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Trang 3Samuel Duane Young, B S E., M S
A Dissertation Presented to the Faculty of the Graduate School of Saint Louis University in
Partial Fulfiliment of the Requirements for the Degree of Doctor of Philosophy
Trang 4Copyright 2000 by
Young, Samuel Ouane
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Trang 5Samuel D Young
ALL RIGHTS RESERVED
Trang 6Samuel Duane Young, B S E., M S
A Digest Presented to the Faculty of the Graduate School of Saint Louis University in Partial
Fulfillment of the Requirements for the Degree of Doctor of Philosophy
Trang 7For more than a decade, companies have searcned for quantifiable links between profitability and various aspects of their firms, employees, and
customers
Early research from the PIMS study showed that increasing market share was key to higher profitability for a firm but this same theory does not hold true
today There are many very profitability firms that do not command a lion’s share of their market
During the 1980s, the ‘Quality Movement’ deluged many companies Most companies attempted to
incorporate Total Quality Management (TQM) activities into their companies in the hopes of reducing the per- unit cost of their products/services thereby increasing profitability While there were many positive
resulting from quality improvement the results were
Trang 8studying customer satisfaction in the hopes of discovering the link between total customer satisfaction and profitability While customer satisfaction is clearly an important part of a
company’s financial performance, satisfaction is not the sole determinant of profitability
Most companies have learned that it is far more profitable to keep customers than attracting new
customers And, more specifically, the ‘right’ type cf customer to maintain Current studies have focused on the need for improving customer loyalty in the hopes of achieving long-term financial health
Trang 9focus their efforts on these factors to increase and enhance customer loyalty and reap the financial
Trang 11LiSEC Of Tables ẶẶ Q HQ HQ ee ee ee et ee 1V List of FiQUY€S - Q QQ Q HS HH HH KH HH vi Chapter 1 Imntroduction 2222.22 e eee eee 1 Research History 2 22 eee eee eee 1 Need for Research 002 eee ees 2
Research Goals and Methodology 3 Purpose of Research -2.-.2 4 Dissertation Organization 4 Chapter 2 Literature Review 2 -000 6 Customer Satisfaction/Retention 6 Total Quality Management 11 Financial Performance - 20 Linkage Between Quality and 26 Performance Customer LOValCVy Q Q Q KH 37 HVyPpotheses HQ HQ HỒ HH n 44 Chapter 3 Methodolcdgy - - {HQ se 46 Data ee ee es 46 Variables and Attributes 47 Independent Variables 47 Dependent Variables - - 61 Statristical Tools 65
Trang 12Model Fitness (Hạạ) c {SH 95 Regression Results (H;) 97 Hypctheses (H,ạ.) ee ee eee 99 Model Fitness (H;c) - 99 Regression Results (HẠ ) - 102 Hypotheses (H;,) Ặ (HQ HQ HS eee 104 Model Fitness (Hj3p) -.2- 2 ee eee ener 105 Regression Results (H;;) - 108 Hypctheses (H,) ẶQ HQ HS He 109 Model Fitness (H,;) - ee 110 Regression Results (H,) - 113 Hypotheses (H,) - - - eee ee ee eee 115 Model Fitness (H,) «‹ 115 Regression Results (H,) 119 Chapter 5 DiscusSSion ee ee eee eee ee 122 Loyalty Index -0.005- 124 Hospital Related Independent 124 Variables Hospital Size .-.2 125 Labor Intensity - -6:5 125 Non-Operating Revenue Mix 126 Average Length of Stay 126 Medicaid Mix -02.22 2 eee 126 Medicare Mix Ặ Q Q SẺ S 127 The Four Factors of the LOYALTY 128 Index Chapter 6 ConcluSions 2.2 eee 131 SUMMALY ee ee ee ee ee te ee eee 131 Study Limitations 133 Suggestions for Future Research 135 Bibliography - ec ee et eee eee 139 Biography of the Author 2.2.2 ce eee eee 145
Trang 13Page
Deming’s Fourteen POinES .- 13
The Malcolm Baldrige Award 1998 Criteria 17
and Point Values Selected Sample Survey Data and the 57
LOYALTY Calculations Frequency of USE Variable 57
Frequency of RECOMMEND Variable 58
Frequency of EXPECT Variable 58
Frequency of SATSCOR1 Variable 58
Frequency of LOYAL Variable 59
Summary of Variables -.+.06- 65 Descriptive Statistics -4.- 69 Correlation Analysis of Regression 73
Variables Ordinary Least Squares Regression 79
Analysis of Total Operating Margin and the Gapenski et al (93a) Variables Ordinary Least Squares RegresSion 85
Analysis of Transformed Total Operating Margin (MARGEXP) and Transformed LOYALTY Variable (LOYLEXP) Ordinary Least Squares RegresSion 92
