CHAPTER 11

MANAGING PEOPLE FOR SERVICE ADVANTAGE

This chapter examines the role of human resource management

in achieving service excellence. From a customer’s perspective,
frontline employees represent the service firm and are the
brand ambassadors. Recognizing that frontline work is difficult
and stressful, the chapter covers various types of conflicts
faced by staff. It uses the Service Talent Cycle to discuss HR
tasks especially relevant to services, ranging from hiring, to
training, and motivation of the frontline, showing how these
relate to the task of moving a firm from the Cycle of Failure to
the Cycle of Success. The chapter also highlights the role of a
strong service culture and the need to establish value-driven
leadership.

LEARNING OBJECTIVES

By the end of this chapter, students should be able to

 (LO1) Explain why service staff is so important to the success of a

service firm
 (LO2) Understand the factors that make the work of frontline staff
so demanding and often difficult
 (LO3) Describe the cycles of failures, mediocrity, and success in
human resource (HR) management for service firms
 (LO4) Understand the key elements of the Service Talent Cycle and
know how to get HR right in service firms
 (LO5) Know how to attract, select and hire the right people for
service jobs
 (LO6) Explain the key areas in which service employees need
training
 (LO7) Understand why empowerment is so important in many
frontline jobs
 (LO8) Explain how to build high-performance service delivery teams
 (LO9) Know how to motivate and energize service employees so
that they will deliver service excellence and productivity
 (LO10) Understand the role of service leadership and culture in
developing people for service advantage
 CHAPTER OUTLINE

(LO1) Explain why service staff is so important to the success

of a service firm

The service level delivered and the way the service is delivered can be
an important source of differentiation and competitive advantage.
Service staff is the most visible element of the service and the
component that significantly delivers service quality. As the service
staff represent the company in its interactions with the customers and
deliver the brand promise, the service staff are also very much the
service firm (from the customers’ point of view) and the brand.

Highly motivated service staff plays a key role in anticipating customer

needs, building personalized relationships with customers, and thus
building customer loyalty. Other than being an invaluable asset in high
contact services, frontline staff is also crucial in low contact services
where technology is largely commoditized. The firms’ differentiation
will then rest on these few moments of truth whether it is through the
phone, email or face-to-face.

(L02) Understand that the factors that make the work of

frontline staff so demanding and often difficult

High performing, satisfied employees are a key ingredient in achieving

service excellence and customer loyalty. Frontline work, however, can
be very demanding. Frontline staff are boundary spanners, as they
operate at the boundary of the company, linking and transferring
information from the inside of the organization to the outside world. As
such, they often have conflicting roles particularly in areas such as
service quality, productivity, and sales, as they have to fulfill both
operational and marketing goals.

Conflict comes from three sources:

 Person/role conflict occurs when the job requirements are

inconsistent with the staff’s own personalities, self-perception, and
beliefs.
 Organization/client conflicts occur when service staff face the
dilemma of whether they should follow the company’s rule or
satisfy customer demands.
 Inter-client conflicts, i.e. when there are conflicts between
customers, can also be a source of stress as the staff are often
called in to resolve conflicts between customers.
 Emotional labor is a very real problem faced by frontline staff
and arises when there are discrepancies between the way the
frontline staff feel inside and the emotions that they are expected to
portray in front of customers.

EMOTIONAL LABOUR
 (L03) Describe the cycles of failures, mediocrity, and success in
HR for service firms.

 Cycle of Failure (Fig 11.6) begins with employee cycle of failure

due to narrow job design, low wages, minimal training, and
overemphasis on rules. This failure results in customer cycle of
failure, which emphasizes on attracting new customers, as the old
customers are dissatisfied due to poor employee performance.

CYCLE OF FAILURE
 Cycle of Mediocrity (Fig 11.9) occurs in large bureaucratic
organizations (e.g. state monopolies) which offer adequate pay and
job security and but little scope for personal initiative. There is little
incentive for the customers to cooperate with the organization to
achieve better service. Customers are frustrated and resent the
bureaucratic approach and lack of service flexibility.

CYCLE OF MEDIOCRITY
 Cycle of Success (Fig 11.11) is the integrative employment
cycle that managers should work toward. This cycle takes into
account the long-term financial performance of the company and
seeks to prosper through investment in their staff. Attractive
compensation packages, broadened job designs, training, and
empowerment practices help in keeping employees happier and
in turn delight customers.

CYCLE OF SUCCESS
 Service Insights 11.1: There are many interesting and comical
anecdotes about how service staff sabotage the service. After reading
this, students will be sensitized to the possibility of how they might
possibly be treated if they express their dissatisfaction. The question
is: How then can customers express their dissatisfaction in a way that
does not incur the wrath of service staff? This may be a point for class
discussion.

