CHAPTER 4: PUTTING THE SERVICE PROFIT CHAIN TO WORK
“The service profit chain unveils a great model that managers can use to maximize both customer loyalty and profit. It links an action plan for managing all elements of a business with a thorough process for measuring results”.John B. McCoy, Chairman and CEO, Bank One Corporation, USA.
The service profit chain is a well-received model to explain the sustainable competitiveness of many service organisations (Lau, 2000: 422). The model attributes a service organisation’s financial and market performance to its relationships with its customers and employees (Heskett: 2002). Internal service quality serves the foundation of the model, igniting a chain effect to an organisation’s growth and profit (Silvestro: 2002).
The Service Profit Chain is a strategic service vision, whereby there is a strong and direct relationship between customer satisfaction (Andreassen: 1994), customer loyalty (de Ruyter & Bloemer: 1999) and the value (Silvestro & Cross: 2000) of goods and services delivered to customers. Furthermore, there is a strong link between these elements and overall profit and growth of an organisation (Heskett, Sasser & Schlesinger, 1997: 11). Organisational profit and growth are linked to customer loyalty, satisfaction and value via the strategic implementation of referral, related sales and retention strategies (Heskett, Jones, Loveman, Sasser & Schlesinger: 1994).
In contrast to economic market forces (Porter: 1998), whereby competitors believe a high correlation between profitability and market share prevail, many management authors (Reichheld & Sasser: 1990) are of the opinion that it is quality of market share which is important (Andreassen: 1994), and a high correlation actually occurs between service value and profitability (Maranto & Reynoso: 2003; Ho & Cheng: 1999). This correlation was evident in Southwest Airlines (USA), who never made the top five largest in its industry, but has over the years been the most consistently profitable (Herbert D. Kelleher, Chairman, President and CEO of Southwest Airline Company). The Service profit chain identifies direct and strong relationships between profit, customer satisfaction, employee satisfaction and capability (Heskett et al: 1994).
The customer value equation is pivotal to the other two elements of the service profit chain, with the employee at one end, and the customer at the other (Ho & Cheng: 1999). The employee links productivity and quality of output with employee loyalty, satisfaction and capability (Andreassen: 1994; Sivestro: 2002). The customer value equation equates results plus process quality against price plus customer access costs, linking profitability and growth with customer satisfaction and customer loyalty (Ruyter & Bloemen (1999). In service settings, these relationships are self-reinforcing; whereby satisfied customers contribute to employee satisfaction and vice versa (Reichheld: 2001).
Figure 4.1 identifies the elements of the service profit chain, depicting the centralisation of the customer value equation. Internal service quality serves the foundation of the model (Lau, 2000: 422), represented by employee loyalty, satisfaction and capability (Silvestro: 2002). The output is depicted on the lateral flank, represented by customer satisfaction and loyalty; resulting in organisational revenue growth and profitability (Heskett et al: 1997).
PROFIT AND LONG TERM GROWTH
Walker, Boyd and Larrache (1999), highlight that marketing is ultimately the art of attracting and keeping profitable customers. Kotler (2000: 55) further identifies a profitable customer as, « a person, household, or company that over time yields a revenue stream that exceeds by an acceptable amount the company’s cost stream of attracting, selling, and servicing that customer. » The emphasis is not on the profit from a particular transaction, but from the lifetime stream of revenue and cost (Sherden: 1994).
Hayes (1993) highlighted the Taco Bell (a leading Mexican take-out chain in USA) retention strategy, whereby their managers help employees understand the value of keeping customers satisfied. Although tacos cost less than a dollar each, one wouldn’t think they would fret over lost customers. Yet, executives at Taco Bell have determined that a repeat customer is worth as much as $ 11,000. Service Profit Chain implementation is seen as a means towards achieving long-term profit and growth (Heskett et al: 1997).
Figure 4.2 (overleaf) identifies internal and external components of the service profit chain, further segmented into four core sections:
- Operating strategy and service delivery system; consisting of internal employee’s loyalty, productivity, service quality, capability and satisfaction. Inputs include workplace design, job design/decision making latitude, selection and development, rewards and recognition, information and communication, and adequate ‘tools’ to serve customers (Lau: 2000; Silvestro: 2002)
- The service concept; consisting of service value, identifying quality and productivity improvements that yield higher service quality and lower cost (Ho & Cheng: 1999)
- The target market; consisting of external customer satisfaction and loyalty (de Ruyter & Bloemer: 1999). Inputs include attractive value, designed service, lifetime value (McDougal, Wyner & Vazdauskas: 1997), retention (Ahmad & Buttle: 2002), repeat business and referrals (Helm: 2003)
- Profitability represented by organisational revenue growth (Bowen & Chen: 2001).