Analysis of Transformed Total Operating Margin (MARGEXP) Using All Three
Trang 14Ordinary Least Squares Regression 98 Analysis of Total Operating Margin
(MARGNTOT) and the Use Again Percentage (USEPER) Variable
Ordinary Least Squares Regression 103 Analysis of Transformed Total Operating
Margin (MARGEXP) Model Using the Transformed Recommend to Others Percentage Variable (RECSQRE)
Ordinary Least Squares Regression 108 Analysis of Transformed Total Operating
Margin (MARGEXP) and the Transformed
Exceeded Expectations Percentage Variable (EXPEXP)
Ordinary Least Squares Regression 114 Analysis of the Total Operating Margin
(MARGNTOT) and Satisfaction Percentage Variable (SATPER)
Ordinary Least Squares Regression 119 Analysis of the Total Operating Margin
(MARGNTOT) and the Gapenski et al (93a) Variables and the Loyalty Variable
(LOYALTY )
Trang 15Page
Deming’s Chain Reaction .- -2 eee eee 13 Graphical Illustration of a Secure Customer 39 Elements of the Service Profit Chain 41 Box Plot of Total Operating Margin 76
Model (MARGNTOT) Residuals Using the Gapenski et al (93a) Variables
Scatter Diagram of Total Operating 77 Margin Model (MARGNTOT) Residuals Using
the Gapenski et al (93a) Variables
Cumulative Probability Plot of Total 77 Operating Margin Model (MARGNTOT)
Residuals Using the Gapenski et al (93a) Variables
Box Plot of Transformed Total Operating 83 Margin Model (MARGEXP) Residuals Using
the Transformed LOYALTY Variable
(LOYLEXP)
Scatter Diagram of Transformed Total 83 Operating Margin Model (MARGEXP)
Residuals Using the Transformed LOYALTY Variable (LOYLEXP)
Cumulative Probability Plot of 84 Transformed Total Operating Margin Model
(MARGEXP) Residuals Using the Transformed LOYALTY Variable (LOYLEXP)
Graphical Analysis of the Relationship Between Transformed Total Operating
Margin (MARGEXP) and Transformed LOYALTY Variabie (LOYLEXP)
Trang 16Box Plot of Transformed Total Operating 90 Margin Model (MARGEXP) Residuals Using
All Three Transformed Components of Loyalty Index Collectively (EXPEXP, SATSQRE, and RECSORE)
Scatter Diagram of Transformed Total 90 Operating Margin Model (MARGEXP)
Residuals Using All Three Transformed Components of Loyalty Index
Collectively (EXPEXP, SATSORE, and
RECSORE)
Cumulative Probability Plot of 91 Transformed Total Operating Margin Model
(MARGEXP) Residuals Using All Three Transformed Components of Loyalty Index Collectively (EXPEXP, SATSQRE, and
RECSORE)
Box Plot of Total Operating Margin 96 (MARGNTOT) Model Residuals and Use Again
Percentage Variable (USEPER)
Scatter Diagram of Total Operating Margin 96 (MARGNTOT) Model Residuals and Use Again
Percentage Variable (USEPER)
Cumulative Probability Plot of Total 97 Operating Margin (MARGNTOT) Model
Residuals and Use Again Percentage Variable (USEPER)
Box Plot of Transformed Total Operating 101 Margin (MARGEXP) Model Residuals Using
the Transformed Recommend to Others Percentage Variable
(RECSQRE)
Scatter Diagram of Transformed Total 101 Operating Margin (MARGEXP) Model
Residuals Using the Transformed Recommend to Others Percentage Variable (RECSQRE)
Trang 17Transformed Total Operating Margin (MARGEXP) Model Residuals Using the Transformed Recommend to Others Percentage Variable (RECSQRE)
Box Plot of Transformed Total Operating 106 Margin (MARGEXP) Model Residuals and the
Transformed Exceeded Expectations Percentage Variable (EXPEXP)
Scatter Diagram of Transformed Total 107 Operating Margin (MARGEXP) Model
Residuals and the Transformed Exceeded Expectations Percentage Variable (EXPEXP) Cumulative Probability Plot of 107
Transformed Total Operating Margin (MARGEXP) Model Residuals and the Transformed Exceeded Expectations Percentage Variable (EXPEXP)
Box Plot of Total Operating Margin 112 (MARGNTOT) Model Residuals and
Satisfaction Percentage Variable (SATPER) Scatter Diagram of Total Operating 112
Margin (MARGNTOT) Model Residuals and Satisfaction Percentage Variable (SATPER) Cumulative Probability Plot of Total 113
Operating Margin (MARGNTOT) Model Residuals and Satisfaction Percentage Variable (SATPER)
Box Plot of Total Operating Margin 117 (MARGNTOT) Model Residuals and the
Gapenski et al (93a) Variables and the Loyalty Variable (LOYALTY)
Scatter Diagram of Total Operating 117 Margin (MARGNTOT) Model Residuals and the Gapenski et al (93a) Variables and the Loyalty Variable (LOYALTY)
Trang 184-25 Cumulative Probability Plot of Total Operating Margin (MARGNTOT) Model Residuals and the Gapenski et al Variables and the Loyalty Variable
