What Is The Service-Profit Chain? Service-Profit Chain In A Nutshell

The service-profit chain was first proposed in a 1994 edition of Harvard Business Review by Leonard Schlesinger, W. Earl Sasser, and James L. Heskett. Three years later, the theory became the subject of a book authored by the same individuals entitled The Service Profit Chain – How Leading Companies Link Profit and Growth to Loyalty, Satisfaction and Value. The service-profit chain is a business management theory linking employee satisfaction to customer loyalty and profitability.

Service-Profit ChainKey ElementsAnalysisImplicationsApplicationsExamples
DefinitionThe Service-Profit Chain is a business framework that establishes a direct relationship between employee satisfaction, customer loyalty, and financial performance. It suggests that employee engagement and satisfaction drive customer satisfaction, which, in turn, leads to increased profitability.Analyzing the Service-Profit Chain involves understanding its core premise: happy and engaged employees deliver better service, leading to satisfied customers who are more likely to remain loyal and make repeat purchases. This, in turn, positively impacts the financial performance of the organization.The Service-Profit Chain underscores the importance of creating a positive work environment, fostering employee loyalty, and delivering exceptional customer experiences. By recognizing these relationships, organizations can prioritize employee well-being and customer satisfaction to drive profitability.The Service-Profit Chain is applicable across various industries, including retail, hospitality, healthcare, and professional services. It can be used by organizations of all sizes to improve employee engagement, customer relationships, and financial outcomes.– Implementing employee engagement programs to enhance job satisfaction and motivation. – Conducting customer satisfaction surveys and feedback analysis to identify areas for improvement. – Monitoring financial performance metrics, such as revenue growth and profitability, to assess the impact of customer satisfaction initiatives.
Employee SatisfactionEmployee satisfaction refers to the contentment and happiness of employees within the organization, influenced by factors such as work culture, leadership, recognition, and opportunities for growth.Analyzing employee satisfaction involves assessing the factors that contribute to or hinder employee happiness. It includes evaluating workplace conditions, management practices, communication, and career development opportunities.High employee satisfaction leads to improved morale, reduced turnover, and increased productivity. Satisfied employees are more likely to deliver better service, positively impacting customer experiences. Investing in employee well-being can yield long-term benefits and enhance an organization’s reputation as an employer of choice.Organizations can measure and improve employee satisfaction through surveys, feedback mechanisms, performance evaluations, and professional development programs.– Conducting regular employee satisfaction surveys to gather feedback and identify areas for improvement. – Offering training and development opportunities to enhance employee skills and career advancement. – Recognizing and rewarding employee contributions through incentive programs and recognition initiatives.
Customer LoyaltyCustomer loyalty refers to a customer’s commitment and preference for a particular brand or organization, leading to repeat purchases and a higher likelihood of recommending the brand to others.Analyzing customer loyalty involves evaluating customer behavior, retention rates, repeat purchase patterns, and feedback. It also considers factors that influence loyalty, such as product quality, customer service, pricing, and brand reputation.High customer loyalty contributes to increased revenue, reduced customer acquisition costs, and positive word-of-mouth marketing. Loyal customers are more forgiving of occasional service issues and tend to provide valuable feedback. Fostering customer loyalty requires consistent quality, personalized experiences, and responsive customer support.Organizations can measure customer loyalty through metrics like Net Promoter Score (NPS), customer retention rates, and customer lifetime value. Loyalty programs, personalized communication, and exceptional service are strategies to enhance customer loyalty.– Implementing customer loyalty programs with rewards and incentives for repeat purchases. – Personalizing marketing and communication to cater to individual customer preferences. – Addressing customer inquiries, concerns, and feedback promptly to demonstrate commitment to their satisfaction.
Financial PerformanceFinancial performance encompasses an organization’s profitability, revenue growth, market share, and return on investment. It is a key indicator of an organization’s success and sustainability.Analyzing financial performance involves assessing key financial metrics, such as revenue, profit margins, return on investment, and market share. It also considers the impact of customer loyalty and employee satisfaction on these metrics.Strong financial performance is the ultimate goal of the Service-Profit Chain. It reflects the positive outcomes of prioritizing employee engagement and customer satisfaction. Improved financial performance can support investments in employee development, customer service enhancements, and business growth initiatives.Organizations track financial performance through financial statements, budget analysis, and market research. They can attribute changes in financial metrics to specific actions taken to improve employee and customer experiences.– Monitoring quarterly and annual financial statements to assess revenue and profit trends. – Analyzing the impact of customer loyalty programs on revenue growth and customer acquisition costs. – Calculating the return on investment (ROI) of employee training and development initiatives.
Employee-Customer RelationshipThe Service-Profit Chain highlights the interconnectedness of employees and customers. Employee satisfaction positively influences customer satisfaction, and satisfied customers are more likely to treat employees well.Analyzing the employee-customer relationship involves recognizing that happy and engaged employees are more likely to provide better service and create positive customer interactions. It also acknowledges that satisfied customers are more patient, understanding, and appreciative of employees’ efforts.A strong employee-customer relationship leads to a positive feedback loop: satisfied employees provide exceptional service, leading to satisfied customers who, in turn, reinforce employee satisfaction through positive interactions. Organizations benefit from improved retention, loyalty, and revenue growth.Organizations can nurture the employee-customer relationship by investing in employee training, recognizing and rewarding outstanding customer service, and encouraging open communication between employees and customers.– Providing customer service training to employees to enhance their skills and responsiveness. – Recognizing and celebrating exceptional customer service through employee awards and recognition programs. – Encouraging employees to collect and act on customer feedback and suggestions to improve service quality.
Continuous ImprovementContinuous improvement is a fundamental principle of the Service-Profit Chain. Organizations should continually seek ways to enhance employee satisfaction, customer experiences, and financial performance.Analyzing continuous improvement involves evaluating an organization’s commitment to ongoing enhancements in its processes, products, services, and customer interactions. It requires a culture of innovation, feedback collection, and responsiveness to changing customer needs.Continuous improvement is the driving force behind the Service-Profit Chain’s success. It ensures that organizations remain competitive, adapt to evolving market dynamics, and sustain employee and customer satisfaction over the long term. Organizations should embrace change, experimentation, and customer-centricity.Organizations employ various methodologies for continuous improvement, including Six Sigma, Lean, Total Quality Management (TQM), and agile practices. They also use customer feedback, surveys, and market research to identify areas for improvement.– Implementing Lean principles to streamline internal processes and reduce waste, leading to cost savings. – Collecting and analyzing customer feedback to identify areas for product or service enhancements. – Embracing agile methodologies to adapt to changing customer demands and deliver incremental improvements to products or services.

