The service profit chain

LITERATURE REVIEW

Introduction

In the previous chapter the researcher looked at the research objectives as well as the research problems. As a result, this chapter will review literature on the service profit chain as a strategy to enhance sales revenue. The chapter is guided by objectives identified in the previous chapter, the review will guide the knowledge gap needed to conduct the study. The service profit chain (SPC) is explained and how it will aid in this study.

Theoretical Context

The service profit chain (SPC) is a framework for linking service operations, employee assessments and customer assessments to a firm's profitability (Heskett et al 1994).

The SPC is a model that provides a framework that is integrative in understanding a firms operating investment into service operations and how they are related to customer perceptions, behaviours and how they translate to profits.

The service profit chain provides guidance for a firm about the complex operational interrelationships that exist among operational investments, customer perceptions and the bottom line.

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According to the SPC model a company that performs well in one aspect and performs poorly in another aspect may develop problems that may affect the entire organisation. The model suggests that there is a connection that exist between high profits, customer loyalty and satisfaction as well as employee productivity, in this model customer satisfaction directly impacts the customers loyalty, the satisfaction comes from the value the customer receives from the organisations satisfied and productive employees.

Laura (2018 defined employee productivity or equally termed as labour productivity to be concerned with the amount (volume) of output that is obtained from each employee, Muhammed (2016) and Bloch (2014) concurred on the definition of employee labour/ productivity as the units of output per labour hour or units of output per shift.

De-konink & Griego (2019) equally defined productivity as how much an employee accomplishes in a certain amount of time. And Desarbo et al (2017:846) define customer value as the trade off between (customer perceived) quality and (customer-perceived) price on the other hand Lapiere defines customer value as the difference between benefits and, explicitly including all monetary and non-monetary costs among the sacrifices. Lapiere discovered that value proporsition implied more than a trade off between product quality and price (2000:130) contradicting the definition used by Desarbo et al. Customer satisfaction is defined as the feeling a customer has about the extent to which their experiences with an organisation has met their needs ( Hill et al p.32). Customer satisfaction has been defined as the degree of fulfilment of some need, desire, goal or other pleasurable end state that results from a specific exchange transaction between the consumer and a firm (Oliver and Rust 2016), while Zeithaml and Bitner (2003) gave a different definition "satisfaction is a is the consumer fulfilment response. It is a judgement that a product or service feature, or the product or service itself provides a pleasurable level of consumption related fulfilment" (p.86).

Influence of Employee Productivity on Sales Revenue

Employee productivity influences organisational performance (Thomas et al, p.32) this occurs when employees are enthusiastic to do their job rather than being instructed to work this then increases the productivity of employees resulting in high levels of organisational performance. Employee skills dimension of organisational performance relates to knowledge that is unique as well as the ability and desire that employees portray to perform assigned tasks to them. An organisation with multi skilled employees if they work as a team with the right mix of skills an organisation will increase its organisational performance over its competitors.

Kelleher believes that recruiting employees with the right attitude is important such that the hiring process takes place on a patina of spirituality. Furthermore, he believes that people who look at things sorely in terms of factors that can effortlessly be quantified is diverging from the heart of business which is people. William Pollard the chairman of service master repeatedly underscores the relevance of teacher learner managers who have what he terms a servant's heart.

Employees are dominantly important within this service driven dynamic this is because employees are often the organisations brand, service and product. As a result, people form the 8ps of the services mix, (Lovelock and Wirtz 2007, p.310-311). Wilson et al. (2012 p.250-251) extended on the position of employees asserting that they influence on all 5 dimensions of service quality (reliability, responsiveness, assurance, empathy and tangibles). The SPC hypothesises a connection between employees being more efficient and improved performance of the service for the customer. A helpful illustration of this is given in the form of South west Airlines, where employees operate flexible proficient work systems which provide value to the customer in terms of cost and speed (Heskett et al, 1994 & 1997).

Only engaged employees exert the necessary levels of discretionary effort that attains loyal customers (Frank et al 2016). Discretionary effort implies the the additional effort that engaged staff are willing to give, research by Rummler (2014) suggest that 40% of employee's effort is discretionary which depends with the levels of engagement. Heskett et al (1997) states that there is a direct and strong relationship between employee engagement and financial performance

Erlen and Isaac (2014) additionally state that "employee productivity is one of the key indicators for the economic efficiency of human resources." Therefore, making it the important factor of production in many companies. Charifzadeh and Taschner (2017) support the fact that employee performance is an important factor for a companies overall economic success, employees are not only an important factor in the service sector, but they are the only asset an organisation has to generate income. They further on state that employee performance is often non-monetary in nature such as sickness and absence, but they do include financial measures such as employee productivity which is measured as the average income or sales revenue an employee generates.

2.2.1 Employee Loyalty and Sales Revenue

Logan (2018) defines loyalty as "a strong tie that binds an employee to his or her/ her company even when it may not be economically sound for him/ her to be there."

Encyclopedia Britanica (2019) also defines loyalty as a person's devotion or sentiment of attachment to a particular object which may be another person or group of persons an ideal, a duty or a cause. "It expresses itself in both thought and action and strives for the identification of interests of the loyal person with those of the objects (Safra 2017)."

The first intention of the SPC is that customer loyalty directly influences the financial performance of a business (Heskett et al, 1994). They maintain that the traditional approaches for managers to increase profits has been to maximise market share, however Reichhald and Sasser (1990 cited in Liu 2005) studied the effect of customer loyalty and profitability across various industries and determined that customer loyalty is a more important factor of profitability than market share.

York (2017) show how the leading service organisations grow and develop profitable business. They demonstrated a quantifiable set of relationships that link profit and growth not only to customer loyalty and satisfaction derived from good external service quality (how customers perceive the organisation versus the competition) but also to high levels of employee loyalty and satisfaction which derives from good internal relationships and working environment.

In current times workers are provided with more employment openings attracting them to leave their jobs often. On the other hand, the organisations point of view losses is suffered as the employer spends resources on employees to brand them more capable so that so that the organisational performance is enhanced thereby leading to greater gross outputs. Rodriguez et al (2015) indicate that economic performance of organisations is becoming evermore dependent on the participation commitment and more generally, loyalty of their employees.

Bakker & Shaufeli (2016) states that an employee's loyalty to the occupation, of his/ her emotional investment and the regularity of his or her commitment to the organisation, are key factors that determine the longevity and the performance of organisations. Employee loyalty is a deliberate commitment to further the best interests of one employer, even when doing so may demand sacrifices of one's aspect of one's self interest beyond what would be required by other and legal and moral duties (Elegido 2014).

A numerous number of studies have shown that employee loyalty is a prerequisite to reaping the benefits of customer loyalty and firm performance (Heskett et al and Reicheld 2001).

Furthermore (Swartz and Iacobucci, 2017) state that "loyal employees are more willing to subjugate their short-term interests to the long term interests of the organisation providing superior service quality to customers" which results in increased sales revenue derived from customer satisfaction. Moreover, loyal employees tend to stay longer with an organisation which then reduces the cost of turnover and its negative effects on service quality (Heskett, Sasser and Hart 1990). Human resource practices and sales per employee serve as an appropriate measure of productivity and profit per employee, this provides an appropriate measure of employee profit that takes full account of employee costs.

Years back most managers believed that market share was the primary driver for profitability, and studies in the mid-1970s reinforced this notion. Earl Sasser who was working with a former student Fred Reichheld found this statement not to be true basing on several factual experiences from a number of organisations, they identified a factor that is often associated with profits and rapid growth which is customer loyalty, as a result this finding has become the basis for every successful consulting practice.

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