(LOYALTY )
Trang 19INTRODUCTION
Chapter 1 introduces specific research history related to customer loyalty, total quality management, and the performance of an organization It also
presents the research justification, goals, and associated methodology used in this study An
organizational outline of this dissertation is also
included
Research History
Trang 20customers and financial performance
Need for Research
Although much research has analyzed customer
loyalty, customer satisfaction, financial performance, total quality management and its impact on performance
(Flynn 1995; Roth and Jackson 1995), no known research has identified an empirical link between customer
loyalty, quality, and financial performance
Trang 21Due to ever-increasing pressures to reduce costs, increase productivity, maintain market share, and
improve competitive edge, the primary goal of this research is to determine the effect(s) of customer loyalty on performance in terms of financial measures
The health care industry was selected as the sample plan for analysis It is hypothesized that there exists a direct relationship between the
financial performance of a health care organization and its patient loyalty A secondary consideration was analysis of the demographic and psychographic
characteristics of loyal (secure) customers It is hoped that the results derived from the research may influence the restructuring of a health care
organization’s marketing and operations strategy so as to positively impact customer loyalty and the
Trang 22This study attempts to establish an empirical relationship between customer loyalty and financial performance Specifically, the goals and contribution of this dissertation to the body of knowledge are to:
1) analyze the potential link of customer loyalty to financial performance,
2) statistically investigate the loyalty index, and
3) analyze the customer demographic and psychographic characteristics that are closely related to the loyalty index
Dissertation Organization
Chapter 2 provides a detailed discussion of current literature germane to the topics of customer loyalty and financial performance In Chapter 2, customer loyalty, total quality management, impact of quality and customer satisfaction on performance
Trang 23in a hospital environment The chapter concludes with testable hypotheses
Analytical methodology and research design used in the analyses is detailed in Chapter 3 which also
includes a discussion of data sources The measurement model is built and tested for validity and reliability via measures derived in the analyses The dependent and independent variables are identified and discussed regarding their relative importance to the model
Results of the multivariate data analyses are contained in Chapter 4 Ail relationships between
dependent and independent variables are discussed based
on results from the models
Trang 24LITERATURE REVIEW
Customer Satisfaction/Retention For the past decade, industry has focused primarily on customer satisfaction With an eye
towards continued or improved financial success, that focus is now redirected towards customer loyalty
(a.k.a secure customers) Thomas (1996) purports that the volume of satisfied customers is abundant, yet
those very same customers defect to competitors He cites that a one-percent dissatisfaction rating might account for the loss of 20 percent of a company’s revenue Hence, a 99 percent satisfaction rating is misleading Furthermore, he suggests that managers
interested in improving their performance must take two steps First, companies must understand how each link in their supply chain affects customer satisfaction Second, those companies must understand that
Trang 2585 percent of defected customers were “satisfied” or “very satisfied” with their previous supplier
Clearly, customer satisfaction alone is not the primary key to long-term financial success
Customer loyalty reflects buying behavior;
customer satisfaction is an attitude It is surmised that customer satisfaction is relevant only to the degree to which it increases customer loyalty
The retention of secure customers is extremely important to the longevity of an organization
