The Concept of Service Profit Chain - Essay Example

Service Profit Chain - an introduction The concept of Service Profit Chain tends to explain that most of the leading companies across the globe try and maintain their leadership position by managing a quantifiable set of relationships that directly links profits and growth to customer loyalty and satisfaction, employee loyalty and satisfaction, and productivity. The quantifiable set of relationships mentioned above together constitutes the Service Profit Chain (James L. Heskett, 2007). A relationship is established by the Service Profit Chain between profitability, customer loyalty, and employee satisfaction, loyalty, and productivity. The linkage in the chain which is in fact the prepositions are between profit and growth. These two are particularly inspired by customer loyalty. Very clearly, loyalty is the direct attribute of customer satisfaction. The reason behind a customer being extremely satisfied about the product or a service is the value of the services that were provided to the customers. Hence, it can be otherwise stated that Value is created by satisfied, loyal and productive employees. The Origin of the Service Profit Chain Heskett - Service Quality, 1986 Heskett, Sasser and Hart - Service Breakthroughs: Changing the Rules of the Game, 1991. Kotter and Heskett - Corporate Culture and Performance,1992 HBR, Putting the Service Profit Chain to Work, 1994 Heskett, Sasser and Schlesinger- The Service Profit Chain, 1997 Heskett, Sasser and Schlesinger- The Value Profit Chain, 2003 (Heskett, 2003) The Service-Profit Chain (SPC) is a conceptual framework, which describes a process for delivering superior service value (Heskett, Sasser, & Schlesinger, 1997). According to the framework, positive business outcomes result when service delivery activities lead to customer satisfaction and customer loyalty. However, managerial implementation of the SPC has remained problematic, primarily because of certain limitations in the modelling methods commonly employed. Providing managers with the ability to model this process in a way that is of practical value to decision makers would be a considerable contribution (Anderson, 2004). The following are the main objectives of the Service Profit Chain - (1) Present a mechanism for implementing the SPC model that is superior to other widely used models, and (2) To demonstrate the decision-enhancing capabilities of the implementation. We use transportation service satisfaction as the specific context for our presentation. Based on the Service Profit Chain model, profitability and growth are determined primarily by maximizing the lifetime value of your customers, and that value is fully realized only when you earn the customer's loyalty. In one study, a 5% increase in customer loyalty produced profit increases from 25% to 85%. A loyal customer is one who obeys the three R's: Retention, Repeat Sales, and Referrals. Major corporations (many of which are household names) subscribe to the Service Profit Chain model and have achieved a level of success that is enviable. The diagram below outlines the links in the Service-Profit Chain. From the diagram given below, it can be clearly noticed that one of the most important links in this chain is the interface between the external service value and customer satisfaction. The external service value represents the service concept: the results for the customers. This is the interface of your installers, sales reps and managers, and your client (SENCORE). Now, the above diagram clearly suggests that customer loyalty is driven by customer satisfaction, customer satisfaction is driven by value, and value is driven by employee productivity, and so on. As already noticed the beginning of the chain is Internal Service Quality. It becomes clear that employee satisfaction and loyalty are directly proportional to the service they provide to your customers. The success of any business thus depends on how the organization cultivates its employees into a productive, passionate, quality-oriented team (SENCORE). Also, the inbuilt implications of the above diagram are that by exceeding the expectation, it is possible to win and retain clients, therefore increasing the revenue & profit of the business, which satisfies the stakeholders, and at the same time keep the employees happy through reinvestment in the working environment. Despite all the above points about the Service Profit Chain being clear, there seems to be some gaps (Karen Ferris, 2003). If properly analysed, they can thus be summarized as under: The gap between what consumers think they want and what they actually receive The gap between what consumers say they want and what suppliers think they mean. The gap between what suppliers think the customer means and the services the supplier can design or provide. The gap between what the suppliers can offer and what they say they can offer. The gap between what the suppliers actually provides as a service to the consumer and how that service is perceived by that consumer. The model most used for measuring service quality and identifying the gaps is SERVQUAL2, and is shown in Diagram 2 below: The Servqual model identifies 5 key dimensions that applied to all the gaps - which are familiar to suppliers and consumers of products and: Tangibles - The appearance of physical facilities, equipment, personnel and communication materials. Reliability - The ability to perform the promised service dependably and accurately. Responsiveness - The willingness to help customers and provide a prompt service. Assurance - The knowledge and courtesy of the employees and their ability to convey trust and confidence in the solutions being provided. Empathy - The caring, individualised attention the company provides its customers. Issues in implementing Service Profit Chain The linkage between customer satisfaction and profitability is a cornerstone of service improvement efforts. Measurement of customer satisfaction is irrelevant if this linkage does not exist. In case the variations in customer satisfaction do not connect with variations in profitability then any kind of attempts to manipulate satisfaction will never have any impact on profitability. Several methodological issues can obscure the relationship, leading companies to erroneously assume that customer satisfaction measurement is not essential to their