An empirical study of employee loyalty, service quality and firm performance in the service industry

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Abstract

Taking an operational perspective on the relations between employee loyalty and business performance, we examine the relationships among employee loyalty, service quality, customer satisfaction, customer loyalty and firm profitability, and the contextual factors influencing these relationships. We developed a research model grounded in the service-profit chain notion of Heskett et al. (1994) and empirically tested the model by conducting a survey of 210 high-contact service shops in Hong Kong. Using structural equation modeling (SEM), we observed that employee loyalty is significantly related to service quality, which in turn impacts customer satisfaction and customer loyalty, ultimately leading to firm profitability in high-contact service industries. Using multiple-group analysis of SEM, we found that the effect of employee loyalty on firm profitability through service quality, customer satisfaction and customer loyalty is robust under different scenarios of employee–customer contact level, market competitiveness, and switching cost in the sampled shops. This finding supports the generalizability of the observed relationships in various operating contexts.

Introduction

Over the years, operations management (OM) has advocated the optimization of operational processes as an effective means to profitably deliver value to customers and meet, or even surpass, customer expectations. Considerable research has devoted to studying such topics as designing, managing and optimizing different service delivery systems in hopes of attaining higher service quality and operational efficiency (e.g., Frei et al., 1999; Soteriou and Zenios, 1999). This operational approach has been applied enthusiastically and has proved to be an effective means towards improving organizational efficiency. On the other hand, researchers of organizational behaviour (OB) have stressed that employee attributes are crucial to organizational effectiveness (Schwab and Cummings, 1970; Vroom, 1964). For a long time, the studies of OM and OB have long been viewed as distinct fields. An abundance of research has been conducted to examine employee attributes, as well as to investigate the extent of employee attributes influence job commitment and performance (Becker and Gerhart, 1996; Meyer et al., 2004). Recently, OM researchers have eagerly promoted inter-disciplinary studies by integrating various fields together (Boudreau et al., 2003), believing that inter-disciplinary studies would yield more fruitful outcomes in both research and practice.

Pioneers of this topic, Heskett et al. (1994) proposed the service-profit chain (S-PC) notion that highlights the importance of employee attributes to deliver high levels of service quality to satisfy customers in order to enhance business performance. The notion has triggered some researchers to study the impact of employee attributes and/or customer purchase indicators on business performance in specified service contexts (e.g., Hallowell, 1996; Voss et al., 2005). However, there is a dearth of research aimed at explicitly examining the relationships between employee attributes and firm performance through service operations based on a rigorous empirical study.

Besides, only a few researchers have recognized the need to examine the moderating factors influencing the relevant relations embedded in the S-PC in particular, and the associations between employee attributes and operational and firm performance in general (Anderson and Mittal, 2000; Ranaweera and Neerly, 2003; Silvestro and Cross, 2000). Jones and Sasser (1995) and Lee et al. (2001) attempted to investigate the moderating effects of market competitiveness and switching cost, respectively, on the association between customer satisfaction and customer loyalty. Ranaweera and Neerly (2003) studied the moderating effects of price perception and customer indifference on the relation between service quality and customer retention. The recognition of the existence of moderating factors emerges from the common knowledge that business performance is contingent upon environmental variables. However, there is a lack of a systematic approach to seeking an understanding of precisely how employee attributes affect service operations performance and business outcomes (Silvestro and Cross, 2000).

In this study we explore two important research questions: (1) What are the likely relationships among employee loyalty, service quality, customer satisfaction and customer loyalty, as well as firm performance in high-contact service industries where there are direct and close contacts between employees and customers? (2) How do various contextual factors, including employee–customer contact time, market competitiveness, and switching cost, moderate such relationships? We developed a research model grounded in the S-PC notion of Heskett et al. (1994) and tested the model by applying structural equation modelling to the empirical data collected from a survey of 210 high-contact service shops in Hong Kong.

Section snippets

Theoretical background

Research on employee attributes and performance has traditionally resided in the domain of organizational psychology, not OM. However, as operations managers are increasingly involved in service management (Oliva and Sterman, 2001), they find employee attributes potentially a vital factor for operational efficiency enhancement. On the other hand, many behaviour psychologists have mainly focused on studying the relationships between employee attributes and individual work performance (e.g.,

Sample

This study focuses on the high-contact service industries in Hong Kong. High-contact service industries typically involve activities in which service employees and customers have close and direct interaction for a prolonged period (Chase, 1981). A high contact environment of services is characterized by long communication time, intimacy of communications and richness of information exchanged (Kellogg and Chase, 1995). Through high contacts, service employees and customers have ample

Data analysis and results

We applied structural equation modelling (SEM) to examine the proposed model and multiple-group analysis of SEM to investigate the influence of moderator variables, using Analysis of Moment Structures (AMOS). Similar to relevant studies (e.g., Fynes et al., 2005; Skerlavaj et al., 2007; Singh, 2008; Koufteros et al., 2009), we followed Anderson and Gerbing's (1988) two-step approach to estimate a measurement model prior to the structural model. In what follows, we present the results of

Discussion and conclusions

In this study we developed and tested the relationships among employee loyalty, service quality, customer satisfaction and customer loyalty, and firm profitability in the context of high-contact services. The results lend strong support for the assertion that employee loyalty is an important determinant of firm profitability. The findings are consistent with the popular S-PC concept that the key driver of firm performance is employee attributes, such as employee loyalty, in service

Acknowledgements

This paper was supported in part by the Hong Kong Polytechnic University under Grant no. 1-BB7M.

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