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

BREAKING DOWN 'Standardization'

Standardization is achieved by setting generally accepted guidelines in regards 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.

Generally Accepted Accounting Principles

An example of standardization would be the generally accepted accounting principles (GAAP) to which all companies listed on U.S. stock exchanges much 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 in Business Operations

Standardization can be found in business processes when companies require a consistent level of quality. 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.

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.

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.

Standardization in Trading

Standardized lots are set by an exchange and allows for greater liquidity in the financial markets. With increased liquidity comes reduced spreads in the market, creating an efficient process for all participants involved. In the stock market, the standard minimum stock order that can be placed through an exchange without incurring higher commission fees is 100 shares.

Standardization is a non-negotiable process used in options and futures trading for price discovery and establishing trade bases for contracts. The standard lot for one equity options contract is 100 underlying shares of a company's stock. In other words, one options contract represents 100 shares.

When it comes to the futures market, the standardized contract sizes vary depending on the type of contract that is traded. For example, one futures contract for corn, soybeans, wheat, or oats has a lot size of 5,000 bushels of the commodity. On the other hand,

the contract size for one Canadian dollar futures contract is 100,000 CAD, one British pound contract is 62,500 GBP, one Japanese yen contract is 12,500,00 JPY, and one Euro futures contract is 125,000 EUR.

 

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