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Service-profit Chain

Service-profitChain

for Presentation

  • Service-profit concept has been advanced in different ways by different scholars.

  • Some of the popular conceptually similar business models include Porter’s Five Forces concept which emphasizes the importance of balancing a business’s internal and external environment.

  • The service-profit chain concept is an idea developed and popularized by a group of business scholars and researchers including James Heskett, Gary Loverman, Earl Sasser, Leonard Schlesinger and Thomas Jones, in the Harvard University business school

  • This presentation is a book review for the book Service Profit Chain by the authors mentioned above.

ConceptBackground

  • Service- Profit Chain is a business performance concept based on a cyclic pattern of business input versus customer feedback versus business growth.

  • This model emphasizes the importance of corroborative connection between the three elements: employer, employee and customers in a business model.

  • In essence, the service-profit concept is based on a cyclic action and feedback loop that continually improves business performance, customer satisfaction, employee satisfaction and business profitability.

BookSummary

  • The book is modeled around the concept of business growth as linked with value addition, employee satisfaction, employee productivity, customer satisfaction, and retention and customer loyalty.

  • According to the book, employee satisfaction leads to two elements employee retention and employee productivity.

  • Customer satisfaction holds an important place in the service-profit chain as it leads to customer loyalty, repeat customers and referrals.

  • The next conceptual link is customer loyalty. Customer loyalty is defined through three elements customer retention, repeat business, and referrals.

  • The three elements, as discussed in the previous paragraph, are interlinked, and all originate from customer satisfaction.

  • In describing how value drives customer satisfaction, the book says that customers’ perception of value creation is measured in terms of the comparison between the customer’s total costs.

  • The book discusses the ways in which employee productivity drives value through the example of Southwest Airlines.

BookRelationship with Contemporary Scenario

  • The current business trade internationally is strongly modeled alongside emerging technologies. The internet has revolutionized the way companies and businesses conduct their operations

  • As the business shifts continually from the manufacturing oriented economies to service oriented economies, customer focus and satisfaction is progressively becoming even more vital in a business’s performance and growth.

  • The currently popular business analysis concept called SWOT.

  • The SWOT concept is based on micro and macro analysis of a business, including the internal and external factors affecting a business’s outcome.

Conclusion

  • The service-profit chain, as advanced by the book, is not only a valid business development and growth model, but a very strong basic foundation of the modern business.

  • It is also clear that, the current era of service industry as an increasingly popular backbone of most economies

TheService Profit Chain Book Review

Service-profitconcept has been advanced in different ways by different scholars.Some of the popular conceptually similar business models includePorter’s Five Forces concept which emphasizes the importance ofbalancing a business’s internal and external environment. Otherconcepts of business chain management exist in different models. Theservice-profit chain concept is an idea developed and popularized bya group of business scholars and researchers including James Heskett,Gary Loverman, Earl Sasser, Leonard Schlesinger and Thomas Jones, inthe Harvard University business school (Heskett, et al., 2008). Aftersuccess of the theoretical framework surrounding the service-profitchain concept, the researchers published a book called TheService Profit Chain – How Leading Companies Link Profit and GrowthTo Loyalty, Satisfaction and Value. Thispaper is a book review for the book Service Profit Chain by theauthors mentioned above.

ConceptBackground

Service-Profit Chain is a business performance concept based on a cyclicpattern of business input versus customer feedback versus businessgrowth. This model emphasizes the importance of corroborativeconnection between the three elements: employer, employee andcustomers in a business model. For a successful business, the threeparticipants have clear roles which are interlinked in the valuecreation process. The service-Profit chain relies on the fundamentalelements of employee satisfaction, productivity, value addition,customer satisfaction, customer loyalty and profitability.Essentially, the process starts with the inception of the business,and contracting of the employees who are to deliver products orservices to the customers. In their role, employees implement thebusiness’s ideals in order to create value in the services orproducts in which the business engages. Without creating this value,the products or services that the business offers will not gainpopularity or meet customers’ expectations. In a perfectlycompetitive market, poor value addition in a business’s products orservices may mean all the difference between success and failure, andtherefore any company has in its core objectives creation of value inits operations as a means to remain competitive and profitable.