(LO4) Understand the key elements of the Service Talent Cycle

and know how to get HR right in service firms

Recruitment, selection, training, motivation, and retention of

employees are the main functionalities of human resource
management. These functions are critical for services, because
customers tend to remember the role played by frontline
employees better than any other aspect of the operation.

The Service Talent Cycle (Figure 11.12) shows how successful service
providers take a long-term view of financial performance, investing in
their employees to create a profitable cycle of success.

SERVICE TALENT CYCLE

(LO5) Know how to attract, select and hire the right people for
service jobs

It is a known fact that when you want happy customers, they must be
served by happy employees. It is, therefore, important that
recruitment of individuals who are best fit for the job. The strategies
are:

 Hire the right people

o Be the preferred employer
o Select the right people

 How to identify the best candidates?

o Observe behavior
o Conduct personality tests
o Employ multiple, structured interviews
o Give applicants a realistic job preview

Service Insights 11.2 Voted FORTUNE’S 100 Best Companies to

Work for 2008, Google’s culture is one of innovation (forward looking),
being non-conventional (they think out-of-the-box), focused (they
know what they want) and of being fun (all work and no play make
Googlers dull boys and girls).

(LO6) Explain the key areas service employees need training

in.

Service champions show a strong commitment in words, dollars and

action to training.

 Train service employees actively. They need to learn about

o Organizational culture, purpose and strategy
o Interpersonal and technical skills
o Product/service knowledge
Service Insights 11.3 Customer Service guru, Ron Kaufman has set
up UP Your Service! College to provide a service to companies that
combines customer service training courses with culture building
activities that uplift the spirit of service throughout the organization.

(LO7) Understand why empowerment is so important in many

frontline jobs

After being the preferred employer, selecting the right candidate and
training the staff well, the next step is to empower and trust the
frontline staff to be able to conduct their job effectively.

 Empower the frontline.

 Empowerment is most appropriate when
o Firm’s business strategy is based on competitive differentiation
o Approach to customers is based on extended relationships
o Organization uses technology that’s complex and nonroutine
o Business environment is unpredictable
o Existing managers are comfortable in letting employees work
independently
o Employees have a strong need to grow, improve their skills and
interact
 Levels of employee involvement are: suggestion involvement, job
involvement and high involvement

Service Insights 11.4: Empowerment at Nordstrom is a good

example of how empowerment of employees can lead to customer
satisfaction. Students can debate on the pitfalls of this kind of
empowerment and their managerial implications.

(LO8) Explain how to build high-performance service delivery

teams

 Identify what the team will achieve

 Select team members with care
 Monitor the team and its member and provide feedback
 Keep team members informed of goal achievement, update them
and reward them for their efforts
 Coordinate with other managers to achieve overall company
Objectives
Service Insights 11.5 Singapore Airline (SIA) is a successful
international airline as it understands the importance of teamwork in
the delivery of service excellence. It introduces the “Team Concept”
culture where, despite the large number of crew (be it air crew or
ground staff), those in administrative, people can relate to a team and
have a sense of belonging.

(LO9) Know how to motivate and energize service employees

so that they will deliver service excellence and productivity

 Motivate and energize people through

o Job content
o Feedback and recognition
o Goal achievement

(L10) Understand the role of service leadership and culture in

developing people for service advantage

A service culture can be defined as:

 A shared perception of what is important in an organization

 Shared values and beliefs about why those things are important.

A strong service culture is one where the entire organization is focused

on the frontline. All levels of hierarchy understand that tomorrow’s
revenues are largely driven by what happens during the service
encounters today (see The Inverted Organizational Pyramid in Figure
11.25). To do this, top management should show their commitment by
being actively involved (e.g., regularly talking to frontline staff and
customers), and by paying attention to the finer details of the service
offering and not just the big picture.
THE INVERTED ORGANISATIONAL PYRAMID

Leaders should bring out the passion for serving. A value -driven
leadership (values found in excellent service firms include excellence,
innovation, joy, teamwork, respect, integrity, and social profit) ins pires
and guides the service provider; taps the creativity of service
providers, nourish their energy and commitment and gives them a
fulfilling working life. A strong communications effort to shape the
culture and get the message to the frontline is also crucial. Multiple
tools are used. Some examples include training, core principles,
company events, and celebrations.

Service Insights 11.6 Ritz Carlton has always been known for
service excellence. This service insights box shows the gold standards
they have for their employees that enable them to deliver consistently
good service.
 QUESTIONS AND EXERCISES

Review Questions

1. Why are service personnel so important for service firms?

2. There is a trend of service delivery moving from high contact

to low contact. Are service employees still important in low-
contact services? Explain your answer.