Companies that do a better job of maintaining their customers generate better financial results than do companies with poor retention records Copacino (1997) estimated that a five-percent reduction in the number of customers decreased profits by 50 percent or more Profits generated by the average customer increase in each of the first four or five years of the vendor- customer relationship Copacino (1997) attributes this to several factors The cost of acquiring a new
Trang 26a new customer Additionally, there are many revenue- related benefits of a loyal customer such as improving the margin of a base purchase, the opportunity to
generate incremental sales, reduced operating costs, and referrals The single act of obtaining positive referrals is among the most powerful factors in
increasing profits for a company Jones and Sasser (1995) identified a company’s best friends and worst enemies as the loyalist/apostle and the
defector/terrorist, respectively The loyalist isa customer completely satisfied with a company’s products and service who continues returning to that company Loyalists are a company's bedrock
Within the loyalist group are customers whose experiences far exceed their expectations the
apostles Apostles are customers so satisfied that they spread the word about the company’s products and service to others One company that gives an
Trang 27highly satisfied customers behave as salespeople These external salespeople, through their personal experiences, found the company’s product and its customer service staff so responsive to their unique needs that they felt compelled to share their positive experiences with coworkers, peers, associates, friends, and family
Customers that are dissatisfied, quite
dissatisfied, or neutral are defectors Defectors may have very unreasonable demands, devour excessive
resources, and wreak havoc on employee morale (Jones and Sasser 1995) For these reasons, savvy service organizations, such as Nordstrom, Sewell Village Cadillac Company in Dallas, Texas, and Southwest Airlines, regularly “fire” customers they cannot properly serve These companies recognize
counterproductive efforts and discontinue them
The most dangerous defectors are terrorists
Trang 28bad experience Unfortunately, terrorists are far more apt to spread the word, are more tenacious, and are more effective at telling their negative experiences than are apostles Like many apostles, terrorists had bad experiences, but no one listened, no one responded, and no one successfully resolved the problem There is a lesson to learn from these mistakes Customers with concerns or complaints need attention and empathy, not to be patronized, or worse, to be ignored This is not a new concept John Milton (1644) stated “when
complaints are heard freely, deeply considered, and speedily reformed, then is the utmost bound of civil liberty attained that wise men look for.” Industry may want to reconsider its customer service efforts in
order to capture the returns available from this vital complaint information Listening to the right
customers is essential to problem resolution
There are many reasons why satisfied customers defect Jones and Sasser (1995) conducted extensive research on the relationship between customer
Trang 29importance to the following aspects of this relationship:
1 Except in a few rare instances, overall
customer satisfaction is the key to securing customer loyalty and generating long-term financial performance
2 Even in markets with relatively little competition, providing customers with
outstanding value may be the only reliable way to achieve sustained customer
satisfaction and loyalty
3 Very poor service or products are not the only cause - and may not even be the main cause - of high dissatisfaction Often, the company has attracted the wrong customers initially or has an inadequate process for turning around the right customers who may have had a bad experience
4 Different satisfaction levels reflect different issues and, therefore, require different actions
5 Even though the results of customer- satisfaction surveys are an important indicator of the health of a business, relying solely on them can prove fatal
Total Quality Management
Trang 30foreign competition, the trade deficit, and consumer demand (Omachonu and Ross 1994) Total Quality
Management (TQM) is a means of implementing quality strategies in a start-to-finish process that integrates interrelated functions at all levels of a firm W Edwards Deming, the “Father of Quality,” popularized quality control in Japan in the early 1950s Deming defines quality as uniformity and dependability with market-driven costs He created the “Deming chain
