International School of Management



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International School of Management


The Effects of Employee Satisfaction and Customer Retention on Corporate Profitability: An Analysis of the Service-Profit Chain

by

Anthony L. Emerson



Doctoral dissertation submitted for the International School of Management’s Doctor of Business Administration degree
Word Count: 91,611
April 2007


LIST OF CONTENTS
Acknowledgements i

List of Figures ii

Notations iii

Abstract v

Executive Summary vi
Page

Chapter 1 – Introduction 1
Chapter 2 – The Elements of Employee Satisfaction 5

Leadership-Management Attitude/Response 5

Work Environment 8

Employee Training/Programs 14

Employee Development & Leadership Planning 20

Employee satisfaction and Recognition 25

Organizational Goals and Employee Expectations 33

Communicating With Employees 37

Employee Satisfaction and Teamwork 48

Employee Empowerment 53

Interaction in the Workplace 60

Organizational Culture/Employee Focused 65

Employee Benefits 73

Page

Employee Motivation 77


Chapter 3 – Increased Employee Satisfaction Leads to Increased 83

Creativity and Innovation

Innovation Process Examples to Learn From 85

Suggestions for Improving the Innovation Process 87

Apple: An Example of Creativity and Innovation 88



Chapter 4 – Customer Service Loyalty and Retention 89

The Customer-Centric Organization 90

Customer Acquisition-Branding & Marketing 93

Customer Acquisition and the Internet 94

Target Marketing 98

Delivering World-Class Customer Service 101

Customer Expectations 103

Training for Customer Service 110

Customer Service Training at the Disney Organization 113

The Important Elements of Delivering Great Customer Service 116

Exceptional Customer Service at the Ritz-Carleton 123

The Employee-Customer Relationship 127

The Customer-Employee Relationship at Pike Place Fish Market 131

Page

Transforming Customer Satisfaction Into Customer Loyalty 134

Measuring Customer Satisfaction 142
Chapter 5 – Knowledge Management & Customer Relationship 149

Management Systems

What is Knowledge Management? 150

Customer Relationship Management Systems 154

The Need and Benefits of CRM Systems 155

CRM Systems Implementation 163

Potential CRM Pitfalls 169

CRM at Amazon.com 172
Chapter 6 – The Effects of Employee Satisfaction-Customer 178

