driving retail store peformance- a service profit chain perspective

DRIVING RETAIL STORE PERFORMANCE: A SERVICE PROFIT CHAIN PERSPECTIVE DISSERTATION Presented in Partial Fulfillment of the Requirements for the Degree Doctor of Philosophy in the Graduate School of The Ohio State University By Todd Michael Stodnick, M.A. ***** The Ohio State University 2005 Dissertation Committee: Professor David A. Collier, Ph.D., Adviser Approved by Professor W.C. Benton, Ph.D. Len Schlesinger, Ph.D., Limited Brands Adviser Graduate Program in Business Administration ii ABSTRACT One service management model that has been gaining momentum in academic and practitioner circles alike is the service profit chain. First introduced in the early 1990’s, the service profit chain offers a structural framework to service management (Heskett et al, 1994). The theory basically asserts that providing employees with a superior internal working environment will lead to satisfied employees who are both loyal to the organization and able to provide the customer with an excellent service experience. Customers will recognize and value the outstanding service afforded them. Over time they will exhibit loyalty behaviors such as continued purchasing and increased referrals. These loyalty behaviors will generate both market share and profitability increases for the service firm. Despite its widespread adoption by many service industry leaders (e.g. Southwest Airlines, Progressive Insurance, etc) and a growing amount of academic literary attention to the topic, very little empirical research has attempted to validate the basic tenets within the service profit chain. As such, the primary objective of this research is to test the structural framework presented in the service profit chain. Two structural models, incorporating nine distinct hypotheses, are the means by which this objective is carried out. To support this primary objective, several secondary objectives must be met. Because this research will use several constructs that have yet to be rigorously validated, much time and attention must be devoted to scale development. The population frame iii used in this study will be one large retail chain within the women’s specialty apparel industry. Seven of the nine hypotheses are supported, two are not. The overall fit statistics of the two models employed suggest that the models do fit the data well, indicating support for the underlying theory behind the service profit chain. A summary of the hypotheses includes: 1.) internal service quality drives both employee satisfaction and loyalty, 2.) employee satisfaction drives employee loyalty 3.) total retail experience drives a customer’s perception of retail value and their satisfaction, 4.) customer satisfaction drives customer loyalty. iv Dedicated to Our Jacqueline, There is A Light That Never Goes Out I dreamt about you last night, and I fell out of bed twice…. VV Ho will believe my verse in time to come, If it were filled with your most high deserts? Though yet heaven knows it is but as a tomb Which hides your life , and shows not half your parts: If I could write the beauty of your eyes, And in fresh numbers number all your graces, The age to come would say this Poet lies, Such heavenly touches nere toucht earthly faces. So should my papers (yellowed with their age) Be scorn'd,like old men of less truth then tongue, And your true rights be termed a Poets rage, And stretched meter of an Antique song. But were some child of yours alive that time, You should live twice in it,and in my rhyme. (Shakespeare, Sonnet XVII) v ACKNOWLEDGMENTS I would like to thank first my advisor David Collier for his invaluable support throughout this entire dissertation process. His willingness to share his wealth of knowledge and expertise has made my work all the better. I would also like to extend my gratitude to my committee members, W.C. Benton and Len Schlesinger, for their assistance and guidance. Both have positively shaped this work and contributed to my growth as a researcher. For their financial contributions to this research, I am grateful to the LimitedBrands, Inc. I owe thanks to many people throughout the organization who made the data collection process not only possible but also trouble free. Special thanks are extended to Dave Klein and Julie Beckman for their tireless efforts. I would like to thank the Ohio State University, and specifically the Fisher College of Business and the Management Science Department, for their support over the last four and half years. I am grateful for all the educational possibilities offered to me. Finally, I would be remiss not to mention the endless support of my family and friends throughout this process. They provided inspiration and encouragement in times of need without which this work would not have been possible. vi VITA June 28, 1972……………………… Born, Cleveland, Ohio 1994…………………………………B.A., Business Administration (Honors), Mount Union College 1996…………………………………M.A., English, University of Manchester, England 1996 – 2000…………………………Materials Manager, Dexter Axle, Elkhart, Indiana 2002…………………………………M.A., Business Administration, The Ohio State University 2000 – 2004…………………………Graduate Research and Teaching Associate, The Ohio State University 2004 – current Visiting Assistant Professor, University of North Texas PUBLICATIONS REFEREED PROCEEDINGS: Stodnick, M. and Collier, D. “What contributes to total retail experience?” Proceedings of the 35 th National Decision Sciences Institute Annual Meeting, Boston, 2004. vii Stodnick, M. and Collier. D. “Defining internal service quality – Results of a pilot study in specialty retailing.” Proceedings of the Midwest Regional Decision Sciences Institute Annual Meeting, Toledo, Ohio 2004. FIELDS OF STUDY Major Field: Business Administration Concentration: Operations Management Minor Field: Industrial Engineering viii TABLE OF CONTENTS Page Abstract ii Dedication iv Acknowledgements v Vita vi List of Tables xi List of Figures xiii Chapters: 1. Introduction 1 1.1. Research motivation 10 1.2. Research objectives 12 1.3. Research theory and hypotheses 16 1.4. Research methods 17 1.5. Layout of dissertation 19 2. Literature Review – Operating Strategy and Service Delivery System 22 2.1. Service profit chain 24 2.1.1. Empirical support 26 2.1.2. Service profit chain parallels 31 2.2. Internal service quality 38 2.2.1. Internal service quality parallels 41 2.2.2. Linking internal service quality to employee indicators 52 2.2.3. Individual dimensions of internal service quality 58 2.3. Employee satisfaction, loyalty and productivity 70 ix 2.4. Summary 75 3. Literature Review – Service Concept and Target Market 77 3.1. Total retail experience 77 3.1.1. Parallels to total retail experience 81 3.1.2. Individual dimensions of total retail experience 83 3.2. Value 95 3.3. Customer satisfaction and loyalty 98 