Critique of the service-profit chain - Essay Example

?Running head: Critique of the service-profit chain Introduction The service-profit chain was developed by Heskett et al. and it seeks to establish a link between two components of the business environment. On one hand, there is customer satisfaction and business profitability while on the other; there is productivity, loyalty and employee satisfaction. In precise detail, Heskett draws the following relationship: Profit and growth are stimulated primarily by customer loyalty. Loyalty is a direct result of customer satisfaction. Satisfaction is largely influenced by the value of services provided to customers. Value is created by satisfied, loyal, and productive employees. Employee satisfaction, in turn, results primarily from high-quality support services and policies that enable employees to deliver results to customers (1997, p. 18) Whereas the proponents of the service-profit chain claim that relationships can be drawn directly between how loyalty through customer satisfaction can lead to profits, the opponents advocate for other theories and argue that in the 21st century, there are many other factors that are considered when seeking to be profitable. Additionally, there are claims that the theories that advance the service-profit chain are just that: theoretical. There has been no conclusive method of mining data that can be used to precisely reflect how the satisfaction of customers leads to the profiteering of a business. This paper seeks to establish whether the service-profit chain is still viable in recent times or it is just a relic that was developed in the 90s when the conditions were not as turbulent as they are in the business environment today. This paper will present conclusive arguments for and against the service-profit chain drawn from a wide range of scholarly articles in order to make a conclusive argument. Literature review Customer satisfaction has always been a major determinant for the overall profitability of a company. Customer satisfaction is the more important determinant of profit in many companies. Customer desires are very important in crafting a method that will ultimately satisfy these desires. The most logical reason for assuming that satisfied customers will mean that the business will eventually be more profitable is that satisfied customers usually tell others of the products and services that have attracted them. The opposite is also true. Unsatisfied customers will still tell others which will lead to loss of customers meaning a loss in revenue. The relationship between services and profits is mainly pegged on the quality of the service, the customer satisfaction and ultimately customer loyalty. There is a major difference between customer satisfaction and quality. Parasuraman claims that while customers usually decide whether they are satisfied after an experience, the quality has to be decided way before the experience (1991). This means that there is no precedent to quality. Customers can learn about the level of service offered by a service provider from a number of sources. However, for them to decide whether the service quality they have learned about meets their standards, they have to experience it themselves. Marketing is a very important concept in the success of any business. Many marketers have realized the role that service quality plays in the overall satisfaction that results from that service (Valerie et al 1996). Service quality and the resultant satisfaction have been described as being “indices of competitive benefit” (Ruyter 1997). The major point of focus is on the service quality rather than the product quality. This is because while the quality of a product can be predetermined and standardized, the same does not hold true for a service. When service quality has been determined, the customer is then satisfied. This leads to the customer being loyal to that service. Loyal customers usually make the basis for a successful business (Caruana 2002). The loyal customers with their repeat business together with the other people that the customer tells form the foundation for profit making. Presently, the perceived quality of any product or service is the major driver for competition. Peeler (1996) describes this era as the quality era. There are many jargons that have been crafted that are aimed at emphasizing the importance of quality in the business environment. Among the most common is that it is the most powerful weapon for competition and also the life giving blood of the organization (Clow 1993). Service quality is not a one dimensional phenomenon. There are many considerations that go into the quality of service. The identification of these drivers of service quality may be the difference between the failure and success of an organization. Service quality has three dimensions. They include the quality of the output, the quality of performance and the perception of the organization (Gronroos 2000). Reliability, Responsiveness, Assurance, Empathy and Tangibles have also been considered as some dimensions of the service quality. The quality of service has become a very major component that it is now mandatory for serious and competitive businesses to continuously measure and assesses it for its continuous improvement (Spohrer & Maglio 2008). The other major aspect that is the final step towards the profitability of a business is customer loyalty. The mere repeat purchase by a customer does not fit in to the dictionary definition of loyalty. Therefore, the definition of loyalty as an extensive form of observed behavior is the fittest in the service domain (Bloemer et al 1999). Loyalty entails having a psychological bond to a given company, product and service and is therefore largely attitudinal. In other definitions, it is in terms of the first product or service that comes into the mind of an individual when he/she is deciding on a purchase. Proponents Gelade and Young conducted a research into the retail banking sector in order to uncover whether the service-profit chain is of relevance today (2005). Although their results were to some extent inconclusive, they demonstrated that the service-profit chain is relevant when assessed in a single business environment and not in a large chain. This is due to the organization-specific biases. The service-profit chain is simplistic in nature. It asserts that motivated employees are the major producers of satisfied customers who in turn purchase more hence building the revenue base of a given company. Heskett et al. (1997, p. 11) defines it 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”. The service-profit model has had considerable effect in management for a long time and it is therefore important for it to be scrutinized in detail. The causal chain of profiteering starts with the consistent and motivated human resource as the most important social factor. The human resource office is responsible for the motivation of employees in their interactions forming a very positive organizational environment. The resultant effect is that the organization is viewed as