Understanding the service-profit chain

Many consider management, staff, customers, and other stakeholders to be the most important components of a marketing mix – and for good reason. The way a company communicates with its employees and provides a suitable workplace for them impacts those outside the organization and the relationships built. This notion was echoed by entrepreneur Richard Branson, who once suggested training people so well they could find employment elsewhere while treating them so well that they didn’t want to leave.

While the service-profit chain is a relatively simple concept, many businesses do not understand the impact of their internal functions and processes on customer interaction. To better synthesize this relationship, the chain itself is based on cause and effect and comprises various components. 

In the next section, we will take a look at these components in more detail.

The seven links of the service-profit chain

The service-profit chain consists of seven links that describe how internal processes impact customer loyalty:

  1. Employee support and enabling policies – at the start of the chain are employee rewards, incentives, programs, and policies that motivate performance and create a stronger culture.
  2. Employee satisfaction – with employees properly supported and motivated, satisfaction increases.
  3. Productive employees – satisfied employees are more likely to be productive employees. What’s more, productive employees tend to go above and beyond for the company and its customers.
  4. Service value – occupying the next link in the chain is service value, which argues productive and satisfied employees bring more value to the customer. This value may take the form of friendlier customer service or higher quality products, among many other things.
  5. Customer satisfaction – naturally, a customer who receives better service or a high-quality product is more satisfied in their dealings with the company.
  6. Customer loyalty – while satisfied customers are more likely to buy from a company multiple times, it’s important to note that the relationship between satisfaction and loyalty is not linear. Satisfaction exists on a scale, with low to moderate amounts unlikely to see the customer recommend a product to a friend or leave a positive review. At the other end of the scale, however, satisfaction becomes enthusiasm. It is this enthusiasm for a product or company that ultimately drives loyalty.
  7. Profit and revenue – at the end of the service-profit chain is profit and revenue, which increases as the number of loyal customers increases.

