Description
Research on the differences in customer satisfaction between product and service organizations has focused on an output perspective, or how customers evaluate performance. This study takes this research inside organizations to analyze and investigate how key internal quality practices of product versus service organizations.
The impact of quality practices on customer
satisfaction and business results: product
versus service organizations
Lars Nilsson
a,1
, Michael D. Johnson
b,
*, Anders Gustafsson
c,2
a
Linko¨ping University, Quality and Human-Systems Engineering, SE-581 83, Linko¨ping, Sweden
b
University of Michigan Business School, 701 Tappan Street, Ann Arbor, MI 48109-1234, USA
c
Service Research Center, Karlstad University, Karlstad SE-651 88, Sweden
Received 1 March 2001; received in revised form 1 May 2001; accepted 1 June 2001
Abstract
Research on the differences in customer satisfaction between product and service organizations has
focused on an output perspective, or how customers evaluate performance. This study takes this
research inside organizations to analyze and investigate how key internal quality practices of product
versus service organizations (employee management, process orientation, and customer orientation)
influence customer satisfaction and business results. Using a national quality survey from 482
companies in Sweden, our analysis shows that for product organizations, internal quality practices
influence customer satisfaction and business results primarily through an organization’s customer
orientation. For service organizations, both customer and process orientation impact customers
directly, and employee management has a direct impact on business results. The research also supports
the claim that organizations with a quality foundation are in a better position to adopt a customer
orientation. D 2001 Elsevier Science Inc. All rights reserved.
Keywords: Quality practices; Customer orientation; Customer satisfaction
1084-8568/01/$ – see front matter D 2001 Elsevier Science Inc. All rights reserved.
PII: S1084- 8568( 01) 00026- 8
* Corresponding author. Tel.: +1-734-764-1259; fax: +1-734-936-0274.
E-mail addresses: [email protected] (L. Nilsson), [email protected] (M.D. Johnson), anders.gustafsson@
kau.se (A. Gustafsson).
1
Tel.: + 46-13-28-16-51; fax: + 46-13-28-27-42.
2
Tel.: + 46-54-700-1556; fax: + 46-54-836-552.
www.journalofqualitymanagement.com
Journal of Quality Management
6 (2001) 5–27
1. Introduction
A growing number of organizations use quality management as a strategic foundation for
generating a competitive advantage (Reed, Lemak, & Mero, 2000) and improving firm
performance (Hendricks & Singhal, 1997; Lemak & Reed, 1997; Samson & Terziovski,
1999). Firms that have won quality awards generally outperform other firms with respect to
both income measures (Hendricks & Singhal, 1997) and stock market value (Lemak & Reed,
1997). It is no surprise that the links among market orientation, quality practices, and
performance have attracted the attention of marketing and operations management researchers
alike (Ettlie & Johnson, 1994; Flynn, Schroeder, & Sakakibara, 1994; Kohli & Jaworski,
1990; Narver & Slater, 1990; Samson & Terziovski, 1999).
Quality practices have been shown to enhance organizational performance for both
product and service organizations (Powell, 1995). However, there is relatively little research
on how product versus service companies differ with respect to the impact of quality
practices on performance. We know little about how these two different types of
organizations view what they do, how well they do it, and its consequences. Rather, the
growing body of research on products versus services has focused on external customer
perceptions of quality and satisfaction rather than organizational knowledge of quality
practices (Anderson, Fornell, & Rust, 1997; Edvardsson, Johnson, Gustafsson, & Strandvik,
2000; Fornell & Johnson, 1993; Fornell, Johnson, Anderson, Cha, & Bryant, 1996; Huff,
Fornell, & Anderson, 1996).
The goal of this research is to examine three key internal quality practices —
employee management, process orientation, and customer orientation — and their role in
creating customer satisfaction and business results. We examine the similarity and
differences in the effects of these practices across a large sample of product and service
organizations. One of the important questions raised in our study is: Does an
organization’s process orientation directly impact customer satisfaction? For service
firms, we expect this to be the case. But for product firms, we expect one’s process
orientation to support a customer orientation or focus, which in turn impacts customer
satisfaction. Another important question addressed here is: Given the critical importance
of employee management in service firms, does employee management have a greater
impact on performance for these firms? The answers to these and related questions are
critically important for quality managers and executives who allocate resources across
quality practices in their organizations.
We first examine the differences between products and services and present our
framework for linking quality practices to performance. We then provide theoretical
arguments and evidence as to how these links differ. We use a broad-based survey of
482 Swedish companies (product and service firms) to investigate the effects of the quality
practices. While our results show that product and service firms are similar in how quality
practices support each other, they also support systematic and predictable differences in the
effects of these quality practices on customer satisfaction and business performance. The
paper ends with a discussion of the implications of our results for quality management
research and practice.
L. Nilsson et al. / Journal of Quality Management 6 (2001) 5–27 6
2. Product versus service quality
Service quality researchers argue that service quality and product quality are systematically
different due to the inherent intangibility, inseparability of production and consumption,
heterogeneity, and perishability that characterize services (Zeithaml, Parasuraman, & Berry,
1990). Mills and Moberg (1982) categorize the differences between products and services as
relating to differences in output and differences in process. Research in marketing has
adopted an output perspective, or how customers evaluate the quality of a product or a
service. Research in quality and operations management has taken more of a process
perspective, or how an organization can work to improve the quality of a product or service.
It is important, however, to understand how the output perspective relates to the internal
process perspective, or its means of accomplishment within organizations. The following
sections briefly review research on the output and process perspectives.
2.1. An output perspective
Quality experts distinguish between two general types of output quality — the degree to
which a good or service provides key customer requirements, or customization, and how
reliably these requirements are delivered, or reliability (Deming, 1981; Juran & Gryna, 1988).
Ishikawa and Lu (1985) make a similar argument when they separate quality into ‘‘backward-
looking’’ and ‘‘forward-looking’’ components. Defects and flaws in quality are called
backward-looking quality, while forward-looking quality is characteristics that can become
a product’s sales point. Oakland (1993) distinguishes between similar components, referring
to ‘‘quality’’ as the meeting of customer requirements, and ‘‘reliability’’ as the ability of a
product to continue to meet the customer requirements.
Scholars in the service management tradition argue that the co-production process that
typifies services makes reliability the more important quality dimension (Gro¨nroos, 1990;
Zeithaml, Parasuraman, & Berry, 1996). Unlike goods, services are co-produced with
customers at a time, and in a place, of the customer’s choosing. And because service
production involves more of the human resources of the firm and customers themselves, it
adds greater inherent variability to the service production process. Thus, reliability should
be relatively more important to maintain and improve. Initial support for the importance
of service reliability in the service quality literature comes from studies using the
SERVQUAL survey methodology (Parasuraman, Zeithaml, & Berry, 1985, 1988). In
their review of the SERVQUAL research, Zeithaml et al. (1990) note that reliability is
consistently the most important service quality dimension, or largest ‘‘gap,’’ to improve
across service industries.
Others argue that the same co-production process makes customization relatively more
important in determining customer satisfaction for services (Anderson et al., 1997; Fornell et
al., 1996). Because many services are personnel-intensive and customized to suit very
heterogeneous needs, customization is more important for services than for manufactured
goods. However, a recent study by Johnson and Nilsson (2000) is more consistent with
Parasuraman et al.’s research by showing that customization is significantly more important
L. Nilsson et al. / Journal of Quality Management 6 (2001) 5–27 7
for products, while reliability and customization are more equally important for services.
Thus, the output-based research, on the whole, suggests that improving reliability is relatively
more important for services than for products.
Edvardsson, Johnson, et al. (2000) also provide evidence of systematic differences
between products and services when it comes to the links from satisfaction to loyalty and
financial performance. Using Swedish data, they show that the links from satisfaction, to
loyalty, to profits and growth are stronger for services than for products. In particular, the
links from loyalty per se to business performance are weaker for physical goods. This is
attributed to the argument that, because physical goods are inventoried for sale, loyalty is
more likely to be bought for products (using coupons or price incentives) as a means of
moving inventory, which lowers margins. In contrast, loyalty is more likely to be earned, and
thus more profitable, for service companies. Research using customer impressions also
provides evidence that customer satisfaction is a leading indicator of financial performance.