CAPITALISING ON THE SERVICE PROFIT CHAIN
Heskett et al (1997) identify issues linking profit and growth, stating that when companies put employees and customers first; a radical shift occurs in the way they manage and measure success. Heskett et al (1994) identify the links in the service profit chain, commencing with the primary stimulation of customer loyalty. A closer analysis of each link reveals how the service profit chain functions as a whole.
Profit and growth link to customer loyalty
The principle of market share equals profit is replaced by the opinion of Reichheld and Sasser (1990), concluding that customer loyalty is a more important determinant of profit than market share in a wide range of industries. As such, they believed that quality of market share, measured in terms of customer loyalty, deserves as much attention as quantity of market share. Loyal customers are customers who hold favourable attitudes toward the company, commit to repurchase the product/service, and recommend the product to others (Bowen & Chen: 2001). It has been regarded as the sine qua non of an effective business strategy (Heskett: 2002). Hallowell (1996) identifies loyalty from a cognitive (attitudinal) and behavioural point of view. Customer loyalty is purchase behaviour, unlike customer satisfaction, which is an attitude (Griffin: 1996). Duffy (1998) identifies loyalty marketing as more than just a program, being a state of mind and a business strategy. Southwest Airlines, the leading budget ‘no frills’ American airline, implement loyalty programmes, primarily by keeping in touch with their customers at the front-line. As Colleen Barrett, Executive Vice President at Southwest, puts it, « Once customers fly on us three times they’re hooked”. This contributes to Southwest’s record of being the only U.S. airline to report twenty-four straight years of profitability. When properly embraced, developed and implemented, loyalty marketing strategies become integrally linked to the product (Duffy: 1998).
Reichheld and Sasser (1990) found that when a company retains just five per cent more of its customers, profits increase by twenty-five per cent to one hundred and twenty-five per cent. Gould (1995) consolidated the interest in loyalty through his research that supported Reichheld and Sasser’s work. The increased profit from loyalty comes from reduced marketing costs, increased sales and reduced operational costs (Bowen & Chen: 2001). Loyal customers are less likely to to switch because of price and they make more purchases than similar non-loyal customers (Reichheld: 2001; Reichheld & Sasser: 1990). Loyal customers will also provide strong word-of-mouth, create referrals, provide references and portray a positive image of the organisation (Bowen & Chen: 2001). Finally, loyal customers cost less to serve, in part because they know the product/service and require less information (Heskett et al: 1994). The results of the Bowen and Chen (2001) study supported the contentions that there is a positive correlation between loyal customers and profitability.
Hallowell’s (1996) regression analysis also supports the inference of a relationship between customer loyalty and profitability. Heskett (2002) believes there is a real opportunity to build loyalty from a core of apostles and owners who have extraordinary lifetime value for the provider of goods and services. Marketers use loyalty-building strategies to help increase customer retention and boost share of customer (Mulhern & Duffy: 2004). Loyalty behaviour such as increased scale or scope of relationship, relationship continuance, and word-of-mouth (recommendation) result from customers’ beliefs that the quantity of value received from one supplier is greater than that available from other suppliers (Hallowell: 1996). Duffy (2003) identifies benefits of loyalty to include cost savings, referrals, complain rather than defect, channel migration, unaided awareness and greater awareness of brand assets.
The financial performance and customer loyalty link demonstrates strong correlation, indicating that retailers with loyal customers are more profitable than those with less loyal customers (Silvestro & Cross: 2000). Heskett et al (1997) emphasized the importance of evaluating the lifetime value of the customer. Service providers need to consider retaining customers in a continuing relationship through consumer orientated initiatives of retention, related sales and referrals (Lau: 2000).