Trang 31
Costs decrease because of
less rework, fewer mistakes,
Improve quality fewer delays, snags: better -———> Productivity improves
use of machine-time and matenals Ỷ Capture the market with better qualty andlowere |— Stay in business ——} Provide jobs and more jobs price
Figure 2-1 Deming’s Chain Reaction (Source: Out _of The Crisis, W Edwards Deming, 1982, 3)
Deming stressed worker pride and satisfaction rather than the establishment of quantifiable goals His overall approach focused on improvement of the
process, in that the system, rather than the worker, is the cause of variation To aid in the ‘carrying out’ of this chain reaction, Deming created his ‘universal fourteen points’ for management, summarized in Table
2-1:
Table 2-1 Deming’s Fourteen Points (Source: Out of The Crisis, W Edwards Deming, 1982, 23)
1 Create consistency of purpose with a plan 2 Adopt the new philosophy of quality
Trang 3210 411 12 13 End the practice of choosing suppliers based solely on price
Identify problems and work continuously to improve the system
Adopt modern methods of training on the job Change the focus from production numbers
(quantity) to quality Drive out fear
Break down barriers between departments
Stop requesting improved productivity without providing methods to achieve it
Eliminate work standards that prescribe numerical quotas
Remove barriers to pride of workmanship Institute vigorous education and retraining Create a structure in top management that will emphasize the preceding thirteen points every day
The revitalization of quality has been widespread throughout domestic companies for the past decade
Awards support individual companies that meet specific quality criteria Among the most noted and
Trang 33as an increasingly important element in
competitiveness, understanding performance excellence requirements, sharing of information on successful performance strategies, and benefits derived from implementation of these strategies Currently, there are three eligibility categories: manufacturing,
service, and small business Categories for higher education and health care organizations were added to the existing categories Recipients are expected to share information about their performance strategies with other U S organizations
The Malcolm Baldrige National Quality award
criteria are the basis for quality awards and providing feedback to applicants The criteria emphasize three important aspects in strengthening U S
competitiveness: 1) improve performance practice and capabilities; 2) facilitate communication and sharing of best practice information among and within
organizations of all types based on a common
understanding of key performance requirements; and, 3) serve as a working tool for managing performance,
Trang 34designed to help companies enhance their
competitiveness through delivery of ever-improving value to customers, resulting in marketplace success and improvement of overall company performance and capabilities Applicants must address seven specific categories Each category to be examined carries a specific point value The Baldrige Award framework and relationships among the criteria are shown in Table 2-2
Trang 35
Table 2-2 The Malcolm Baldrige Award 1998 Criteria and Point Values Point Examination Categories/Items Value 1.0 Leadership 110 1.1 Leadership System 80 1.2 Company Responsibility and Citizenship 30 2.0 Strategic Planning 80 2.1 Strategy Development Process 40 2.2 Company Strategy 4
3.0 Customer and Market Focus 80
3.1 Customer and Market Knowledge 40
3.2 Customer Satisfaction and Relationship 40
Enhancement
4.0 Information Analysis 80
4.1 Selection and Use of Information and Data 25 4.2 Selection and Use of Comparative
Information 15
and Data
4.3 Analysis and Review of Company Performance 40
5.0 Human Resources Focus 100 5.1 Work Systems 40 5.2 Employee Education, Training, and Development 30 5.3 Employee Well-Being and Satisfaction 30 6.0 Process Management 100
6.1 Management of Product and Service Process 60
6.2 Management of Support Processes 20
6.3 Management of Supplier and Partnering 20
Processes
7.0 Business Results 450
7.1 Customer Satisfaction Results 125
7.2 Financial and Market Results 125
7.3 Human Resource Results 50
7.4 Supplier and Partner Resuits 25
7.5 Company-Specific Results 125
Total Points 1,000
Trang 36Many researchers have focused on the relationship between quality and business performance One company, Strategic Planning Institute of Cambridge,
