Quality as a Key Driver of Profit Performance - Case Study Example

work] The Service Profit Chain: Implications for the Practice of Management in Service Business It is a widely believed thatquality is a key driver of profit performance, but that has been re-focused to customer perceived quality, especially when dealing with service operations. (Soteriou & Zenios 1997). The customer has already become the decision maker of company operations in the digital economy, emphasizing that without customers, no company can ever survive (Shaun & Wheeler 2002). In several dozen research studies on what customers consider to be most important, three attributes were almost always ranked among the top five: feeling appreciated, convenience or easy-to-do-business-with, and perceived value (Smith & Wheeler 2002). The development of relationships with customers which evolve from their satisfaction to loyalty to advocacy should then be carefully managed. This is gist of service-profit chain propounded by Heskett, Sasser & Schlesinger (1997). A powerful process that stresses the importance of people in terms of both employees and customers linked, service-profit chain can leverage corporate performance (Heskett et al.1997). Specifically, service-profit chain is an equation that goes beyond to establish the relationship between corporate policies, employee satisfaction, value creation, customer loyalty, and profitability (Kotelnikov 2006). With this framework, conventional measures of performance must now include the enthusiasm of the employees and the quality of customer satisfaction. It requires then service managers to blend marketing, technology, people, and information to achieve a distinctive competitive advantage (Heskett, Sasser & Schlesinger 1997). The flow of the service profit chain is described as follows: Fig.1. The Service Profit Chain. Because of the quality of service, a customer keeps coming back for more and profit is assured. Internal service quality leads ultimately to profit and growth According to Kotelnikov (2006), there is a straight line between superior service and sustainable profit growth. Two-thirds of customers, it is said, defect from their previous favorite establishments because of poor service. Employee loyalty, employee capability, job satisfaction, productivity and customer satisfaction must then be strong as they are said to be the links in the service-profit chain (Heskett et al. 1997). Companies. The case of Xerox, for example, is classic as described by Jack Mackey (2006). Its customer research was said to prove that a "highly satisfied" customer is six times more likely to buy again as one who is merely "satisfied." Before this, Xerox was said to be happy to see its customers rate their experience as either "satisfied" or "highly satisfied." Now Xerox sets the target at achieving "highly satisfied" ratings from 100% of their customers because the probability of keeping one’s merely "satisfied" customers coming back is alarmingly low. The explanation is that one is not really the preferred choice but just an available choice, and the customer with rating of “satisfied” is actually ripe for the picking by the competitor as loyalty is not there. Hence, "good" is to be construed as "vulnerable." This is an example of hitting strong on customer satisfaction for profit performance. Companies have managed to turn customers into advocates who constantly refer their friends and colleagues to those businesses. McConnell, Huba & KawasakiI (2002) called them “evangelists.” One is said to gain this unbeatable competitive advantage through the step-by-step process of creating loyalty by design (Smith & Wheeler 2002). This may be another term for the much touted concept of “branded customer experience” where a customer finds himself not wanting to do business with another but the choice company. A concept within the service-profit chain framework, “branded customer experience” is described by Smith and Wheeler (2002) as creating a ‘significantly memorable’ and ‘emotionally attaching’ experience that satisfies the conscious and unconscious needs of the target customer. Apparently, for such experience, marketing, operations, and human resources have to work together. Starbucks offers an excellent example of branded customer experience under Howard Schultzs leadership. This international chain of gourmet coffee shops, in combining "experiencing the brand" and "branding the experience" is said to treat its part-time employees better with compensation and benefits than most organizations and, in turn, they reciprocate with a consistency high level of service in both competence and cordiality. In turn, they function as advocates (Smith & Wheeler 2002). Among companies that are said to create sustainable competitive advantage through branded customer experience are Amazon.com and Home Depot. In the hurry to control cost, however, service providers are said to often make life difficult for the customer but the result may lead to massive damage to the brand, and ultimately to the company (Heskett et al 1997). The Service Profit Chain Institute features two case studies (Client Case Studies 2006) that it has worked with towards delivering a competitively superior customer and employee experience. One is The Steak n Shake Company. Their restaurants have been made to understand that the interaction between their employees and their guests is central to their long term success. Steak n Shake has developed, therefore, a 5 year plan to engineer a transformation process. This program begins with a deep understanding of the guest and associate needs and is followed by a series of initiatives to move Steak n Shake closer to its long term vision. The other one is CA, formerly Computer Associates (Client Case Studies 2006). The foundation was said to have begun a customer-driven transformation of one of