Customer loyalty link to customer satisfaction
Leading companies quantify customer satisfaction; often revealing that there is no constant link between customer satisfaction and loyalty (Soderlund: 1998). Based on recent research, this link has been found to be the least reliable in the service profit chain (Heskett et al: 1997). Customer satisfaction (or dissatisfaction) results from experiencing a service quality encounter and comparing that encounter with what was expected (Caruana, Money & Berthon: 2000). Reichheld (1996) expressed the suspicion that those things satisfying customers may not be the same things that enhance loyalty to the provider. He further informs of short-term tactics, such as price discounting, which may entice satisfied customers to migrate to competitors. Hallowell’s (1996) regression results support the inference of customer satisfaction and customer loyalty relationship. Results are however ambiguous regarding the role of price satisfaction in predicting customer loyalty. Support for a view that the effects of customer satisfaction on loyalty are different depending on the level of satisfaction is offered by Jones and Sasser (1995). They argue that the relationship is non-linear, being subject to different patterns depending on the product/service. Soderlund (1998) concludes that the relationship between customer satisfaction and loyalty is different at different levels of satisfaction.
Van der Wiele, Boselie and Hesselink (2002) relayed empirical data finding evidence that there is a positive relationship between customer satisfaction and organisational performance indicators (albeit not very strong), and that there is a significant time-lag effect on the relationship. Considerable research has focussed on service quality dimensions as the primary determinants of customer satisfaction (Parasuraman et al: 1998; Ziethaml & Bittner: 2003). There is a correlation between satisfaction and service quality, emphasized by cross-tabulation analysis (Sureshchander, Rajendran & Anantharaman: 2002). The two constructs do however exhibit independence, and are different constructs from the customer’s point of view. McDougall and Levesque (2000) empirically identified a strong relationship between loyalty and satisfaction, suggesting the importance of perceived value to loyalty and, in turn, to profitability. It is further well understood that increasing customer loyalty is positively correlated with increasing profitability (Heskett et al: 1997; Reichheld: 1996). Andreassen (1994), in agreement with Soderlund (1998) identifies the satisfaction and loyalty link dependent on the nature of the product/service. Silvestro and Cross (2000) do not suggest a significant relationship between customer satisfaction and loyalty, except for the link between satisfaction and a customer’s propensity to recommend services to friends and relatives. Due to the link between customer service and loyalty being the weakest in the chain, the relationship between them is not constant, with varying relationships dependent on complexities of the situation (Heskett, et al: 1997). The service profit chain however reflects the behavioural side of customer loyalty, as opposed to attitudinal loyalty (Hallowell: 1996); which can only be reinforced by increased customer satisfaction (Lau: 2000).
