AM Page 7
Does Six Sigma
Improve Performance?
S. THOMAS FOSTER JR.
BRIGHAM YOUNG UNIVERSITY
This article presents the long-term financial and oper-
ational results coming from the implementation of Six
Sigma. The results from Six Sigma programs were
somewhat mixed. The author found a significant effect
on free cash flow (FCF), earnings before interest,
taxes, depreciation, and amortization (EBITDA), and
asset turnover. Six Sigma did not seem to affect sales
return on assets, return on investment, or firm
growth. As a result, if firms want to improve cash,
earnings, or productivity in using assets, Six Sigma
might be of use. In 1998, companies with high cash
flows and no quality management program (QMP)
had lower FCF in 2002 than companies that had
adopted Six Sigma. Companies with low cash flow and
no QMP did better than companies using Six Sigma,
suggesting that for cash-poor firms, Six Sigma may be
a drain on resources. Also, these companies may not
have the cash necessary to sustain effective Six Sigma
results over four years. Among companies with low
and medium asset turnover, Six Sigma led to higher
asset turnover. It could be that companies with low
asset turnover could benefit more from process
improvement implicit in Six Sigma than firms with
high asset turnover.
Key words: financial and operational outcomes, quality
management, Six Sigma
© 2007, ASQ
INTRODUCTION
In recent years, many firms have adopted Six Sigma in
an effort to improve quality and reduce costs (Pyzdek
2003). Six Sigma has been attractive to business exec-
utives, as it is thought to overcome some of the pitfalls
of historical quality management implementations
(Linderman et al. 2003). Quality management pro-
grams have been criticized for relying on improvement
without mechanisms for ensuring that positive results
will ensue (Howard, Foster, and Shannon 2005). That
is, if employees are trained and empowered in quality
improvement approaches, quality improvements and
benefits will “percolate to the top,” thereby improving
company performance.
On the other hand, the Six Sigma approach
requires more direction and leadership from top
management than traditional quality management.
This is termed “leadership for Six Sigma” (Foster
2007; Treichler et al. 2002). Along with this higher
degree of leadership is a more structured process for
improving performance. One approach to Six Sigma
is the five-phase define, measure, analyze, improve,
and control (DMAIC) process. Included with DMAIC
is a method for leaders to prioritize potential
improvement projects based on the probability that
such projects will result in financial benefit to the
organization.
Similarly, another defining aspect of Six Sigma is
its greater emphasis on cost reduction through quality
improvement. This aspect includes a target of at least
$200,000 in cost reduction for each Six Sigma project
taken on with two to three projects per Black Belt over
a one- to two-year period (Bisgaard and DeMast
2006). Such returns are the results expected from the
high cost of investing in Black Belt employees.
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Does Six Sigma Improve Performance?
The convergence of these dimensions of leadership,
structured process for improvement, and focus on
financial results present in Six Sigma was designed to
address the perceived weaknesses of traditional quality
management. It is expected that this increased focus
on financial outcomes should result in improvements
in financial and operational results. The purpose of
this research is to determine if this is indeed the case.
LITERATURE REVIEW AND
HYPOTHESIS DEVELOPMENT
Several studies have examined the impact of quality
practices on financial and operational results
(Kaynak 2003). Most of these studies compare the
results of firms that adopt quality practices versus
control groups to determine if quality practices signif-
icantly influence financial and operational results.
The purpose of this literature review is threefold. The
author defines Six Sigma. Then he identifies similar
studies that have examined the financial and opera-
tional impacts of different quality improvement
approaches such as total quality management (TQM).
Finally, he uses this review to provide a basis for
selecting variables to be studied in this research.
Six Sigma
The author’s literature review revealed only one article
relating to Six Sigma in an A-level journal (Linderman
et al. 2003). Linderman et al. studied Six Sigma from
a goal-theoretic perspective. They examined the rela-
tionship between goals and Six Sigma success and
developed a series of propositions suggesting that high,
yet attainable, goals were important to the success of
Six Sigma programs. They also examined the inter-
vening effects of effort, persistence, and direction
resulting from explicit Six Sigma goals. Given the wide
adoption of Six Sigma in many organizations around
the world, there is a need for more research elucidat-
ing the benefits and costs of Six Sigma implementa-
tion. Currently, no studies investigate the relationship
between Six Sigma implementation and financial and
operational results.
8 QMJ VOL. 14, NO. 4/© 2007, ASQ
The most common process for Six Sigma is DMAIC.
This is similar to the plan, do, check, act (PDCA) cycle
proposed by Walter Shewhart and W. Edwards Deming
(Deming 1986). Since results from Six Sigma are
closely related to the DMAIC process, the author dis-
cusses it in detail. It should be noted that as recently
as the 1990s, many companies used DMAIC to guide
Six Sigma projects.
In the define phase, projects are identified and
selected. Project selection is performed under the
direction and with the participation of a Six Sigma
champion. Also involved are Master Black Belts and
Black Belts or Green Belts. Project selection is per-
formed in four steps: 1) developing the business case;
2) project evaluation; 3) Pareto analysis; and 4) project
definition. Business case development involves identify-
ing a group of possible projects, writing the business
case, and stratifying the business case into problem and
objective statements. Project evaluation often involves
risk and return assessment. The key individuals in per-
forming this analysis are project champions. Project
champions are usually top management executives
who have legitimate and financial authority to support
Six Sigma projects (Treichler et al. 2002). The process
for defining Six Sigma projects helps in prioritizing
which projects will provide the greatest financial and
operational returns.
The measure phase involves two major steps:
1) selecting process outcomes; and 2) verifying meas-
urements. To select process outcomes, process mapping
is used to help understand and define the process
itself. A process map is a flowchart showing responsi-
bilities (Gourishankar 2003). The goal of a process
map is to identify nonvalue-added activities. Two
important measures that are monitored are defects per
unit (DPU) and defects per million opportunities
(DPMO). Measurement systems analysis (MSA) is
used to determine if measurements are consistent
(Conklin 2006).
The analyze phase involves gathering and ana-
lyzing data relative to a particular Black Belt project
(Pyzdek 2003). The analyze-phase steps are as follows:
1) define the performance objectives; 2) identify inde-
pendent variables (Xs); and 3) analyze sources of
variability. Defining objectives involves determining
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Does Six Sigma Improve Performance?
what characteristics of the process need to be changed to
achieve improvement. Next, independent variables are
identified for gathering data. These are variables that
significantly contribute to process or product variation.
The goal of analyzing sources of variability is to use
visual and statistical tools to better understand the rela-
tionships between dependent (X) and independent (Y)
variables for use in future experimentation. A variety
of tools are used in this analysis, including his-
tograms, box plots, scatter plots, regression analysis,
and hypothesis tests.
The improve phase of the DMAIC process involves
off-line experimentation (Antony and Esamilla 2003;
Montgomery 2004). Off-line experimentation involves
studying the identified variables and using design of
experiments (DOE) to determine whether the inde-
pendent variables significantly affect variation in
dependent variables.