Foremployees to create value in products and services, employeesatisfaction is essential. Employee satisfaction is the basicmotivation for them in their work processes. This is especiallyimportant in the modern prevalent service industry, where anemployee’s attitude towards customers is a key component ofsuccessive customer contact and a key driver of customer retention.The ‘Moment of Truth’ concept emphasizes the importance of thefirst contact between a customer or potential customer and thecompany or business. This initial impression that a customer gets isthe strongest determinant of the likelihood of future interactionsbetween the business and the customer. Thus, the employee, who is theface or image of the business, needs to project the right energy,enthusiasm, will, flexibility and listening ability the customerneeds to experience in this first moment of contact. Once thecustomer interacts with the employee, the customer needs to feelconnected with the business through realization of value. Theimportant concept in the interaction is that the customer needs tosee a change in the way they are treated, the quality of service theyreceive or the quality of goods in the business transaction (Heskett,et al., 2008).

Oncethe customer sees the value addition, the customer is satisfiedbecause their expectations are met or exceeded. This in turnencourages the customer to want to visit the business or companyagain for services or goods. Customer satisfaction leads to customerretention, which in turn leads to customer loyalty. A loyal customeris one who is strongly attached to a business and who is unlikely topurchase goods or services with other companies offering similarproducts. In essence, the service-profit concept is based on a cyclicaction and feedback loop that continually improves businessperformance, customer satisfaction, employee satisfaction andbusiness profitability. The section below will review the bookService-Profitchain.

BookSummary

Thebook is modeled around the concept of business growth as linked withvalue addition, employee satisfaction, employee productivity,customer satisfaction, and retention and customer loyalty. The bookis, in summary, based on a seven stage business growth model. Thechain is arranged in a causative link pattern starting with abusiness’s internal environment and ending with revenue growth andprofitability- two elements that share the last stage the figurebelow is the illustrated concept development.

Thebook depicts a business’s internal environment as comprising ofworkplace design, job roles, employee development and selection,reward and recognition as well as customer service tools. Thus,internal service quality is mainly aimed at realizing employeesatisfaction. The workplace design is concerned with such elements asworkplace safety, comfort and sustainability of routines. It also isconcerned with employee participation in role creation, as well astheir perceived responsibility for their duties. Reward andrecognition is about such elements as employee promotion, reward ofexemplary performance and similar recognitions. The fulfillment ofthe internal environment has a bearing on employee satisfaction,which is the second element in the chain. Employee satisfaction isthe sum total experience of an employee regarding their duties, theirroles in the business development, and their relationship withstakeholders that makes them have feelings on satisfaction andpersonal fulfillment.

Accordingto the book, employee satisfaction leads to two elements employeeretention and employee productivity. Employee retention is relatedwith employee productivity. Only satisfied employees can achieve thenecessary level of productivity needed to realize business growth ina perfect competition market type. Employees who are satisfied intheir job roles are likely to feel the need to keep their currentjob, and as well may feel the need to give back to the employerthrough dedication in their work. According to James et al, 1994,only after the internal environment is successfully managed can abusiness or company expect good results in the external environment. External Service Value is the first link to the external businessenvironment. External service is measured using two key parameters-service concept and customer results. In service concept, the bookdiscusses the specific manner in which customer engagement is done ,the type of products and the manner of packaging, establishment ofmarket niche for the particular goods or services, the way customerfeedback is processed. This, the book emphasizes, is a very importantaspect of business success as it is the first impression a customermight have regarding the business. Customer results include theentire process of customer satisfaction, customer feedbackmanagement, issues escalation and improvement process. If handledproperly, customer feedback management leads to customersatisfaction, which is the next link in the chain. Customersatisfaction is defined using realization of products and targetstailor made to suit customer needs as established in the previouslink- customer results.

