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 businessmanagement theory linking employee satisfaction to customer loyalty and profitability.
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:
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.
Employee satisfaction – with employees properly supported and motivated, satisfaction increases.
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.
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.
Customer satisfaction – naturally, a customer who receives better service or a high-quality product is more satisfied in their dealings with the company.
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.
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.
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.
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.
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.
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.
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 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 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.
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.
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 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.
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 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 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 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 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 (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 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 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 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.
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Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
