What Is Standardization?

Standardization is a framework of agreements to which all relevant parties in an industry or organization must adhere to ensure that all processes associated with the creation of a good or performance of a service are performed within set guidelines.

Standardization ensures that the end product has consistent quality and that any conclusions made are comparable with all other equivalent items in the same class.

Key Takeaways

  • Standardization ensures that certain goods or performances are produced in the same way via set guidelines.
  • Standardized lots are used in trading stocks, commodities, and futures to allow for greater liquidity, efficiency, and reduced costs.
  • Standardization is used in accounting practices and for establishing quality and production standards in manufacturing.

How Standardization Works

Standardization is achieved by setting generally accepted guidelines with regard to how a product or service is created or supported, as well as to how a business is operated or how certain required processes are governed. The goal of standardization is to enforce a level of consistency or uniformity to certain 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 created by the Financial Accounting Standards Board (FASB) to ensure that all financial statements undergo the same processes so that the disclosed information is relevant, reliable, comparable, and consistent.

Standardization ensures that certain goods or performances are produced in the same way via set guidelines.

Examples of Standardization in Business

Standardization can be found throughout the business world when companies want to achieve a consistent level of quality, production standards, manufacturing output, and brand recognition.

Franchises

For example, many fast-food franchises have detailed processes documented to make sure that a burger is prepared in the same manner, regardless of which establishment in its franchise a consumer visits.

Product Standards

Certain production and manufacturing businesses adhere to agency standards to ensure all products of the same category are created to the same specifications between different facilities or companies.

For example, the wood products industry participates in international standards to maintain consistency of like products. This can include references to acceptable product sizing, water-solubility, grading, and composite properties. These standards ensure that when a person goes to a retail store to purchase an item, such as a two-by-four, the sizing is consistent regardless of the store visited or the product manufacturer.

Brand Names

The marketing of products sold internationally may be standardized to keep a uniform image among the varying markets. For example, the Coca-Cola Company uses global standardization in marketing by keeping the appearance of the product relatively unchanged between different markets. The company uses the same design theme even when different languages are presented on the products. Coca-Cola's marketing also maintains a consistent theme to help reinforce the image it is presenting.

Examples of Standardization in Trading

Standardization is commonplace in the financial markets, which helps facilitate trades and financial transactions involving all of the 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 incurring higher commission fees is 100 shares. These standardized lots are set by exchanges, such as the New York Stock Exchange (NYSE), to allow for consistency and greater liquidity in the markets. The increased liquidity means that investors can buy and sell shares without delays or difficulties, which helps to reduce trading costs and creates an efficient process for all of the market participants involved.

Futures and Options

Standardization is also used in options and futures markets, which derive their values from underlying instruments such as stocks or commodities. For example, one equity option contract represents 100 shares of that stock. When an options investor trades an option contract, they know they're buying or selling 100 shares of the stock and determining the value based on the stock's current price in the market.

In the futures market, the standardized contract sizes vary depending on the type of contract that is traded. However, there are set parameters within the futures market that determine the size and delivery dates for those contracts.