The control phase involves putting into place
process checks to ensure that improvements are long
lasting. The DMAIC process provides a process for
improving operational results that is cost-reduction
oriented. This results in the removal of waste from
processes. These improvements are expected to result in
operational and financial improvements. In this
research, the author examines whether this is the case.
Financial Results
Previous studies on the financial and operational
impacts of quality efforts have provided mixed results.
The Jacobsen and Aaker (1987) study using the Profit
Impact of Market Strategy (PIMS) database examined
the relationship between quality and market share,
return on investment (ROI), relative price, relative
cost, and relative quality. Jacobsen and Aaker (1987)
found the impacts of quality improvement practices to
be positive and significant. Depending on how busi-
nesses were grouped, however, they found variance in
results that might be reflective of business strategies.
Phillips, Chang, and Buzzell (1983) found similar
relationships and added that product quality appeared
to be negatively related to cost.
Several researchers have investigated the impact
of quality practices on stock prices. Easton and Jarrell
(1998) reviewed the financial results of 108 firms that
started TQM programs between 1981 and 1991. They
found that these firms’ stocks outperformed a control
group by finding excess cumulative returns. Hendricks
and Singhal (1996; 1997; 2001a; 2001b) found similar
results by analyzing the market returns of quality
award winners. Hendricks and Singhal used winners of
various awards to determine whether implementing
effective TQM resulted in improved operating perform-
ance in firms. They used the winning of a quality
award as a proxy for effective implementation of TQM.
In their research, they found strong evidence that
winners of quality awards outperformed control firms
on operating-income-based measures. Subsequent to
their studies, other researchers have continued to
study receipt of awards such as the Malcolm Baldrige
National Quality Award as indicative of mature quality
implementation (Rajan and Tamimi 1999; Wilson and
Collier 2000; Dean and Tomovic 2004). The literature,
however, is not unanimous. York and Miree (2004)
studied the links between TQM and financial perform-
ance. Conducting a comparison of the financial per-
formance of quality award winners against their
control firms by SIC groups, they studied performance
both before and after the winning of the Baldrige
Award. York and Miree found that TQM firms had better
financial performance before and after they won the
awards—some for even 20 years prior to winning the
awards. The author suggested that winning the award
was a covariate for financial success.
Adams, McQueen, and Seawright (1999) studied
the stock performance of Baldrige Award winners
from the day their award was announced. They found
only limited evidence to support the hypothesis that
stockholders are rewarded with abnormal returns on
the day of the quality award announcement. They
suggested that stock analysts may have been fore-
warned that the company was winning or that they
were at least aware of prior TQM efforts. They also
suggested that there may be little impact on stock
price, as stock impact is not the purpose of the
Baldrige Award. They do propose that stock impacts
relating to announcements are not as important as
improvements relating to quality improvement
efforts. While many studies have focused on the
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Does Six Sigma Improve Performance?
financial and operational results of TQM and the
Baldrige Award (Pannirselvam, Siferd, and Ruch
1998), the author’s literature review revealed no such
studies relative to Six Sigma.
It is expected that Six Sigma should result in
improved financial performance. Since Six Sigma
emphasizes reductions in cost and increases in meas-
ures such as rolled-throughput, one should find that
cash flows, earnings, and other financial measures will
show improvement. General Electric (GE) has reported
more than $12 billion in savings due to Six Sigma.
Similarly, Motorola reported $15 billion in savings over
11 years from Six Sigma implementation. As processes
and products are improved, it is also expected that sales
will improve. This research was performed to see if the
expected financial results occurred for companies that
implemented Six Sigma overall.
As the author has discussed, when compared with
traditional quality management, Six Sigma is much
more cost-reduction and financial-results oriented. A
comprehensive review of the quality management lit-
erature reveals that financial and operational perform-
ance could generally be categorized as measuring
profitability, cost, efficiency, and growth (Phillips,
Chang, and Buzzell 1983; Jacobsen and Aaker 1987;
Ward, Leong, and Boyer 1994; Flynn, Schroeder, and
Sakakibara 1995; Mohrman et al. 1995; Hendricks and
Singhal 1996; 1997; Easton and Jarrell 1998; Samson
and Terziovski 1999; Curkovic, Vickery, and Droge
2000; Lapre, Mukherjee, and VanWassenhove 2000;
Wilson and Collier 2000; Cua, McKone, and Schroeder
2001; Devaraj, Matta, and Conlon 2001; Douglas and
Judge 2001; Fynes and Voss 2001; Hendricks and
Singhal 2001a; 2001b; Park, Hartley, and Wilson 2001;
Sousa and Voss 2001; Eriksson and Hansson 2003;
Fullerton, McWatters, and Fawson 2003; Kaynak
2003). For this study, the author used a modified ver-
sion of Hendricks and Singhal’s (1997) performance
measures. Financial measures used in this study
include free cash flow per share; cost per dollar share;
earnings before interest, taxes, depreciation, and
amortization (EBITDA); sales; and sales per employee.
The author starts with the following proposition:
Proposition 1: Six Sigma adoption will positively
affect financial results.
10 QMJ VOL. 14, NO. 4/© 2007, ASQ
Next, this proposition is translated into five hypothe-
ses for this study. The author posits that investment in
Six Sigma training and implementation signals a
focus on aggressive cost reduction coupled with
process and organizational improvement. Given that
costs are reduced, cash is freed up for other uses. This
results in hypotheses H1a and H1b:
• H1a: Six Sigma adoption is positively associated with
free cash flow per share.
• H1b: Six Sigma adoption is positively associated with
cost per dollar sales.
As a result of this signaling of a focus on process
and organizational improvement, operating margins
should improve. This argument is similar to Deming’s
value chain—that focusing on quality will result in
lower costs and improved performance. Since operating
margin can be expressed as EBITDA/sales, the author
proposes the following three hypotheses:
• H1c: Six Sigma adoption is positively associated
with EBITDA.
• H1d: Six Sigma adoption is positively associated
with sales.
• H1e: Six Sigma adoption is positively associated
with sales per employee.
Operational Results
In addition to looking at financial results, many stud-
ies have examined the relationship between quality
implementation and operational results. Again, the
author reviews these studies to understand impacts
found by traditional quality improvement approaches.
Dow, Samson, and Ford (1999) studied the effect of
quality practices on quality outcomes. They categorized
quality practices into nine dimensions. Not all of their
dimensions, however, contributed to superior quality
performance. Employee commitment, shared vision,
and customer focus yielded positive correlations with
quality outcomes. Conversely, other hard quality
practices, such as benchmarking, work teams,
advanced manufacturing technologies, and close
supplier relations, were not related to superior quality
operational results.
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Does Six Sigma Improve Performance?
Focusing on the competitive aspects of quality per-
formance, Douglas and Judge (2001) found strong
empirical support for a positive relationship between
the degree of TQM implementation and organizational
performance. They also found some empirical evidence
that this relationship between TQM implementation
and organizational performance was moderated by
organizational structure.
Das et al. (2000) used structural equation modeling
to study the impacts of international competition on
quality. They found that competitive intensity provided
