Service excellence, productivity, and organizational performance
Terms | Definitions |
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Cost-effective service excellence (CESE) | •Refers to a state when an organization delivers simultaneously high levels of customer satisfaction and high levels of productivity. That is, an organization delivers CESE if it simultaneously is among the best performers in its competitive set in terms of customer satisfaction and productivity. |
Dual culture strategy | •Refers to organizations that achieved CESE through ambidexterity (i.e., leadership, contextual, and structural ambidexterity), making both service excellence and productivity integral parts of the organizational culture. It enables organizations to deploy generic productivity strategies and tools to the extreme while focusing on service excellence. It allows an organization to close the gap between actual productivity and potential productivity at a given level of customer-induced variability. |
•The literature uses various terms similar to dual culture strategy, including dual strategy, dual emphasis (Rust et al. 2016; Mittal et al. 2005; Swaminathan et al. 2014), and simultaneous attempts to increase both customer satisfaction and productivity (Anderson et al. 1997). We use the term dual culture strategy throughout. | |
Service excellence strategy | •We define service excellence as an organizational strategy of delivering high levels of service that generates high customer satisfaction to its customers. |
Customer satisfaction strategy | •Service marketing literature uses various terms to describe an organization’s focus on delivering customer satisfaction, including revenue emphasis (Rust et al. 2016), customer satisfaction (Anderson et al. 1997; Swaminathan et al. 2014), and effectiveness (Rust and Huang 2012). We focus on the high end of customer satisfaction and use the term service excellence strategy. |
Perceived service quality and customer satisfaction | •Perceived service quality is defined as “meeting or exceeding customer expectations,” which is consistent with the Gaps Model (Parasuraman et al. 1985, 1988). In this manuscript, we use the terms customer satisfaction and perceived service quality interchangeably when we refer to perceptions of customers. |
Productivity | •Productivity is defined throughout the manuscript as output/input ratio (Grönroos and Ojasalo 2004). |
Customer-induced variability | •The term customer-induced uncertainty was used in early service operations research to discuss efficiency-related challenges in service organizations (Chase 1981). More recent work use the term variability (e.g., in arrival times, and requested services and features) which follows a statistical distribution and is not uncertain (Frei 2006). In the marketing literature, customer induced variability is typically referred to as “customization” (e.g., Anderson et al. 1997). For simplicity, we refer to customer-inducted uncertainty, variability, and customization as customer-induced variability. |
Study | Focus of study | Method | Key findings and conclusions |
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Empirical Studies on the joint impact of customer satisfaction and productivity on organizational performance | |||
Anderson et al. (1997) | Conditions under which a customer satisfaction/ productivity tradeoff is likely | Empirical model using combined Swedish Customer Satisfaction Barometer and economic return data from publicly listed firms (ROI, labor productivity) | •Tradeoffs between customer satisfaction and productivity are more likely for services than goods. |
•Conflicts between customer satisfaction and productivity are stronger when customer satisfaction is more dependent on customization than standardization, and when service employees play an important role. | |||
Rust et al. (2002) | Compared performance of firms that tried to achieve high customer satisfaction, high productivity, or both | Longitudinal two-period survey; sample of 71 business units, 186 respondents; subjective organizational performance data | •Firms that primarily tried to achieve a customer satisfaction strategy (i.e., a revenue expansion strategy) outperformed firms that focused on productivity (i.e., cost reductions), and firms that tried to achieve both high customer satisfaction and productivity. |
Mittal et al. (2005) | Compared performance of firms that successfully achieved high customer satisfaction, high productivity, or both | Empirical model using ACSI data, and data envelopment analysis (DEA) to measure productivity from Compustat and Competitive Media Services data; 77 firms, longitudinal data over 6 years | •Firms that successfully achieved a dual emphasis (i.e., achieved both high customer satisfaction and high productivity) showed higher long-term financial performance than firms that achieved either high customer satisfaction or high productivity alone. |
Rust and Huang (2012) | Optimal level of productivity for profit maximization | Empirical model using Compustat data; more than 700 service firms over two periods, 5 years apart. | •Found an inverted U-shape relationship between productivity and profitability. |
•Optimal level of productivity is lower when better service quality is financially beneficial (when the firm has higher profit margins or can charge higher prices). | |||
•Optimal level of productivity is higher when market concentration is higher, or when higher wage levels discourage the provision of better service quality. | |||
•Optimal level of productivity increases as technology advances. | |||
Swaminathan et al. (2014) | How a firm’s merger moderates the joint impact of the dual goal of customer satisfaction and productivity | Empirical model; combined ACSI data with financial data obtained from Compustat. Uses a differencing approach (i.e., changes in customer satisfaction and productivity as independent variables rather than absolute levels) | •Firms in a merger situation that successfully achieved a dual emphasis (i.e., simultaneously increased customer satisfaction and productivity) outperformed firms with a dual emphasis in a non-merger context. |
•In non-merger situations, firms that achieved a dual goal did not realize high firm value increases but still achieved a small positive return, whereas firms that focused on customer satisfaction or efficiency alone showed a small decline in Tobin’s q.