3. What is emotional labor? Explain the ways in which it may

cause stress for employees in specific jobs. Illustrate your
answer with suitable examples.

4. What are the key barriers for firms to break the Cycle of
Failure and move into the Cycle of Success? How should an
organization trapped in the cycle of mediocrity proceed?

5. List five ways in which investment in hiring and selection,

training, and ongoing motivation of employees will pay
dividends in customer satisfaction for such organizations
such as: (a) a restaurant, (b) an airline, (c) a hospital, and
(d) a consulting firm.
 CHAPTER 12

MANAGING RELATIONSHIPS AND BUILDING LOYALTY

Chapter 12 shows how firms can develop a loyal and profitable

customer base. It introduces the Wheel of Loyalty, which
shows three systematic steps in building customer loyalty.
Starting with the foundations for loyalty (including segmentation,
selective customer acquisition, tiering of service, and service
quality), it shows how to create loyalty bonds (including
deepening the relationship through cross- selling and bundling,
loyalty rewards, and higher-level social, customization, and
structural bonds). Emphasis is also placed on reducing customer
churn/defections. The chapter closes with a discussion on
customer relationship management (CRM) systems.

LEARNING OBJECTIVES

By the end of this chapter, students should be able to

 (LO1) Recognize the important role customer loyalty plays in

driving service firm’s profitability
 (LO2) Calculate the lifetime value (LTV) of a loyal customer
 (LO3) Understand why customers are loyal to a particular service
firm.
 (LO4) Know the core strategies of the Wheel of Loyalty that explain
how to develop a loyal customer base
 (LO5) Appreciate why it is so important for service firms to target
the “right” customers
 (LO6) Use service tiering to manage the customer base and build
loyalty
 (LO7) Understand the relationship between customer satisfaction
and loyalty
 (LO8) Know how to deepen the relationship through cross-selling
and bundling
 (LO9) Understand the role of financial and non-financial loyalty
rewards in enhancing customer loyalty
 (LO10) Appreciate the power of social, customization and structural
bonds in enhancing loyalty
 (LO11) Understand what factors cause customers to switch to a
competitor, and how to reduce such switching
 (LO12) Understand the part played by Customer Relationship
Management (CRM) systems in delivering customized services and
building loyalty
 CHAPTER OUTLINE

(L01) Recognize the important role customer loyalty plays in

driving a service firm’s profitability

The longer a customer stays with a firm, the more profitable that
customer is to serve (Figure 12.3). The sources of this greater
profitability (Figure 12.4) include:

FIG12.3 CUSTOMER PROFITABILITY OVER TIME

FIG12.4 WHY CUSTOMERS ARE PROFITABLE OVER TIME

 Increased usage over time

 Reduced operating costs as loyal customers become more efficient
to serve
 Profits from referrals, and willingness—at least on occasion—to pay
a price premium. The economic benefits of customer loyalty often
explain why one firm is more profitable than another.

(L02) Calculate the lifetime value (LTV) of a loyal customer

Loyal customers may not always be more valuable than those making
a one-time transaction. The profit impact of a customer may also vary
dramatically depending on the stage of the product life cycle the
service is in. Managers must analyze the situation and look within the
customer segments in their organization and determine the
profitability levels for the different groups of customers.

Managers should be concerned with the gap between actual and

potential customer value to maximize profitability.
(LO3) Understand why customers are loyal to a particular
service firm

One cannot expect customers to become loyal just because they have
bought from our stores. A repeat customer does not make a loyal
customer. We need to give customers a reason to continue to buy
from us instead of going to the competitors.

Service Insights 12.1 Research has shown that relationships can

create value for individual customers through factors such as inspiring
greater confidence, social benefits and special treatment. Students can
be ask to talk about a service company they are loyal to, and to test
the reasons for their loyalty and see if they match what researchers
have found.
(LO4) Know the core strategies of the Wheel of Loyalty that
explain how to develop a loyal customer base

The Wheel of loyalty (Figure 12.6) shows that arriving at customer

loyalty involves 3 components:

 Building a foundation for loyalty

 Creating loyalty bonds
 Reducing churn drivers

WHEEL OF LOYALTY

The rest of the chapter is organized around these 3 components.

(LO5) Appreciate why it is important for firms to target the

“right” customer

Students will learn that it is important for service firms to segment

their markets carefully and to choose a portfolio of target segments
that is consistent with the firm’s goals and capabilities. Matching
customers to the firm’s capabilities is critical. Managers must think
carefully about:
 How a customer’s needs relate to such operational elements as
speed and quality
 The schedules when service is available
 The firm’s capacity to serve many customers simultaneously
 The physical features and appearance of service facilities.
 Evaluate how well their service personnel can meet the
expectations of specific types of customers in terms of both
personal style and technical competence.
 Consider whether the company could match or exceed competing
services that are directed at the same customers.