an explanation for the absence of returns from invest-
ments in quality capital. Obtaining customer satisfaction
performance from quality practices was shown to be
contingent on the degree of international competition
present in the business environment.
Curkovic, Vickery, and Droge (2000) studied the
direct effects of 10 quality action programs on six firm
performance outcomes as well as their indirect effects
through eight quality performance dimensions. Two
paths from action programs through quality perform-
ance to firm performance in the automotive supply
industry were identified. The first path was product
quality, whose hallmarks were superior performance on
conformance and design quality. The second path
involved relationship quality. This path included supe-
rior customer responsiveness and service. Both the
product-quality and the relationship-quality paths led
to superior operational ROI. Product quality led to
enhanced return on assets (ROA), and relationship
quality led to enhanced market share performance.
Flynn, Schroeder, and Sakakibara (1995) con-
structed a framework that focuses on both core quality
management practices and the infrastructure used to
engender an environment supportive of their use. They
incorporated two measures of quality performance and
their roles in establishing and sustaining competitive
advantage. The author used path analysis to test a pro-
posed model that explained that perceived quality
market outcomes were primarily related to statistical
control/feedback and the product design process, while
the internal measure of percent that passed final
inspection without requiring rework was strongly
related to process flow management and statistical
control/feedback. The focus of most Six Sigma efforts
is on operational improvements. By focusing on the
processes and variables associated with operational
outcomes (for example, y=f(x)), it is expected that
Six Sigma programs will result in more efficient uses
of assets and higher ROI. The general proposition is
stated as:
Proposition 2: Six Sigma adoption results in better
operational results.
Using COMPUSTAT, the author computed several
operational measures using productivity ratios. Part of
the process of Six Sigma is to improve the use of assets.
During the improve phase of the DMAIC cycle, DOE
involves tolerance design, systems design, and parame-
ter design (Foster 2006). Systems design involves
choices, tradeoffs, and improvements to existing assets.
These improvements may include the optimization of
plant, equipment, or technology. Implicit in this
improved usage is a more productive usage of assets.
This results in hypotheses H2a through H2d.
• H2a: Six Sigma adoption is positively associated with
asset turnover.
• H2b: Six Sigma adoption is positively associated with
return on assets.
• H2c: Six Sigma adoption is positively associated with
return on investment.
• H2d: Six Sigma adoption is positively associated with
total assets.
Improvement efforts such as Six Sigma could help a
company to grow as profitability improves. Often these
efforts result in downsizing and the more productive use
of employees. Therefore, Six Sigma could result in either
growth in the number of employees or a reduction in the
number of employees. The literature is not clear on this
issue. Therefore, hypothesis H2e is stated in null form.
• H2e: Six Sigma adoption is not related to number of
employees.
METHODS
This study examines the long-term financial and opera-
tional impacts of implementing Six Sigma. In order to
create a population of Six Sigma-adopting firms, the
author performed a keyword Lexis/Nexis (LexisONE)
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Does Six Sigma Improve Performance?
online search of corporate financial reports for the terms
Six Sigma, ISO 9000, TQM, and Baldrige through the
LexisONE subscription database. Since annual reports
are used to transmit information to shareholders, the
mention of a quality management initiative such as Six
Sigma is interpreted as signaling an organizational
commitment to that effort. Since annual reports are
used to elucidate strategic emphases, it can be said that
these quality improvement efforts are strategic in nature.
Using this rationale, the author performed a content
analysis to determine which firms had announced the
implementation of Six Sigma. Initially, the year 1998
was searched. Since only 12 Six Sigma firms were
returned, the author also searched 1996 and 1997. This
content analysis of annual reports resulted in a list of 30
companies that had adopted Six Sigma as a means of
improving performance. In a further step, they assem-
bled a panel of six judges, including academics and
quality professionals, to perform a content analysis of
the annual reports found in LexisONE to determine
which firms showed strategic commitment to Six Sigma.
Based on this content analysis, six firms were removed
from the analysis, resulting in a final set of 24 Six Sigma
firms. They also found 24 Baldrige firms, 26 TQM firms,
and 23 ISO 9000 firms. In addition, a randomly selected
list of 50 companies from the 1998 Fortune 500 list was
used as a control group.
Company ticker symbols were obtained using
Hoover’s Online, and the database of firms the author
created was searched for duplicates and firms that were
returned in more than one search. If a firm in the control
group was also returned in the list of Six Sigma compa-
nies, it was deleted from the control group and another
firm in the Fortune 500 was randomly selected. In addi-
tion, firms no longer in business or that had been
acquired since 1998 were also stricken. In the end, the
database of control firms was reduced to 41 companies.
As stated, a modified version of Hendricks and
Singhal’s (1997) performance measures was used.
Profitability measures used were earnings (EBITDA),
ROA, operating margin (EBITDA/sales), and net sales.
Cost structure was analyzed by calculating cost per
dollar of sales and FCF per share. Relative firm growth
measures were obtained using total assets and number
of employees.
12 QMJ VOL. 14, NO. 4/© 2007, ASQ
Firm data were collected using Standard and Poor’s
COMPUSTAT database. Data were collected for the firms
drawn from the Lexis/Nexis database for fiscal years
1998 through 2004. This provided data for the author’s
longitudinal analysis.
In this article, the author compares results from the
time Six Sigma was mentioned in the annual report to
four years later. This four-year interval is needed, as it
takes time for quality improvement programs to yield
significant results. In a study of best quality practices,
Ozan (1992) found that quality improvement pro-
grams should be implemented gradually. A study by the
United States General Accounting Office (1991) stated
that, on average, 3.5 years were required to see signifi-
cant results for TQM programs. In a study of the U.S.
auto industry, Narasimhan, Ghosh, and Mendez (1993)
found a 2.26-year lag between quality improvement
efforts and sales improvements. Foster (1996) studied
the speed of quality improvement in five different pro-
duction facilities and found that plants that improved
more slowly actually had better financial results than
plants that attempted to improve rapidly. Given these
prior research results, it was thought that a four-year
interval would provide necessary time to see significant
improvement in results if it was present.
RESULTS
The results are organized according to the outcome
variables studied. For each dependent variable the
author discusses data transformation (when needed).
Next, analysis of covariance (ANCOVA) results for main
effects are presented. ANCOVA was used to test where sig-
nificant differences exist between outcomes for each of
the treatments. ANCOVA is a general linear model with
one explanatory variable and multiple factors. It was
applied where a potentially strong correlation exists
between independent and dependent variables. Then,
the author explains interactions between various quality
programs (Six Sigma, Baldrige, TQM, and ISO 9000)
and no quality program relative to each financial or
performance outcome. The interaction tests used
ANCOVA to determine if there are significant interaction
effects between quality management programs (QMP)
and outcomes. Model-based estimates are presented for
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Does Six Sigma Improve Performance?