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•A merger situation may enable a successful dual strategy as resources for pursuing both strategies simultaneously are more likely to be made available during the integration period after a merger. | |||
Rust et al. (2016) | How firms adopt cost and quality (revenue) emphasis and their impact on business performance | Longitudinal multi-level survey | •Quality (revenue) emphasis is driven by individuals close to the customer (front-line and sales employees) and converges at the organizational level (i.e., individual-to-collective convergence). |
•Productivity (cost) emphasis is driven by formalized organizational procedures and senior management and converges at the organizational level (i.e., collective-to-individual convergence). | |||
•Quality emphasis convergence improved business performance, but cost-emphasis convergence did not. | |||
Organizational ambidexterity and dual culture | |||
Gibson and Birkinshaw (2004) | Contextual ambidexterity at the business-unit level | Interviews in 41 business units across four levels of hierarchy | •Introduces the concept of contextual ambidexterity. |
•Achieving ambidexterity at the individual level (i.e., individuals make their own choices between conflicting goals) results in superior unit performance. | |||
Raisch and Birkinshaw (2008) | The antecedents, outcomes, and moderators of ambidexterity | Literature review and conceptual study | •Structure (structural and spatial separation), context, and leadership are organizational antecedents to organizational ambidexterity. |
•Environmental factors (environmental dynamism and competitive intensity) and market orientation are moderators of the antecedents and outcomes of organizational ambidexterity. | |||
•Contexts of organizational ambidexterity include organizational learning, technological innovation, organizational adaptation, strategic management, and organizational design. | |||
Heracleous and Wirtz (2010) | Mechanisms through which Singapore Airlines achieved a dual culture of cost-effectiveness and service excellence | Case study-based research | •A full-service airline can simultaneously be a quality and a cost leader. |
•The airline’s incentive system, training, and internal communications drove a dual culture that focused on cost-effectiveness in everything that did not touch the customer, and it focused on service excellence as soon as the customer was involved. | |||
Productivity in service operations | |||
Levitt (1972) | Manufacturing principles applied to service processes | Conceptual study | •Manufacturing principles can be applied to services to increase productivity and consistency. |
•Highly centralized, carefully organized and elaborately engineered processes are key for the industrialization of service. | |||
Levitt (1976) | Redesigning services to achieve high productivity and consistency | Conceptual study | •Services can be industrialized using hard technologies (e.g., machines, tools, and artifacts), soft technologies (e.g., preplanned service systems), and hybrid technologies. |
•High volume, carefully planned systems, and division of labor are key to achieving high productivity and quality. | |||
Customer contact limits productivity; suggests decoupling and buffering of the back office | Conceptual study | •The less direct contact a customer has with a service system, the greater is the system’s potential productivity. | |
•Low contact systems are easier to industrialize. | |||
•Decoupling and buffering the “technical core” (i.e., back office) from the front office allow higher productivity in the back office. | |||
Lovelock and Young (1979) | Productivity impact of customer behavior | Conceptual study | •Customer behavior is a critical determinant of the productivity of service operations and therefore has to be managed carefully. |