growth. The measurement of customer satisfaction has become more common among organizations providing products and services to consumers and businesses. Customer satisfaction measurement is central to operations. The reason behind this is measuring customer satisfaction will provide valuable feedback to organizations about where the efforts of the organization in the area of improvement are most necessary, as well as indicating the degree to which improvements are likely to have the most significant impact on customer behavior and loyalty. In an effort to improve customer satisfaction, companies have spent millions of dollars evaluating customer satisfaction and making improvements, always assuming that their measures are directing them to address the right issues. Organizations usually invest in customer satisfaction measurement because they assume that satisfied customers will engage in a number of behaviors beneficial to the company and demonstrate a long-term commitment to their brand. These behaviors include, but are not limited to, continuation of the customer relationship, deepening of the customer relationship through cross-selling, and referrals to new customers. Thus, it has been assumed that customer satisfaction should be consistently and positively associated with a company's profitability. This assumption of a customer satisfaction-profit link is the heart of the service profit chain as described by Heskett, Sasser and Schlesinger in the year 1997 (Heskett, Sasser, and Schlesinger, 1997). The key linkage that must be demonstrated is the linkage connecting customer satisfaction to profitability. Demonstrating this linkage provides the ultimate justification for measuring customer satisfaction. Research has demonstrated that a highly satisfied customer is six times more likely to re-purchase than a customer who is merely satisfied (Jones & Sasser, 1995). The link between satisfaction and probability - Certain Exceptions Most commonly, the relationship will not exist if a majority of customers do not have a choice of which company will provide a product or service. These customers are defined as hostages by Heskett, Sasser and Schlesinger. Hostages are customers who are not satisfied, but still express an intention to purchase from the company. The clearest examples of a company whose customers are likely to be hostages are utility companies in communities where the customer has no choice of providers. A relationship between satisfaction and profitability would not be expected as customer satisfaction has little impact on a customer's choice of service providers (Murphy, 2001). This relationship would also not be expected to exist in situations where the cost of switching providers is low and there are many companies providing the product or service. Heskett, et al (1997) refers to customers in these markets as mercenaries, as price can be a strong determinant in the product/service choice process. Commodity markets are the clearest examples of this type of market, where customers have ready alternative choices and their selection is likely to be driven by price. There are also certain methodological issues with respect to the Service Profit Chain. The level of analysis is one among them. Typically, customer satisfaction is measured with respect to a specific instance of experience. This decision is supported psychometrically, as there is a possibility that the respondents can more accurately evaluate their experience at a specific point in time. The views of the same respondents would definitely differ if they are asked to cognitively combine their satisfaction with multiple experiences that they might have had with a company's products or services. These individual measures are commonly aggregated to represent the level of satisfaction typical of any customer interacting with a specific business unit, such as a store location or individual restaurant. Analyses are then conducted examining the relationship of unit-level satisfaction with a unit-level measure of profitability. Matching the level of analysis enhances the ability to identify a significant relationship between profitability and customer satisfaction. Another alternative is to examine the relationship between loyalty and profitability. Theoretically, loyalty can exist with respect to a specific unit or to the brand, or both, in contrast to customer satisfaction, normally measured with respect to a specific experience. In other words, a consumer may be satisfied or unsatisfied with his or her own meal experience at a restaurant. While that satisfaction may have an impact on the individual's likelihood of returning, other factors may also impact that decision. The relationship between unit loyalty and unit profitability may not exist when conducting research with companies that might provide several alternative locations within a respondent's zone of convenience. Customers may be more strongly driven by brand loyalty and brand equity and operationalizing loyalty and profitability at a unit level may obscure the expected relationship. In this instance, profitability needs to be operationalized at a market level as do loyalty measures. References 1. Anderson, R. D. (2004). Baynesian Estimation of Service Profit Chain. Retrieved 01 08, 2008, from BNet Research Center: http://findarticles.com/p/articles/mi_qa3713/is_200410/ai_n9458572/pg_1 2. Heskett, S. &. (2003). Value Profit Chain. Retrieved 01 08, 2008, from 12Manage Management Communities: http://www.12manage.com/methods_heskett_value_profit_chain.html 3. James L. Heskett, W. E. (2007). The SErvice Profti Chain. Retrieved 01 08, 2008, from Business Book Review: http://www.businessbookreview.com/books/Finance/The_Service_Profit_Chain_James_L_Heskett_W_Earl_Sasser_Jr_and_Leonard_A_Schlesinger.html 4. Karen Ferris, H. S. (2003). Mind The Gap. SErvice Talk - The Journal of the IT SErvice Management Forum , 1-4. 5. SENCORE. (n.d.). The Service Profit Chain. Retrieved 01 08, 2008, from SENCORE: http://www.sencore.com/newsletter/Mar05/ServiceProfitChain.htm 6. Heskett, James L., W. Earl Sasser, Jr. and Leonard A. Schlesinger (1997). The Service Profit Chain: How Leading Companies Link Profit and Growth to Loyalty, Satisfaction, and Value. The Free Press, New York. 7. Jones, Thomas O. & W. Earl Sasser, Jr. (1995). "Why satisfied customers defect." 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