Table 1 Summary statistics for FCF in 1998 Table 2 ANCOVA results main effects.
and 2002. Term F value Pr>F
1998 2002
Free cash flow .94 0.3300
Number of companies 138 138
Log cost per dollar sales 36.07 <.0001
Minimum -14.05 -22.18
EBITDA 9.57 0.0027
25th percentile -0.54 0.33
Log of sales 579.24 <.0001
Median 0.25 1.05
Sales per employee 306.97 <.0001
75th percentile 0.85 2.38
Asset turnover 3.01 0.0800
Maximum 17.58 12.40
ROA 1.12 0.2910

© 2007, ASQ
Mean 0.19 1.19
ROI 1.81 0.1806
Standard deviation 2.82 3.63

© 2007, ASQ
Total assets 1.66 0.2006

Log number of employees 860.94 <.0001

companies in the 10th percentile, median, and 90th
percentile. The percentiles were determined according to
firm size, as prior research has suggested that firm size Table 3 ANCOVA results interaction terms.
has a moderating effect on QMP effects (Hendricks and
Term F Value Pr>f
Singhal 2001a; York and Miree 2004). Finally, hypothe-
sis tests were performed to study the author’s research Free cash flow by QMP 6.08 0.0002
propositions. The results are presented according to Log cost per dollar sales by QMP 16.99 <.0001
financial or performance outcome in order to enhance
EBITDA by QMP 8.56 <.0001
clarity of presentation.
Log sales by QMP .83 0.5101

Free Cash Flow Per Share Sales per employee by QMP 0.46 0.7600

Summary statistics for free cash flow per share (FCF) in Asset turnover by QMP 14.94 <.0001
1998 and 2002 are presented in Table 1. This summary ROA by QMP 2.45 0.0490
shows that 138 companies were evaluated for this
ROI by QMP 2.42 0.0517
research. These companies are rank ordered, with the
© 2007, ASQ