•Organizations can shape and change customer behavior to better align it with more productive service processes. | |||
Frei (2006) | Customer involvement in service processes as a strategic decision | Conceptual study | •Customers introduce five types of variability into service processes (i.e., arrival time, product and feature choice, customer capability, customer effort, and involvement). |
•Strategies to deal with customer-induced uncertainty include two broad options: focusing on a tightly defined customer segment combined with a limited breadth of service products; and using automation combined with SST (“low-cost accommodation”). | |||
Meuter et al. (2000) | Customer responses to SSTs | Critical incident study with 800 respondents | •Key satisfiers include increased customer efficiency (e.g., saves time) and convenience by making service available when and where customers need them. |
Meuter et al. (2005) | Customer trial of SSTs | Two surveys of users and non-users of two new SSTs in the context of prescription refill ordering | •Consumer readiness is identified as a key barrier of SST trial. |
•Key consumer readiness variables are identified: role clarity, intrinsic and extrinsic motivation, and ability to use the SST. | |||
•Consumer readiness also mediated effects from innovation and individual characteristics and explained why these variables affect trial. |
Empirical evidence
Root causes of the conflict between service excellence and productivity
Methodology for synthesis of literature and case analysis
Organization (Industry, Country, Size)a
| Evidence for service excellence | Evidence for Cost-effectiveness |
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Singapore Airlines (SIA) (airline, Singapore, 24,000 employees) | •Costs per available seat kilometer (ASK) were 4.6 cents compared to 8–16 cents for full-service European airlines, 7–8 cents for U.S. airlines, and 5–7 cents for Asian airlines (Heracleous and Wirtz 2010, 2014). SIA was identified as a cost leader in its peer group measured in cost/ASK (Airline Leader 2014) | |
•Was ranked number 1 for 28 of the previous 29 years in the Condé Nast Traveler’s World’s Best Airline Award (Condé Nast Condé 2017) | ||
•Won Global Traveler (USA) Best Overall Airline in the World Award in 2016 for the 12th time (Global Traveler 2016) | ||
•Skytrax’s Airline of the Year Award 3 times since 2004; ranked among top 3 of the World’s Best Airlines in the past 5 years (Skytrax 2017) | ||
•Was the top rated airline in the Customer Satisfaction Index of Singapore (CSISG) since its inception in 2008 (CSISG 2016) | ||
Ristorante D’O (restaurant, Italy, 40 employees) | •Had 1 Michelin Star; 1 Gambero Rosso Fork (Nobel 2013) | |
•Was ranked number 1 of 31 restaurants in Cornaredo on TripAdvisor (2016) | ||
Amazon (online shopping, web hosting, content distribution, US, 270,000 employees) | •Was the top rated Internet retailer in the ACSI (2017) for 18 years | |
•Highest sales/employee p.a. ($1.2 million) of online retailers in 2016 (CSIMarket 2017) | ||
The Vanguard Group (investment management, US, 14,000 employees) | •Highest ACSI rating of its industry (ACSI 2017) | |
•Entire suite of U.S. ETFs made Forbes’ list of “Best ETFs for Investors in 2016″ in 10 of 13 categories (Baldwin 2016) | ||
•Morningstar awarded the advisory teams of Vanguard Wellesley Fund and Vanguard Market Neutral Fund the “Managers of the Year” Award in 2016 (Waggoner 2016) | •Won the CIO 100 Award from CIO Magazine in 2015 which recognized organizations that exemplified the highest level of operational and strategic excellence in IT (CIO Magazine 2016) | |
•InformationWeek magazine named Vanguard one of the top innovators in IT in 2014 in the US (InformationWeek 2014) | ||