3.4. Summary 103 4. Measurement Model Development 105 4.1. Methodology 106 4.1.1. Pilot study 106 4.1.2. Main study 110 4.2. Population frame 113 4.2.1. Sampling plan – pilot study 115 4.2.2. Sampling plan – main study 116 4.3. Survey development 117 4.4. Measurement model 118 4.4.1. Pilot study factor development 118 4.4.2. Main study factor development 129 4.5. Summary 140 5. Structural Models and Analysis 143 5.1. Structural equation modeling 145 5.2. Employee model 146 5.2.1. Composition of internal service quality 147 5.2.2. Linking internal service quality to satisfaction, loyalty and productivity 153 5.3. Customer model 166 5.3.1. Composition of total retail experience 167 5.3.2. Linearity between customer satisfaction and customer loyalty 173 5.3.3. Linking total retail experience, value, satisfaction and loyalty 175 5.4. Summary 185 6. Summary and future research 188 6.1. Research objective 188 6.2. Overview of the study 189 6.3. Summary of research findings 192 x 6.4. Contributions of research 197 6.4.1. Managerial contributions 198 6.4.2. Academic contributions 200 6.5. Limitations and future research 204 Bibliography 211 Appendices 234 Appendix A Composition of internal service quality 234 Appendix B Summary of empirical evidence relating internal service quality to other service profit chain variables 236 Appendix C Summary of empirical evidence relating employee satisfaction to other service profit chain variables 237 Appendix D Summary of empirical evidence relating employee loyalty to other service profit chain variables 238 Appendix E Summary of empirical evidence relating employee productivity to other service profit chain variables 239 Appendix F Summary of empirical evidence relating external service quality to other service profit chain variables 240 Appendix G Summary of empirical evidence relating value to other service profit chain variables 242 Appendix H Summary of empirical evidence relating customer satisfaction to other service profit chain variables 243 Appendix I Summary of empirical evidence relating customer loyalty to other service profit chain variables 245 Appendix J Final survey instruments 246 Appendix K List of stores using in main data collection 253 [...]... a women’s specialty fashion retail chain determine the most important drivers of retail store performance Using a service profit chain framework, in essence, this study will try to establish what operational practices lead to improved store performance – with performance being measured on several different dimensions The problem is a common one faced by many large retail chains – if all of the retail. .. than those with highest turnover Replacement and training costs of a new associate are roughly 7.5* annual salary Nordstrom’s investments in employee satisfaction and development programs has led to the company to enjoy 2* the national retail average sales per square foot ratio Sears implemented the service profit chain theory company wide In 2 years company went from a loss of $3.9 billion to a gain... that a group of researchers fashioned the service management model called “the service profit chain (Schlesinger and Heskett, 1991; Schlesinger and Zornitsky, 1991; Heskett et al, 1994; Heskett et al, 1997) The service profit chain was developed from an analysis of service organizations with the aim of linking operational resource investments to marketing, operating and financial outcomes Specifically,... evidence for the service profit chain and a review of parallel theories to the service profit chain The next major section within this chapter, section 2.2., looks exclusively at the driver of the service profit chain – internal service quality Internal service quality is defined and parallels to similar concepts are drawn Empirical evidence of the existence of internal service quality is given The... of internal service quality are elucidated and each is briefly treated The final section surveys literature that investiages the employee outcome variables in the service profit chain: satisfaction, loyalty and productivity The variables are looked at singly, and then their inter-relationships are explored Throughout this chapter, when factors are being discussed, special mention is made as to where... the service profit chain model – total retail experience This factor is analyzed from a holistic perspective and is hypothesized to be five dimensional Parallels are drawn between total retail experience and other customer oriented valuation frameworks Each of the five total retail experience dimensions is then analyzed individually The second half of chapter 3 introduces three other constructs: value,... 1988; Anderson et al, 1994; Anderson et al, 1997, Mittal and Lasser, 1998) Customer Satisfaction Drives Customer Loyalty The best way to increase customer loyalty is to create what Heskett et al (1994) call “apostles” – customers that are so satisfied that they not only continue buying from an organization but they also “convert the uninitiated” Customer satisfaction has been anecdotally and empirically... used in service profit chain research This list begins with evidence of individual links within the chain and moves toward an overall application of service profit chain theory itself 8 Path Customer Loyalty _ Revenue Growth Customer Loyalty _ Profitability Customer Satisfaction _ Customer Loyalty Customer Satisfaction _ Customer Loyalty Employee Satisfaction _ Customer Satisfaction Employee Loyalty _... 12 that fall outside of the traditional service quality definitions, e.g servicescape, product selection and availability, and store layout One emerging stream of research that closely resembles the anecdotes Heskett et al (1994, 1997, 2001) provide in their description of external service quality is total retail experience (Terblance and Boshoff, 2001) Total retail experience can be defined as “all... collection at 5 retail locations Factor assessment – unidimensionality, reliability, convergent validity Instrument modifications Main study data collection at 90 retail locations Factor assessment – unidimensionality, reliability, convergent and divergent validity Structural equation modeling: customer and employee models Figure 1.3 Research methodology 17 Pilot data was collected from five retail locations . Brands Adviser Graduate Program in Business Administration ii ABSTRACT One service management model that has been gaining momentum in academic and practitioner circles alike is the service profit. was put together into one comprehensive framework was only a decade ago. It was at that time that a group of researchers fashioned the service management model called “the service profit chain . other service profit chain variables 243 Appendix I Summary of empirical evidence relating customer loyalty to other service profit chain variables 245 Appendix J Final survey instruments 246 Appendix