In a recent article in the Globe and Mail, “How Lululemon gets high returns,” Jonathan Stoller comments:
Lululemon has posted extraordinary results at a time when many retailers have struggled. Despite a sputtering global economy, the yoga apparel company reported a near 50-per-cent jump in profit in the second quarter of this year, and saw revenue soar to nearly $283-million, an increase of 33 per cent over Q2 2011.
Analysts like to point to traditional markers – strong branding, effective marketing, good customer relations – but if you talk to Margaret Wheeler, senior vice-president of people potential, it’s all about employee attitudes.
Stoller’s point that many analysts are still locked into a traditional set of markers that don’t factor in the impact that employee attitudes and engagement can have on a company’s performance is concerning for two reasons:
- It diminishes the value of their opinions about the relative strength of brands and businesses in the marketplace.
- The link between employee attitudes and engagement and corporate performance has been taught in leading MBA programs across the world for some time.
Fortunately, many of today’s astute marketers recognize its importance and share Margaret Wheeler’s point of view.
Winning service organizations boost their ability to create compelling customer value, and consequently their marketplace performance, by putting The Service Profit Chain to work. Employee engagement (satisfaction, loyalty, and productivity) is the key in this regard.
What is The Service Profit Chain?
Originally published in the Harvard Business Review in 1994, “Putting the Service Profit Chain to Work” by James L. Heskett, W. Earl Sasser, and Leonard A Schlesinger, it was intended to, “To help managers target new investments to develop service and satisfaction levels for maximum competitive impact, widening the gap between service leaders and their merely good competitors.”
The authors assert in their article that:
The service-profit chain establishes relationships between profitability, customer loyalty, and employee satisfaction, loyalty, and productivity.
The links in the chain…are as follows:
Profit and growth are stimulated primarily by customer loyalty. Loyalty is a direct result of customer satisfaction. Satisfaction is largely influenced by the value of services provided to customers. Value is created by satisfied, loyal, and productive employees. Employee satisfaction, in turn, results primarily from high-quality support services and policies that enable employees to deliver results to customers.
The crucial role of corporate leadership in the chain’s success is self-evident.
My diagram switches this order to emphasize the important role that corporate leadership plays in ensuring the high-quality support services and policies integral to employee engagement (satisfaction, loyalty and productivity).
Re-published in 1997 to highlight the successes enjoyed by the many corporations that introduced company-wide business practices to give leverage to this concept within their own organizations, it has been the central thesis in two books by these authors, The Service Profit Chain, (1997) and The Value Profit Chain (2002), together with a third The Ownership Quotient (2008) by James L. Hasket, W. Earl Sasser, and Joe Wheeler. These books reveal indisputable evidence based on over 35 years of research that today’s employee satisfaction, loyalty, and commitment strongly influences tomorrow’s customer satisfaction, loyalty, and commitment and ultimately the organization’s profit and growth.
What ‘s the bottom line for analysts given the weight of this evidence?
It’s time for analysts to recognize that traditional markers such as strong branding and effective marketing communication are simply insufficient for assessing the relative strength of service brands and businesses in today’s marketplace.
Analysts need to interrogate corporations to understand the degree to which their leadership teams actively seek to boost their performance through The Service Profit Chain. Only then will they be in a position to provide useful commentary on a corporation’s ability to improve or sustain its performance over time relative to the competition.
Hi Ashley, really enjoyed this article…simple concept but I know we can trip up on the execution of having an ‘engaged, motivated and knowledgeable front line person’. There is a lot of investment to achieve this person (as previously described)…but worth its weight in gold!
Thanks for reminding us of these often forgotten points on how to drive a profitable business forward.
Ashley – certainly high-touch organizations (like the travel vertical) realize this very simple, but crucial, linkage. When working with the Hilton WW group, it was great to see their value brands – like Hampton – place a tremendous emphasis on employee engagement and ownership and how this impacted customer satisfaction & loyalty. At that end of the spectrum, Hampton was able to show high loyalty in a sector dominated by value pricing. No mean feat. Pity organizations like the airlines haven’t seen fit to implement the same strategies.