The national customer satisfaction indices in both the US (Ittner & Larcker, 1996) and
Sweden (Anderson, Fornell, & Lehmann, 1994) are significant and positively related to the
firms’ financial performance.
2.2. A process perspective
Quality practices are usually presented as a universal concept, applicable in all contexts
and having a large impact on business performance. There is a substantial body of empirical
research that provides support for the notion that quality management and practices improve
firm performance (see Hendricks & Singhal, 1997; Lemak & Reed, 1997; Samson &
Terziovski, 1999). The most well-known study of quality practice is the International Quality
Study (1992) conducted by Ernst Young and the American Quality Foundation. This study
provides evidence that quality management has the highest impact on performance in firms
that already perform well (International Quality Study, 1992). Hendricks & Singhal (1997,
2001) focus their research on quality award winners. They find that many different
organizational characteristics impact the benefits of quality practice. Examples of such
organizational characteristic are firm size and the degree of capital intensity. Lemak and
Reed (1997) investigate the impact of quality practice on performance in organizations that
had been committed to quality management for a 5-year period. Their results indicate that a
firm’s market valuation increases significantly after its implementation of quality manage-
ment. Overall, although there are a number of studies that have investigated the impact of
quality practices on performance, these studies do not explicitly provide empirical evidence
on the differences between service and product firms.
Within marketing, Kohli and Jaworski (1990) and Narver and Slater (1990) explore the
impact of a market orientation on different organizational performance measures. One
consistent finding is that being market-oriented does improve organizational performance
for large and small firms, as well as for both product and service organizations (Wrenn,
1997). A review of the research on market orientation by Wrenn (1997) reveals that, even
though this research has been conducted both in product and service environments, no
thorough investigation has been made of how the effect differs between them.
L. Nilsson et al. / Journal of Quality Management 6 (2001) 5–27 8
Indeed, the contrasting of product and service firms is important toward our ability to
reconcile differences across studies in the literature. The relationship between market
orientation and customer satisfaction has not been very systematic. While, for example,
McCullough, Heng, & Khem (1986) found them to be positively related in a bank
environment, this finding has not been validated across industries (Wrenn, 1997).
Within operations management, a number of studies have investigated the relationship
between quality practices and performance. Most of these studies develop measurement
instruments and conduct their investigations in a manufacturing environment (Ahire, Golhar,
& Waller, 1996; Flynn et al., 1994). These studies suggest that different quality practices act
in synergy to influence product quality (Ahire et al., 1996). Dow, Samson, and Ford (1999)
test the impact of nine quality practices on quality output in a manufacturing environment.
Only three of these practices show a significantly positive impact on performance —
customer focus being the most important one.
All of the studies mentioned examine the effect of quality practice on performance
within a manufacturing environment. In contrast, studies by Powell (1995), Benson,
Saraph, and Schroeder (1991), and Saraph, Benson, and Schroeder (1989) develop
instruments for measuring quality practices in both a product and service environment.
Saraph, Benson, and Schroeder do not investigate the differences of the effect of quality
practice on performance, but rather how quality practices are influenced by the
organizational context, such as corporate support for quality and past quality perform-
ance. They conclude that the main difference is that service firms do not have any
external contextual factors (such as entry barriers and degree of external quality demand)
that influence quality practice, while this is evident for product firms. One of the
limitations of this research is that they exclude customer orientation or focus from their
operationalization of quality practices, which we include. Powell investigates the
correlation among 12 factors of total quality management and financial performance.
The study concludes that there are differences between service and products organiza-
tions. For example, supplier relationships are vital for a product organization, while
process improvements are more important for a service organization. Yet the number of
organizations in Powell’s study is limited to 24 product and 15 service organizations. By
contrasting a much broader range of product and service firms, we hope to better
understand how and why the importance of certain quality practices varies by industry
and context.
3. A framework for linking quality practices to performance
A quality concept is essentially a business philosophy, a company ideal, or a policy
statement. The business philosophy can be contrasted with its implementation reflected in the
activities and behaviors of an organization. Focusing on behaviors rather than philosophical
notions makes it easier to operationalize the different quality constructs. This is an important
step as it helps to translate concepts into actions and thereby provide a better differentiation
between different organizations.
L. Nilsson et al. / Journal of Quality Management 6 (2001) 5–27 9
Our proposed framework includes five general areas or constructs to consider:
(1) employee management, (2) process orientation, (3) customer orientation, (4) customer
satisfaction, and (5) business results. The framework is presented in Fig. 1. The first three
areas are quality practices, or activities performed within an organization to improve product
and process quality. Employee management is the starting point in the model. The
presumption is that effective employee management, or having employees that are committed
and involved, is itself a requirement for both a process orientation and a customer orientation
to be effective. The other two quality practices have different starting points — one taking the
processes of the organization as the focal point and the other taking the customers as the
central focus. This distinction is similar, but not equal to the concept of customer and
operations orientation used by Reed, Lemak, and Mongomery (1996). The core processes on
which our process orientation construct focuses are those that immediately support a firm’s
customer orientation.
The remaining two constructs in our framework capture the results of quality practices —
one from the customers’ perspective in the form of customer satisfaction and the other from a
business performance perspective. Generally, the framework posits that improvements in
internal quality impact customer satisfaction and, in turn, business results.
Fig. 1. A framework for linking quality practices to performance.
L. Nilsson et al. / Journal of Quality Management 6 (2001) 5–27 10
One of the main conditions for successful quality practices is to engage everyone in the
improvement process (Bergman & Klefsjo¨, 1994). We focus on the activities taken on an
organization level, such as the measurement and improvement of employee satisfaction and
the involvement of employees in the development of the business, to capture the quality of an
organization’s employee management. The basic assumption of quality researchers is that
employee satisfaction and commitment are needed to support process and customer
orientation (Hackman & Wageman, 1995).
A process is a set of activities that, taken together, produce a result of value to a customer
(Ittner & Larcker, 1997). A process is therefore a structure for action, the structure by which
an organization does what is necessary to produce value for its customers (Davenport, 1993).
There is a wide range of process management mechanisms, from process-focused improve-
ment tools (such as process value analysis and process cycle time analysis), to the
implementation of organizational structures that are based on core business processes (Ittner
& Larcker, 1997).
Frei, Kalakota, Leone, and Marx’s (1999) study of the impact of process variation on
financial performance in financial service institutions sheds further light on the dynamics of
the impact of process orientation on customer satisfaction. They identify a lack of rigorous
policies and processes as one important factor that contributes to the substantial variation in
service delivery. An improvement in processes can reduce the apparent variation in the
process, and can have an indirect effect on business results through increased customer
satisfaction. Overall, this suggests that while process orientation, like employee management,
supports a firm’s customer orientation, process orientation can have a direct effect on
customer satisfaction.
In marketing, a market orientation has been defined as the organization-wide generation of
market intelligence, dissemination of the intelligence across departments, and organization-
wide responsiveness to it (Kohli & Jaworski, 1990). Narver and Slater (1990) argue that a
full-blown market orientation also includes a competitor orientation. However, our focus is on
a firm’s more specific customer orientation. A customer orientation emphasizes an organ-
ization’s ability to attain customer information, analyze it to set priorities for improvement,
and use these priorities to drive product and process change (Johnson, 1998; Johnson &
Gustafsson, 2000). By gaining a better understanding of customer needs and the use of this
knowledge to design better products and services, a customer orientation should have a direct
impact on customer satisfaction.
Research that links customer satisfaction to other business measures usually defines
satisfaction as a customer’s overall evaluation of the consumption experience (Johnson,
2001). Customer satisfaction research demonstrates a positive impact of satisfaction on both
market value and accounting returns (Anderson et al., 1994; Ittner & Larcker, 1996). Because
of a ‘‘front loading’’ of customer costs and a ‘‘back loading’’ of revenues over the course of
one’s relationship with customers, satisfied and loyal customers are more profitable (Johnson,
1998). This predicts the last link in our framework — a relationship from customer
satisfaction to business results.