Key takeaways:

  • The service-profit chain is a business management theory linking employee satisfaction to customer loyalty and profitability. It was first proposed in 1994 by Leonard Schlesinger, W. Earl Sasser, and James L. Heskett.
  • The service-profit chain is a straightforward concept, but many businesses fail to recognize the relationship between their internal processes and interactions with customers.
  • The service-profit chain is based on seven links, with each link interacting with the rest of the chain through cause and effect. The seven links are employee support and enabling policies, employee satisfaction, productive employees, service value, customer satisfaction, customer loyalty, and profit and revenue.

Key Highlights

  • Origin and Authors: The service-profit chain was introduced in a 1994 Harvard Business Review article by Leonard Schlesinger, W. Earl Sasser, and James L. Heskett. They later expanded on the concept in their book titled “The Service Profit Chain – How Leading Companies Link Profit and Growth to Loyalty, Satisfaction and Value.”
  • Concept Overview: The service-profit chain is a business management theory that establishes a link between employee satisfaction, customer loyalty, and overall profitability. It underscores the interconnectedness of internal operations and customer relationships.
  • Components of Marketing Mix: The theory recognizes the significance of management, staff, customers, and stakeholders in the marketing mix. How a company treats its employees and provides a positive work environment has a direct impact on external relationships and customer experiences.
  • Richard Branson’s Perspective: Richard Branson’s viewpoint aligns with the service-profit chain concept. He emphasizes training employees well enough so they could find jobs elsewhere, but treating them so well that they choose to stay with the company.
  • Cause and Effect Relationship: The service-profit chain is based on a cause-and-effect relationship between different components. It explains how internal factors influence customer interactions and loyalty.
  • Seven Links of the Service-Profit Chain:
    • Employee Support and Enabling Policies: Starting point of the chain, involving rewards, incentives, programs, and policies that motivate employees and create a positive culture.
    • Employee Satisfaction: Proper support and motivation lead to increased employee satisfaction.
    • Productive Employees: Satisfied employees tend to be more productive, leading to enhanced commitment and going beyond standard expectations.
    • Service Value: Productive and satisfied employees contribute more value to customers, such as better customer service and higher-quality products.
    • Customer Satisfaction: Improved service value results in greater customer satisfaction.
    • Customer Loyalty: Satisfied customers are more likely to become repeat customers, with strong satisfaction leading to enthusiastic recommendations and loyalty.
    • Profit and Revenue: The ultimate outcome of the chain, where an increase in loyal customers directly impacts profitability and revenue.
  • Complexity of Customer Loyalty: Customer loyalty is not merely tied to customer satisfaction. It exists on a spectrum, where moderate satisfaction might not lead to loyalty, while strong satisfaction transforms into enthusiasm, driving loyalty.
  • Business Implications: Understanding and implementing the service-profit chain helps businesses realize the impact of internal processes on external customer interactions, loyalty, and overall profitability.

Types of Organizational Structures

Organizational Structures

Siloed Organizational Structures


In a functional organizational structure, groups and teams are organized based on function. Therefore, this organization follows a top-down structure, where most decision flows from top management to bottom. Thus, the bottom of the organization mostly follows the strategy detailed by the top of the organization.



Open Organizational Structures




In a flat organizational structure, there is little to no middle management between employees and executives. Therefore it reduces the space between employees and executives to enable an effective communication flow within the organization, thus being faster and leaner.

Connected Business Frameworks

Portfolio Management

Project portfolio management (PPM) is a systematic approach to selecting and managing a collection of projects aligned with organizational objectives. That is a business process of managing multiple projects which can be identified, prioritized, and managed within the organization. PPM helps organizations optimize their investments by allocating resources efficiently across all initiatives.

Kotter’s 8-Step Change Model

Harvard Business School professor Dr. John Kotter has been a thought-leader on organizational change, and he developed Kotter’s 8-step change model, which helps business managers deal with organizational change. Kotter created the 8-step model to drive organizational transformation.

Nadler-Tushman Congruence Model

The Nadler-Tushman Congruence Model was created by David Nadler and Michael Tushman at Columbia University. The Nadler-Tushman Congruence Model is a diagnostic tool that identifies problem areas within a company. In the context of business, congruence occurs when the goals of different people or interest groups coincide.