Service companies should consider the financial value to the firm of

each customer, rather than just count how many customers can be
served. Heavy users (who buy more frequently and in larger volume s)
are generally more profitable than occasional users. And because
customers interact with each other in many services, managers need
to think about whether different target segments are compatible with
one another.

Attracting the right customers is important as they bring in long-term

revenues, continued growth in referrals, etc. Emphasis must also be
given to prevent attracting the wrong customers that typically results
in costly churn, a diminished company reputation and disillusioned
employees.

Service Insights 12.2: Vanguard managed to achieve low

redemption rates, making it the fastest-growing mutual fund in its
industry. Their secret was careful customer acquisition. They managed
to recruit customers who were long-term index holders. This stability
of its loyal customer base gave it a cost advantage. Vanguard also
introduced changes to a number of industry practices, discouraging
active traders from buying funds. Finally, it’s pricing was set up to
reward loyal customers. These factors in combinat ion helped Vanguard
to become the success that it is today.

(LO6) Use service tiering to manage the customer base and

build loyalty

Customer loyalty can be increased in the series of steps illustrated in

the Wheel of Loyalty in Figure 12.6. Service tiering, building loyalty
bonds, and creating membership programs are three of the strategies.

Customer tiers can be developed around different levels of profit

contribution, needs (including sensitivities to variables such as price,
comfort, and speed), and identifiable personal profiles such as
 demographics. Each customer tier requires significantly different
service levels based on customer requirements and customer value to
the firm.

EFFECTIVE TIERING OF SERVICE – THE CUSTOMER PYRAMID

Slicing the customer base per se allows the firm to see clearly where
the profits and the loss making segments are and tailor their
marketing accordingly in response. The Customer Pyramid (Figure
12.8) shows how this is done through a four-level tier: platinum, gold,
iron and lead.

(LO7) Understand the relationship between customer

satisfaction and loyalty

The satisfaction-loyalty relationship can be divided into three zones:

1) zone of defection – occurs at low satisfaction levels

2) zone of indifference – found at moderate satisfaction levels
3) zone of affection – occurs at very high satisfaction where customers
do not find the need to seek alternative service providers
THE CUSTOMER SATISFACTION – LOYALTY RELATIONSHIP

Service Insights 12.3 A study was made to determine if a firm’s

customer satisfaction had a correlation with its stock price. Results
showed that satisfied customers improve the level and the stability of
cash flow.
(LO8) Know how to deepen the relationship through cross-
selling and bundling

To deepen one’s relationship with the customers, many firms cross-

sell, up-sell or offer bundled services to their customers. The rationale
is that the more involved a customer is with the company, the lesser
the opportunity that he will move his business elsewhere.

(LO9) Understand the role of financial and non-financial loyalty

rewards in enhancing customer loyalty

The challenge for services that are transaction based is to move on to

forming membership relationships with the customers. Membership
programs and loyalty programs often are the enabler to allow the firm
to tier its services and create loyalty bonds when the individual
customer is not known to the firm. This is the case in many
transaction-based services such as restaurants, movie theatres, and
gas stations. Without motivating customers via a membership or
loyalty rewards program to identify themselves during the service
encounter, the firm would know little about these individual customers.
Programs to reward frequent users (like the frequent flyer clubs
created by the airlines) offer rewards, priority reservations and more.
Many service businesses now have programs similar to the frequent
flyer programs that reward members making frequent purchases.
Some examples include hotels, video rental companies, landscapers,
coffee shops, car rental firms, and grocery stores.

Service Insights 12.4: Shares how British Airway’s frequent flyer

program rewards not just frequency of use, but value of use. There is
a table illustrating the benefits offered by British Airways to its most
valued passengers.

(LO10) Appreciate the power of social, customization and

structural bonds in enhancing loyalty

Loyalty bonds can help in building on the loyalty created. Some

specific strategies include:

 Deepening the relationship via bundling or cross selling

 Providing both tangible (i.e., both financial and non financial) and
intangible rewards
 Building social bonds based on personal relationships
 Building customization bonds where the service to an individual is
heavily customized
 Forming structural bonds through joint investment in projects etc.
(LO11) Understand what factors cause customers to switch to
a competitor, and how to reduce such switching

Figure 12.14 give good illustrations of the causes behind customer

defections. Equally important as the strategies to build loyalty are the
strategies to reduce churn. Some strategies include effective complaint
management and service recovery, as well as increasing switching
barriers and maintaining churn alert systems.