We expect internal quality processes related to process and customer orientation to impact
business results largely through their impact on customers, or customer satisfaction.
L. Nilsson et al. / Journal of Quality Management 6 (2001) 5–27 11
Customizing a product to meet or exceed the needs of a heterogeneous population of
customers increases customer satisfaction, which in turn increases profitability. The core
processes within our process orientation construct are those that support an organization’s
customer orientation.
Finally, we posit a direct effect of employee management on business results. This is
consistent with prior research that posits a direct relationship between job satisfaction and
company performance (Iaffaldano & Muchinsky, 1985). This effect captures a variety of
factors that include, but are not limited to, increases in employee learning and
competence, employee productivity and teamwork, and increased commitment and loyalty
(decreased turnover).
3.1. Research hypotheses
As argued, services have several unique qualities relative to products (i.e., physical goods).
Services are more intangible than products, making them hard if not impossible to count,
measure, inventory, and test (Gro¨nroos, 1990; Parasuraman et al., 1985). This also makes it
difficult for customers to understand service quality and, as a result, difficult for firms to
understand how consumers perceive and evaluate a service (Zeithaml et al., 1990). Unlike
goods, where production and consumption are typically separated in time and place, services
are co-produced at a time and place of the customer’s choosing (Parasuraman et al., 1985).
The inseparability of production and consumption for services means that service reliability is
more outside the control of the firm. As a co-production process, services involve more of the
human resources of the firm and customers themselves (Gro¨nroos, 1990). There is simply a
higher ratio of people to inanimate objects in the ‘‘service factory.’’ As a result, services
exhibit higher variances that cannot be directly controlled by the service process (Bateson &
Hoffman, 1999).
These differences between services and products are hypothesized to affect the impact that
our different internal quality constructs have on customer satisfaction and business results.
We focus on four particular relationships: (1) the effect of process orientation on customer
satisfaction, (2) the effect of customer orientation on customer satisfaction, (3) the effect of
customer satisfaction on business results, and (4) the effect of employee management on
business results. We do not expect product and service firms to differ in how the internal
quality constructs affect each other. For products and services alike, effective employee
management and satisfaction are needed to support process and customer orientation
(Hackman & Wageman, 1995). Organizations working actively with employee management
as the main building block in their quality strategy are in a better position to succeed with the
implementation of their quality practices. Thus, we do not expect products and services to
differ in the degree to which employee management impacts either process orientation or
customer orientation.
Now consider the effect of process orientation on customer satisfaction. Many services are
not thoroughly tested prior to market introduction (Edvardsson, Gustafsson, Johnson, &
Sande´n, 2000). Consequently, the failure rate of services is high and there is a substantial
variation in service delivery (Frei et al., 1999). Unlike products, where assembly plant
L. Nilsson et al. / Journal of Quality Management 6 (2001) 5–27 12
managers are likely to carefully map out process details and rigorously adhere to the process
maps, services are not subject to the same process discipline resulting in greater variation in
the process (Frei et al., 1999). Importantly, the production process is more visible to service
customers than to product customers. As captured in Langeard and Englier’s ‘‘servuction’’
model (see Bateson & Hoffman, 1999), service firms and the service production process can
be divided in two parts — one that is visible to the consumer and a second that is invisible
(the ‘‘technical core’’).
Because the production process is visible to service customers — indeed they are part of
the process — process orientation should have a significant direct impact on customer
satisfaction with services. In contrast, the more invisible nature of product production implies
that the effect of process orientation on customer satisfaction with products is more likely to
be mediated by customer orientation. That is, a process orientation creates a framework by
which a customer orientation can be operationalized or built upon. As a result, the direct
effect of process orientation on satisfaction should be lower, if not insignificant, for products.
An implication of this logic is that customer orientation should have a greater impact on
customer satisfaction for products compared to services. As typified by methods such as
Quality Function Deployment (QFD), the translation from customer satisfaction back into its
means of accomplishment is more of a chain-like series of events for products (Akao, 1990).
Satisfying customers requires the identification of customers’ needs (customer orientation)
and translation of these needs into key process activities (process orientation) and people
(employee management). In contrast, service customers are more directly intimate with and
affected by a service organization’s downstream processes (Dube`, Johnson, & Renagham,
1999). We thus predict that while process orientation has the greater direct impact on service
satisfaction, customer orientation has the greater direct impact on product satisfaction.
Next we expect customer satisfaction to have a greater impact on business results for
services versus products. For one, this prediction is consistent with prior research that
finds the overall effect of satisfaction on performance to be greater for services
(Edvardsson, Johnson, et al., 2000). Satisfaction is profitable because of its ability to
maintain or increase revenues and increase margins. Because product firms have an
incentive to buy loyalty (move inventory using price mechanisms), satisfaction is less
profitable for products on average. Another argument is that the satisfaction–performance
logic depends on the regularity of the purchase–consumption–repurchase cycle. For many
services, this is a regular and often-repeated cycle (such as paying the bills, gas station
services, etc.). While the same is true for many nondurable products (such as food
products), this is not the case for major durable products (such as computers and
automobiles). Therefore, we propose that customer satisfaction has a larger direct impact
on business results for services than for products.
Finally, as argued previously, we expect employee management to have a greater direct
impact on business results for service organizations. Because service organizations are
relatively labor-intensive (versus physical plant-intensive), the impact from employee
management to business results should be greater for service organizations. Recall that this
effect captures such factors as employee learning, competence, productivity, teamwork, and
commitment (decreased turnover).
L. Nilsson et al. / Journal of Quality Management 6 (2001) 5–27 13
We state these predictions formally as Hypotheses 1–4.
Hypothesis 1: Process orientation has a greater positive impact on customer satisfaction
for service organizations than for product organizations.
Hypothesis 2: Customer orientation has a greater positive impact on customer satisfaction
for product organizations than for service organizations.
Hypothesis 3: Customer satisfaction has a greater positive impact on business results for
service organizations than for product organizations.
Hypothesis 4: Employee management has a greater positive impact on business results
for service organizations than for product organizations.
4. Empirical study
The hypotheses are tested using data from the Swedish Business Excellence Index, which
is patterned after the Danish Business Excellence Index (Kristensen & Juhl, 2000).
4.1. Models and data
Because quality management is a potentially unified business strategy, many of the
quality practices used in organizations are strongly correlated with one another. As a
result, multicollinearity can obscure the relationships between practices and performance
(Dow et al., 1999). Structural Equation Modeling is well suited to handling such
situations. We use partial least squares (PLS), a causal modeling method that is
particularly well suited to operationalizing quality-related models such as that in Fig. 1
(Gustafsson & Johnson, 1998). PLS is an estimation procedure that integrates aspects of
principal components analysis with multiple regression (Wold, 1982). The procedure
essentially extracts the first principal component from each subset of measures for the
various latent variables and uses these principal components within a system of regression
models. The algorithm then adjusts the principal component weights to maximize the
predictive power of the model.
To test our hypotheses, two separate versions of the model in Fig. 1 were estimated —
one for product organizations and one for service organizations. All constructs were
modeled using reflective indicators (i.e., the indicators are created under the perspective
that they all reflect the same underlying phenomenon; Chin, 1998). To evaluate the
significance of the paths in the two models, jackknife estimates were generated (Chin,
1998). The general approach of jackknifing is to delete every nth case or observation,
estimate the model parameters, and repeat this sample–resample procedure to generate a set
of standard errors for the model parameters (Efron & Tibshirani 1993; Hjorth, 1994).
Simple t statistics are then computed to determine whether the parameters are different from
zero and different from model to model. Following Tukey’s guidelines (see Fornell &
L. Nilsson et al. / Journal of Quality Management 6 (2001) 5–27 14
Barclay, 1993), 5% of the sample was removed during the re-sampling procedure, resulting
in 20 subsamples per model.
