Hesketts Service Profit Chain - Essay Example

Introduction: Hessket, Sesser, and Schlesinger (1994) in their seminal work on value chains, at the Harvard Business School, suggested that companiesneed to enhance service to the customer, investors, and employees by focussing on ‘value creation.’ The customers, the employees and the investors, they are argued, by their uniquely intermeshed roles make a business chain profitable. Customers, Employees, and Investors are the three pillars that add profit to the chain. Branson quoted by Parsley (2005) arranges employees, customers, and investors in the decreasing order of the importance of their roles in profit chains. According to him employees represent the front end of the company, in the sea of market forces, the customer. Higher satisfaction levels in these groups drives profits in the value chain. In fact higher the satisfaction, the better the performance and more profitable an organisation becomes. We will critically examine the ideas of Heskett. et. al with reference to remarks made on it, by on it by modern theorists, practitioners, researchers and business leaders of service industry. In order to develop conclusive arguments on the theory of Hesket et. al. we need to begin by stating definitions of terms like Value Chain, Profit, Customer, Investor, and Services. Definitions: Value Chain: ICH Resource Architecture Center defines it as “a set of support activities to deliver valued added outputs to customers; an interrelated set of generic activities of inbound logistics, outbound logistics with intermittent functions of operations and sales (Porter); ACDI/VOCA sums all activities that bring a product from conception to end stage in the value chain. Customer: A customer is an individual or a business that buys a product or a service from another business. Employee: The British Employment Law defines employee as “"an individual who has entered into or works under a contract of employment. (emplaw.co.uk)”. The employment can be of short duration and long duration and its rules, regulations vary from country to country. Investor: Investor is an individual who puts in money into an enterprise and seek profit thereof. In the current parlance, the word stakeholder is being used for investors. But sometimes the stakeholder is also used to mean the employees, the consumers and the community in which a company operates. Services: Answers.com defines a service that sells assistance and expertise rather than a tangible product. However service may also has a wider connotation for tangible items called product servicing. For theoretical purposes we will service in the tangible and intangible context. Critical Analysis: Having briefly defined the important terms involved, we will critically analyse the working of Heskett et.al. profit chain. Heskett et.al proposed value addition as the core element of a business, big or small, public or private, profit or non-profit driven. Importantly, Heskett et.al. Identify value beneficiaries, namely, the customer, the investors and the employees who encourage the three R’s of Referrals, Retention, and Related sales. A business that adds profits in its value chain gets referrals and related sales through all the key players. They are also retained by the company through its good services. Based on Heskett et.al model it is suggested that an atmosphere of leadership, supported by vision, culture and strategy be promoted. The five virtues to create a value chain are leverage, focus, fit, trust and adaptability. Heskett et.al use the metaphor of ‘satisfaction mirror’ in which employee attitudes are expressed in customer satisfaction and vice-versa (Horn and Myers, 2007). The modus operandi of Heskett et.al is simple. A sound investor confidence leads to formation of good policies that leads to development of better work environment. A better work environment positively produces higher customer satisfaction. Higher levels of customer satisfaction give rise to brand loyalty, higher retention, referrals and thus more profit margins. Parsley (2005) reports that an increase of 5% in customer royalty drove the profit margin increase from 25% to 85%. The chain turns company from here, with increased profits sending positive indications to the employees, and to the investors, who then repose more faith in the employees through rewards, incentives and bonuses. Thus an excellence driven environment sets in motion a perpetual profit making process. At another level, the satisfied customers become brand ambassadors spreading the reputation of the company through word-of-mouth publicity (Horn and Myers, 2007). This is also called the Apostle like behaviour i.e. willingness to convince others to use a product or service and ownership i.e willingness to recommend product or service improvements (Heskett, 2000). “The development of a loyal customer base has been found to be a key ingredient of profitability and growth.” (Chow and Read quoted by Gefen). Various studies have been carried out to study the dynamics, structure, environment, its relationship with macro-environmental aspects, especially globalization. In the macro-environmental context, for example, ACDI/VOCA (Agricultural Cooperative Development International and Volunteers in Overseas Cooperative Assistance) mooted addressing the major constraints and opportunities at multiple levels of profit chain for economic development. The study furthers suggests a series of steps for dynamic linking between firms involved in dispensing