Influence of Hesketts Service Profit Chain - Essay Example

Organizations across the world now recognize the need to have a focused and employee focused approach for attaining success. Investment in people, investment in technology that supports performance, revamped selection and recruitment procedures, and performance linked compensation have been found to enhance the service delivery in every sector. According to Heskett et al., (1994) the new economics of service requires innovative measurement techniques. These techniques help to determine the impact of employee satisfaction, loyalty, and productivity on the value of services delivered. This in turn helps the managers to build customer satisfaction and loyalty and then determine its impact on profitability and growth. Services are intangible and hence service quality is a growing concern in every industry. In the service sector customer satisfaction is a critical variable and management theorists call this the service profit chain. The service profit chain implies that satisfied and motivated employees produce satisfied customers and satisfied customers translate into higher revenues and profits for the organization. Heskett et al., define the service profit chain as ‘involving direct and strong relationships between profit; growth; customer loyalty; customer satisfaction; the value of goods and services delivered to customers; and employee capability, satisfaction, loyalty and productivity’ (Gelade & Young, 2005). If the service profit chains are carefully interpreted and adapted to suit an organization’s situation, the outcome can be remarkable. Service profit chain can have considerable influence in management circles. It influences decisions of investments to develop service and satisfaction levels. It is important to understand the implication it has in different industries and under different circumstances. Heskett’s service profit chain is clearly understood through this diagram – Source: Heskett et al., (1994). The service profit chain demonstrates the link between each factor. Profit and growth are stimulated by customer loyalty and customer loyalty is a direct outcome of customer satisfaction. Satisfaction is influenced by the value of service created and value in turn is created by satisfied, loyal and productive employees. Employee satisfaction results from support services that enable employees to deliver service to the customers. The service profit chain is a private sector model with desired goals derivations of financial motivation: increased turnover, higher profits or more customers (Davis, 2006). The service profit chain revealed that organizations that wish to be successful in financial terms should not focus on profits. They should instead focus on staff and other resources required to do the job. The service profit chain also reveals that there is a sequence of variables that form a chain reaction that produce the end result that the company gets. According to Marshall, Baker and Finn (1998), the service profit chain perspective means that service quality should be an integrated approach implemented along the entire supplier-customer chain. It should be a basic business strategy that provides goods and services that completely satisfy both internal and external customers by meeting their explicit and implicit expectations. Since the service profit chain is dependent on a satisfied employee, recruitment of the right personnel is critical to the customer satisfaction. The CEO of South West Airlines believes that having employees with the right attitude is important and the success of an organization cannot always be quantified (Heskett et al., 1994). The people in any organization are the heart of any business and hence people need to be motivated and committed to progress further on the chain. It has been suggested that quality of market share measured in terms of customer loyalty is as important as the quantity of market share. Customer loyalty can increase profits from 25% to 85 percent (Heskett et al., 1994). Attempts are also made to quantify customer satisfaction. Companies like Xerox measure satisfaction and have found that those that are less satisfied are less likely to be returning customers and can also give rise to adverse publicity. Customers have become value oriented which has influenced the insurance companies to settle claims promptly. The insurance companies provide all the support services like transportation and housing and handling claims rapidly. They even try to keep the legal costs minimum and actually place more money in the hands of the injured. The value that is important to the customer is influenced by employee productivity. The employee productivity at South West Airlines is phenomenal to the extent that their average turn around of the aircraft is the lowest in the industry. They also have about 40% more pilot and aircraft utilization than its competitors and flies on an average 70 hours per month than the industry average of 50 hours (Heskett et al., 1994). Customer satisfaction level at South West is high because of the schedules they maintain, on-time service, low fares and friendly staff that keep in regular touch with the passengers. Thus employee productivity can be directly linked to customer satisfaction. Employee productivity is in turn linked to employee loyalty. High turnover of staff can increase the costs for the company for hiring and again training. At the same time, low employee turnover is linked to high customer satisfaction. South West Airlines experiences the highest rate of employee retention and consequently employee turnover rates are very high. Employee satisfaction demonstrates the internal quality of the company. Internal quality also refers to the attitude that people have towards