4.2. Survey instrument
The survey instrument was a four-page mail survey sent to the CEO in different
Swedish organizations in the competitive sector during November 1999. The survey
instrument was developed following the EFQM Excellence model and included 51 items.
Each item was scored on a 10-point scale ranging from ‘‘completely disagree’’ to
‘‘completely agree’’ (except for a section containing background variables for categorizing
the organization). For the purpose of this study, 17 items were used to operationalize the
latent constructs; 11 for the three internal quality constructs and 6 for the two
performance constructs (see Table 1).
Table 1
Construct measures
Constructs Description of measures
Employee management
EM
1
The competence of the employees is maintained and developed in a systematic way.
EM
2
The employees participate systematically in the development of the business.
EM
3
The factors that have a positive impact on employee satisfaction are defined.
EM
4
There are systematic goals for employee satisfaction, loyalty, turnover, and absence.
EM
5
Employee satisfaction is analyzed and the results are the target of
continuous improvement.
Process orientation
PO
1
Core processes are identified and documented.
PO
2
The core processes are measured and evaluated.
PO
3
Co-workers are continuously stimulated and motivated to participate
in development and improvement of the core processes.
Customer orientation
CO
1
The factors creating customer satisfaction are clearly defined.
CO
2
There are systematic goals for customer satisfaction, loyalty, and complaints.
CO
3
Analysis of customer satisfaction is made and the results are followed
by continuous improvements.
Customer satisfaction
CS
1
During the last years, customer satisfaction has increased.
CS
2
During the last years, customer complaints have decreased.
Business results
BR
1
During the last years, the business result has improved.
BR
2
During the last years, the effectiveness of the organization has improved.
BR
3
During the last years, the use of resources has improved.
BR
4
During the last years, the business result has improved compared to other
similar businesses.
L. Nilsson et al. / Journal of Quality Management 6 (2001) 5–27 15
4.3. Firm sample
In the Swedish Business Excellence Index for 1999, 1658 organizations participated.
The response rate for this mail survey was 26%, a level that is typical for this kind of
study. An investigation of some of the organizations that choose not to participate in this
study revealed that they did not adhere to a systematic quality strategy, while other
organizations did not feel that they had time to participate in this kind of survey. The
participating organizations are categorized in five industry categories: (1) Industry,
Manufacturing, and Supply (NACE 01–44); (2) Construction (NACE 45); (3) Trade,
Transportation, and Communication (NACE 50–64); (4) Bank and Insurance (NACE 65–
67); and (5) Service (NACE 70–99). The organizations in our sample are also categorized
according to size in five classes. For this research project, a subsample of organizations
suitable for the purpose of this study was chosen. Two categories were chosen: Industry
(1) and Service (5). After a validity check of the constructs
3
for quality practices, it was
decided that only organizations with more than 50 employees were to be included in the
study. In the end, 360 product and 122 service organizations were used to estimate the
product and service models, respectively.
4.4. Operationalization of the constructs
The constructs used in this research are sufficiently general as to apply to both a product
and a service context. It is arguably more appropriate to use more abstract, inclusive
dimensions when making cross-industry comparisons between relatively ‘‘noncomparable’’
goods and services (Johnson & Fornell, 1991). And many of the proposed constructs for
quality practices have been developed only for manufacturing companies (see Ahire et al.,
1996; Samson & Terziovski, 1999). The constructs proposed by Saraph et al. (1989) are
tested and validated in both a service and product context. Unfortunately, their framework
does not include customer orientation. And while their operationalization of process
management relies heavily on the usage of statistical methodologies, our process orientation
construct focuses more on the core processes that relate to customer requirements and thus
support a firm’s customer orientation.
As shown in Table 1, employee management is operationalized as a five-item construct,
while both process and customer orientation are three-item constructs. Our constructs for
business results and customer satisfaction are measured indirectly by asking the management
of the participating organizations. Subjective measures of performance are commonly used in
research on companies and the business units of large companies (Powell, 1995). Previous
studies have found a strong correlation between subjective assessments and their objective
counterparts (Powell, 1992). In this study, we use a two-item construct to measure customer
satisfaction and a four-item construct to measure business results. However, in order to verify
3
Among organizations with fewer then 50 employees, it was not possible to separate between the two
constructs of process and customer orientation in a factor analysis. This result is consistent with the lower level of
adoption of quality practices in small organizations.
L. Nilsson et al. / Journal of Quality Management 6 (2001) 5–27 16
that our business performance results are robust, we conduct a subsequent analysis using two
objective performance measures.
4.5. Results
The proposed model was estimated using PLS across individual firms separately for
product (n = 360) and service (n = 122) organizations. We first discuss the quality of the
measurement models and then examine the latent variable model results.
The first step in assessing the measurement models involves testing the reliability of
each measured variable to ensure that the measurement variables (MVs) load meaningfully
to their related constructs. Overall, the MV loadings are all relatively large and positive.
The loadings of all MVs should exceed .707 to ensure that at least half of the variance in
the observed variable is shared with the construct (the squared correlation equals the
variance explained, where .707
2
=50%; see Hulland, 1999). The proportion of this shared
variance to the total variance of the underlying construct is called the communality of the
construct (Fornell & Cha, 1994). As can be seen in Table 2, in the model for product
organizations, all the loadings exceed the recommended threshold value, while 16 of the 17
loadings in the service model exceed the threshold value. The exception is the loading for
the fifth item in the employee management construct (loading EM
5
=.661). The research
practice is to keep the item in the analysis if the loading exceeds .5, if there are good
theoretical reasons to do so. In this case, the item is retained in the analysis in order to keep
the models directly comparable.
Table 2
Loadings for all items in the two estimated models
Indicator Products Services
EM
1
.7423 .8497
EM
2
.7228 .7817
EM
3
.8185 .8383
EM
4
.8009 .7462
EM
5
.7629 .6611
PO
1
.8596 .8854
PO
2
.8929 .9029
PO
3
.8426 .8981
CO
1
.8288 .8208
CO
2
.8972 .8670
CO
3
.8663 .8474
CS
1
.9399 .9057
CS
2
.8359 .8671
BR
1
.8278 .8408
BR
2
.8813 .8862
BR
3
.8635 .8027
BR
4
.7829 .7333
L. Nilsson et al. / Journal of Quality Management 6 (2001) 5–27 17
In addition to the reliability of the individual items or MVs, we need to study the
composite reliability of the constructs. To investigate the internal consistency for a given
block of indicators, the r coefficient developed by Werts, Linn, and Jo¨reskog can be
calculated (see Chin, 1998). To design constructs with high internal consistency, researchers
have suggested that the value of r should be greater than .70. The r coefficients for the
constructs of the two separate models are presented in Table 3. All coefficients are higher than
the proposed threshold of .70, and this supports the ability of the measures used in this
research to operationalize the various latent constructs.
To check the validity of the model, the Average Variance Extracted (AVE) is used (Fornell
& Larcker, 1981). The AVE measures the amount of variance that is captured by the
constructs in relation to the amount of variance due to measurement error (Fornell & Cha,
1994). To ensure discriminant validity of the constructs, the AVEs of the latent variables
should be greater than the square of the correlations among the latent variables (Chin, 1998).
In PLS, the correlation matrix of the latent constructs, where the diagonal elements are
replaced by the square root of the computed AVEs, is used to make this comparison. Higher
values for the diagonal elements compared to the off diagonal elements suggest good
discriminant validity. As can be seen in Table 4a and b, this is the case for both the product
and service models, which ensures that both models show good discriminant validity.
4.6. Testing the hypotheses
The two estimated models are presented in Fig. 2a and b, where the significant paths are
highlighted and the ability of the model to explain variation in the endogenous variable is
indicated for each construct. The models for product and service organizations explain 25%
and 37% of the variation in business results, respectively. Consistent with previous research,
the explanatory power is larger for the service model (Edvardsson, Johnson, et al., 2000). Of
the 14 proposed paths in the two models, 13 are significant (using adjusted t tests and
P
Research on the differences in customer satisfaction between product and service organizations has focused on an output perspective, or how customers evaluate performance. This study takes this research inside organizations to analyze and investigate how key internal quality practices of product versus service organizations.