Customersatisfaction holds an important place in the service-profit chain asit leads to customer loyalty, repeat customers and referrals.Customer referrals are cases where a satisfied customer is willing torefer another third party, assumed to be previously free of anyinteractions with the target business, to conduct business with it. Acustomer is likely to repeatedly visit a premise either because ofthe monopolistic nature of a business type in a market segment, orbecause they realize value addition in the products or services theypurchase from the business. In the book’s case, repeat customersare assumed to be within the context of a perfectly competitivemarket. Customer’s needs are the basic necessity that businessesare created to meet, therefore, customer satisfaction, even beforeprofit realization, is the true measure of an ideal business’ssuccess. Therefore, the book emphasizes on customer satisfaction as acentral business target.

Thenext conceptual link is customer loyalty. Customer loyalty is definedthrough three elements customer retention, repeat business, andreferrals. The three elements, as discussed in the previousparagraph, are interlinked, and all originate from customersatisfaction. The last link in the chain is actually business growthand profitability. Revenue growth is realized when customers purchaseproducts or services from the business, and is partially proportionalto business profitability. Profits are realized after the businessmeets its expenses including salaries, remunerations, bills, rewardsand other monetary recognitions. In the next development, the bookreviews the concept of customer loyalty. Loyalty, according to thebook, is developed through a multiphase arrangement with zones ofdefection, indifference, and affection. The book uses the analogy ofterrorist versus apostle, where a terrorist is the extremelydissatisfied customer, while an apostle is the image of a totallyloyal customer. A totally satisfied customer is rated 100% loyal,while an extremely dissatisfied customer has a loyalty measure of 0%.The zone of defection is the largest in a business’s cycle, andtherefore statistically the most probable outcome of a regularbusiness performance. The zone of indifference is almost equallyexpansive, but the zone of affection, which is every business’saspiration, is very narrow, and therefore the hardest to achieve.

Source:James et al, 1994

Onpage 167 of the book Service-profit chain, the book expounds on therelationship between the various links of the chain. In describinghow value drives customer satisfaction, the book says that customers’perception of value creation is measured in terms of the comparisonbetween the customer’s total costs. This includes the cost ofpurchase of the product or service and all other related costs suchas transport, handling, accessories and other items whose costs theywould not have incurred if they had not chosen to engage in businesswith the company, as compared to the total value the customer gets byactually choosing to use the product or service ( roughly measured bythe amount of time, inconvenience, and money they would use or incurby not purchasing the product or service or by using an alternativeproduct or service). If the costs outweigh the benefits, or if thecosts incurred by choosing one company’s products are higher thanthe costs incurred by choosing another company’s similarly placedproducts , then a customer will not realize value in the businesstransaction and is unlikely to be satisfied, and therefore unlikelyto become a repeat customer. The book uses the example of ProgressiveCorporation, an insurance company. In value creation, the companyembraces the extra responsibility of visiting victims in theirpremises, actually reducing the time used for making claims and thelegal fees otherwise applicable in the process of claims, andpresenting a closer cover experience by the customers during thetimes of need. The team manages a CAT team that handles claims, helpscustomers in distress, and actually goes the extra mile in drivingcustomer satisfaction, sometimes incurring extra expenses in theprocess. However, contrary to popular beliefs, a company that goesthe extra mile to provide customers with exemplary services and addvalue to its products makes up for the expenses through increasedcustomer traffic, achieved through referrals, retention and loyalty.Progressive Corporation, for instance, has one of the highest profitmargins per capita in the entire insurance industry. Thisillustration is an example of the benefit of value addition in abusiness cycle.