Retention on Profitability

The Effects of Customer Loyalty on Corporate Profitability 180

Customer Loyalty is a Direct Result of Customer Satisfaction 181

Creating Value Through Satisfied, Loyal, & Productive Employees 183

Satisfied Employees’ Impact on Customer Loyalty & Profitability 184

Page

Chapter 7 – An Analysis/Evaluation of the Service Profit Chain at 186

Maine Savings

Maine Savings History 187

Leadership at Maine Savings 188

Leadership-Management Attitudes/Response 189

Work Environment 191

Employee Training/Programs 194

Employee Development & Leadership Planning 199

Employee Satisfaction and Recognition 201

Organizational Goals and Employee Expectations 205

Communicating With Employees 208

Employee Satisfaction and Teamwork at Maine Savings 211

Employee Empowerment 213

Interaction in the Workplace 217

Organizational Culture/Employee Focused 222

Employee Benefits 228

Employee Motivation 231


Chapter 8 – Customer Service, Loyalty, and Retention at Maine 234

Savings

Maine Savings as a Customer-Centric Organization 234


Page

Customer Acquisition – Branding & Marketing 237

Maine Savings Customer Acquisition and the Internet 241

Target Marketing at Maine Savings 242

Delivering World-Class Customer Service at Maine Savings 244

Training for Customer Service at Maine Savings 245

Important Elements of Customer Service at Maine Savings 247

The Employee-Customer Relationship at Maine Savings 252

The FISH Philosophy at Maine Savings 256

Transforming Customer Satisfaction Into Customer Loyalty 259

Measuring Customer Satisfaction at Maine Savings 261

Knowledge Management Strategies at Maine Savings 264

Knowledge Management Instruments at Maine Savings 265

Knowledge Management Barriers Identified at Maine Savings 266

Customer Relationship Management at Maine Savings 270

Chapter 9 – A Summary of the Service Profit Chain Initiative at 272

Maine Savings

The Benefits of Added Employee Satisfaction at Maine Savings 273

The Benefits of Increased Customer Satisfaction at Maine Savings 276

Resultant Effects on Corporate Profitability at Maine Savings 282



Page

Chapter 10 – Academic Literature Review 282

Overview 282

Employee Satisfaction 284

Customer Satisfaction 286

Customer Loyalty 289

Corporate Profitability and the Service Profit Chain 290


Chapter 11 – Research Methodology 291

Objectives 291

Research Approach 292

Method & Data Collection 293

Selection and Description of Interviewees 294

Chapter 12 – Interview Results 296

CEO, Vice Presidents and Board Members 296

Service Profit Chain 296

Employee Satisfaction 298

Customer Satisfaction/Retention 302

The Combination of the Elements of the Service Profit Chain 307

Interview Results Summary 310


Page

Chapter 13 – Summary, Discussion, Conclusions, and Limitations 310

Employee Satisfaction 310

Leadership-Management Attitude Response 311

Work Environment 312

Employee Training 314

Employee Development and Leadership Planning 315

Employee Recognition 316

Organizational Goals and Employee Expectations 317

Communicating With Employees 318

Employee Satisfaction and Teamwork 321

Employee Empowerment 322

Interaction in the Workplace 324

Employee Benefits 325

Employee Motivation 325

Customer-Centricity 327

Customer Acquisition-Branding & Marketing 327

World-Class Customer Service 329

Customer Expectations 331

Customer Service Training 332

The Employee-Customer Relationship 333

Transforming Customer Satisfaction Into Customer Loyalty 335

Page

Measuring Customer Satisfaction 336

Customer Relationship Management 337

Creating Value Through Satisfied, Loyal & Productive Employees 339

Customer Loyalty Effects on Corporate Profitability 341

The Service Profit Chain at Maine Savings, Discussion 343

Limitations 343
Chapter 14 – Recommendations & Where, When, How, and Why 344
Bibliography 355

Appendices 381

ACKNOWLEDGEMENTS
I would like to thank the many business executives, college professors, and business scholars that helped me identify, analyze, and choose this topic. I would especially like to thank all of the employees at Maine Savings for their generous gift of time and attention to my many inquiries as I pursued this research. In particular, I would like to recognize the members of Maine Saving’s Executive Team for their many hours of input during interviews and their contribution to my data gathering efforts.
I would also like to thank my family for their support, understanding, and flexibility as I undertook this task. I would like to especially thank my Son Anthony who spent many long hours next to me as I endeavored to compile my research. I would be remiss if I did not mention the appreciation I have for the outstanding program of study at the International School of Management, for which I am grateful. I would like to especially thank Professor Peter Horn, PhD. for his input, support and patience during my time in the DBA program.
LIST OF FIGURES

Figures Page



Figure 1 Maslow’s Hierarchy of Needs 25

Figure 2 Organization Strategy 33

Figure 3 Organization Environment 33

Figure 4 Performance Management 34

Figure 5 Leadership for Empowerment 54

Figure 6 Management/Employer Performance Cycles 67

Figure 7 Employee Motivation 78

Figure 8 Motivational Theories 79

Figure 9 Motivation & Satisfaction Levels 80

Figure 10 Maslow’s Hierarchy of Needs (illustration) 81

Figure 11 Customer Acquisition/Experience Model 98

Figure 12 Customer Perceived Value 137

Figure 13 Customer Loyalty Pyramid 140

Figure 14 Adoption Factors for Knowledge Management Systems 151

Figure 15 Purposes for Knowledge Management Systems 152

Figure 16 Static Knowledge Management 153

Figure 17 Automated Knowledge Management 153

Figure 18 Reasons to Implement CRM Strategies 156

Figure 19 CRM Risk Tolerance 168

NOTATIONS

ACH Automated Clearing House

AVP Assistant Vice President

B2B Business to Business

B2C Business to Customer

CE Corporate Entrepreneurship

CEO Chief Executive Officer

CFO Chief Financial Officer

CPV Customer Perceived Value

CRM Customer relationship Management

CSM Customer Service Management

DP Data Processing

EAP Employee Assistance Program

ERP Employee Response Program

HR Human Resources

IT Information Technology

KM Knowledge Management

MBO Management by Objective

MS Maine Savings

NI Net Income

NPV Net Present Value

OTJ On the Job

PAT Process Action Team

PFI Primary Financial Institution

PTO Paid Time Off

R&D Research and Development

ROA Return on Assets

ROE Return on Equity

ROI Return on Investment

SOP Standard Operating Procedure

US United States

VP Vice President

Abstract


The elements that lead to employee satisfaction and customer retention are said to have fundamental implications for corporate profitability. Unlike much of the mainstream literature, which generally focuses on the relationship between two of these three subjects (employee satisfaction, customer retention, and corporate profitability), this paper considers the effects, importance and reliance between all three. Based on published research, completed case studies, and interviews, the paper emphasizes the effects of employee satisfaction and customer retention on corporate profitability, otherwise known as the Service-Profit chain. It especially highlights the importance of the link, and subsequent success of each area. It argues that, in order to be effective, a complete understanding of the link between employee satisfaction and its relationship to customer retention and corporate profitability must be understood and practiced.