The impact of quality practices on customer
satisfaction and business results: product
versus service organizations
Lars Nilsson
a,1
, Michael D. Johnson
b,
*, Anders Gustafsson
c,2
a
Linko¨ping University, Quality and Human-Systems Engineering, SE-581 83, Linko¨ping, Sweden
b
University of Michigan Business School, 701 Tappan Street, Ann Arbor, MI 48109-1234, USA
c
Service Research Center, Karlstad University, Karlstad SE-651 88, Sweden
Received 1 March 2001; received in revised form 1 May 2001; accepted 1 June 2001
Abstract
Research on the differences in customer satisfaction between product and service organizations has
focused on an output perspective, or how customers evaluate performance. This study takes this
research inside organizations to analyze and investigate how key internal quality practices of product
versus service organizations (employee management, process orientation, and customer orientation)
influence customer satisfaction and business results. Using a national quality survey from 482
companies in Sweden, our analysis shows that for product organizations, internal quality practices
influence customer satisfaction and business results primarily through an organization’s customer
orientation. For service organizations, both customer and process orientation impact customers
directly, and employee management has a direct impact on business results. The research also supports
the claim that organizations with a quality foundation are in a better position to adopt a customer
orientation. D 2001 Elsevier Science Inc. All rights reserved.
Keywords: Quality practices; Customer orientation; Customer satisfaction
1084-8568/01/$ – see front matter D 2001 Elsevier Science Inc. All rights reserved.
PII: S1084- 8568( 01) 00026- 8
* Corresponding author. Tel.: +1-734-764-1259; fax: +1-734-936-0274.
E-mail addresses: [email protected] (L. Nilsson), [email protected] (M.D. Johnson), anders.gustafsson@
kau.se (A. Gustafsson).
1
Tel.: + 46-13-28-16-51; fax: + 46-13-28-27-42.
2
Tel.: + 46-54-700-1556; fax: + 46-54-836-552.
www.journalofqualitymanagement.com
Journal of Quality Management
6 (2001) 5–27
1. Introduction
A growing number of organizations use quality management as a strategic foundation for
generating a competitive advantage (Reed, Lemak, & Mero, 2000) and improving firm
performance (Hendricks & Singhal, 1997; Lemak & Reed, 1997; Samson & Terziovski,
1999). Firms that have won quality awards generally outperform other firms with respect to
both income measures (Hendricks & Singhal, 1997) and stock market value (Lemak & Reed,
1997). It is no surprise that the links among market orientation, quality practices, and
performance have attracted the attention of marketing and operations management researchers
alike (Ettlie & Johnson, 1994; Flynn, Schroeder, & Sakakibara, 1994; Kohli & Jaworski,
1990; Narver & Slater, 1990; Samson & Terziovski, 1999).
Quality practices have been shown to enhance organizational performance for both
product and service organizations (Powell, 1995). However, there is relatively little research
on how product versus service companies differ with respect to the impact of quality
practices on performance. We know little about how these two different types of
organizations view what they do, how well they do it, and its consequences. Rather, the
growing body of research on products versus services has focused on external customer
perceptions of quality and satisfaction rather than organizational knowledge of quality
practices (Anderson, Fornell, & Rust, 1997; Edvardsson, Johnson, Gustafsson, & Strandvik,
2000; Fornell & Johnson, 1993; Fornell, Johnson, Anderson, Cha, & Bryant, 1996; Huff,
Fornell, & Anderson, 1996).
The goal of this research is to examine three key internal quality practices —
employee management, process orientation, and customer orientation — and their role in
creating customer satisfaction and business results. We examine the similarity and
differences in the effects of these practices across a large sample of product and service
organizations. One of the important questions raised in our study is: Does an
organization’s process orientation directly impact customer satisfaction? For service
firms, we expect this to be the case. But for product firms, we expect one’s process
orientation to support a customer orientation or focus, which in turn impacts customer
satisfaction. Another important question addressed here is: Given the critical importance
of employee management in service firms, does employee management have a greater
impact on performance for these firms? The answers to these and related questions are
critically important for quality managers and executives who allocate resources across
quality practices in their organizations.
We first examine the differences between products and services and present our
framework for linking quality practices to performance. We then provide theoretical
arguments and evidence as to how these links differ. We use a broad-based survey of
482 Swedish companies (product and service firms) to investigate the effects of the quality
practices. While our results show that product and service firms are similar in how quality
practices support each other, they also support systematic and predictable differences in the
effects of these quality practices on customer satisfaction and business performance. The
paper ends with a discussion of the implications of our results for quality management
research and practice.
L. Nilsson et al. / Journal of Quality Management 6 (2001) 5–27 6
2. Product versus service quality
Service quality researchers argue that service quality and product quality are systematically
different due to the inherent intangibility, inseparability of production and consumption,
heterogeneity, and perishability that characterize services (Zeithaml, Parasuraman, & Berry,
1990). Mills and Moberg (1982) categorize the differences between products and services as
relating to differences in output and differences in process. Research in marketing has
adopted an output perspective, or how customers evaluate the quality of a product or a
service. Research in quality and operations management has taken more of a process
perspective, or how an organization can work to improve the quality of a product or service.
It is important, however, to understand how the output perspective relates to the internal
process perspective, or its means of accomplishment within organizations. The following
sections briefly review research on the output and process perspectives.
2.1. An output perspective
Quality experts distinguish between two general types of output quality — the degree to
which a good or service provides key customer requirements, or customization, and how
reliably these requirements are delivered, or reliability (Deming, 1981; Juran & Gryna, 1988).
Ishikawa and Lu (1985) make a similar argument when they separate quality into ‘‘backward-
looking’’ and ‘‘forward-looking’’ components. Defects and flaws in quality are called
backward-looking quality, while forward-looking quality is characteristics that can become
a product’s sales point. Oakland (1993) distinguishes between similar components, referring
to ‘‘quality’’ as the meeting of customer requirements, and ‘‘reliability’’ as the ability of a
product to continue to meet the customer requirements.
Scholars in the service management tradition argue that the co-production process that
typifies services makes reliability the more important quality dimension (Gro¨nroos, 1990;
Zeithaml, Parasuraman, & Berry, 1996). Unlike goods, services are co-produced with
customers at a time, and in a place, of the customer’s choosing. And because service
production involves more of the human resources of the firm and customers themselves, it
adds greater inherent variability to the service production process. Thus, reliability should
be relatively more important to maintain and improve. Initial support for the importance
of service reliability in the service quality literature comes from studies using the
SERVQUAL survey methodology (Parasuraman, Zeithaml, & Berry, 1985, 1988). In
their review of the SERVQUAL research, Zeithaml et al. (1990) note that reliability is
consistently the most important service quality dimension, or largest ‘‘gap,’’ to improve
across service industries.
Others argue that the same co-production process makes customization relatively more
important in determining customer satisfaction for services (Anderson et al., 1997; Fornell et
al., 1996). Because many services are personnel-intensive and customized to suit very
heterogeneous needs, customization is more important for services than for manufactured
goods. However, a recent study by Johnson and Nilsson (2000) is more consistent with
Parasuraman et al.’s research by showing that customization is significantly more important
L. Nilsson et al. / Journal of Quality Management 6 (2001) 5–27 7
for products, while reliability and customization are more equally important for services.
Thus, the output-based research, on the whole, suggests that improving reliability is relatively
more important for services than for products.
Edvardsson, Johnson, et al. (2000) also provide evidence of systematic differences
between products and services when it comes to the links from satisfaction to loyalty and
financial performance. Using Swedish data, they show that the links from satisfaction, to
loyalty, to profits and growth are stronger for services than for products. In particular, the
links from loyalty per se to business performance are weaker for physical goods. This is
attributed to the argument that, because physical goods are inventoried for sale, loyalty is
more likely to be bought for products (using coupons or price incentives) as a means of
moving inventory, which lowers margins. In contrast, loyalty is more likely to be earned, and
thus more profitable, for service companies. Research using customer impressions also
provides evidence that customer satisfaction is a leading indicator of financial performance.