34th company in the 25th percentile, company 69 at the
median, and the 104th company at the 75th percentile.
These statistical tests were performed using SAS.
The model for FCF in 2002 was fit with all data
present and no transformations. Table 2 shows the
ANCOVA results for FCF (as well as the other measures).
The author has combined tables here for efficient pres-
entation. Table 2 shows that the main effect for FCF
was not significant. However, as is shown in Table 3,
the interaction term for FCF by QMP was significant
(p < 0.0002). With a low R2 of 0.22, this suggests that
other variables are having an effect on an otherwise
null model. The first five rows in Table 4 present
Total assets by QMP 17.4 <.0001
Log employees by QMP 1.14 0.3400
model-based estimates of FCF in 2002 at key levels of
FCF in 1998. For reference, Table 5 shows the counts
of companies in various percentiles of FCF in 1998 to
provide an indication of the range of data behind the
estimates shown in previous tables and figures.
Companies without a QMP appear to have a differ-
ent relationship between FCF in 2002 and 1998 than
all other companies. While FCF in 2002 appears to be
more or less positively related to FCF in 1998, these

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Does Six Sigma Improve Performance?

companies have a negative relation- Table 4 Model-based mean estimates (std. error of estimates)
ship between FCF in 2002 and 1998. of effects in year 5, based on levels of year 1.
Figure 1 plots this interaction.
Free Cash Flow 10th Median 90th
The author evaluates H1a in Table 6.
Among companies with high FCF in Six Sigma 1.59 (0.75) 1.64 (0.68) 1.7 (0.83)
1998, those with no QMP have an esti- Baldrige 1.27 (0.76) 1.94 (0.73) 2.65 (1.04)
TQM -0.29 (1.35) 1.61 (0.69) 3.61 (1.38)
mated FCF for 2002 that is substantially
ISO 0.79 (1.03) 1.21 (0.77) 1.65 (1.43)
lower than all other companies, whereas No QMP 2.59 (0.67) 1.13 (0.55) -0.4 (0.56)
companies using Six Sigma have an esti-
Cost Per Dollar Sales
mated 2002 FCF that is substantially
higher than all other companies. Thus, Six Sigma -0.18 (0.06) -0.13 (0.02) -0.11 (0.04)
they see Six Sigma companies and the Baldrige -0.34 (0.04) -0.13 (0.02) -0.02 (0.03)
TQM -0.1 (0.02) -0.1 (0.02) -0.098 (0.02)
average of all companies with a QMP as
ISO -0.16 (0.03) -0.07 (0.02) -0.02 (0.03)
having significantly higher FCF in 2002 No QMP -0.35 (0.03) -0.16 (0.02) -0.07 (0.02)
than those companies without a QMP.
EBITDA
At low FCF in 1998, however, those
companies without a QMP had signifi- Six Sigma 2.76 (3.56) 11.88 (2.97) 23.99 (3.14)
cantly higher FCF in 2002, leading to Baldrige 15.11 (4.96) 8.73 (3.49) 0.263 (3.79)
TQM 2.63 (4.8) 7.58 (3.07) 14.15 (7.04)
the patterns of significance displayed ISO 10.98 (4.27) 13.68 (3.29) 17.26 (3.79)
in Table 6. No QMP 5.69 (3.17) 13.8 (2.19) 24.57 (3.22)

Asset Turnover
Cost Per Dollar Sales Six Sigma 15,272 (2,550) 10,116 (2,083) 812 (2,725)
It was evident from the review of the Baldrige -2,352 (3,392) -627 (2,685) 2,487 (2,826)
TQM 11,426 (5,604) 4,765 (2,519) -7,255 (6,004)
1998 data that cost per dollar sales value
ISO 9,435 (8,878) 4,937 (2,614) -3,182 (12,084)
was extremely skewed, and to better No QMP 6,266 (1,957) 6,011 (1,579) 5,551 (2,252)
accommodate model fitting, the author
ROA
fitted the model to the natural log of
cost per dollar sales. The 2002 values, Six Sigma 2.18 (2.25) 2.28 (1.75) 2.37 (2.34)
however, were evenly distributed. Baldrige -1.17 (2.77) -1.12 (1.77) -1.13 (2.42)
TQM 3.74 (3.76) 3.08 (1.84) 2.55 (2.54)
Table 2 shows the ANCOVA results
ISO -1.52 (1.96) 2.65 (1.88) 5.96 (2.08)
for the model fit to logged cost per dol- No QMP 1.98 (1.71) 2.87 (1.29) 3.58 (1.8)
lar sales. As shown in Table 3, because
ROI
of the significant interaction between
1998 cost per dollar sales and QMP, the Six Sigma 3.91 (3.8) 4.25 (2.98) 4.47 (3.67)
effect of QMP is different depending on Baldrige -6.05 (4.76) -0.82 (3.02) 2.63 (3.68)
TQM 7.26 (7.96) 6.88 (3.06) 6.63 (5.32)
the level of cost per dollar sales in
ISO -2.08 (3.77) 6.81 (3.45) 12.67 (4.26)
1998. Table 4 gives the model-based None 8.2 (3.3) 6.46 (2.19) 5.3 (2.93)
estimates for mean (logged) cost per
Total Assets
dollar sales in 2002 by QMP and level
of 1998 logged cost per dollar sales. Six Sigma -705.3 (1659.4) 1894 (1 j610.9) 6140.6 (1562.7)
As can be seen in the plots of Baldrige 7682.9 (1937.1) 7523.7 (1804.5) 7263.5 (1741.2)
© 2007, ASQ

TQM -28.3 (3916.3) 1784.6 (1638.3) 4746.2 (6746.5)

means in Figure 1, the interaction
ISO 1502.8 (1846.6) 1950.3 (1718.7) 2681.4 (2220.2)
appears to result from different char- None 4135.2 (1193.8) 4545.1 (1167.6) 5214.9 (1396.8)
acteristics with respect to cost per

14 QMJ VOL. 14, NO. 4/© 2007, ASQ

Foster v14 i4 9/20/07 10:10 AM Page 15

Does Six Sigma Improve Performance?