Executive Summary

Most every organization must deal with the issues of employees, customers and profitability in the normal course of carrying out business. This paper considers each issue, but in relation to how they correlate with, and affect each other. More and more research is being done in regard to the effects of employee satisfaction and customer retention on corporate profitability, and the importance of this relationship. The focus of this paper is to fully define each issue, highlight the important relationship between each, and offer dynamic recommendations to improve the benefits of their correlation. This will be accomplished by analyzing published research, interviews with established professionals in the field, and case studies related to employee satisfaction, customer retention, and corporate profitability.
The research on employee satisfaction is constantly evolving, with new points of view and strategies emerging on a regular basis. In fact, there are a plethora of books that have been written on the subject. This paper will analyze the various components of employee satisfaction, as well as the key drivers involved in employee fulfillment. The results of this analysis will be used to examine the relationship between a “satisfied” employee and effective customer retention and loyalty. The paper highlights the major considerations for retaining customers, and the relationship between satisfied employees and loyal customers.
In the end, the issues of employee satisfaction and customer retention are examined in relation to their impact and influence on corporate profitability. This paper will analyze and focus on the touch points that must be considered in the relationship between each issue. The paper will conclude that there is a direct and fundamental link in the relationship between employees, customers and corporate profitability. The paper also concludes that an organization can benefit from enhancing these elements that make up what is known as the “service-profit” chain. After analyzing the research contained herein, the reader should be able to conclude that there is attainable value in combining these elements into a synergistic system for the benefit of the organization.

Chapter 1

Introduction

For many years now, research has been conducted on the effects of employee satisfaction and the correlation to categories such as: productivity, turnover, customer loyalty, and profitability. The aim of this paper is to examine the effects of employee satisfaction and customer retention on corporate profitability, often referred to as the “service profit chain.” These three elements are the main touch points in business that account for a majority of all organizational processes. The empirical literature is clear that if organizations concentrate on employee satisfaction elements, positive effects on customer satisfaction and corporate profitability can be realized (Levine 1995). The analysis in this paper will highlight the integral relationship between employee satisfaction, customer retention, and corporate profitability. It will outline a clear and direct link between these elements, as well as provide evidence of the benefits to an organization that makes these elements a priority.


In order to sufficiently examine the service profit chain, each of the three elements will be comprehensively analyzed and defined. The main tenets and elements of employee satisfaction will be discussed in relation to one another, as well as how they fit together to achieve the desired result. In much the same fashion, the elements of customer satisfaction will be analyzed in relation to both employee satisfaction tenets and potential effects on profitability. An in-depth examination of the relationship between employee satisfaction and customer retention and their effect on corporate profitability will be presented. The paper considers the theoretical research and analysis on this subject, as well as comparisons to actual case studies on the Ritz-Carleton organization, Pike Place Fish Market, the Disney Company, and Amazon.com. In addition, an analysis of the current service profit chain initiatives being carried out at Maine Savings will also be examined. The combination of theory, case study analysis, and physical observation will enhance the foundation and serve to support the main hypothesis of this paper.
The information in this paper will be presented in the context of achievable initiatives that are capable of being implemented at most present day organizations. Although previously published empirical research data will be used to support the analysis presented in this paper, the data will be presented in a context relevant to businesses today. The paper will also attempt to answer the question, “If it is so easy, why aren’t all companies doing it?” Several of the reasons for this will be given and examined relative to the elements of the service profit chain. In the end, the reader will be able to assess the processes, elements, and benefits of instituting a service profit chain initiative that focuses on the effects of employee satisfaction on customer retention and corporate profitability (Appendix 1).
The Service Profit Chain