CAUSES BEHIND CUSTOMER DEFECTIONS

Service Insights 12.5: America Online paid employees high bonuses

to “save” all customers who wanted to cancel their accounts. This
resulted in complaints that led the company to paying $1.25 million
penalties and costs. This provides us with a good example of how
companies must be wise in their implementation of churn reduction
strategies.
 (LO12) Understand the part played by Customer Relationship
Management (CRM) systems in delivering customized services
and building loyalty

CRM signifies the whole process by which relations with the customers
are built and maintained. CRM systems allow the company to better
understand, segment, and tier its customer base, better target
promotions and cross selling, and implement churn alert systems.

CRM is an enabler, capturing customer information (such as history of

transactions, customer preferences, etc.) and de livering it to the
various touch points thus offering a “united customer interface” and a
better service experience for the customer.

INTEGRATED FRAMEWORK FOR CRM STRATEGY

Service Insights 12.6 Companies are making use of CRM
applications to develop a profitable relationship with customers. Some
of the popular applications include sales force automation and call
center automation.

Service Insights 12.7 A tongue-in-cheek look at how much intimate

knowledge companies can know about their customers. It may be a
scenario in 2015 but the future seems to be fast forwarded to present
day.
 QUESTIONS AND EXERCISES

Review Questions

1. Why is customer loyalty an important driver of profitability

for service firms?

2. Why is targeting the “right” customers so important for

successful customer relationship management?

3. How can a firm calculate the lifetime value of customers?

4. How do the various strategies described in the Wheel of

Loyalty relate to one another?

5. How can a firm build a foundation for loyalty?

 CHAPTER 13

COMPLAINT HANDLING AND SERVICE RECOVERY

This chapter discusses consumer complaining behavior and

principles of effective service recovery systems. Service
guarantees are discussed as a powerful way of institutionalizing
effective service recovery and as an effective marketing tool
signaling high quality service. Jaycustomers are those that
might take advantage of the firm and they need to be
managed.

LEARNING OBJECTIVES

By the end of this chapter, students should be able to

 (LO1) Recognize the actions that customers may take in response

to service failures
 (LO2) Understand why customers complain
 (LO3) Know what customers expect from the firm when they
complain
 (LO4) Understand how customers respond to effective service
recovery
 (LO5) Explain the service recovery paradox
 (LO6) Know the principles of effective service recovery
 (LO7) Be familiar with the guidelines for frontline employees on how
to handle complaining customers and recover from a service failure
 (LO8) Recognize the power of service guarantees
 (LO9) Understand how to design effective service guarantees
 (LO10) Know when firms should not offer service guarantees
 (LO11) Be familiar with the seven groups of jaycustomers and
understand how to manage them effectively
 CHAPTER OUTLINE

(LO1) Recognize the actions that customers may take in

response to service failures

When customers experience a service failure (defined as a perception

that one or more specific aspects of service delivery have not met
customer expectations), they can take one or more of four major
courses of action (see Figure. 13.3):

CUSTOMER RESPONSE CATEGORIES TO SERVICE FAILURES

1) do nothing;
2) complain to the service firm;
3) take action through a third party (e.g., regulatory agencies or the
courts); or
4) switch suppliers and spread negative word of mouth about the
service provider.
(LO2) Understand why customer complain

There are two main reasons why customers complain:

 Compensation for a monetary loss—either in the form of a refund

and/or by having a service performed again.
 Complain to rebuild self-esteem. When customers feel service
employees have mistreated them, their self-esteem, self-worth, or
sense of fairness may be negatively affected.

Before customers complain, however, they will consider the costs of

taking action. These can include monetary costs (like postage or a
long-distance phone call), costs in time and effort, or psychological
costs associated with having to complain in person to a service
employee. Customers’ are more likely to complain about service
outcomes than service processes. Cultural and social norms may also
affect complaining behavior. In some countries (e.g., Japan),
customers feel awkward or embarrassed about making a complaint.
Social norms also tend to discourage criticisms of professional service
providers like doctors or lawyers, because they are viewed as experts
in the services they offer.

(LO3) Know what customers expect from the firm when they
complain

When customers complain they expect:

 Procedural justice
 Interactional justice
 Outcome justice

(LO4) Understand how customers respond to effective service

recovery

Higher chance that customers involved will remain loyal

(LO5) Explain the service recovery paradox

The service recovery paradox – the effect that customers who

experience a service failure and then have it resolved to their full
satisfaction are sometimes more likely to make future purchases than
customer who have no problem in the first place. However, this of
course depends on the severity and “recoverability” of the failure.

The best strategy is to do it right the first time!

(LO6) Know the principles of effective service recovery systems

Managers should also consider developing guidelines for employees on

how to handle customer complaints effectively when designing a
system to address service failures. Table 13.1 highlights the strategies
to reduce barriers to customer complaints.