Similarly,the book discusses the ways in which employee productivity drivesvalue through the example of Southwest Airlines, an American aviationcompany whose 14,000 employees have mobility, clear channels of workprocess management, representation and understandable, rationaltargets. The book discusses how in return, the company achieves thehighest percentage of in-time arrivals and departures as measured bythe Federal Aviation Administration. Again, this is an indication ofthe benefit of employee productivity as related to value creation.Customers flying the Southwest Airlines are assured of lesser delaysin arrivals and departures than customers using other airlines. Thebook also discusses other correlated links in the successful businesschain. It correlates employee loyalty with productivity, as well asemployee satisfaction with loyalty. In the later section of the book,the authors link the service- profit chain with good leadership. Inpage 168, the book states that leadership is essential in merging thevarious stakeholders that actualize the service-profit chain. As anexample, the book relates the examples of John Martin, CEO of TACOBell, and Herb Kelleher, the president of Southwest Airlines amongothers. The book uses a very candid example of the way companies viewrevenue, profitability and service delivery. In the illustration, thebook illustrates how popular companies which are popular on businesstraffic achieve very high revenues, but very low, sometimes negativeprofits. The driving factor in a company is profitability, notrevenue. Therefore, a company that is high on revenue but low onprofits is a company that has very high operating costs, and has notoptimized its value addition chain. The example given compares Delta,American, Northwest, United, USAir and Southwest- all companiesoperating in the US aviation sector. Of the companies, Southwest havethe lowest revenues, but the highest profit and best businesspractices. This outstanding difference, the book shows, is as aresult of good leadership. Therefore, the service-profit chain,without proper effective leadership, is unlikely to succeed (Heskett,et al., 2008).

BookRelationship with Contemporary Scenario

Thecurrent business trade internationally is strongly modeled alongsideemerging technologies. The internet has revolutionized the waycompanies and businesses conduct their operations. In addition,internet has accelerated the trend of globalization, an importantbusiness expansion platform. The basic principles in theservice-profit chain of customer focus, employee satisfaction, valueaddition, customer feedback and good management in the businessmanagement and growth environment still find strong applicability intoday’s business dynamics. As the business shifts continually fromthe manufacturing oriented economies to service oriented economies,customer focus and satisfaction is progressively becoming even morevital in a business’s performance and growth. In addition,competition today is more prevalent across all business sectors thanit was any time in the past, as online business becomes even morecommonplace and dominant. This implies that the market types todayare rapidly turning into perfectly competitive markets, where productdifferentiation, customer service levels, and product diversitybecome the key determinants of successful business. Thus, the conceptof service- profit chain is even more applicable today than it was in1994, when manufacturing was still a stronger driver of economy, andthe internet was still in the inception stages.

Inaddition, this concept is mirrored by many business performancestrategies in use today. One such model is the Porter’s Five ForcesAnalysis. The Porter’s business strategy focuses on beatingcompetition as a primary driver of business success. In the model,bargaining powers of customers and suppliers, as well as the threatsof new entrants and substitutes to the existing products and servicesare vital determinants of the way a business performs. This strategyresonates with the service-profit chain with regard to the fact thatboth strategies emphasize the fundamental importance of customermanagement. In addition, there exists a strong similarity between thebook’s concept of value creation and Porter’s concept ofsubstitute products. Substitution, in a perfect market setting, isaimed mainly at value addition, since the product categories ofcompeting products are essentially similar, and thereforeinterchangeable. Therefore, both strategies are similar in conceptand underlying principles.

Similarly,the currently popular business analysis concept called SWOT(Strengths, Weaknesses, Opportunities and Threats) strongly mirrorsthe concept of service-profit chain, but on a wider perspective. TheSWOT concept is based on micro and macro analysis of a business,including the internal and external factors affecting a business’soutcome. The internal environment is modeled around employeesatisfaction, processes workflow, management issues, and localpolicies. The external environment is modeled around competition,legal issues, product development, and future prospects. In essence,the SWOT analysis and service-profit chain have the same baseelements of customer and employee focus, competition and productdelivery.

Conclusion

Theservice-profit chain, as advanced by the book, is not only a validbusiness development and growth model, but a very strong basicfoundation of the modern business. The strategy is importantespecially in today’s concept of globalized business culture wherecustomer taste is the driver of business concepts. In addition, thecurrent era of service industry as an increasingly popular backboneof most economies, as well as development of most markets intoperfect competition markets, have rendered the concepts advanced inthe book Service-Profit Chain very vital in realizing business growthand profitability.

References

Heskett,J. et al. (2008). Putting the Service-Profit Chain to Work. HarvardBusiness Review