dollar sales among compa- Table 5 Count of companies in each percentile category and QMP.
nies using TQM and those
Six Sigma Baldrige TQM ISO None Total
using either no QMP or one
of the other three under 0–10th percentile 3 6 1 4 14
study. All companies other 10th–50th percentile 7 10 14 16 7 54
than those with TQM appear
to have a direct relationship 50th–90th percentile 12 5 11 6 22 56

© 2007, ASQ
between cost per dollar sales 90th percentile and higher 2 3 1 8 14
in 2002 and 1998, while
Total 24 24 26 23 41 138
TQM companies appear to
have no such relationship.
Evaluation of the hypotheses of interest is given in was fairly symmetric, but it was peaked. Therefore, the
Table 6. Null hypotheses regarding Six Sigma compa- model for EBITDA in 2002 was fit with all data present
nies cannot be rejected. Among companies with low cost and no transformations.
per dollar sales in 1998, companies using the Baldrige Table 2 shows significant ANCOVA results (p < .0027).
Award criteria have a significantly lower predicted cost Table 3 shows the model-based estimates for EBITDA in
per dollar sales than companies using any of the other 2002. Because of the significant interaction between
three QMPs. Therefore, H1b is not supported. EBITDA 1998 and QMP, the effect of QMP is different
depending on the level of EBITDA in 1998. Table 4
shows model-based estimates of average EBITDA in
EBITDA 2002 at levels of 1998 EBITDA.
A review of the data showed that the distribution of Inspection of Figure 1 suggests the following as an
EBITDA in 1998 was skewed because of the presence of interpretation of the interaction: Among companies with
outlying companies. In 2002 the distribution of EBITDA the highest EBITDA in 1998, those using the Baldrige

Figure 1 Interaction Plots by Effect.

FCF 1998 by QMP interaction Return on Assets by QMP interaction
4 7
3.5 6
3 5
2002 Return on Assets

2.5 Six Sigma Six Sigma

4
2 Baldrige Baldrige
FCF 2002

3
1.5 TQM TQM
ISO 2 ISO
1
None 1 None
0.5
0 0
-2 -1 0 1 2 3 -4 -2 0 2 4 6 8 10
-0.5 -1

-1 -2
FCF 1998 1998 Return on Assets

Asset Turnover Logged Cost per dollar sales by QMP interaction ROI 1998 by QMP interaction
20,000 0 15
-0.35 -0.3 -0.25 -0.2 -0.15 -0.1 -0.05 0
-0.05
Logged cost/dollar sales, 2002

15,000
10
-0.1
2002 Asset Turnover

10,000 Six Sigma Six Sigma Six Sigma

-0.15 5
ROI, 2002

Baldrige Baldrige Baldrige

5,000 TQM -0.2 TQM TQM
ISO ISO 0 -4.1 8.4 16.6 ISO
-0.25
None None None
-3000 -2000 -1000 0 1000 2000 3000 4000 5000 6000
-0.3
-5
(5,000)
-0.35

(10,000) -0.4 -10

1998 Asset Turnover level Logged Cost/dollar sales, 1998 ROI, 1998

Mean EBITDA in 2002, by QMP and EBITDA in 1998 Total assets by QMP interaction
30.00 9000
8000
25.00 7000
6000
Six Sigma Six Sigma
Total assets 2002

20.00
5000
EBITDA 2002

Baldrige Baldrige
4000
15.00 TQM TQM
3000
ISO ISO
2000
10.00 None None
© 2007, ASQ

1000
5.00 0
-1000 0 1000 2000 3000 4000 5000 6000 7000
-1000
0.00 -2000
0 5 10 15 20 25 30
Total Assets 1998
EBITDA 1998

www.asq.org 15
Foster v14 i4 9/20/07 10:10 AM Page 16

Does Six Sigma Improve Performance?

Award criteria had the low- Table 6 Hypothesis results.

est EBITDA in 2002, and
Free cash flow 10th1 Median2 90th3
those using Six Sigma or no
QMP had the highest. That Six Sigma vs. No QMP -1 (0.99) 0.5 (0.87) 2.1 (1.01)*
result is somewhat reversed Six Sigma vs. Other QMP 1 (0.99) 0.05 (0.81) -0.94 (1.12)*
among companies with the
lowest EBITDA in 1998. Any QMP vs. No QMP 1.75 (0.85)* -0.46 (0.67) -2.8 (0.82)*

Evaluation of the Cost per dollar sales

hypotheses of interest is
Six Sigma vs. No QMP 0.17 (0.08) 0.03 (0.03) -0.04 (0.05)
given in Table 6. The
EBITDA in 2002 is statisti- Six Sigma vs. Other QMP 0.01 (0.07) -0.03 (0.03) -0.06 (0.05)

cally equivalent between Any QMP vs. No QMP -0.16 (0.04)* -0.06 (0.02)* -0.01 (0.03)
Six Sigma companies and
EBITDA
companies with no QMP,
regardless of EBITDA in Six Sigma vs. No QMP -2.93 (4.71) -1.92 (3.66) -0.57 (4.54)
1998. Among companies Six Sigma vs. Other QMP -6.81 (4.44) 1.88 (3.52) 13.43 (4.3)*
with a QMP, Six Sigma
Any QMP vs. No QMP -2.17 (3.84) 3.33 (2.76) 10.65 (4.13)*
companies have a higher
EBITDA in 2002. However, Asset turnover
this only holds among Six Sigma vs. No QMP 9005.74 (2813.7)* 4105.52 (2592.55) -4738.12 (2696.38)
companies with a higher
Six Sigma vs. Other QMP 9101.92 (4355.24)* 7091.12 (2571.04)* 3462.13 (5065.76)
EBITDA in 1998; for all
others, performance of Any QMP vs. No QMP -2179.08 (3458.55) 1213.03 (2110.05) 7334.95 (3709.69)
EBITDA in 2002 is equiva-
ROA
lent. This provides partial
support for H1c. Six Sigma vs. No QMP 0.20 (2.82) -0.58 (2.17) -1.21 (2.97)