various services. There is yet another emerging field of importance in the service sector that has an important bearing on the profit chain. Kassinis et.al (2003) has established that environmental practices are positively related to performance through the “mediated effect of enhanced customer satisfaction and loyalty” ( Kassinis, pp1). The study argues that “environmental practices are a component of a service firms operations and as such a component of what Heskett et al. (1994) term the "front end" of the service profit chain. (Kassinis, pp1)” The increasing awareness about ecology, environmental concerns, future of earth in face of rising pollution and temperature has made the customer extremely wary of reckless usage of resources. An informed customer not only wants to know the environmental practice in the service delivery but also wants to be ensured of total conformance to regulatory standards in the supply chain. Media and education have played a great role in ‘awakening the global citizen’ to environmental concerns. Environmental practices and customer satisfaction may not yet be the foremost component in increasing profit in the value chain, but it is an important one. It can be emphatically stated that greening of the profit chain has begun and will roll on. There is, though, a definite bias towards the west, in implementation of green strategies in business and the consumer awareness about it. “The significance of these mediating effects … is especially noteworthy given rising consumer awareness, both in Europe and the United States, where consumers demand increased corporate environmental responsibility-in services and in manufacturing alike (Kassinis et. al, 11). The importance of service industry is corroborated by the fact that it constitutes 60% of GDP in the developed economies (Porter). Durado (1999) emphasises ‘Service Design’ to transcend “unstructured superficialities’ or soft feel good behaviour such as smiling and greeting” (4, para1) to meet the ever spiralling customer expectations. Post Design, Durado (1999) calls for integration of operations and servicing. Here specifically Durado is referring to servicing in tangible (products sales) and intangible (service sales) aspects. However, Durado doesn’t suggest discarding of soft techniques. They need to be, he suggests, integrated into a passion for excellence. Of their own accord, these ‘sweet nothings’ yield no good. However, Durado seeks the use of performance metrics to measure customer satisfaction and compare it with employee performance to establish a direct relationship between the two. Myers and Horn (2007) take argument to the employees’ arena, keeping their satisfaction central to dispensation of better services. “Their (employees) positive interaction with customers leads to increased satisfaction, advocacy, retention and ultimately profitability (Myers and Horn, 2007 para1). American Express, Sears, and Southwest-Airlines have made a discernible improvement in their profits by introducing employee satisfaction (Myers and Horn,2007). The behaviour of employees need to be improved from passive obedience to active decision-making since their role is elemental to profit making. The management needs to provide an environment with a distinct vision and strategy (Horn and Myers, 2007). Employees need to be instilled with the confidence that they are working for a cause (Horn and Myers, 2007), and provided with opportunities for growth in the company, and personal growth (Seijts and Crim, 2006 cited by Horn and Myers, 2007). A positive work environment leads to greater employee loyalty and increased retention. A positive relationship between employee retention and value chain margin was established in profit chain analysis by Taco Bell. The analysis of its profit chain deduced that 20 per cent of stores with the highest Employee Retention rates enjoyed double the sales and 55 per cent higher profits than the 20 per cent of stores with the lowest Employee Retention rates (Parsley). Referrals attract good employees into the organisation leading to an avalanche effect in profit maximization. An open atmosphere of communication has a direct bearing on the profit chain. In a study conducted over 36-months by ISR(Institutional and Scientific Relations) (2005) (cited by Parsley) found that low levels of employee engagement resulted in fall of net profit margins by 1.38%. The above average levels of employee engagement resulted in net margin rise of 2.06 percent. This study clearly reflects the importance of employee engagement in service management and indicates the linear difference between employee engagement and profit chain. Thus we see communication as a key driver, running as a thread, in profit chain whether it engages investor and employee or employee and customer. The importance of investor employee communication in increasing profits is illustrated by the study of Watson Wyatt (n.d.) “The study has given us the ultimate end-to-end measurement: from key driver of employee engagement (communication) to shareholder return on activity (Parsley, part 2). To further delineate the importance of investor-employee relationship Lev (2001) has developed the concept of Value Chain Scoreboard. “By using the Value Chain Scoreboard, both managers and investors can attain a comprehensive portrayal of a firm’s innovation capabilities and success in creating economic Value.” (Lev quoted by Daum, para1). The landmark study of Lev (2001) delves deep into studying the impact of