National Library Board Singapore (NLB) (public library system, Singapore, 1000 employees) | •Was identified as an organization that delivered service excellence (Johnston 2007) | •Highest labor productivity compared to peers in terms of number of library visitations and borrowing per employee (authors’ analysis based on data provided by global benchmark libraries; data will be provided upon request) |
•Won a long list of Singapore and global awards related to service excellence, technology, and innovation, incl. Singapore Service Excellence Award 2009; Singapore Quality Award 2011; Singapore Service Excellence Medallion 2015; Public Service Premier Award 2012; President’s Design Award for library@Orchard (Design of the Year) 2015; Innovation Excellence Award Singapore 2016; MIS Asia 2011 IT Excellence Award; World Summit Award Mobile 2013; Global Business CIO Award 2014; WebAward 2014 – Government Standard of Excellence; Interactive Media Award 2014; Global Enterprise & IT Architecture Excellence Award 2014 & 2015; SAP 2010 Award for Most Innovative Project (Public Sector); (Source: National Library Annual Reports 2017) | ||
Google (Internet-related services and advertising, US, 57,000 employees) | •Achieved the top industry ACSI rating since its inaugural coverage in 2002 except for one year (ACSI 2017) | •Second highest sales/employee p.a. ($1.7 million) in the internet and social media industry and third highest in the technology sector (CSIMarket 2017) |
•Won Tech Brand of the Year at the TrustedReviews Awards 2016 (TrustedReviews 2016) | ||
United Services Automobile Association (USAA) (financial services, US, 28,000) | •Top-ranked in The Customer Experience Index by Forrester Research in the bank, credit card, and insurance categories 2013 to 2016 (Forrester 2016) | •Operating expense ratio was almost half of industry average; it was 21% compared to 39% in 2015 (USAA Annual Report 2015) |
•Top-ranked company in Net Promoter Index of Customer Loyalty from 2009 to 2016 in the Satmetrix benchmarks in the banking, automotive and home insurance categories (Satmetrix 2016) | ||
•Named Customer Service Champion 2014 (JD Power 2014) | ||
•Low annual customer churn rate of 2.2% (Lal and Fisher 2014) | ||
Narayana Health (healthcare, India, 16,000 employees) | •Frost and Sullivan India Healthcare Excellence Awards – Healthcare Provider Company of the Year 2012 (Frost and Sullivan 2012) | •Won Economist Business Process Reengineering Award 2011 for “reducing health-care costs using mass-production techniques; performs more heart operations at a lower cost and a lower mortality rate than leading American hospitals.” Dr. Shetty was called the “Henry Ford of Healthcare” (Economist 2011) |
•Winner of Gold Award in Customer Service by Asian Hospital Management Awards 2014 (Hospital Management Asia 2014) | ||
Mortality rate 30 days after open heart surgery 1.4% vs. 1.9% in the US (Anand 2009) | •Cost was as low as $800 for an open heart surgery in its new facility in Mysore, India (Global Health and Travel 2014) | |
Shouldice Hospital (healthcare, Canada, 100 employees) | ||
•Low nurses to patient ratio of 1:14, compared to an industry average of 1:4 (Heskett and Hallowell 2004) | ||
•Ranked as one of the top 10 global hospitals by healthcareglobal.com (Sarma 2013) | ||
JetBlue Airways (airline, US, 18,000 employees) | •Had the highest ACSI rating of its industry since its inaugural coverage since 2012 except for one year where it tied with Southwest Airlines (ACSI 2017) | •Offered fares of up to 65% lower than legacy carriers, but added comfort features such as more leg room, leather seats, individual video screens, free Wi-Fi, and flew into major airports (Hoyt et al. 2010; Huckman and Pisano 2011; Jacobs 2013), and was positioned as “best service at low prices” (Smyth and Pearce 2006, p. 13) |
•Rated as the top low-cost airline for customer satisfaction for the 12th consecutive year in 2016 (JD Power 2016) | ||