Why are a select few service firms better at what they do -- year in and year out -- than their competitors? For most senior managers, the profusion of anecdotal "service excellence" books fails to address this key question. In this pathbreaking book, world-renowned Harvard Business School service firm experts James L. Heskett, W. Earl Sasser, Jr. and Leonard A. Schlesinger reveal that leading companies stay on top by managing the service profit chain. Based on five years of painstaking research, the authors show how managers at American Express, Southwest Airlines, Banc One, Waste Management, USAA, MBNA, Intuit, British Airways, Taco Bell, Fairfield Inns, Ritz-Carlton Hotel, and the Merry Maids subsidiary of ServiceMaster employ a quantifiable set of relationships that directly links profit and growth to not only customer loyalty and satisfaction, but to employee loyalty, satisfaction, and productivity. The strongest relationships the authors discovered are those between (1) profit and customer loyalty; (2) employee loyalty and customer loyalty; and (3) employee satisfaction and customer satisfaction. Moreover, these relationships are mutually reinforcing; that is, satisfied customers contribute to employee satisfaction and vice versa.
Here, finally, is the foundation for a powerful strategic service vision, a model on which any manager can build more focused operations and marketing capabilities. For example, the authors demonstrate how, in Banc One's operating divisions, a direct relationship between customer loyalty measured by the "depth" of a relationship, the number of banking services a customer utilizes, and profitability led the bank to encourage existing customers to further extend the bank services they use. Taco Bell has found that their stores in the top quadrant of customer satisfaction ratings outperform their other stores on all measures. At American Express Travel Services, offices that ticket quickly and accurately are more profitable than those which don't. With hundreds of examples like these, the authors show how to manage the customer-employee "satisfaction mirror" and the customer value equation to achieve a "customer's eye view" of goods and services. They describe how companies in any service industry can (1) measure service profit chain relationships across operating units; (2) communicate the resulting self-appraisal; (3) develop a "balanced scorecard" of performance; (4) develop a recognitions and rewards system tied to established measures; (5) communicate results company-wide; (6) develop an internal "best practice" information exchange; and (7) improve overall service profit chain performance.
What difference can service profit chain management make? A lot. Between 1986 and 1995, the common stock prices of the companies studied by the authors increased 147%, nearly twice as fast as the price of the stocks of their closest competitors. The proven success and high-yielding results from these high-achieving companies will make The Service Profit Chain required reading for senior, division, and business unit managers in all service companies, as well as for students of service management.
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April 09, 1997
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Excerpt from Service Profit Chain by James L. Heskett
Setting the Record Straight
How many of us have attended seminars or read recently written books that admonish us to: (1) treat customers like royalty, (2) exceed customers' expectations, (3) either seek low operating costs or some means of differentiating our businesses from competitors, and (4) assume that the customer is always right. They are led by master storytellers who move with ease among the audience and are filled with enjoyable anecdotes that seem relevant at the time. We know. We've given our share of these presentations.
Who hasn't heard a Nordstrom story at one of these seminars? Most often it's the one about the Nordstrom store that accepts the return of a set of tire chains by someone claiming to have bought them there even though Nordstrom doesn't sell tire chains. The misguided moral is that by wowing the customer in that manner, Nordstrom will gain a new customer and possibly great word-of-mouth advertising. However the story is designed to make a point that is not only illogical, but is supported by no substantial evidence, quantitative or otherwise. Fortunately, few of us try to act on the implied advice. And yet we remember the story, if not the point it is designed to make.
A WORLD OF MISLEADING ADVICE
Why is it that the advice implied by these storytellers is so difficult to apply? Or worse yet, leads to the opposite results that they forecast? It's because the advice too often is sometimes totally inappropriate and always partially wrong. It nearly always is offered out of context, is based on incorrect assumptions, emphasizes symptoms instead of real causes, in the process trivializes service issues by confining them to the front line, and overemphasizes process quality while underemphasizing results.
Too Much Advice out of Context
Too much anecdote-peppered advice is given by many service gurus today without a context. We're not told that what worked in one organization may not be appropriate for another. The advice is so overly simplistic that it leads us as managers to seek the elusive "one big idea" that can help us improve performance. It is offered with little real supporting evidence other than the fact that the subjects of the anecdotes are often regarded as successes.
On the other hand, how often are we told that Nordstrom actually "fires" customers? We rarely, if ever, hear that side of the story. In fact, Nordstrom wows some customers and fires others who may be especially difficult for its staff to deal with (by advising them that, because of Nordstrom's failure to find a way to meet their needs, they should perhaps seek out other stores) as part of a careful strategy to target people with a particular profile and a record of outstanding loyalty to the company. If the tire story ever did occur, you can bet that it involved a customer that Nordstrom's people, based on facts, knew they did not want to alienate. In the context of a more carefully planned strategy, it could have made sense, although one could question the loyalty of a customer who would pull such a stunt on the company and expect to get away with it.
The Tyranny of the Trade-off
Ever since the popularization of Michael Porter's research on competitive strategy, we have been advised to seek either the lowest costs or a significant means of differentiation from competition for our businesses. The assumption here is that managers must choose, because both can't be achieved. In some cases, this is simply wrong. In fact, there is little evidence that it was the message that Porter himself intended. Furthermore, it leads us to achieve "merely good" performances as opposed to outstanding achievements that can result from strategies designed to achieve both low cost and competitive differentiation, strategies that are more achievable than is generally believed.
James Collins and Jerry Porras, in their fascinating book Built to Last, which reports their study of companies with long-term staying power in the marketplace, call this "the tyranny of either/or." They point out that many companies with long records of success practice the policy of "and/also," assuming they can "have it all."
Management by trade-offs reached its peak during an era in which the price of low inventory investments was thought to be poor customer service, or in order to achieve the economies of long production runs, factories had to stop trying to supply "one-of-a-kind" items to customers. Information systems, computer-aided design and manufacture, and robotics have killed, or at least seriously crippled, assumptions underlying trade-off management. Yes, trade-offs are a part of some businesses. But truly outstanding competitors, often limited to one or two in any one industry, achieve both outstanding