Standardization is a framework of agreements that all relevant parties in an industry or organization must adhere to in order to ensure that all processes associated with the creation of a good or the performance of a service are executed within set guidelines.
Standardization ensures that the end product has consistent quality and that any conclusions drawn are comparable with all other equivalent items within the same category.
Key Takeaways
- Standardization ensures that certain goods or services are produced uniformly following established guidelines.
- Standardized lots are used in trading stocks, commodities, and futures to enable greater liquidity, efficiency, and reduce costs.
- Standardization is employed in accounting practices and for establishing quality and production standards in manufacturing.
How Standardization Works
Standardization is achieved by setting generally accepted guidelines regarding how a product or service is created or supported, as well as how a business operates or required processes are governed. The goal of standardization is to enforce a level of consistency or uniformity in practices or operations within the selected environment.
An example of standardization would be the generally accepted accounting principles (GAAP) to which all companies listed on U.S. stock exchanges must adhere. GAAP is a standardized set of guidelines ensuring that all financial statements undergo the same processes, so the disclosed information is relevant, reliable, comparable, and consistent.
Examples of Standardization in Business
Standardization is a common practice in the business world, aiming to achieve a consistent level of quality, maintain production standards, ensure uniform manufacturing output, and foster brand recognition.
Franchises
Fast-food franchises are prime examples of standardization. Detailed processes are documented to make sure that a burger is prepared in the same manner, no matter which establishment in the franchise a consumer visits.
Product Standards
Certain production and manufacturing industries comply with agency standards to ensure products in the same category are made to the same specifications across different facilities or companies. For instance, the wood products sector adheres to international standards to ensure consistency in product sizing, water-solubility, grading, and composite properties, making sure a two-by-four has the same dimensions, regardless of where or by whom it was manufactured.
Brand Names
Marketing of products sold internationally may be standardized to maintain a uniform image across varying markets. The Coca-Cola Company exemplifies this by using global standardization in its marketing efforts to keep the product’s appearance consistent even when different languages are used on the packaging. This consistency reinforces the brand image across different markets.
Examples of Standardization in Trading
Standardization is pervasive in financial markets, facilitating efficient trades and financial transactions among participants, such as investors, brokers, and fund managers.
Stock Orders
In the stock market, the standard minimum stock order that can be placed through an exchange without higher commission fees is 100 shares. These standardized lots are set by exchanges like the New York Stock Exchange (NYSE) to ensure consistency and enhance liquidity. Increased liquidity allows investors to buy and sell shares seamlessly, helping to reduce trading costs and creating an efficient process for all market participants.
Futures and Options
Standardization is also employed in options and futures markets, which derive their values from underlying instruments such as stocks or commodities. For instance, one equity option contract represents 100 shares of the respective stock. When an options investor trades a contract, they’re dealing with 100 shares, determining value based on the current stock price.
In the futures market, standardized contract sizes vary by the type of contract traded. Nonetheless, set parameters within the futures market dictate the size and delivery dates for these contracts, ensuring a consistent and predictable process.
Related Terms: Quality Assurance, Efficiency, Consistency, Guidelines, Compliance, Regulations.