a model to be emulated and the perception of the customers is drawn by these sentiments. The positive climate in addition triggers collective attributes in employees such as identification, motivation and commitment. This in turn leads to more salient behaviors in employees including performance, attachment and citizenship, which refers to a pro-social behavior. This more attendant employee who feels a part of the organization performs the in-role tasks effectively and efficiently. The result of all these factors is that the organization becomes more productive (Kopelman et al 1990, p 299). Customers will be served more efficiently and professionally and will develop an attachment to the business. Many researchers show that there is a linkage between overall job satisfaction and the relationship with customer satisfaction (Schneider et al. 2000, p.32). Job satisfaction is closely related to the positive emotions that an employee has. The more positive and employee is, the more he/she radiates that positive vibe to the customer. This case is very true for bank personnel. Pugh (2001) conducted a survey of the banking staff and concluded that the positive energy that is radiated by satisfied bank employees eventually rubs off on the bank customers. This was equated with the customer satisfaction that was envisaged in the service-profit chain. The customers mainly equated the way that they were treated with the overall quality of the service. The correlation between employee behaviors in a collective manner with the result from customer satisfaction could help to draw conclusive evidence on the functionality of the service-profit chain at the business unit level. Dissatisfied employees most likely leave a business causing it to have lower levels of expertise and a negative attitude that is affected by the turnover and thus only afford employees with lower levels of expertise and negative energy which leads to customers not being satisfied. Opponents The main aim of the development of the service-profit chain is to establish the relationship between a satisfied customer and a profitable business. However, the major emphasis is the customer satisfaction. A satisfied customer can only be achieved when the gap between what the customer expects and the performance of the major product and service attributes is non existent. Therefore, in deciding the level of satisfaction of a customer, there are three fundamental measurements. The first is the importance of the product or service to the customer, then the expectation that the customer has of the product or service and lastly, the performance of the product. Traditional approaches to customer satisfaction have been accused of being unable to conclusively measure all these three. When they do measure the metrics, it is usually under the old methods which do not produce conclusive results. The service-profit chain is one of the traditional methods that aim at measuring the true value of customer satisfaction as it links directly to profits. There are three limitations that arise from the use of these traditional methods (DSS 2009, pp. 1). First, the measurement of performance on a scale does not necessarily reflect it actual value in the real world. When measuring performance, it is common to hear that it has improved from 7 to 8 on a scale of 1 to 10. Mostly, these figures are sourced from other variables that in turn affect performance. However, there is no direct relationship between these measurements and how customers actually feel. The most efficient way of measuring the performance of a product or service would be to ask customers directly and gauge their response. The second limitation of traditional methods of measuring customer satisfaction is judging the importance of a product or service from its performance. Majority of the customer satisfaction and service quality approaches do not even attempt to measure the importance of products and services. These methods attempt to either correlate or regress customer satisfaction with the performance and the score is then referred to as the importance. In experiments, one cannot purport that coefficients that are sourced from either regression or correlation are measures of importance. On the contrary, they only measure association. In order for this to be remedied, there is need for the measurement of the importance of importance on its own using a variety of techniques including discrete choice analysis or conjoint analysis. The third limitation is the failure of the traditional approaches in linking customer satisfaction to the real world results. Traditional approaches usually use the customer satisfaction index (CSI) that is applied in organizations over an extended period of time t decide whether the organization is improving. Furthermore, the approach is pegged on the change that a product or service attribute has on the overall CSI. The overall result is gotten by the use of a regression equation where the CSI is observed depending on how the attribute is altered. The modern approaches to customer satisfaction and service quality measure these by using real world outcomes. The key is to monitor product and attributes like sales, revenues and switching by, for example, varying telephone hold time when getting customer feedback. If all the limitations of the traditional methods are considered, the model that will best ensure customer satisfaction and business profitability will involve even more variables and attributes than previously envisaged. Fig.2 illustrates the modern approach that is largely computer generated. Fig. 2: Customer Satisfaction Relationship Management breaks out of the traditional Customer Satisfaction Management domain to generate maximal revenue and profit (DSS 2009) Discussion The service-profit chain draws parallels between employee satisfaction, customer satisfaction and financial performance. This means that for any business to be competitive and to have a superior advantage, it must be focused on the initial satisfaction of its employees and then that of its customers. There are many theorists and management experts who are in support of this assertion. While supporting this view, it is reported that those customers that strongly identify with a given product or service arising from the services that they get form the company’s employees report a stronger intention to make further purchases. Dissatisfied customers on the other hand cite the low quality of the service that they received as the reason for their dissuasion from making a purchase. This is all true to the service-profit concept. The intention for future purchases can be interpreted as loyalty, and can cause increased revenues and in turn increased profitability. The single business unit presents the best scenario for the assessment of the service-profit chain concept. For example, if a given restaurant serves lunch in a business district, there is definitely a lot of competition from other establishments. The best approach for such a business would be to ensure that its customers are satisfied with the overall setting in order to