Employee Satisfaction



The three main components of the service profit chain theory are employees, customers, and profitability. This section focuses on the place and importance of employees to the process that makes up the overall theory. The specific components of “employee satisfaction” will be discussed later in further detail. As most everyone in business is aware of, employees are important to any organization, as they are the foundation for any potential productivity. Employee satisfaction has been directly linked to employee loyalty. Because employees can be considered the heart of an organization, management should consider investments in employee satisfaction and subsequent loyalty, to be a necessity. Most organizations fail to take into account the loss of productivity and a decrease in customer satisfaction that results from poor employee satisfaction and increased employee turnover (Heskett, Sasser and Schlesinger 1997). This paper will also highlight the negative effects of low employee productivity that are a result of employee dissatisfaction in the section that will address the link between employee satisfaction and corporate profitability.
Although there are three main elements to the service profit chain, customer retention/loyalty can be considered the primary conduit between the other two. In other words, the glue that binds the elements together and produces positive results from the theory itself. Creating customer value is the key to attaining customer loyalty. The issue of customer retention and loyalty is more complex than usually assumed and may be affected by many different aspects of operations within an organization. Customer retention is a gauge that is used to assess how well an organization is doing at creating value for its customers (Reichheld 1996). It is widely accepted that it is far cheaper and more efficient to have loyal, repeat customers, than to have to market and mine new customers.
The major component of customer retention is “loyalty”, which is why the paper will explore the elements of customer loyalty in more depth later in the customer satisfaction section. However, it is important here to point out the importance of customer loyalty to the theory of the service profit chain. Within the concept of the service profit chain, the important point in regard to customer loyalty is that customers should be looked upon as revenue generating assets. That is, they should be accounted for, monitored, and proactively taken care of as any valuable corporate asset. By adopting this viewpoint, a company is able to view customers not only as one-time events but also as long-term, valuable assets that require attention in order to bolster their retention and satisfaction.
The third main element of the service profit chain is profitability, which is a by-product of employee satisfaction and customer retention/loyalty. While many organizations still focus on trimming expenses and generating new business, there is an abundance of evidence linking customer retention to positive financial performance (Marketing Innovators 2005). This theory has been embraced and implemented by many successful titans of business including Jack Welch, former CEO of General Electric and Herb Kelleher, founder of Southwest Airlines. It is not enough anymore for a company to focus only on improving profitability; it is necessary to examine the main components that lead to profitability. It is now recognized that the best way to improve corporate profitability is to focus on the effective management of human capital and customer capital. As this paper will highlight in the case studies and the ongoing efforts at Maine Savings, this theory can be implemented successfully and profitably. Many successful managers and leaders today are focusing more attention on frontline workers and their customers, rather than the traditional items of profit goals or market share (Jones 1994).
Chapter 2

The Elements of Employee Satisfaction

Employees can derive satisfaction from their jobs by meeting or exceeding the emotional wants and needs they expect from their work (Pepitone 2006). Therefore, Managers that can recognize this and understand the many different aspects that are involved in employee satisfaction will be successful at achieving the link between employee satisfaction, customer retention and added profitability. As previously stated, the issue of employee satisfaction has a major impact on customer retention and corporate profitability. This section will comprehensively analyze the many important elements that are related to employee satisfaction, and resultant employee loyalty. The paper will consider the elements, define their concepts, and discuss the salient points in relation to the main hypothesis that employee satisfaction has a major impact on customer retention and corporate profitability.
Leadership – Management Attitude/Response

Although there will be many aspects of employee satisfaction discussed in subsequent sections of this paper, the element of leadership and management’s attitude toward employees should be considered the foundation of employee satisfaction. There is no single definition of a successful leader or manager but recognized leaders and managers do share many of the same traits. Jack Welch, the widely acclaimed former CEO of General Electric states, “Without question, there are lots of ways to be a leader. You need to look only as far as the freewheeling, straight-talking Herb Kelleher, who ran Southwest Airlines for thirty years, and Microsoft’s quiet innovator, Bill Gates, to know that leaders come in all varieties” (Welch and Welch 2005). The main point here is that successful leaders can possess different styles, but use similar strategies to engender employee trust, loyalty, and satisfaction. The paper will now discuss and consider several of the successful traits exhibited by successful leaders and managers.


One would be hard pressed to argue against the fact that leaders in organizations can have a definitive influence on employee behavior and subsequent employee satisfaction. Employee satisfaction issues have been researched extensively. A heavily researched topic relating to employee satisfaction is the relationship of an employee’s satisfaction level and the leadership style of the organization (Brooke 2005). Up to this point, the paper has combined the terms “leadership” and “management”. It should be noted that there are distinct differences between the two, as leaders establish the vision to be accomplished and managers monitor the performance and progress at attaining the vision. However, for the purposes of this paper, the two terms shall be referred to synonymously because of the way they are typically viewed by employees of an organization.
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