one another and the way people serve each other inside the organization. Even mundane jobs like cleaning a hospital room can be made interesting and interactive, which hones up the communication skills of the employee as well keeps the patient in good humor. It is very essential for managers to understand the implications of the service profit chain. It helps them to extend service to their customers and fellow employees. Many companies spend a lot of time with their employees, trying to understand and also listen to their suggestions. This trend becomes a part of their corporate culture. Job satisfaction is also derived depending on how the employees their own ability to meet customer demands. If they feel they have not been able to meet the customer needs they experience low job satisfaction. At the same time, if an employee leaves the company, customer satisfaction levels drop phenomenally (Heskett et al.,). There is ample evidence to support the view that employees influence customer satisfaction. Employees who feel positive about their workplace radiate positive affect as they conduct their work (Gelade & Young, 2005). The customers experience pleasant service encounters as they receive and absorb these emotions. Similarly, when dissatisfied employees leave the organization the satisfaction level in the business unit reduces thereby reducing the levels of customer satisfaction. The second link is between the satisfied customer and financial performance. Once a customer is satisfied there is a stronger intention to purchase from the same supplier than a dissatisfied customer. Thus the essence of service profit chain is that customer satisfaction mediates between employee experiences and financial performance. Gelade and Young (2005) tested the service profit chain the in the retail banking sector and found that customer satisfaction mediates the relationship between employee attitudes and sales performance. They studied four large financial corporations all of which were strongly regulated by government and followed industry code of conduct. The effect size was very small which implies that service profit chain is of limited practical value. This study did not find much of association between favorable employee experiences and enhanced business unit sales. This does not mean that customer satisfaction in business units is unimportant or irrelevant. A positive emotion displayed by the bank employee helps the customer to evaluate the service at that bank. The satisfied customers may not make additional purchases in the insurance segment like the dissatisfied customers but the satisfied customer certainly makes referrals which bring in more business for the insurance companies. Therefore satisfied customers are important organizational asset. In a multi-business unit the beneficiaries may be some other unit and not necessarily where satisfaction was generated. Service failure gives rise to complaints from customers and the efficient handling of such issues is vital in maintaining customer satisfaction and loyalty (Bamford & Xystouri, 2005). If the organization is unable to provide the right environment to the employee in which to operate, service recovery has to be ensured. Service recovery should be the cornerstone of a customer satisfaction strategy. Service recovery strategies have been found to impact the company’s revenue and profitability. By implementing active recovery strategies, Hampton Inn Hotels in the US realized $11 million in additional revenue while scoring the highest customer retention rate in the industry. It has been found that if customers make a complaint about a service and the complaint is satisfactorily resolved, it is highly likely that the customer will ask for the same service again. If the complaint is not resolved, many may not buy the same service again which means there is profit to be made by retaining the customers that were not satisfied initially. This means the employees must have the ability to deal with the unsatisfied customers. The employees can satisfactorily deal with the customer depending upon the employees’ satisfaction level. There are several factors identified by Heskett et al., for employee satisfaction. These include - satisfaction with the job itself; training; pay; advancement fairness; treatment with respect and dignity; teamwork; the company’s interest in employees’ well-being; and the service worker’s perceptions of their abilities to meet customer needs (Bamford & Xystouri, 2005). The point is that very few customers register complaints and hence most often the company may not even be aware of the dissatisfied customers. The dissatisfied customers just silently switch the service provider and may even engage in negative publicity. Customers may be reluctant to complain for various reasons – they may not be aware of their rights as customers or they may be lacking in time and effort to lodge a complaint. Besides, they may also not be willing to confront the employee responsible for the service or they might be concluding that the company would not be responsive (Bamford & Xystouri, 2005). In such circumstances the organization should set performance standards. The customers should also be educated and made conscious of their rights and responsibilities. They should be taught how to complain. Many companies are maintaining call centers to improve service recovery. It has also been found that more than the failure of the service it is the lack of response from the organization that triggers greater resentment and dissatisfaction among the customers. The service profit chain has given rise to different concepts and techniques by which firms can identify and respond to complaints. These include surveys, mystery shopping, focus groups, customer and employee advisory