The national customer satisfaction indices in both the US (Ittner & Larcker, 1996) and
Sweden (Anderson, Fornell, & Lehmann, 1994) are significant and positively related to the
firms’ financial performance.
2.2. A process perspective
Quality practices are usually presented as a universal concept, applicable in all contexts
and having a large impact on business performance. There is a substantial body of empirical
research that provides support for the notion that quality management and practices improve
firm performance (see Hendricks & Singhal, 1997; Lemak & Reed, 1997; Samson &
Terziovski, 1999). The most well-known study of quality practice is the International Quality
Study (1992) conducted by Ernst Young and the American Quality Foundation. This study
provides evidence that quality management has the highest impact on performance in firms
that already perform well (International Quality Study, 1992). Hendricks & Singhal (1997,
2001) focus their research on quality award winners. They find that many different
organizational characteristics impact the benefits of quality practice. Examples of such
organizational characteristic are firm size and the degree of capital intensity. Lemak and
Reed (1997) investigate the impact of quality practice on performance in organizations that
had been committed to quality management for a 5-year period. Their results indicate that a
firm’s market valuation increases significantly after its implementation of quality manage-
ment. Overall, although there are a number of studies that have investigated the impact of
quality practices on performance, these studies do not explicitly provide empirical evidence
on the differences between service and product firms.
Within marketing, Kohli and Jaworski (1990) and Narver and Slater (1990) explore the
impact of a market orientation on different organizational performance measures. One
consistent finding is that being market-oriented does improve organizational performance
for large and small firms, as well as for both product and service organizations (Wrenn,
1997). A review of the research on market orientation by Wrenn (1997) reveals that, even
though this research has been conducted both in product and service environments, no
thorough investigation has been made of how the effect differs between them.
L. Nilsson et al. / Journal of Quality Management 6 (2001) 5–27 8
Indeed, the contrasting of product and service firms is important toward our ability to
reconcile differences across studies in the literature. The relationship between market
orientation and customer satisfaction has not been very systematic. While, for example,
McCullough, Heng, & Khem (1986) found them to be positively related in a bank
environment, this finding has not been validated across industries (Wrenn, 1997).
Within operations management, a number of studies have investigated the relationship
between quality practices and performance. Most of these studies develop measurement
instruments and conduct their investigations in a manufacturing environment (Ahire, Golhar,
& Waller, 1996; Flynn et al., 1994). These studies suggest that different quality practices act
in synergy to influence product quality (Ahire et al., 1996). Dow, Samson, and Ford (1999)
test the impact of nine quality practices on quality output in a manufacturing environment.
Only three of these practices show a significantly positive impact on performance —
customer focus being the most important one.
All of the studies mentioned examine the effect of quality practice on performance
within a manufacturing environment. In contrast, studies by Powell (1995), Benson,
Saraph, and Schroeder (1991), and Saraph, Benson, and Schroeder (1989) develop
instruments for measuring quality practices in both a product and service environment.
Saraph, Benson, and Schroeder do not investigate the differences of the effect of quality
practice on performance, but rather how quality practices are influenced by the
organizational context, such as corporate support for quality and past quality perform-
ance. They conclude that the main difference is that service firms do not have any
external contextual factors (such as entry barriers and degree of external quality demand)
that influence quality practice, while this is evident for product firms. One of the
limitations of this research is that they exclude customer orientation or focus from their
operationalization of quality practices, which we include. Powell investigates the
correlation among 12 factors of total quality management and financial performance.
The study concludes that there are differences between service and products organiza-
tions. For example, supplier relationships are vital for a product organization, while
process improvements are more important for a service organization. Yet the number of
organizations in Powell’s study is limited to 24 product and 15 service organizations. By
contrasting a much broader range of product and service firms, we hope to better
understand how and why the importance of certain quality practices varies by industry
and context.
3. A framework for linking quality practices to performance
A quality concept is essentially a business philosophy, a company ideal, or a policy
statement. The business philosophy can be contrasted with its implementation reflected in the
activities and behaviors of an organization. Focusing on behaviors rather than philosophical
notions makes it easier to operationalize the different quality constructs. This is an important
step as it helps to translate concepts into actions and thereby provide a better differentiation
between different organizations.
L. Nilsson et al. / Journal of Quality Management 6 (2001) 5–27 9
Our proposed framework includes five general areas or constructs to consider:
(1) employee management, (2) process orientation, (3) customer orientation, (4) customer
satisfaction, and (5) business results. The framework is presented in Fig. 1. The first three
areas are quality practices, or activities performed within an organization to improve product
and process quality. Employee management is the starting point in the model. The
presumption is that effective employee management, or having employees that are committed
and involved, is itself a requirement for both a process orientation and a customer orientation
to be effective. The other two quality practices have different starting points — one taking the
processes of the organization as the focal point and the other taking the customers as the
central focus. This distinction is similar, but not equal to the concept of customer and
operations orientation used by Reed, Lemak, and Mongomery (1996). The core processes on
which our process orientation construct focuses are those that immediately support a firm’s
customer orientation.
The remaining two constructs in our framework capture the results of quality practices —
one from the customers’ perspective in the form of customer satisfaction and the other from a
business performance perspective. Generally, the framework posits that improvements in
internal quality impact customer satisfaction and, in turn, business results.
Fig. 1. A framework for linking quality practices to performance.
L. Nilsson et al. / Journal of Quality Management 6 (2001) 5–27 10
One of the main conditions for successful quality practices is to engage everyone in the
improvement process (Bergman & Klefsjo¨, 1994). We focus on the activities taken on an
organization level, such as the measurement and improvement of employee satisfaction and
the involvement of employees in the development of the business, to capture the quality of an
organization’s employee management. The basic assumption of quality researchers is that
employee satisfaction and commitment are needed to support process and customer
orientation (Hackman & Wageman, 1995).
A process is a set of activities that, taken together, produce a result of value to a customer
(Ittner & Larcker, 1997). A process is therefore a structure for action, the structure by which
an organization does what is necessary to produce value for its customers (Davenport, 1993).
There is a wide range of process management mechanisms, from process-focused improve-
ment tools (such as process value analysis and process cycle time analysis), to the
implementation of organizational structures that are based on core business processes (Ittner
& Larcker, 1997).
Frei, Kalakota, Leone, and Marx’s (1999) study of the impact of process variation on
financial performance in financial service institutions sheds further light on the dynamics of
the impact of process orientation on customer satisfaction. They identify a lack of rigorous
policies and processes as one important factor that contributes to the substantial variation in
service delivery. An improvement in processes can reduce the apparent variation in the
process, and can have an indirect effect on business results through increased customer
satisfaction. Overall, this suggests that while process orientation, like employee management,
supports a firm’s customer orientation, process orientation can have a direct effect on
customer satisfaction.
In marketing, a market orientation has been defined as the organization-wide generation of
market intelligence, dissemination of the intelligence across departments, and organization-
wide responsiveness to it (Kohli & Jaworski, 1990). Narver and Slater (1990) argue that a
full-blown market orientation also includes a competitor orientation. However, our focus is on
a firm’s more specific customer orientation. A customer orientation emphasizes an organ-
ization’s ability to attain customer information, analyze it to set priorities for improvement,
and use these priorities to drive product and process change (Johnson, 1998; Johnson &
Gustafsson, 2000). By gaining a better understanding of customer needs and the use of this
knowledge to design better products and services, a customer orientation should have a direct
impact on customer satisfaction.
Research that links customer satisfaction to other business measures usually defines
satisfaction as a customer’s overall evaluation of the consumption experience (Johnson,
2001). Customer satisfaction research demonstrates a positive impact of satisfaction on both
market value and accounting returns (Anderson et al., 1994; Ittner & Larcker, 1996). Because
of a ‘‘front loading’’ of customer costs and a ‘‘back loading’’ of revenues over the course of
one’s relationship with customers, satisfied and loyal customers are more profitable (Johnson,
1998). This predicts the last link in our framework — a relationship from customer
satisfaction to business results.