Six Sigma vs. Other QMP 1.81 (2.85) 0.76 (2.06) -.09 (2.70)

Sales Any QMP vs. No QMP 1.16 (2.22) 1.15 (1.63) 1.15 (2.21)

Despite a large range of Total assets

sales data, the raw data Six Sigma vs. No QMP -4,840.5 (2,029.3) -2,651.1 (1,975.6) 925.7 (2,087.3)
were left in their original
scales. The author exam- Six Sigma vs. Other QMP -3,757.9 (2,293.2) -1,858.9 (1,894.2) 1,243.5 (2,895.8)
© 2007, ASQ

ined the summary of sales Any QMP vs. No QMP
data and found they were
* p < .0001
extremely skewed. To bet-
ter accommodate model
fitting, he modeled the natural log of sales.
Table 2 gives the ANCOVA table for the model for
logged sales. While the overall R2 for the model is 0.93,
no terms other than sales in 1998 have any explanatory
power for sales in 2002 (see Table 3). For this reason, the
author concludes that the null hypotheses of interest
cannot be rejected and that Six Sigma has no influence
on sales. Therefore, H1d is not supported.
2,022.1 (1,754) 1,257 (1,476.2) 7 (2,362.3)
Sales Per Employee
The raw data were divided by 1,000 to drop the scale to a
more useable level. It was evident from the summary
data that this value was extremely skewed, and to better
accommodate model fitting, the author used the natural
log of sales per employee (in thousands). Table 2 gives
the ANCOVA table for the model fit. While the overall