McKinsey’s Seven Degrees of Freedom

McKinsey’s Seven Degrees of Freedom for Growth is a strategy tool. Developed by partners at McKinsey and Company, the tool helps businesses understand which opportunities will contribute to expansion, and therefore it helps to prioritize those initiatives.

Mintzberg’s 5Ps

Mintzberg’s 5Ps of Strategy is a strategy development model that examines five different perspectives (plan, ploy, pattern, position, perspective) to develop a successful business strategy. A sixth perspective has been developed over the years, called Practice, which was created to help businesses execute their strategies.

COSO Framework

The COSO framework is a means of designing, implementing, and evaluating control within an organization. The COSO framework’s five components are control environment, risk assessment, control activities, information and communication, and monitoring activities. As a fraud risk management tool, businesses can design, implement, and evaluate internal control procedures.

TOWS Matrix

The TOWS Matrix is an acronym for Threats, Opportunities, Weaknesses, and Strengths. The matrix is a variation on the SWOT Analysis, and it seeks to address criticisms of the SWOT Analysis regarding its inability to show relationships between the various categories.

Lewin’s Change Management

Lewin’s change management model helps businesses manage the uncertainty and resistance associated with change. Kurt Lewin, one of the first academics to focus his research on group dynamics, developed a three-stage model. He proposed that the behavior of individuals happened as a function of group behavior.

Organizational Structure Case Studies

Airbnb Organizational Structure

Airbnb follows a holacracy model, or a sort of flat organizational structure, where teams are organized for projects, to move quickly and iterate fast, thus keeping a lean and flexible approach. Airbnb also moved to a hybrid model where employees can work from anywhere and meet on a quarterly basis to plan ahead, and connect to each other.

eBay Organizational Structure

eBay was until recently a multi-divisional (M-form) organization with semi-autonomous units grouped according to the services they provided. Today, eBay has a single division called Marketplace, which includes eBay and its international iterations.

IBM Organizational Structure

IBM has an organizational structure characterized by product-based divisions, enabling its strategy to develop innovative and competitive products in multiple markets. IBM is also characterized by function-based segments that support product development and innovation for each product-based division, which include Global Markets, Integrated Supply Chain, Research, Development, and Intellectual Property.

Sony Organizational Structure

Sony has a matrix organizational structure primarily based on function-based groups and product/business divisions. The structure also incorporates geographical divisions. In 2021, Sony announced the overhauling of its organizational structure, changing its name from Sony Corporation to Sony Group Corporation to better identify itself as the headquarters of the Sony group of companies skewing the company toward product divisions.

Facebook Organizational Structure

Facebook is characterized by a multi-faceted matrix organizational structure. The company utilizes a flat organizational structure in combination with corporate function-based teams and product-based or geographic divisions. The flat organization structure is organized around the leadership of Mark Zuckerberg, and the key executives around him. On the other hand, the function-based teams based on the main corporate functions (like HR, product management, investor relations, and so on).

Google Organizational Structure

Google (Alphabet) has a cross-functional (team-based) organizational structure known as a matrix structure with some degree of flatness. Over the years, as the company scaled and it became a tech giant, its organizational structure is morphing more into a centralized organization.

Tesla Organizational Structure

Tesla is characterized by a functional organizational structure with aspects of a hierarchical structure. Tesla does employ functional centers that cover all business activities, including finance, sales, marketing, technology, engineering, design, and the offices of the CEO and chairperson. Tesla’s headquarters in Austin, Texas, decide the strategic direction of the company, with international operations given little autonomy.

McDonald’s Organizational Structure

McDonald’s has a divisional organizational structure where each division – based on geographical location – is assigned operational responsibilities and strategic objectives. The main geographical divisions are the US, internationally operated markets, and international developmental licensed markets. And on the other hand, the hierarchical leadership structure is organized around regional and functional divisions.

Walmart Organizational Structure

Walmart has a hybrid hierarchical-functional organizational structure, otherwise referred to as a matrix structure that combines multiple approaches. On the one hand, Walmart follows a hierarchical structure, where the current CEO Doug McMillon is the only employee without a direct superior, and directives are sent from top-level management. On the other hand, the function-based structure of Walmart is used to categorize employees according to their particular skills and experience.

Microsoft Organizational Structure

Microsoft has a product-type divisional organizational structure based on functions and engineering groups. As the company scaled over time it also became more hierarchical, however still keeping its hybrid approach between functions, engineering groups, and management.

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