the world’s premier software companies. CA was guided to develop their vision, mission and core values and then a “Transformation Roadmap” which was a three year plan to harness the commitment and knowledge of the entire organization. The key initiatives were said to include re-engineering the customer and front-line employee measurement system; a comprehensive communication strategy; launching six Councils of cross-functional leaders to guide the transformation effort; and designing of the CEO’s leading the transformation leadership development program to the top 500 leaders in the company. Obviously, customer satisfaction is no longer enough. To lead the market, companies need customers who are enthusiastic advocates or customers who are highly loyal and drive new business to the company. For example, it is said that 38% of First Directs business comes from customer referrals. Advocacy comes from creating a customer experience that becomes synonymous with the brand (Mackey 2006). Harrahs Casinos and Hotels, is another example of the “Customer-loyalty-is-driven-by-employees” theory of the Service Profit Chain. As told by Jack Mackey (2006), a Performance Payout Program targeting measurable customer satisfaction serves to motivate employee efforts in win high marks from customers and achieve excellent service levels individually. Accordingly, only engaged employees deliver to the level of superior service. Extending this to the entire team, employees also have a vested interest in the performance of the group. At the end of the quarter, engaged employees may pick up $200. Recognizing that loyalty is armor against competition, outstanding employees are recognized with special Chairman Awards and their names published in Harrahs annual report. Mackey (2006) adds that there is also a managers annual bonus that is tied to achieving loyalty-inspiring customer service goals. Testing Service-Profit Chain. The findings of a study done by Xu & van der Heijden (2005) indicate that there is positive association between employee factors and corporate profitability, and that profitability seems to be strongly influenced by employee tenure. For all the touted benefits of service profit chain, however, Kamakura, Mittal, de Rosa & Mazzon (2002) said implementing it is a pervasive problem among most service firms, and several attempts have been made to model various aspects of the service-profit chain. In assessing this framework, they found a need for approaches that combine data such as operational inputs, customer perceptions and behaviors, and financial outcomes. This is the same thinking of Soteriou and Zenios (1997) who had specified that when it comes to looking into service-profit chain, several drivers of performance should be benchmarked simultaneously. To them it is not sufficient to identify the links of the service-profit chain, or to benchmark one link at a time. Several links should—and can—be benchmarked together, as integral parts of the chain, they believed. The three links they looked into their development in the service-profit chain are operations, quality of services, and profits. Outcomes have found diffusion of the service profit chain framework on slow process, however. A related study on customer relationship management (CRM) by Bohling, Bowman, LaValle, Mittal, Narayandas, Ramani & Varadarajan (2006) said successful implementation depends on a number of factors such as fit between of a firm’s strategy, its intra-organizational and inter-organizational cooperation and coordination among entities involved in implementation. Implications. Between market-oriented management and marketing management, there is said to be a powerful difference. In the first, the competitive advantage and value of the firm is built upon customer relationships. In simple words, if your customers perception of the quality and value your company delivers is based on an array of interactions and activities, then no marketing or other separate business function can successfully guarantee customers satisfaction and loyalty in their relationship with you. This is what happens in market-oriented management or service-profit chain exemplified (Heskett et al.1997). Service profit chain principles are actually being exemplified by best practice companies. Service-profit chain may be said to be a refined summary of all of the best service management theories. Following Service Profit Chain principles may lead to distinctive and sustained levels of service, lower total costs, higher everyday margins, and happier, more loyal employees and customers. It also breaks new ground as far as making a new service order happen within a business. With the banking industry, for example, there have been changes from the way they conduct business. Notwithstanding the importance of skill and ability, exceptional bank performance was found requiring more than just highly capable employees. Researchers across the retail and banking industries have supported the hypothesis that employee attitudes impact customer satisfaction and loyalty, which in turn leads to increased revenue and profitability (Soteriou & Zenios 1997). The strategy now is to combine the drivers of employee commitment, customer satisfaction sales and branch success (Xu & van der Heijden 2005). Service Profit Chain can change an entire corporate vision. In sum, Service Profit Chain is helpful in organizing the confusing array of ideas for managers that proliferate today. It can provide a basis for benchmarking an organization against best practice on various dimensions of the chain. However, the concept is fairly straightforward on paper, but can be very challenging in practice. The principles are not always easy to implement. To go from a top-down, financial management company to a bottom-up, service excellence performer takes a total transformation starting with the