STRATEGIES TO REDUCE CUSTOMER COMPLAINT BARRIERS

Principles of effective service recovery systems:

 Make it easy for customers to give feedback

 Enable effective service recovery
 Make service recovery proactive
 Have planned recovery procedures
 Teach recovery skills
 Empower employees for recovery
(LO7) Be familiar with the guidelines for frontline employees on
how to handle complaining customers and recover from a
service failure

1) Act fast
2) Acknowledge the customer’s feelings
3) Don’t argue with the customer
4) Empathize with the customer
5) Clarify the truth and sort out the cause
6) Give customers the benefit of doubt
7) Propose the steps needed to solve the problem
8) Keep customers informed of progress
9) Consider compensations
10) Continue to regain customer goodwill
11) System audit and improve on flaws and shortcomings

(LO8) Recognize the power of service guarantees

Well-designed, unconditional service guarantees are an effective way

of identifying and justifying needed improvements, plus creating a
culture in which employees and management take proactive steps to
satisfy guests. Why? They force firms to:

 Focus on what their customers want an expect

 Set clear performance standards for both customers and employees
 Require the development of systems for generating and acting on
customer feedback
 Force service organizations to identify existing and potential failure
points and take actions to correct them
 Build marketing muscle by reducing pre-purchase risk and building
long-term loyalty

(LO9) Understand how to design effective service guarantees

Although it is possible for dishonest customers to take advantage of

unconditional service guarantees, research has shown that such
behavior is limited. Companies can make use of data management
techniques to sieve out these dishonest customers and take action,
while maintaining a unconditional service guarantee.

Effective service guarantees should be:

 Unconditional
 Easy to understand and communicate
 Meaningful to the customer
 Easy to invoke
 Easy to collect on
 Credible
(LO10) Know when firms should not offer service guarantees

Not all firms are suited to introduce service guarantees . A service

leader may not need to take such actions as this may undermine its
reputation. Conversely, if all the offerings are similar in a very
competitive market environment with no distinct market leader, the
first firm to introduce unconditional guarantees could enjoy first mover
advantage.
(LO11) Be familiar with the seven groups of jaycustomers and
understand how to manage them effectively

In this chapter, we use the term jaycustomers to denote badly

behaved or abusive customers. There are seven types of
jaycustomers.

 Cheat
 Thief
 Rule breaker
 Belligerent
 Family feuders
 Vandal
 Deadbeat

Students must recognize that although procedures must be developed

to deal with problem customers, service businesses should not allow
fear and suspicion of possible abuses to degrade the experience of the
vast bulk of honest, well-behaved customers. Educating customers
about the rules, through signboards and warnings should reduce the
need for taking corrective action. Employees should be trained to deal
with abusive customers and a course of action need to be laid down
explicitly to protect employees and punish wrongdoings by customers.

Service Insights 13.4: This is a very humorous example of how

guests of Hampton Inn, who attempt to cheat can be tracked down, if
there is a guarantee tracking system in place.
 QUESTIONS AND EXERCISES

Review Questions

1. How do customers typically respond to service failures?

2. Why don’t many more unhappy customers complain?

What do customers expect the firm to do once they have
filed a complaint?

3. Why would a firm prefer its unhappy customers to come

forward and complain?

4. What is the service recovery paradox? Under what

conditions is this paradox most likely to hold? Why is it
best to deliver the service as planned, even though the
paradox does hold in a specific context?

5. What could a firm do to make it easy for dissatisfied

customers to complain?
 CHAPTER 14

IMPROVING SERVICE QUALITY AND PRODUCTIVITY

This chapter introduces students to service quality, including

its definition, diagnosing quality shortfalls using the gap model,
key tools, and strategies to close quality gaps. Productivity is
introduced as closely related to quality, and it is emphasized
that in today’s competitive markets, firms need to be focused
on simultaneously trying to improve both quality and
productivity—not one at the expense of the other. Various
productivity improvement strategies are discussed, including
total quality management, ISO 9000 Certification, Malcolm-
Baldrige Model, and Six Sigma applied to service operations.

LEARNING OBJECTIVES

By the end of this chapter, students should be able to

 (LO1) Explain how quality and productivity relate to each other in a

service context
 (LO2) Describe the dimensions of service quality
 (LO3) Demonstrate how to use the gaps model for diagnosing and
addressing service quality problems
 (LO4) Differentiate between hard and soft measures of service
quality
 (LO5) Explain the common objectives of effective customer
feedback systems
 (LO6) Describe key customer feedback collection tools
 (LO7) Be familiar with hard measures of service quality and control
charts
 (LO8) Select suitable tools to analyze service problems
 (LO9) Appreciate the financial implications of quality improvements
 (LO10) Define and measure service productivity
 (LO11) Understand the differences between productivity, efficiency,
and effectiveness
 (LO12) Recommend the key methods to improve service
productivity
 (LO13) Know how productivity improvements impact quality and
value
 CHAPTER OUTLINE

(LO1) Explain how quality and productivity relate to each other

in a service context

Service managers need to focus on both productivity and quality from

the customer’s point of view to ensure long-term financial success.
Service quality is the extent to which a service meets or exceeds
customer expectations.

