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The Service‐Profit Chain
Chapter · January 2015
DOI: 10.1002/9781118785317.weom090241
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Wiley Encyclopedia of Management
Volume 9 (1-4) - Marketing
The Service Profit Chain
Christine T Ennew, University of Nottingham Malaysia Campus
Published online – Jan 2015
Abstract
The Service-Profit Chain explains in detail how one of the most basic principles
of marketing works in a service context; specifically, it outlines a sequence of
causal links which demonstrate how employee satisfaction contributes to service
quality and customer satisfaction and how they in turn can influence revenue
and profit. In essence, the service profit chain highlights the important links
between how an organisation manages itself internally, the impact of this on the
experience of customers and the benefits in terms of organisational
performance.
Keywords
Service-profit chain, employee satisfaction, customer satisfaction
Main text
In very simple terms, the foundational premise of marketing is that
organisational performance can be enhanced by a focus on satisfying customer
needs and wants. The Service-Profit Chain explains in detail how this premise
works in a service context; specifically, it outlines a sequence of causal links
which demonstrate how the management of employees internally impacts on the
service delivered to customers, on customer satisfaction and ultimately on
financial performance. The concept was originally introduced in a paper by
James Heskett and colleagues, published in Harvard Business Review in 1994.
This paper subsequently gave rise to a book in 1997 and was then republished in
2008 under the title “Best of HBR”. The logic that underlies the service-profit
chain is intuitive and compelling – look after your employees, they will look after
your customers and those satisfied customers will deliver better revenue. It is a
concept that has secured widespread adoption among educators, researchers,
managers and consultants. Google records in excess of 1.2million references to
the service profit chain and publications databases such as ABI/Inform and
Business Source Premier report in excess of 1400 and 600 articles respectively
on the subject.
The original conceptualisation of the service profit chain (SPC) as developed by
Heskett et al (1994, 2008) is outlined in Figure 1. This model starts with internal
service quality which refers to the extent to which an organisation is able to
deliver to its employees the kind of quality support that will enable them to
service customers effectively. Included in the general concept of internal service
quality would be factors such as job design, working environment, reward
systems, training and support systems. A high level of internal service quality
will result in higher levels of employee satisfaction, productivity and retention.
Employees who are satisfied in their job and well motivated will deliver a high
quality service to customers. This high quality is the foundation for delivering
enhanced service value. In turn, value leads to increased levels of customer
satisfaction and retention. Given the economics of customer retention, improved
revenues and profit are the expected consequences. In essence, the service
profit chain highlights the important links between how an organisation manages
itself internally, the impact of this on the experience of customers and the
benefits in terms of organisational performance.
Figure 1
A particular feature of this model is that there are very clear managerial
interventions internally that can be used to address problems with customer
experiences and ultimately with organisational profitability. Arguably this is one
of the reasons why the SPC has proved to be so popular with consultants and
managers. Indeed, when Heskett et al (1994) first introduced the concept of the
SPC, they described the effective use of its key principles by organisations as
diverse as South West Airlines, Xerox and Taco Bell. One widely cited example of
the SPC in action comes from the experience of Sears in the mid 1990s. Rucci,
Kirn and Quinn (1998) describe how senior managers at the company employed
an “employee-customer profit model” to engineer a dramatic turnaround in the
fortunes of one of the US’s most iconic retailers. And while the simplicity of the
underlying SPC model as used by Sears is clear, the authors highlight the very
real challenges associated with: understanding the drivers of employee and
customer satisfaction, being able to measure and manage those drivers and
securing managerial engagement with the process.
Systematic research to test the SPC model has proved difficult because of the
complexities of measurement and data collection. One of the first and most
comprehensive studies was undertaken in relation to retail banking in the US.
Loveman, (1998) used secondary, branch level data and found that internally,
reward systems, the organisation’s customer focus and the quality of
management had a positive impact on employee satisfaction. There was limited
evidence for a link between employee satisfaction and loyalty and the
relationship between employee satisfaction and customer satisfaction was weak.