CHAPTER 1: BACKGROUND AND ORIENTATION OF THE PROBLEM
1.2 BACKGROUND OF THE STUDY..
1.2.1 Limitations of the study
1.3 IMPORTANCE OF THE STUDY
1.4 DEFINITION OF THE RESEARCH PROBLEM.
1.4.1 Research questions
22.214.171.124 Primary research question
126.96.36.199 Secondary research questions
1.4.2 Key terminology
1.4.3 Research objectives
1.4.4 Hypotheses to be tested
188.8.131.52 Primary hypothesis
184.108.40.206 Secondary hypotheses
1.5 RESEARCH DESIGN.
1.5.1 Applicable design process
1.5.2 Sources of data.
1.5.3 Data collection format
220.127.116.11 The survey method
18.104.22.168 The sampling plan
1.5.4 Measurement scale
1.5.5 Instrument design
1.5.6 Data analysis.
1.6 RESEARCH FINDINGS AND RECOMMENDATIONS
1.7 OUTLINE OF THE THESIS.
1.7.1 Chapter One: Background and orientation of the problem
1.7.2 Chapter Two: Entrepreneurial orientation
1.7.3 Chapter Three: The franchise paradox
1.7.4 Chapter Four: Putting the service profit chain to work
1.7.5 Chapter five: Integrating service quality, relationship marketing and benchmarking for best practice
1.7.6 Chapter Six: Research methodology
1.7.7 Chapter Seven: Research findings
1.7.8 Chapter Eight: Summary, conclusions and recommendations
CHAPTER 2: ENTREPRENEURIAL ORIENTATION
2.2 ENTREPRENEURIAL ORIENTATION
2.3 NATURE AND DEVELOPMENT OF ENTREPRENEURSHIP.
2.4 ENTREPRENEURIAL PARTICIPATION RATES
2.5 DEFINITION OF THE ENTREPRENEUR
2.6 THE NATURE, CHARACTERISTICS AND BEHAVIOUR OF THE ENTREPRENEUR
2.6.1 Intuition and entrepreneurial behaviour
2.6.2 Behavioural traits and characteristics
2.6.3 Creativity, innovation and entrepreneurship.
2.6.4 The entrepreneurial personality
2.6.5 Comparison of entrepreneurs, intrapreneurs and traditional managers
2.6.6 Entrepreneurial synthesis (three factors)
22.214.171.124 What entrepreneurs are like: the personality factors
126.96.36.199 Where entrepreneurs come from: the environmental factors
188.8.131.52 What entrepreneurs do: the action factors
2.6.7 Entrepreneurial talent, temperament and technique
184.108.40.206 The entrepreneur among others
220.127.116.11 Linking talent, temperament and technique
18.104.22.168 Gallup’s ‘life themes’
22.214.171.124 Gallup’s ‘entrepreneur-perceiver’ interview
126.96.36.199 Towards a profile of the entrepreneur: talent, temperament and technique
188.8.131.52 The well of talent
184.108.40.206 Entrepreneurs, managers and leaders
220.127.116.11 Talent, temperament and technique.
18.104.22.168 Social .
2.6.9 Application of the facets.
22.214.171.124 Facets interaction
126.96.36.199 The entrepreneur and the leader
188.8.131.52 Extreme presence.
184.108.40.206 Character themes 20-question profile
220.127.116.11 Character theme questionnaire .
CHAPTER 3: THE FRANCHISE PARADOX
3.2 NATURE AND DEVELOPMENT OF FRANCHISING
3.3 FRANCHISE SYSTEM RELATIONSHIPS
3.4 ENTREPRENEURIAL ORIENTATION IN A FRANCHISE SYSTEM
CHAPTER 4: PUTTING THE SERVICE PROFIT CHAIN TO WORK
4.2 PROFIT AND LONG TERM GROWTH
4.3 CAPITALISING ON THE SERVICE PROFIT CHAIN
4.4 SERVICE PROFIT CHAIN MANAGEMENT IMPLICATIONS
4.5 MANAGING CUSTOMER SATISFACTION
4.6 THE CUSTOMER VALUE EQUATION
4.7 CUSTOMER LOYALTY
4.8 ENHANCING SERVICE PROFIT CHAIN INITIATIVES
CHAPTER 5: INTEGRATING SERVICE QUALITY, RELATIONSHIP MARKETING AND BENCHMARKING FOR BEST PRACTICE
5.2 SERVICE QUALITY
5.3 RELATIONSHIP MARKETING
5.4 BENCHMARKING FOR BEST PRACTICES
CHAPTER 6: RESEARCH METHODOLOGY.
6.2 THE RESEARCH PROCESS .
6.3 PROBLEM FORMULATION
6.4 RESEARCH DESIGN
6.6 DATA ANALYSIS
CHAPTER 7: RESEARCH FINDINGS
7.2 REALISATION, RESPONSE AND REPRESENTATION OF RESULTS
7.3 SECTION A: DEMOGRAPHIC AND BIOGRAPHIC INFORMATION
7.4 SECTION B: ENTREPRENEURIAL ORIENTATION IN A FRANCHISE SYSTEM
7.5 SECTION C: THE FRANCHISE PARADOX
7.6 SECTION D: THE SERVICE PROFIT CHAIN
7.7 SECTION F: RELATIONSHIP MARKETING
7.8 SECTION G: INDUSTRY BEST PRACTICE
7.9 SECTION E: SERVICE QUALITY
7.10 KEY CONSTRUCT SUMMARY STATISTICS
CHAPTER 8: SUMMARY, CONCLUSIONS AND RECOMMENDATIONS
8.2 A REVIEW OF THE LITERATURE RESEARCH
8.3 CONCLUSIONS AND IMPLICATIONS OF THE EMPIRICAL RESEARCH
8.4 THE RESEARCH HYPOTHESES REVISITED
8.6 LIMITATIONS OF THE STUDY
8.7 RECOMMENDATIONS FOR FUTURE RESEARCH
8.8 WRAP-UP CONCLUDING REMARKS
GET THE COMPLETE PROJECT