Massachusetts, analyzed about 3,000 strategic business units and made two significant discoveries:
1 Quality drives market share When superior quality and large market share are both present, profitability is virtually guaranteed (Buzzell and Gale 1987)
2 There is no doubt that relative perceived quality and profitability are strongly related Whether the profit measure is return on sales or return on investment, businesses with a superior product/service offering clearly outperform those with inferior quality products and/or services
(Buzzell and Gale 1987)
The rewards of higher quality are positive,
substantial, and pervasive Ross and Georgoff (1991) found that attaining quality superiority produces the following organizational benefits:
1 Greater customer loyalty 2 Market share improvements 3 Higher stock prices
Trang 375 Higher prices
6 Greater productivity
By improving the quality of products and services, organizations may realize a significant competitive advantage in the marketplace Flynn, Schroeder, and Sakakibara (1995) studied the relationship of specific quality management practices to quality performance and competitive advantage They found that perceived
market quality outcomes were primarily related to statistical control/feedback and the product design process However, the internal measure of percent that passed final inspection without requiring re-work was strongly related to process flow management, and to a lesser extent, to statistical control/feedback Both measures of quality were related to competitive
advantage Important infrastructure components included top management support and workforce
Trang 38operations capabilities-service quality-performance (C- SQ-P) triad
Singhal (1997) found strong statistical evidence that firms that have won quality awards outperform firms in the control sample on operating-income based measures Over a 10-year period, from six years before to three years after the year of winning the first
quality award, the median change in the operating- income for the test sample is 107% higher than that of the control sample Singhal (1997) also found that there is reasonably strong evidence that firms that have won quality awards do better in terms of sales growth than the control firms Over the 10-year
period, the median change in sales for the sample group is 64% higher than that of the control sample
Financial Performance
Significant research indicates an improvement in quality is associated with an increase in
Trang 39Baldridge National Quality Award, sustained
considerable loss due to high levels of spending on customer satisfaction and decreased focus on
profitability Within two years of winning the Award, the Wallace Company filed bankruptcy (Hill 1993)
McKinsy and Company data suggests that twenty out of thirty quality programs they studied stalled or failed to produce desired results Brown (1993) attributes failure of the TQM projects to:
1 Disguising cost control as total quality 2 Measuring too many irrelevant items
3 Lack of support from top management 4 Changing too much too quickly
5 Waiting too late to get started or committing too few resources to these efforts
6 Establishing quality as a separate set of organizational tasks and not integrating them into day-to-day operations
7 Focusing on activities versus results 8 Getting stuck on implementation of quality
training and establishment of quality teams and not changing and integrating
organizational systems into normal activities
Trang 4010 Treating total quality as a fad
Many executives have rejected quality programs due to the programs’ inability to produce a hard dollar return on their company’s investment From experiences such as the Wallace Company failure, it becomes clear there are diminishing returns from expenditures on quality Improving quality helps to a point, but
further expenditures on quality are potentially harmful to company profits
“Quality gurus” (Deming 1986, Crosby 1979) and researchers (Bohan and Horney 1991) indicate that quality improvements result in a reduction of costs that more than make up for quality expenditures These improvements, however, are more prevalent in
manufacturing and standardized services (e.g., fast food restaurants) than they are in the highly
customized, big-ticket services that constitute the growth industries of the information age (e.g.,