intangible assets like corporate culture, ideas, brands, business processes and innovation force measurable with the help of Value Chain Scoreboard. It is set of metrics for measuring the intangibles that aim to satisfy both the managers and the investors. Lev (2001) suggests the development of Value Chain Blueprint. It is a measure based information system that aids internal decision-making and enables reporting to investors (Daum, 2001). Value Chain Scoreboard also helps to elicit the customer satisfaction levels. These can be further used to plug in deficiencies, lacunae and improve upon the services. Though Lev angles his study from the relative importance of intangibles and tangibles on the value chain, nevertheless, it makes for cause for development of investor-employee relationship for profit increment. Flexible working hours, work-life balance, and customer satisfaction go hand in hand. Then, especially for the service industry there is the concept of having the right workforce, at the right time. Decreases in wasteful allocation of service industry helps in deriving profits. The methodologies for efficient use of workforce are called Human Logistics and it makes amazing results on businesses and profits. We have theoretically listed development of a common culture, robust communications, and a shared psychological belonging between investor and the employee. Now we study its implementation in “South-west Airlines” famous as the “people (employee) friendly company. Whereas a large number of Airlines lost post-2001, Southwest has been constantly registering profits. The backbone of its “people-friendly” policy is the profits-sharing plan, where employees own at least 10 percent of the company’s stock (Carey, n.d.). To put it across rather crassly “it is the money that makes the mare go.” Nothing works like giving the employees a share of the pie. In contrast, some companies are raking in millions, while sending waves of dissatisfaction amongst employees. A survey of conducted by a non-profit organisation over 5000 households in the US revealed rampant dissatisfaction (Carey, n.d). Anne Tsui (quoted by Carey, n.d) attributes higher discontent level in the workforce to a “quasi-spot contract” or “under-investment approach” in the workplace. Such a contract carried out with short sighted aims carries no job security and holds little scope for long-time structural value chain relations. In short it is touch and go affair and renders Heskett et.al version of investor-employee value chain model untenable. Such short term relationship will never allow the build up of strong subliminal brand presence in the customer to make a long term effect positive effect on the value chain. The view is further corroborated by Reichfeld (2002) who purposes build up of a loyal customer base through promotion of strong relations with front line employees. “Loyalty leader” companies out-performed their competitors in the stock market by a factor of 2.2 on average during the 1990s. (Finnie and Randall). The study conclusively establishes the vital customer-employee-investor linkage in the value chain. The Five Value Chain Virtues We will briefly discuss the five virtues of value chain that find a mention in the Heskett et.al model, and find out how they affect the value chain viability. Heskett et.al makes a mention of Leverage, Focus, Fit, Trust and Adaptability as drivers of profit chain. Trust assumes significance in business world when law and customs do not ensure the outcome of an exchange (Gefen 2000). Luhmann (1979 cited by Gefen, 2000) rationalises Trust as assuming away undesirable behaviours and thus simplifying social complexity. Trust plays an important role in hospitality and e-commerce service sectors. Fit is the ease with which the value chain essentials mesh into each other. A perfect fit is when services and products meet needs, desires and expectations of the key players. Focus is the identification of those areas in the value chain that would yield maximum value creation and thus resulting in profit maximization. Adaptability in the value chain is the agility with which organisations spells and adapt to change. Change can be driven from the customer end, investor end or rarely from the employee end. However, it is the employees who have to show maximum disposition towards change adaptation. Leveraging the value chain for profit maximization is involves a strategic mix of policy and practice. It involves skilful using of relationships amongst the key players and between them to derive maximum profits. It is in fact a key virtue in value chain that makes a business distinctly successful. Conclusion The current business scenario is extremely competitive, made more so by the spate of globalisation. The movement of goods, services and products calls for quality management to keep the business viably running and growing. Value Profit Chain created by Heskett et.al gives a ready for model for benchmarking and improving business activity. Incidentally, while conceptualising the Heskett et. al. model, the theorist made it applicable to businesses of all sizes. However, the major drawback of the Heskett et.al model remains its implementation. The interests of customers, employees and investors are far too divergent to yield a common platform for thinking and performance. It has been widely used in management theories to conceptualise ideal value chain, but lacks sufficient evidence of its implementation. 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