DEFINITIONS OF SERVICE QUALITY

Productivity measures how efficiently a service firm can turn inputs

into outputs. Productivity and quality were historically seen as issues
for operations managers, so companies focused on making internal
process improvements that were not necessarily linked to customer
service priorities. Continuing efforts to understand and improve quality
reinforces the idea that quality is customer defined.

(LO2) Describe the dimensions of service quality

The generic dimensions used by customers to evaluate service

quality

 Tangibles (appearance of physical elements)

 Reliability (dependable, accurate performance)
 Responsiveness (promptness and helpfulness)
  Assurance (competence, courtesy, credibility, and security)
 Empathy (easy access, good communications, and customer
understanding).

Dimensions used by customer to evaluate service quality

 Credibility
 Security
 Access
 Communication
 Understanding the customer
 Tangibles
 Reliability
 Responsiveness
 Competence
 Courtesy

(LO3) Demonstrate how to use the gaps model for diagnosing

and addressing service quality problems

The Gaps model (Figure. 14.3) is a diagnostic tool relates quality

standards to customer expectations. The Gaps model of service quality
identifies gaps where a discrepancy may occur between the service
provider’s performance and the customer’s expectations.

The final goal in improving service quality is to reduce or eliminate all

gaps, including lack of management understanding of what customers
expect, failure to translate managers’ perceptions of customer
expectations into service delivery quality standards, a perceived
difference between specified delivery standards, and the service
provider’s actual performance, a difference between what a company
promises through its advertising and the actual service quality that is
perceived at delivery, the difference between what is actually delivered
and what customer feel they have received. The final gap is the
difference between what the customer perceives and his/her original
expectations.
SIX SERVICE QUALITY GAPS

SUGGESTIONS FOR CLOSING THE SIX SERVICE QUALITY GAPS

(LO4) Differentiate between hard and soft measures of service
quality

Customer defined standards and measures of service quality can be

grouped into “soft” and “hard” measures. Organizations known for
excellent service make use of both soft and hard measures to improve
service quality.

 Soft measures include: transactional surveys, total market surveys,

mystery shopping, analysis of feedback such as complaints and
compliments, focus group interviews, and service reviews.
 Hard measures typically refer to operational processes or outcomes
and include data such as uptime, delivery cost, failure rates, and
service response times.

Service-based components: The SERVQUAL Scale

SERVQUAL (Appendix 14.1) is a survey research instrument based on

the premise that customers can evaluate a firm’s service quality by
comparing their service perceptions with their prior expectations. In its
basic form, the scale contains 21 perception items and 21 expectation
items, reflecting five dimensions of service quality.
(LO5) Explain the common objectives of effective customer
feedback systems

It is critical for companies to learn from customers and change

according to shifting customer needs and perceptions. An effective
customer feedback system enables a firm to

 Assess and benchmark its service quality and performance

 Initiate customer driven learning and improvements
 Create a customer-orientated service culture

Together, these allow the company to understand where it stands

against the best in the market, how it is perceived by its customers,
and help improve its service offering to satisfy (if not delight) its
customers.

(LO6) Describe key customer feedback collection tools

The collection of customer feedback collection tools include:

 Total market surveys

 Annual surveys
 Transactional surveys
 Service feedback cards
 Mystery shopping
 Unsolicited customer feedback
 Focus group discussion
 Service reviews

Choosing the relevant feedback tools and collecting customer feedback

is meaningless if the company cannot disseminate the information to
the relevant parties to take action. Hence, it is necessary to use
service performance reports to provide information for service
management and team learning.

Service Insights 14.1 This is an insightful sharing of how customer

feedback can backfire and affect customer satisfaction with a service if
they are used as quality control inspectors.
(LO7) Be familiar with hard measures of service quality and
control charts

Hard measures typically refer to operational processes or outcomes

and include data such as uptime, delivery cost, failure rates, and
service response times.

Service Insights 14.2 This article highlights FedEx’s commitment to

service excellence. The company believes that service quality can be
mathematically measured and developed the Service Quality Indicator
(SQI), which is a 12-item measure of satisfaction and service quality
from a customers’ viewpoint.

With the SQI, FedEx was able to quantify the service outcome and the
satisfaction level received by customers. It was able to pin-point
failure points and address them immediately.

(LO8) Select suitable tools to analyze service problems

The tools include Fishbone Diagram - Cause and Effect Chart, Pareto
Analysis and Blueprinting.