dated, unspoken core assumptions or beliefs of the Chief Executive Officer. A big change is supposedly necessary for big gain, but it most often will involve some big pain. (Achieving breakthrough, 2006). If companies master the "rules of the service game” however, service organizations can outperform the competition (Schneider and Bowen 1995). In the service contexts, it is found that marketing decisions cannot be separated from overall management decisions or any business function. These decisions cannot be considered without taking into account their external implications, that is, the customer. The Service Profit Chain then points out properly that it is the employee that makes the customer (Achieving breakthrough, 2006). Smith and Wheeler (2002) earlier mentioned that "If you dont have employees who are competent and cordial as well as committed to the enterprise, you wont have any customers." This was the very same thesis of Heskett et al. (1997). From the observations of Heskett and his group, many companies are focused on the next quarterly earnings release that they dont ever see the lifetime value of their customers. But within the service-profit chain paradigm, managers at service industries wont have to keep trading off employee satisfaction in order to achieve customer satisfaction; and customer satisfaction wont be viewed as a cost factor and a drag on profit growth. Service companies that just dont understand these concepts wont be around for long. As the world embarks into the e-commerce age, service and technology companies that can quickly apply these concepts within their business models where there is no direct, face-to-face, contact with the customers will build a truly competitive advantage. Incidentally, Heskett, Sasser and Schlesinger (1997) have upgraded Service Profit Chain into what they call Value Profit Chain (Achieving results 2003). They argue that organizations need to focus on providing what their employees, customers, investors, suppliers, and others value most. Focusing on value will bring about necessary organizational change, and tying an organization to the most valued needs of its customers will make it more responsive to its markets. In addition, giving employees what they appreciate in an organization will make them more productive and decrease the costs of employee turnover. They conclude that a value approach will result in greater organizational effectiveness and profitability. Basically, Value Profit Chain is also Service Profit Chain but expanded to stress focus not much on customer relationship but on customer perceived value. The assumptions of the theory are that the employee value causes the satisfaction, loyalty and productivity that produce customer value. In turn, satisfied, loyal, trusting and committed customers are the primary drive of company growth and profitability, and determinants of investor value. References ‘Achieving Breakthrough Value. 7 Steps to Redesign Your Employee and Customer Experience for Extraordinary Results! Linking Employees, Customers and Profits.’ The Service Profit Institute. Available 18 Dec 2006 at: http://www.serviceprofitchain.com/consult/ABV_Transformation.pdf ‘Achieving results and process quality by fostering key constituents loyalty, trust, commitment, and ownership. Explanation of Value Profit Chain of Heskett, Sasser and Schlesinger (2003).’ Website: 12Manage.Rigor and Relevance. Available 18 Dec. 2006 at: http://www.12manage.com/methods_heskett_value_profit_chain.html ‘Client Case Studies.’ The Service Profit chain Institute. Available 18 Dec. 18, 2006 at: http://www.serviceprofitchain.com/client.htm Bohling, T., Bowman, D., LaValle, S., Mittal, V., Narayandas, D., Ramani, G., & Varadarajan, R. 2006, CRM Implementation. Effectiveness Issues and Insights. Journal of Service Research, Vol. 9, No. 2, 184-194 (2006) DOI: 10.1177/1094670506293573. SAGE Publications Heskett, J. L., Sasser W.E., Jnr., & Schlesinger, L.A., 1997, The Service Profit Chain: How Leading Companies Link Profit and Growth to Loyalty, Satisfaction and Value. ISBN 0684832569. Simon & Schuster Inc. Kamakura, W. A., Mittal, V. de Rosa, F. & Mazzon, J.A., 2002, Assessing the Service-Profit Chain. ISSN: 1526-548X. Volume 21, Issue 3. Institute for Operations Research and the Management Sciences (INFORMS), Linthicum, Maryland, USA Kotelnikov, V. ‘Service Profit Chain. Leveraging Corporate Performance through Linking and Satisfying Your Employees and Customers.’ E-Coach. Available 15 Dec. 2006 at: http://www.1000ventures.com/business_guide/im_s-p_chain.html Mackey, J. ‘How To Earn Your Customers Loyalty. Putting the Service Profit Chain to Work.’ Website: Franchising.com. Franchise Update Media Group. Harvard Business Review. Available 18 Dec 2006 at: http://www.franchising.com/article.php?id=51 or www.whysmg.com McConnell, B., Huba, J., & Kawasaki, G., 2002, Creating Customer Evangelists: How Loyal Customers Become a Volunteer Sales Force. ISBN: 0793155614. Kaplan Business. Schneider, B. & Bowen, D.E., 1995, Winning the Service Game. ISBN: 0875845703. Harvard Business School Press Smith, S. and Wheeler, J., 2002, Managing the Customer Experience: Turning Customers into Advocates. 1st edition. ISBN: 0273661957. Financial Times Prentice Hall. Soteriou, A., & Zenios, S.A. Efficiency, Profitability and Quality of Banking Services. Financial Institutions Center. Working Paper, Department of Public and Business Administration. University of Cyprus, Nicosia, CYPRUS. May 5, 1997. Available 18 Dec. 2006 at: http://fic.wharton.upenn.edu/fic/papers/97/zenios.pdf Xu, Y. and van der Heijden, B. I.J.M. The Employee Factor in the Service-Profit Chain Framework: A Study among Service Employees Working Within a Leading Chinese Securities Firm. Journal of International Consumer Marketing. (2005, December 19). Volume18. Issue: 1/2 ISSN: 0896-1530. Read More