panels, and service operating performance data. The firms then correlate and integrate data collected from different sources. They are able to identify the impact of the service at various levels and then determine how to improve upon the delivery of service. For instance if a hotel has improved the speed of check in, they try to determine the impact it has on customer satisfaction (Bamford & Xystouri, 2005). Investment decisions are then drives by the outcome of such impact of process improvements. The relation between service recovery and organizational profitability can be seen by examining through Heskett’s service profit chain. The impact of service recovery can be traced through improvements in the service system and through the direct effect on satisfaction of resolving a customer complaint. In the airlines industry it has been found that there is a positive correlation between the profits and service excellence of Singapore Airlines (SIA). SIA’s culture of service excellence is in line with the service profit chain. The staff looks at all the process all the time searching for areas where improvement is possible. They maintain consistency and ensure they are able to meet all the needs of all the customers. British Airways (BA) launched the Customer First Campaign which monitored the expectations of the customers and how well BA was able to match these expectations. They regularly train their staff and also have a Quality Assurance Unit whose focus is on defining detailed customer service standards (Bamford & Xystouri, 2005). They also developed a service quality audit to meet the need of overseas stations. When SAS started recovering after a massive loss, their success was based on their commitment to manage customer satisfaction. All the 27,000 employees were put through a two-day training program. This cross-functional training was considered necessary because if only the front line staff is given the training, their best efforts to satisfy the customers could be blocked by the efforts of the back-room staff. Nevertheless, in the case of the airlines that 70 percent of the delays, diversions and cancellations are caused due to weather than can be predicted but not controlled (Bamford & Xystouri, 2005). External factors beyond the control of the airline like air-traffic congestion or failure in another airport can cause delays or cancellations. In such cases it is the personal touch in service that can keep the customers in good humor and loyal. Service failure occurs when the attitude of the ground staff is bad. To deliver standard service requires rigorous selection procedure and training. This is essential because as per the service profit chain customer satisfaction is enhanced when the company combines the service recovery process by offering initiatives to the employees. The service profit chain thus makes the airlines conscious to keep their focus on internal service quality like selection, training, motivating the employees through rewards and appreciation and management support. Front-line employee empowerment enhances motivation. The organizations need to adopt employee – management relationship strategies in an effort to enhance the customer service which translates into enhanced profits for the company. The service profit chain measures different components of an organization’s performance. It is a chain reaction and the next variable in the chain is influenced by the outcome of the preceding variable. An organization is a chain of individual functional units linked together for the purpose of satisfying external customers. Each unit is an independent producer – turning inputs into outputs for the direct use of the next function (Marshall, Baker and Finn, 1998). Hence at each functional interface customer needs, reciprocal obligation and satisfaction should be determined. The service profit chain implies that satisfied and motivated employees produce satisfied customers and satisfied customers purchase more, thereby increasing the revenue and profits of the company. Hence customer satisfaction acts as the bridge between employee satisfaction and financial performance. According to Heskett et al., the chain’s success lies to a large extent on leadership (Ju & Toropainen, 2005). Those leaders that understand the service profit chain develop and maintain a corporate culture which is customer and employee focused. Leaders express their concern about their employees and spend a lot of time selecting, tracking, motivating and recognizing employees. The service profit chain model was applied in the Mexican supermarkets and hotels. Previous studies revealed that in Mexico internal efficiency and technology play a central role in service organizations but they do lack in employee empowerment and training (Maranto & Reynoso, 2003). This makes the decision making process rather slow but firms have been using technology to bring about differentiation in service delivery. The study found that supermarkets and hotels have been concentrating on the elements of the service profit chain. The supermarkets concentrated more on establishing appropriate levels of frontline capability and identifying and communicating core values while the hotels focused on receiving customer feedback. It was found that managers both at the super markets and the hotels were taking steps to achieve customer satisfaction than was the case ten years ago. Services have become an important economic activity in Latin America now. The firms are conscious to find out what drives value to customers and how that service represents business to the firm. The service profit chain was tested in a US bank and positive correlation was found between internal service quality, employee satisfaction and loyalty and customer satisfaction and loyalty