An empirical study of the service-profit chain

Abstract

The extant operations management literature has extensively investigated the association among quality, customer satisfaction, and firm profitability. However, the influence of employee attributes on these performance dimensions has rarely been examined. In this research, we empirically examined the relationships among employee attributes, operational performance, and business outcomes based on the well-known conceptual framework of the service-profit chain (S-PC). We propose relevant theories to support the conceptualization of S-PC, develop two related models for analysis, and explore some potential moderating factors. First, we develop a relatively simple framework, postulating the relationships among employee satisfaction, service quality, customer satisfaction, and firm profitability. Then, we validate the relationships among all the major constructs of S-PC as proposed by Heskett et al. (1997). We further explore the potential contextual factors, including level of employee-customer contact, market competitiveness, and switching cost, which might be moderators for some postulated relationships in S-PC. This study was conducted in the service industry of Hong Kong. Research data were collected from two service employees and the shop-in-charge in each shop and a sample of 210 firms was collected. We applied structural equation modeling to analyze the research data. The results of the first model showed that the relationships among employee satisfaction, service quality, customer satisfaction, and firm profitability are significant, suggesting that employee satisfaction is an important determinant of operational performance in service organizations. In the second model, we further examined the relationships stipulated in the S-PC. Most of the postulated relationships are highly significant, supporting the conceptualization of the S-PC as proposed by Heskett et al. (1994). On the other hand, using multi-group analysis, we did not find any significant moderating factors on various relationships of the S-PC. Instead, these relationships stipulated by the S-PC appear to be rather robust under different employee-customer contact levels, market competitiveness, and switching cost in the sample, supporting the generalizability of the S-PC in different operating contexts. In short, this research provides strong evidence that employee satisfaction and loyalty play a critical role in enhancing organizational performance in the service industry, contributing to our understanding in service operations management.