We expect internal quality processes related to process and customer orientation to impact
business results largely through their impact on customers, or customer satisfaction.
L. Nilsson et al. / Journal of Quality Management 6 (2001) 5–27 11
Customizing a product to meet or exceed the needs of a heterogeneous population of
customers increases customer satisfaction, which in turn increases profitability. The core
processes within our process orientation construct are those that support an organization’s
customer orientation.
Finally, we posit a direct effect of employee management on business results. This is
consistent with prior research that posits a direct relationship between job satisfaction and
company performance (Iaffaldano & Muchinsky, 1985). This effect captures a variety of
factors that include, but are not limited to, increases in employee learning and
competence, employee productivity and teamwork, and increased commitment and loyalty
(decreased turnover).
3.1. Research hypotheses
As argued, services have several unique qualities relative to products (i.e., physical goods).
Services are more intangible than products, making them hard if not impossible to count,
measure, inventory, and test (Gro¨nroos, 1990; Parasuraman et al., 1985). This also makes it
difficult for customers to understand service quality and, as a result, difficult for firms to
understand how consumers perceive and evaluate a service (Zeithaml et al., 1990). Unlike
goods, where production and consumption are typically separated in time and place, services
are co-produced at a time and place of the customer’s choosing (Parasuraman et al., 1985).
The inseparability of production and consumption for services means that service reliability is
more outside the control of the firm. As a co-production process, services involve more of the
human resources of the firm and customers themselves (Gro¨nroos, 1990). There is simply a
higher ratio of people to inanimate objects in the ‘‘service factory.’’ As a result, services
exhibit higher variances that cannot be directly controlled by the service process (Bateson &
Hoffman, 1999).
These differences between services and products are hypothesized to affect the impact that
our different internal quality constructs have on customer satisfaction and business results.
We focus on four particular relationships: (1) the effect of process orientation on customer
satisfaction, (2) the effect of customer orientation on customer satisfaction, (3) the effect of
customer satisfaction on business results, and (4) the effect of employee management on
business results. We do not expect product and service firms to differ in how the internal
quality constructs affect each other. For products and services alike, effective employee
management and satisfaction are needed to support process and customer orientation
(Hackman & Wageman, 1995). Organizations working actively with employee management
as the main building block in their quality strategy are in a better position to succeed with the
implementation of their quality practices. Thus, we do not expect products and services to
differ in the degree to which employee management impacts either process orientation or
customer orientation.
Now consider the effect of process orientation on customer satisfaction. Many services are
not thoroughly tested prior to market introduction (Edvardsson, Gustafsson, Johnson, &
Sande´n, 2000). Consequently, the failure rate of services is high and there is a substantial
variation in service delivery (Frei et al., 1999). Unlike products, where assembly plant
L. Nilsson et al. / Journal of Quality Management 6 (2001) 5–27 12
managers are likely to carefully map out process details and rigorously adhere to the process
maps, services are not subject to the same process discipline resulting in greater variation in
the process (Frei et al., 1999). Importantly, the production process is more visible to service
customers than to product customers. As captured in Langeard and Englier’s ‘‘servuction’’
model (see Bateson & Hoffman, 1999), service firms and the service production process can
be divided in two parts — one that is visible to the consumer and a second that is invisible
(the ‘‘technical core’’).
Because the production process is visible to service customers — indeed they are part of
the process — process orientation should have a significant direct impact on customer
satisfaction with services. In contrast, the more invisible nature of product production implies
that the effect of process orientation on customer satisfaction with products is more likely to
be mediated by customer orientation. That is, a process orientation creates a framework by
which a customer orientation can be operationalized or built upon. As a result, the direct
effect of process orientation on satisfaction should be lower, if not insignificant, for products.
An implication of this logic is that customer orientation should have a greater impact on
customer satisfaction for products compared to services. As typified by methods such as
Quality Function Deployment (QFD), the translation from customer satisfaction back into its
means of accomplishment is more of a chain-like series of events for products (Akao, 1990).
Satisfying customers requires the identification of customers’ needs (customer orientation)
and translation of these needs into key process activities (process orientation) and people
(employee management). In contrast, service customers are more directly intimate with and
affected by a service organization’s downstream processes (Dube`, Johnson, & Renagham,
1999). We thus predict that while process orientation has the greater direct impact on service
satisfaction, customer orientation has the greater direct impact on product satisfaction.
Next we expect customer satisfaction to have a greater impact on business results for
services versus products. For one, this prediction is consistent with prior research that
finds the overall effect of satisfaction on performance to be greater for services
(Edvardsson, Johnson, et al., 2000). Satisfaction is profitable because of its ability to
maintain or increase revenues and increase margins. Because product firms have an
incentive to buy loyalty (move inventory using price mechanisms), satisfaction is less
profitable for products on average. Another argument is that the satisfaction–performance
logic depends on the regularity of the purchase–consumption–repurchase cycle. For many
services, this is a regular and often-repeated cycle (such as paying the bills, gas station
services, etc.). While the same is true for many nondurable products (such as food
products), this is not the case for major durable products (such as computers and
automobiles). Therefore, we propose that customer satisfaction has a larger direct impact
on business results for services than for products.
Finally, as argued previously, we expect employee management to have a greater direct
impact on business results for service organizations. Because service organizations are
relatively labor-intensive (versus physical plant-intensive), the impact from employee
management to business results should be greater for service organizations. Recall that this
effect captures such factors as employee learning, competence, productivity, teamwork, and
commitment (decreased turnover).
L. Nilsson et al. / Journal of Quality Management 6 (2001) 5–27 13
We state these predictions formally as Hypotheses 1–4.
Hypothesis 1: Process orientation has a greater positive impact on customer satisfaction
for service organizations than for product organizations.
Hypothesis 2: Customer orientation has a greater positive impact on customer satisfaction
for product organizations than for service organizations.
Hypothesis 3: Customer satisfaction has a greater positive impact on business results for
service organizations than for product organizations.
Hypothesis 4: Employee management has a greater positive impact on business results
for service organizations than for product organizations.
4. Empirical study
The hypotheses are tested using data from the Swedish Business Excellence Index, which
is patterned after the Danish Business Excellence Index (Kristensen & Juhl, 2000).
4.1. Models and data
Because quality management is a potentially unified business strategy, many of the
quality practices used in organizations are strongly correlated with one another. As a
result, multicollinearity can obscure the relationships between practices and performance
(Dow et al., 1999). Structural Equation Modeling is well suited to handling such
situations. We use partial least squares (PLS), a causal modeling method that is
particularly well suited to operationalizing quality-related models such as that in Fig. 1
(Gustafsson & Johnson, 1998). PLS is an estimation procedure that integrates aspects of
principal components analysis with multiple regression (Wold, 1982). The procedure
essentially extracts the first principal component from each subset of measures for the
various latent variables and uses these principal components within a system of regression
models. The algorithm then adjusts the principal component weights to maximize the
predictive power of the model.
To test our hypotheses, two separate versions of the model in Fig. 1 were estimated —
one for product organizations and one for service organizations. All constructs were
modeled using reflective indicators (i.e., the indicators are created under the perspective
that they all reflect the same underlying phenomenon; Chin, 1998). To evaluate the
significance of the paths in the two models, jackknife estimates were generated (Chin,
1998). The general approach of jackknifing is to delete every nth case or observation,
estimate the model parameters, and repeat this sample–resample procedure to generate a set
of standard errors for the model parameters (Efron & Tibshirani 1993; Hjorth, 1994).
Simple t statistics are then computed to determine whether the parameters are different from
zero and different from model to model. Following Tukey’s guidelines (see Fornell &
L. Nilsson et al. / Journal of Quality Management 6 (2001) 5–27 14
Barclay, 1993), 5% of the sample was removed during the re-sampling procedure, resulting
in 20 subsamples per model.