Customer satisfaction had a positive impact on loyalty which in turn was found
to have an impact on financial performance. Kamakura et al (2002) also used
bank data – this time from Brazil – to evaluate the whole SPC. They combined
information from individual customers with branch level data to estimate the
entire chain for the bank as a whole and to provide efficiency benchmarking at
individual branch level. The model for the bank as a whole suggested that all
estimated links in the SPC were significant. In a particularly comprehensive test
of SPC, Larivière, (2008) used data from a financial services provider to
demonstrate links between customer metrics (satisfaction, quality, share of
wallet) and performance metrics (retention and profitability). Longitudinal
testing highlighted the potential complexity of some of the relationships
including non-linearity over time and variations in strength across segments and
over time.
Evidence from other contexts has been less supportive. In the case of a leading
UK grocery retailer, Silvestro and Cross (2000) noted that store profitability
tended to be negatively rather than positively correlated with employee
satisfaction, although they did find evidence to support the customer dimensions
of the SPC. Similarly using data from a major UK home improvement store,
Pritchard and Silvestro (2005) also noted the absence of any substantial link
between employee and customer satisfaction. In the case of UK and Irish Banks,
Gelade and Young (2005) find only weak evidence to suggest that customer
satisfaction mediates the relationship between employee attitudes and revenues.
More recently, Homburg et al (2009) have argued that the conventional SPC
needs further development, not least because the potential for customer
satisfaction to impact significantly on loyalty is becoming increasingly limited as
customer expectations increase on the back of past positive experiences.
Organisations need to look for other mechanisms to improve loyalty and
Homburg et al (2009) propose the use of social identity theory. They estimate
an SPC model for German travel agencies and include as additional constructs
employee-company and customer-company identification. The results suggest
only weak support for the traditional SPC paths but much stronger support for
the identity based paths. Milliaman and Ferguson (2008) also propose an
augmentation to the traditional SPC model but their focus is on the employee
component. Reporting on a case study of a nonprofit organization, they highlight
the importance of expanding the focus on internal service quality to encompass
a broader range of supportive services and programs to help employees deal
with personal issues which might impact on work performance.
The evidence to support individual links within the SPC is more compelling (see
Johnson and Chiagouris,(2006) for a brief review). During the late 1980s and
the 1990s, a range of studies provided evidence for the links between quality,
satisfaction, loyalty, and word-of-mouth. Cronin and Taylor (1992) provided
some of the earliest evidence concerning the relationship between quality and
satisfaction; other studies have demonstrated that the link between customer
satisfaction and customer loyalty is positive (eg, Anderson and Sullivan, 1992)
as is the link between service quality and customer loyalty (Zeithaml, et al,
1996, Ennew and Binks, 1996). And there are a growing number of studies
which demonstrate the link between the employee experience and customer
satisfaction (see for example Malhotra and Mukherjee, 2004)
Links between loyalty and profitability have been much more difficult to
demonstrate because of the difficulties associated with relating constructs
measured at the individual level (satisfaction/loyalty) with constructs measured
at the organisational level (profit). However the development of customer
satisfaction indices such as the American Consumer Satisfaction index (ACSI)
has resulted in a number of empirical studies that have been able to
demonstrate the link between an aggregate measure of satisfaction and
organisational profitability (see for example Itter and Larckner, 1998).
Notwithstanding the array of evidence to support the SPC and the relationships it
encompasses, there are dissenting voices. There is a generic concern that the
model itself does not explicitly address issues relating to the cost of quality and
that it focuses more on revenue than profit. A further issue is that retention may
be behavioural rather than attitudinal and thus a reflection of inertia rather than
positive attachment (see for example Colgate and Lang (2001). It has also been
argued that satisfaction alone is not sufficient and that what really creates
loyalty is customer ‘delight’, an issue which has subsequently been addressed by
Homburg et al (2009). Others have questioned the financial value of loyalty in a
service profit chain context, and it has been argued that many loyal customers
may not be profitable and many profitable customers may not be loyal (Reinartz
and Kumar, 2002).
SPC is a model which tries to represent in a parsimonious fashion the complex
chain of causality that runs from managerial decisions, via employee responses
and consumer experiences through to financial performance. There is some
evidence to support the operation of the entire chain in certain contexts; there is
more evidence to support the existence of key individual links. Inevitably the
process of simplifying a complex set of relationships means that researchers will
identify gaps and failings with the model and that very process has seen the SPC
model being developed and refined while remaining fundamentally a way of
trying to explain, in the context of service industries, how the management of
employees can deliver a positive customer experience and thereby improve
organizational performance.
Figure 1: The Links in in the Service Profit Chain
Source: Heskett et al (1994, 2008)
References
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