(LO9) Appreciate the financial implications of quality

improvements

Return on quality. It is possible to determine whether there is a

relationship between service quality and revenues.

Students should be made aware that not all investments in service

quality will lead to positive results and satisfied customers. In some
cases, even firms that are recognized for their service quality efforts
have run into financial difficulties.

To overcome this problem, firms must analyze the costs involved

before implementing the service quality initiatives. The bottom line is
to ask if the firm can attain the desired results from the efforts put in.

Service Insights 14.3 This shows how the relationship between

product quality and financial performance can be determined in 1,135
franchised Holiday Inn hotels in the United States and Canada.
Indicators of product quality came from the franchisor’s quality
assurance reports, while the hotel chain provided revenue per
available room at each hotel.
(LO10) Define and measure service productivity

Productivity measures the amount of output produced relative to the

amount of inputs used. Measurement of productivity is more difficult in
people-processing services, and information-based services, compared
to possession-processing services that tend to be more like
manufacturing organizations.

(LO11) Understand the difference between productivity,

efficiency, and effectiveness

Classical methods in measuring productivity often focus on outputs

rather than outcomes, stressing efficiency but neglecting effectiveness.
The focus of productivity can be shifted from its traditional focus on
volume of output to one emphasizing value of output. If the same
volume can be sold at higher prices without a comparable increase in
input costs, then the transformation of inputs into outputs will be more
productive. Under these circumstances, the productivity goal shifts
from efficiency to effectiveness. The former is operations and finance
oriented. The latter is marketing and customer oriented. Because
higher quality service creates more value for customers, the
effectiveness approach to productivity is closely allied to service
quality.

(LO12) Recommend the key methods to improve service

productivity

Organizations that are more effective in consistently delivering

customer desired outcomes would be able to command higher prices.
Three customer driven strategies of improving productivity are:

 Changing the timing of customer demand: Managers can make

better use of their productive assets and provi de better service by
shifting demand away from the peak periods. To do this, they may
need to target new market segments with different needs and
schedules.

 Involving customers more actively in the production process :

Through technological innovations such as the Internet and self-
servicing counters, customers can take over some of the labor task
thus saving cost and improving productivity. Although much of
these depend on customers’ willingness to change, research into
socialization can help marketers redesign the service encounter to
encourage more customer participation.

 Asking the customers to use third parties: Specialist intermediaries,

enjoying economies of scale and scope, can perform the task
 cheaper then the core service provider thus it makes sense to
outsource delivery of supplementary service elements to
intermediary organizations to improve service productivity.

(LO13) Know how productivity improvements impact quality

and value

It should be noted that backstage changes filter through to the

frontline, and frontline changes to improve productivity can impact
customers. Marketing communications can play a big part in preparing
customers for the change and explain the rationale and benefits and
what the new behavior expected of the customer is. Managing
customers’ reluctance to change is also very important

Service Insights 14.4 Many companies are reviewing the use of

biometrics to help manage productivity and efficiency, and to help
manage costs at the same time.

(LO14) Understand how TQM, ISO 9000, Malcolm-Baldrige

Approach and Six
Sigma relate to managing and improving service quality and
productivity

TQM and Six Sigma are established quality and productivity initiatives
with their respective set of tools and methods for managing and
improving service quality and productivity. Some of these tools are
also now increasingly used in companies that may not have embraced
the entire TQM or Six Sigma concept. The Fishbone diagram, Pareto
Analysis, and control charts are examples of tools that originated from
TQM but have found their way to common use among companies
interested in improving service quality. The DMAIC model, a Six Sigma
improvement model, is also commonly used for analyzing and
improving business processes.

The Malcolm-Baldrige Awards and the ISO 9000 certification comprises

requirements, standards, guidelines, definitions, and related standards
that provide an independent assessment and certification of whether
companies are practicing best practices in quality management and
are a benchmark of quality achievements.

Companies, in managing and improving quality and productivity,

should consider the approach that is best aligned with the overall
business strategy and adopt a mixture of tools from the above
systemic approaches depending on their own needs and desired level
of sophistication. For example, TQM tools can be used at any level of
sophistication by any service firm, although the Six Sigma initiative
requires much more commitment and investments.

QUESTIONS AND EXERCISES

Review Questions

1. Explain the relationship between service quality,

productivity, and profitability.

2. Identify the gaps that can occur in service quality and

the steps that service marketers can take to close them

3. Why are both “soft” and “hard” measures of service

quality needed?

4. What are the main objectives of an effective customer

feedback system?

5. What are the key customer feedback collection tools?

What are the strengths and weaknesses of each of these
tools?

6. What are the main tools that service firms can use to
analyze and address service quality problems