4.2. Survey instrument
The survey instrument was a four-page mail survey sent to the CEO in different
Swedish organizations in the competitive sector during November 1999. The survey
instrument was developed following the EFQM Excellence model and included 51 items.
Each item was scored on a 10-point scale ranging from ‘‘completely disagree’’ to
‘‘completely agree’’ (except for a section containing background variables for categorizing
the organization). For the purpose of this study, 17 items were used to operationalize the
latent constructs; 11 for the three internal quality constructs and 6 for the two
performance constructs (see Table 1).
Table 1
Construct measures
Constructs Description of measures
Employee management
EM
1
The competence of the employees is maintained and developed in a systematic way.
EM
2
The employees participate systematically in the development of the business.
EM
3
The factors that have a positive impact on employee satisfaction are defined.
EM
4
There are systematic goals for employee satisfaction, loyalty, turnover, and absence.
EM
5
Employee satisfaction is analyzed and the results are the target of
continuous improvement.
Process orientation
PO
1
Core processes are identified and documented.
PO
2
The core processes are measured and evaluated.
PO
3
Co-workers are continuously stimulated and motivated to participate
in development and improvement of the core processes.
Customer orientation
CO
1
The factors creating customer satisfaction are clearly defined.
CO
2
There are systematic goals for customer satisfaction, loyalty, and complaints.
CO
3
Analysis of customer satisfaction is made and the results are followed
by continuous improvements.
Customer satisfaction
CS
1
During the last years, customer satisfaction has increased.
CS
2
During the last years, customer complaints have decreased.
Business results
BR
1
During the last years, the business result has improved.
BR
2
During the last years, the effectiveness of the organization has improved.
BR
3
During the last years, the use of resources has improved.
BR
4
During the last years, the business result has improved compared to other
similar businesses.
L. Nilsson et al. / Journal of Quality Management 6 (2001) 5–27 15
4.3. Firm sample
In the Swedish Business Excellence Index for 1999, 1658 organizations participated.
The response rate for this mail survey was 26%, a level that is typical for this kind of
study. An investigation of some of the organizations that choose not to participate in this
study revealed that they did not adhere to a systematic quality strategy, while other
organizations did not feel that they had time to participate in this kind of survey. The
participating organizations are categorized in five industry categories: (1) Industry,
Manufacturing, and Supply (NACE 01–44); (2) Construction (NACE 45); (3) Trade,
Transportation, and Communication (NACE 50–64); (4) Bank and Insurance (NACE 65–
67); and (5) Service (NACE 70–99). The organizations in our sample are also categorized
according to size in five classes. For this research project, a subsample of organizations
suitable for the purpose of this study was chosen. Two categories were chosen: Industry
(1) and Service (5). After a validity check of the constructs
3
for quality practices, it was
decided that only organizations with more than 50 employees were to be included in the
study. In the end, 360 product and 122 service organizations were used to estimate the
product and service models, respectively.
4.4. Operationalization of the constructs
The constructs used in this research are sufficiently general as to apply to both a product
and a service context. It is arguably more appropriate to use more abstract, inclusive
dimensions when making cross-industry comparisons between relatively ‘‘noncomparable’’
goods and services (Johnson & Fornell, 1991). And many of the proposed constructs for
quality practices have been developed only for manufacturing companies (see Ahire et al.,
1996; Samson & Terziovski, 1999). The constructs proposed by Saraph et al. (1989) are
tested and validated in both a service and product context. Unfortunately, their framework
does not include customer orientation. And while their operationalization of process
management relies heavily on the usage of statistical methodologies, our process orientation
construct focuses more on the core processes that relate to customer requirements and thus
support a firm’s customer orientation.
As shown in Table 1, employee management is operationalized as a five-item construct,
while both process and customer orientation are three-item constructs. Our constructs for
business results and customer satisfaction are measured indirectly by asking the management
of the participating organizations. Subjective measures of performance are commonly used in
research on companies and the business units of large companies (Powell, 1995). Previous
studies have found a strong correlation between subjective assessments and their objective
counterparts (Powell, 1992). In this study, we use a two-item construct to measure customer
satisfaction and a four-item construct to measure business results. However, in order to verify
3
Among organizations with fewer then 50 employees, it was not possible to separate between the two
constructs of process and customer orientation in a factor analysis. This result is consistent with the lower level of
adoption of quality practices in small organizations.
L. Nilsson et al. / Journal of Quality Management 6 (2001) 5–27 16
that our business performance results are robust, we conduct a subsequent analysis using two
objective performance measures.
4.5. Results
The proposed model was estimated using PLS across individual firms separately for
product (n = 360) and service (n = 122) organizations. We first discuss the quality of the
measurement models and then examine the latent variable model results.
The first step in assessing the measurement models involves testing the reliability of
each measured variable to ensure that the measurement variables (MVs) load meaningfully
to their related constructs. Overall, the MV loadings are all relatively large and positive.
The loadings of all MVs should exceed .707 to ensure that at least half of the variance in
the observed variable is shared with the construct (the squared correlation equals the
variance explained, where .707
2
=50%; see Hulland, 1999). The proportion of this shared
variance to the total variance of the underlying construct is called the communality of the
construct (Fornell & Cha, 1994). As can be seen in Table 2, in the model for product
organizations, all the loadings exceed the recommended threshold value, while 16 of the 17
loadings in the service model exceed the threshold value. The exception is the loading for
the fifth item in the employee management construct (loading EM
5
=.661). The research
practice is to keep the item in the analysis if the loading exceeds .5, if there are good
theoretical reasons to do so. In this case, the item is retained in the analysis in order to keep
the models directly comparable.
Table 2
Loadings for all items in the two estimated models
Indicator Products Services
EM
1
.7423 .8497
EM
2
.7228 .7817
EM
3
.8185 .8383
EM
4
.8009 .7462
EM
5
.7629 .6611
PO
1
.8596 .8854
PO
2
.8929 .9029
PO
3
.8426 .8981
CO
1
.8288 .8208
CO
2
.8972 .8670
CO
3
.8663 .8474
CS
1
.9399 .9057
CS
2
.8359 .8671
BR
1
.8278 .8408
BR
2
.8813 .8862
BR
3
.8635 .8027
BR
4
.7829 .7333
L. Nilsson et al. / Journal of Quality Management 6 (2001) 5–27 17
In addition to the reliability of the individual items or MVs, we need to study the
composite reliability of the constructs. To investigate the internal consistency for a given
block of indicators, the r coefficient developed by Werts, Linn, and Jo¨reskog can be
calculated (see Chin, 1998). To design constructs with high internal consistency, researchers
have suggested that the value of r should be greater than .70. The r coefficients for the
constructs of the two separate models are presented in Table 3. All coefficients are higher than
the proposed threshold of .70, and this supports the ability of the measures used in this
research to operationalize the various latent constructs.
To check the validity of the model, the Average Variance Extracted (AVE) is used (Fornell
& Larcker, 1981). The AVE measures the amount of variance that is captured by the
constructs in relation to the amount of variance due to measurement error (Fornell & Cha,
1994). To ensure discriminant validity of the constructs, the AVEs of the latent variables
should be greater than the square of the correlations among the latent variables (Chin, 1998).
In PLS, the correlation matrix of the latent constructs, where the diagonal elements are
replaced by the square root of the computed AVEs, is used to make this comparison. Higher
values for the diagonal elements compared to the off diagonal elements suggest good
discriminant validity. As can be seen in Table 4a and b, this is the case for both the product
and service models, which ensures that both models show good discriminant validity.
4.6. Testing the hypotheses
The two estimated models are presented in Fig. 2a and b, where the significant paths are
highlighted and the ability of the model to explain variation in the endogenous variable is
indicated for each construct. The models for product and service organizations explain 25%
and 37% of the variation in business results, respectively. Consistent with previous research,
the explanatory power is larger for the service model (Edvardsson, Johnson, et al., 2000). Of
the 14 proposed paths in the two models, 13 are significant (using adjusted t tests and
P