and revenue growth. In the case of UK chain of superstores also positive link was found between productivity and output quality. Pritchard and Silvestro (2005) applied the service profit chain to the retail sector to develop a better understanding of the linkages between employee perceptions and performance, customer perceptions and behavior, and financial performance. The strategy at this retail chain was based on the premise that improvements in service quality would drive customer satisfaction and loyalty which in turn would improve financial performance. The study measured the internal quality, service capability, employee and customer satisfaction on the basis of perceptual survey data. The study found many correlations between variables and performance which were not aligned in the service profit chain. It was found that employee satisfaction is based on the extent to which the employee is able to implement and the extent to which the employee’s suggestions are accepted by the organization. Employee satisfaction results in higher employee loyalty which reduces labor turnover, absenteeism and the organization experiences labor stability. This does not imply that low levels of employee satisfaction would translate into higher labor turnover because labor turnover is also dependent on similar offers by the competitors. What the service profit chain implies is that higher internal service quality and an empowered workforce means higher level of employee satisfaction. Employee loyalty is linked with several variables in the service profit chain – it is positively correlated with service value, employee satisfaction, productivity, customer satisfaction and growth. Thus to maintain customer store experience and productivity, it is essential to maintain high levels of labor stability and keep labor turnover low. This study reveals that every retail company should explore the nature of the service profit chain in their own organizations because there does not seem to be a generic model applicable to all. The authors found that analysis of performance linkages is not as simple as Heskett et al devised. Multivariate analysis is essential to have a deeper understanding of the processes and requirements in the organization. The service profit chain devised by Heskett et al., has been further subject to criticism by Irene (2001) who contends that if the McDonalds Burger itself falls below expectations, no matter how efficient the service is, they cannot expect customer loyalty. The service profit chain can be more effective if the service is accompanied by a tangible good than when the service is purely experiential. This enables the customers to evaluate the service more effectively and decide if they have obtained value. Lack of customer satisfaction can weaken the service profit chain. Thus the service profit chain by Heskett et al., does have serious managerial implications. Several studies have been conducted to ascertain to what extent the linkages suggested by Heskett et al., are effective. It has been found that employee satisfaction is vital and employees should be considered as internal customers. It is definitely a chain reaction leading from employees’ satisfaction to employee loyalty, to customer satisfaction and finally profitability and growth. However the linkages in every industry and in every organization may not be the same. The outcome cannot be generalized and the strategy should be specific to the organization. Nevertheless, many organizations have benefited by applying the service chain to analyze their performance and altered their strategies to maximize customer satisfaction. Most organizations now have adopted a customer focused approach to maximize profits. To motivate employees they use various tools like employee empowerment. The service profit chain has definitely provided a guideline to firms to draw their strategies but each firm is unique, each employee is unique and so is each customer. Hence, while the linkages would remain, the degree of integration between each link would differ across companies and across industries. References: Bamford, D. & Xystouri, T. (2005). A case study of service failure and recovery within an international airline. Managing Service Quality Vol. 15 No. 3, 2005 pp. 306-322 Davis, P. J. (2006). In search of the common wealth: a service-profit chain for the public sector. International Journal of Productivity and Performance Management Vol. 55 No. 2, 2006 pp. 163-172 Gelade, G. A. & Young, S. (2005). Test of a service profit chain model in the retail banking sector. Journal of Occupational and Organizational Psychology (2005), 78, 1–22 Heskett et al., (1994). Putting the Service-Profit Chain to Work. HARVARD BUSINESS REVIEW March-April 1994 Irene Ng (2001). Preparing to do Research. Sample Critique. Available from: http://www.people.ex.ac.uk/icln201/research/papers/samplecritique.pdf [accessed 14 July 2008] Ju, L. & Toropainen, M. (2005). In Search of Linkages – Examining the Relationships between Employee Attitudes, Customer Satisfaction and Business Performance. Available from: http://www.handels.gu.se/epc/archive/00004781/01/Linlin%5F%2B%5FToropainen%5FMIM.pdf [accessed 14 July 2008] Maranto, D. & Reynoso, J. (2003). Understanding the service-profit chain in Latin America: managerial perspective from Mexico. Managing Service Quality. Vol. 13 No. 2 pp. 134-147 Marshall, G. W. Baker, J. & Finn, D. W. (1998). Exploring internal customer service quality. JOURNAL OF BUSINESS & INDUSTRIAL MARKETING, VOL. 13 NO. 4/5 1998, pp. 381-392 Pritchard, M. & Silvestro, R. (2005). Applying the service profit chain to analyse retail performance The case of the managerial strait-jacket? International Journal of Service Industry Management Vol. 16 No. 4, 2005 pp. 337-356 Read More