Become a Financial Modeling & Valuation Analyst (FMVA)®. Enroll today to advance your career!
Login to your new FMVA dashboard today!

Standardization

The process of creating standards to guide the creation of a good or service based on the consensus the industry

What is Standardization?

Standardization is the process of creating standards to guide the creation of a good or service based on the consensus of all the relevant parties in the industry. The standards ensure that goods or services produced in a specific industry come with consistent quality and are equivalent to other comparable products or services in the same industry.

Standardization also helps in ensuring the safety, interoperability, and compatibility of the goods produces in the market. Some of the parties that must be involved in the standardization processes include users, interest groups, governments, corporations, as well as standards organizations.

 

Standardization - Folders with divisor written as Standards.

 

Goal of Standardization

The goal of standardization is to ensure uniformity to certain practices within the industry. The standardization focuses on the product creation process, operations of the businesses, technology in use, and how specific compulsory processes are delivered.

One example of standardization is the Generally Accepted Accounting Principles (GAAP) that companies must follow when preparing or reporting their annual financial statements. They ensure uniformity in how financial reports are prepared and improve the clarity of the financial information presented to the public.

 

Standardization of Business Processes

The most common form of standardization is in business processes. Typically, companies with a global presence or franchises refer to detailed process documentation that ensures that the quality of the product or service is the same regardless of the geographical location of the business that a customer visits.

 

Manufacturing businesses

Businesses engaged in manufacturing processes often form framework agreements that ensure that the products they produce meet the same specifications as other businesses in the industry. The standardization may cover products sold in one geographical location or the global arena.

For example, manufacturers of LED and LCD television follow certain product standardization rules that ensure that the products sold in the market have similar features. The standards cover specifications like the screen resolution, size, inputs (like HDMI port, USB ports, etc.), internet connectivity, etc. The standards are modified along with the continuous advancements in technology.

Standardization among manufacturing businesses ensures that customers get similar specifications regardless of the manufacturer or geographical location of the store where customers buy from.

 

Product marketing

Standardizing products that are available in various states, countries, or continents ensures that customers get to see the same image regardless of the stores they buy from. It mainly applies to big brands that customers already identify with, and any change in the product image can affect the product purchase.

One example of a company that uses this form of standardization is Coca-Cola. The company operates across the globe, and it maintains a uniform design theme across the different markets as a way of reinforcing its image among its global audience. The same theme is applied even when the product packaging is presented in a different language.

 

Standardization of Trading

Standardization in the trading industry is set by the exchange in which the security is trading, and it provides greater liquidity for investors. It also makes the trading process for all the participants involved in the exchange.

Standardization mainly applies in the options and futures trading markets. Exchange set standards as a way of establishing the minimum trade bases for contracts. In options trading, one contract represents 100 underlying shares of the company’s stocks. It means that for every options contract that an investor holds, it represents 100 shares of the company’s stock.

In the futures trading market, the size of the futures contract depends on the type of asset that is being traded. Futures contracts are available on different types of assets such as commodities, currencies, and stock exchange indexes. For example, an oil producer may offer one futures contract at $75 per oil barrel.

In addition, futures contracts are standardized differently when the underlying asset is a currency. For example, one British pound futures contract is pegged at GBP 62,500 while on Japanese yen futures contract is pegged at JPY 12,500.

 

Effects of Standardization

Some of the effects of standardization include the following:

 

Firms

When competing firms standardize their products and services, the competition shifts from integrated systems to the individual components. It means that companies whose main selling point is the integrated system must change strategy to focus on the individual components of the system.

Companies can create a competitive advantage by selling components or sub-systems of the integrated system to other businesses that are compatible with their business model.

 

Consumers

One of the benefits that consumers reap from standardization is increased compatibility and interoperability between products. For example, when communication gadgets and services are standardized, consumers can share information across a large number of people outside who are not limited by a specific service or product.

Also, consumers can match up the components of a system in a way that fits their specific preferences. However, standardization can also adversely affect consumers. For one, it means that options will be limited for consumers. Also, standardization will limit producers from providing more value to consumers than their competitors, because they are constrained by the standards.

 

Technology

The effect of standardization on technology is mixed, and it may yield both positive and negative outcomes. The positive effect of standardization is that it can help weed out incompatible technologies in the market that slow the growth of technology. There will be an increased uptake of standardized technology, which will spur the growth of the technology industry.

On the downside, standardizing technology will restrict the innovativeness of new and existing technologies, as developers shift their focus from features to prices, since the features are determined by existing standards.

 

Other Resources

CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful:

  • Business Life Cycle
  • Inventory
  • Marginal Propensity to Consume
  • Solow Growth Model

Financial Analyst Certification

Become a certified Financial Modeling and Valuation Analyst (FMVA)® by completing CFI’s online financial modeling classes!