16 QMJ VOL. 14, NO. 4/© 2007, ASQ

Foster v14 i4 9/20/07 10:10 AM Page 17
Does Six Sigma Improve Performance?
R2 for the model is a high 0.77, no terms other than
sales per employee in 1998 have any explanatory power
for sales per employee in 2002 (see Table 3). For this
reason, they concluded that the null hypotheses H1e
cannot be rejected and that QMP has no influence on
sales per employee.
Asset Turnover
Once again, Table 2 shows the ANCOVA table for the
model fit, and Table 4 shows the model-based esti-
mates for asset turnover in 2002. These estimates
indicate that companies with high asset turnover in
1998 had a lower 2002 asset turnover than companies
with a low asset turnover in 1998. This is generally
true for companies using Six Sigma, TQM, and ISO
9000. The 2002 asset turnover for Baldrige companies
shows the opposite pattern (companies with high asset
turnover in 1998 had higher asset turnover in 2002
than those with lower 1998 asset turnover). Those
companies with no QMP showed no real difference in
2002 asset turnover, regardless of their 1998 asset
turnover. Figure 1 plots these estimates from Table 4.
Evaluation of the hypotheses of interest is given in
Table 6. Among companies with low and median 1998
asset turnover, companies using Six Sigma QMP had
significantly higher asset turnover in 2002 than com-
panies with no QMP; the asset turnover of these Six
Sigma companies was also higher than the average of
companies with the other three programs. Among
companies with high asset turnover in 1998, there was
no significant difference among any of the hypotheses
of interest. Therefore, H2a is partially supported.
Return on Assets
Table 2 gives the ANCOVA table for the model fit, and
Table 3 shows the model-based estimates for ROA in
2002. Table 3 shows a significant interaction between
ROA and sales (p < .05). Table 4 provides the model-
based estimates of average 2002 return on investments
at levels of 1998 ROA.
Evaluations of the hypotheses of interest are given
in Table 6. While the interaction is significant, none
of the hypotheses of interest are. Table 6 provides
means and standard errors of the return on asset data
used in the model by QMP, company size, and year.
Therefore, H2b is not supported.
Return on Investment
ROI for either year looks bell-like in distribution except
for the presence of very long tails that show outlying
observations in both the positive and negative direction.
Attempts at transformation did little to pull in these
strong outliers. Thus, the ANCOVA model was fit on the
raw data. Table 2 shows the ANCOVA table. As one can
see in Table 3, at p < .05, the interaction of QMP by
ROI in 1998 is technically not statistically significant.
However, it is of borderline significance. Table 5 gives
the model-based estimates for ROI in 2002 by per-
centiles of ROI in 1998 and QMP. Figure 1 plots these
means for easier interpretation. From Figure 1 it
appears that Baldrige and ISO 9000 companies may be
responding differently than the companies with the
other three QMPs. This is descriptive only, however,
owing to the lack of significance of any of the terms in
the ANCOVA model. Therefore, H2c is not supported.
Total Assets
To bring the data to a more manageable scale, the
original data were divided by 1,000. The model was fit
with all available data for total assets in 2002. The
nonsignificant ANCOVA result is presented in Table 2.
As is shown in Table 3, because of the significant
interaction between total assets 1998 and QMP, the
effect of QMP is different, depending on the level of
total assets in 1998. Table 4 shows the model-based
estimates of the average total assets (in thousands) for
2002 for each QMP by levels of total assets in 1998.
Figure 1 shows a plot of the estimates to facilitate
general interpretation of the interaction. Generally, it
appears that the relationship between 1998 total assets
and 2002 total assets does not hold for companies
using Baldrige, ISO 9000, or no QMP.
Table 6 contains the tests of the hypotheses of
interest. Among companies at the highest level of total
assets in 1998, there is no difference in 2002 total
assets. For all others, however, those using the
www.asq.org 17
Foster v14 i4 9/20/07 10:10 AM Page 18
Does Six Sigma Improve Performance?
Baldrige Award criteria have higher total assets in
2002 than those using any other QMP. Therefore, H2d
is not supported.
Number of Employees
Because these data are skewed, the author used the
natural logarithm as the outcome in modeling efforts.
Table 2 gives the results of the ANCOVA model. For this
model, adding the indicator for company size was not
appropriate, so it was not included here. Because no
term other than the number of employees in 1998 is
statistically significant, H2e is not supported.
DISCUSSION AND CONCLUSIONS
As has been seen, the results from Six Sigma programs
are at best mixed. The author found a significant effect
on FCF, EBITDA, and asset turnovers; however, Six
Sigma did not seem to affect sales, ROA, ROI, or firm
growth. As a result, if firms want to improve cash,
earnings, or productivity in using assets, Six Sigma
might be of use. An intervening variable in this analy-
sis was firm size, which confirmed Hendricks and
Singhal’s finding on the importance of firm size. It
appears that firm size mitigates the effects of programs
like Six Sigma. Certainly, large firms such as GE and
Motorola have resources and assets to invest in Six
Sigma programs. These firms also showed great
capacity for improvement. Smaller firms may not
have the same resources to apply to such programs;
however, smaller firms that invest in efforts such as
Six Sigma may be impacted more significantly as a
total proportion of the firm’s business results.
Companies with high cash flows in 1998 and no
QMP had lower FCF in 2002 than companies that had
adopted Six Sigma. Companies with low cash flow
and no QMP did better than companies using Six
Sigma, suggesting that for cash-poor firms, Six Sigma
may in fact be a drain on resources. Also, these com-
panies may not have the cash necessary to sustain
effective Six Sigma results over four years. Therefore,
H1a was supported for firms with high cash flows, but
may have a negative effect for companies with poor
cash flows.
18 QMJ VOL. 14, NO. 4/© 2007, ASQ
Among companies with low and medium asset
turnover, Six Sigma led to higher asset turnover.
Therefore, H2a was supported for companies with low
and medium asset turnover in 1998. It could be that
these companies with low asset turnover could benefit
more from process improvement implicit in Six Sigma
than firms with high asset turnover.
The adoption of Six Sigma seemed to not affect ROA
and ROI significantly. This may not be surprising
because many factors affect ROA and ROI, as evidenced
by the DuPont model. Further investigation showed that
large firms using Six Sigma performed better. That is,
the improvement rates were in the correct direction. The
differences, however, were not significant. Reflecting
on the original research question regarding financial
and operational outcomes, it appears that at a macro
level, the effects, while in some cases significant, are
somewhat modest. While the author did see benefits in
both financial and operational areas, quality profes-
sionals should be careful to not oversell the benefits of
Six Sigma or any other QMP.
That Six Sigma did not affect firm growth was not
surprising. There were many exogenous macroeconomic
factors, including 9/11, that could have influenced
growth during this period. Powell (1995) and others
have stated that there are many factors that affect firm
growth other than quality management approaches.
Indeed, many quality programs have been associated
with reductions in number of employees. On the other
hand, that one is able to find any significant results for
these small numbers of firms demonstrates that quality
programs such as Six Sigma can potentially provide
important financial and operational returns. This
research is very high level with much room for future
study. Future studies should examine specific effects on
specific projects in companies. It is expected that such
studies could verify and clarify these findings.
Limitations
There were several limitations to this research. As was
discussed previously, financial results during this period
were influenced by 9/11 and other events. In addition,
these firms’ use of Six Sigma or other quality programs
in 1998 does not guarantee that they implemented these
Foster v14 i4 9/20/07 10:10 AM Page 19
Does Six Sigma Improve Performance?
programs effectively or maintained their strategic
support through 2002 and beyond. Of course, the
normal provisos concerning COMPUSTAT hold, as
these data were firm-level data, and many times Six
Sigma programs are implemented at the business unit
level. While the methodology the author used is
adapted from prior QMP studies, it is difficult to isolate
the effects of Six Sigma at a macro level. Future stud-
ies at a more micro level may help the understanding
of these phenomena.
This study included firms from a variety of indus-
tries. For future research, the author suggests industry-
specific studies of the effects of Six Sigma adoption. It
has been suggested that Six Sigma is best suited for
process industries. It is expected that in some ways such
industries would have been leading-edge adopters.
Implications for Managers
This research has implications for managers. The
author found negative cash flows for small firms, but
positive cash flows for larger firms. It is apparent that
managers in smaller firms should carefully consider
the cash flow impacts of quality improvement invest-
ments. Managers should also carefully monitor the
effects of Six Sigma efforts and focus on “hard dollar”
benefits. If not skillfully implemented, the benefits of
Six Sigma may be marginal. The “fad” element of Six
Sigma should also be noted. It is more likely that
companies that understand the benefits of Six Sigma
are able to effectively manage to achieve those bene-
fits. It could be that companies that implement Six
Sigma to merely parrot industry practice will likely
find modest competitive benefits from Six Sigma or
any other quality improvement effort.
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BIOGRAPHY
S. Thomas Foster is area leader of global supply chain at
Brigham Young University. He has published more than 50 quality-
related ar ticles in journals such as Decision Sciences,
International Journal of Production Research, the Journal of
Operations Management, the International Journal of Quality
and Reliability Management, the Quality Management Journal,
and Quality Progress magazine. His book is titled, Quality
Management: Integrating the Supply Chain (Prentice Hall).
Foster is founder of http://www.freequality.org, was awarded
the ASBSU 2000 Outstanding Faculty Award, and received the
prestigious 2002 Decision Sciences Institute Instructional
Innovation Award. He is currently serving as guest editor for a
special issue on supply chain quality for the Journal of
Operations Management. He served twice as an examiner for
the Malcolm Baldrige National Quality Award and is a member
of ASQ. He can be reached by e-mail at tom_foster@byu.edu.