guarantee repeat business. According to the service-profit chain, the only way that such a restaurant can ensure that it retains and attracts customers should start with the satisfaction of its own employees. When the employees are satisfied and they are motivated, they will relay a positive attitude that will be absorbed by the customers who will also feel happy and ensure that they come back for the experience. If such a restaurant has dissatisfied employees, then it will mean that they will not radiate positivity when dealing with customers and the experience will be judged on that scale which may mean the loss of business. Consider a second scenario: an insurance company. As soon as one commits hi/herself to pay insurance, then one is bound by the contract and may risk loosing cover in case of any eventuality. This means therefore that for one to be attracted to the insurance company there must be a sense of quality that is associated with the cover one is purchasing. Thus, the company may follow the service-profit chain meaning that it may satisfy its employees who in turn satisfy the customers and in turn, these customers rake in profits for them or attract others. However, when one makes payments on his/her premium, whether they are satisfied or not, they still have to come back and make other subsequent deposits. So whether the insurance company satisfies its employees or not or whether the service delivery system satisfies the customer or not, the bottom line is that they will still have to pay their premiums meaning that the service-profit chain will not hold true. There is no real method of determining the level of satisfaction that the customer has. There has been mixed findings in attempting to draw the line between the actual customer satisfaction and the intended customer satisfaction and its influence on the overall financial performers. In fact, some companies that rank the lowest in customer satisfaction are some of the most profitable. For example, if one examines the pharmaceutical industry, one finds that although customers feel dissatisfied with the overall quality of service, there is nothing much they can do except complain. Recently, there was an increase in the prices of some essential drugs in the US. Although the authorities are working towards dropping most patents that lead to fleecing of customers by pharmaceutical giants, consumers have no option but to continue buying the drugs. Therefore, the service-profit chain does not hold true for essential products like prescription medicine. The employee or the customer does not have to be satisfied for the company to make a profit. Monopolies present another scenario within which the assertions of the service-profit chain do not hold true. This is because customers do not have a choice of the products and services that they require meaning that they can only source them form one location. Although monopolies do not follow the service-profit chain model, they are bound by law on a number of things. This might include having price caps on their products which means that they may not afford the luxury of customer satisfaction and still remain profitable. The reason for considering the above scenarios that do not follow the service-profit chain is that the chain assumes universality in its claims. It does not consider the fact that some businesses are aimed at profit making and yet they do not conform to the general market environment. The chain does not also consider that some service providers, even though are in a competitive environment have the power to dictate the direction in which the industry leans. A case in point is the pharmaceutical industry. The major players who are mostly multi-nationals have the power to dictate the direction of the entire industry as they craft strategies that discourage competition and also price their products evenly. Therefore, whether a customer is satisfied by one company, it may be irrelevant as the next company will not be different and yet at the end of it all, a purchase will be made. Conclusion The service-profit chain is a good theory that assisted and continues to assist many organizations to make profit through the satisfaction of its employees and in turn its customers. It has been proven that in most cases, the service-profit chain hold true and is efficient in ensuring that businesses are profitable through the actions it supports. In many sectors like in banking, hospitality and retail, the overall profitability is in most cases pegged on the satisfaction of customers. This is because in these sectors, competition is usually very stiff and many customers who are not satisfied by one operator usually find satisfaction in the competition. However, as discussed above, the service-profit chain is not applicable to the sale of essential products like prescription drugs or in the case of monopolies where there are single products in the market. Pundits claim that the service-profit chain is too simplistic and theoretical and is incapable of giving conclusive data that can directly be used to draw conclusions. While arguments and counterarguments have been presented that have been aimed at establishing the viability and validity of the service-profit chain, it is important to recall some simple facts. First, in cases of single business units, there has been evidence of a relationship between the job satisfactions of employees with the satisfaction of customers. Second, in the researches that have been cited on the validity of the service-profit chain, there has been evidence that the companies that are most focused on the satisfaction of customers are the ones that attract loyalty from customers. Third, there has been no numerical fact that have been cited by all researchers (for or against of the service-profit chain) that suggests whether it hold true or not and all assertions have been hypothetical and lastly, there has been evidence that the service-profit chain does not hold true for all business models. In order to decide whether the service-profit chain is still relevant in today’s business environment or it is simply a relic, all the above facts have to be considered. In conclusion, and considering all the facts laid in this paper, it is fair to say that for the most part, albeit without conclusive evidence for or contrary to, the service-profit chain is still very much relevant into the business environment today although studies have to be further done on the topic to establish and attempt to measure the variable that determine to what extent it is relevant. References Bloemer, J. 1999. Linking perceived service quality and service loyalty: a multi-dimensional perspective. European Journal of Marketing, 33(11, 12), 1082-1106. Caruana, A. 2002. Service Loyalty: The Effects of Service Quality and the Mediating role of Customer Satisfaction. European Journal of Marketing, 36(7), 811-828. Clow, K, E. 1993. Building a competitive advantage for service firms. International Journal of Service Marketing, 7(1), 22-32. Decision Support Sciences (DSS) 2009. 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