This is the Pre-Published Version.

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The following publication Yee, R. W. Y., Yeung, A. C. L., & Edwin Cheng, T. C. (2010). An empirical study of employee loyalty, service quality and
firm performance in the service industry. International Journal of Production Economics, 124(1), 109-120 is available at
https://dx.doi.org/10.1016/j.ijpe.2009.10.015.

AN EMPIRICAL STUDY OF EMPLOYEE LOYALTY, SERVICE QUALITY AND

FIRM PERFORMANCE IN THE SERVICE INDUSTRY

ABSTRACT

Taking an operational perspective on the relations between employee loyalty and

business performance, we examine the relationships among employee loyalty, service quality,

customer satisfaction, customer loyalty and firm profitability, and the contextual factors

influencing these relationships. We developed a research model grounded in the service-profit

chain notion of Heskett et al. (1994) and empirically tested the model by conducting a survey

of 210 high-contact service shops in Hong Kong. Using structural equation modeling (SEM),

we observed that employee loyalty is significantly related to service quality, which in turn

impacts customer satisfaction and customer loyalty, ultimately leading to firm profitability in

high-contact service industries. Using multiple-group analysis of SEM, we found that the effect

of employee loyalty on firm profitability through service quality, customer satisfaction and

customer loyalty is robust under different scenarios of employee-customer contact level,

market competitiveness, and switching cost in the sampled shops. This finding supports the

generalizability of the observed relationships in various operating contexts.

© 2009. This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/.
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1. INTRODUCTION

Over the years, operations management (OM) has advocated the optimization of

operational processes as an effective means to profitably deliver value to customers and meet,

or even surpass, customer expectations. Considerable research has devoted to studying such

topics as designing, managing and optimizing different service delivery systems in hopes of

attaining higher service quality and operational efficiency (e.g., Frei et al., 1999, Soteriou and

Zenios, 1999). This operational approach has been applied enthusiastically and has proved to

be an effective means towards improving organizational efficiency. On the other hand,

researchers of organizational behaviour (OB) have stressed that employee attributes are crucial

to organizational effectiveness (Schwab and Cummings, 1970, Vroom, 1964). For a long time,

the studies of OM and OB have long been viewed as distinct fields. An abundance of research

has been conducted to examine employee attributes, as well as to investigate the extent of

employee attributes influence job commitment and performance (Becker and Gerhart, 1996,

Meyer et al., 2004). Recently, OM researchers have eagerly promoted inter-disciplinary studies

by integrating various fields together (Boudreau et al., 2003), believing that inter-disciplinary

studies would yield more fruitful outcomes in both research and practice.

Pioneers of this topic, Heskett et al. (1994) proposed the service-profit chain (S-PC)

notion that highlights the importance of employee attributes to deliver high levels of service

quality to satisfy customers in order to enhance business performance. The notion has triggered

some researchers to study the impact of employee attributes and/or customer purchase

indicators on business performance in specified service contexts (e.g., Hallowell, 1996, Voss

et al., 2005). However, there is a dearth of research aimed at explicitly examining the

relationships between employee attributes and firm performance through service operations

based on a rigorous empirical study.

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Besides, only a few researchers have recognized the need to examine the moderating

factors influencing the relevant relations embedded in the S-PC in particular, and the

associations between employee attributes and operational and firm performance in general

(Anderson and Mittal, 2000, Ranaweera and Neerly, 2003, Silvestro and Cross, 2000). Jones

and Sasser (1995) and Lee et al. (2001) attempted to investigate the moderating effects of

market competitiveness and switching cost, respectively, on the association between customer

satisfaction and customer loyalty. Ranaweera and Neerly (2003) studied the moderating effects

of price perception and customer indifference on the relation between service quality and

customer retention. The recognition of the existence of moderating factors emerges from the

common knowledge that business performance is contingent upon environmental variables.

However, there is a lack of a systematic approach to seeking an understanding of precisely how

employee attributes affect service operations performance and business outcomes (Silvestro

and Cross, 2000).

In this study we explore two important research questions: (1) What are the likely

relationships among employee loyalty, service quality, customer satisfaction and customer

loyalty, as well as firm performance in high-contact service industries where there are direct

and close contacts between employees and customers? (2) How do various contextual factors,

including employee-customer contact time, market competitiveness, and switching cost,

moderate such relationships? We developed a research model grounded in the S-PC notion of

Heskett et al. (1994) and tested the model by applying structural equation modelling to the

empirical data collected from a survey of 210 high-contact service shops in Hong Kong.

2. THEORETICAL BACKGROUND AND HYPOTHESIS DEVELOPMENT

2.1 Theoretical Background

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Research on employee attributes and performance has traditionally resided in the

domain of organizational psychology, not OM. However, as operations managers are

increasingly involved in service management (Oliva and Sterman, 2001), they find employee

attributes potentially a vital factor for operational efficiency enhancement. On the other hand,

many behaviour psychologists have mainly focused on studying the relationships between

employee attributes and individual work performance (e.g., Becker et al., 1996, Hunter and

Thatcher, 2007, Meyer, Becker and Vandenberghe, 2004). Only a few organizational studies

have contributed to examining the relationships between employee attributes and operational

and firm performance (e.g., Hui et al., 2001, Sun et al., 2007). To the best of our knowledge,

the relationship between employee loyalty and operational performance has not been explicitly

examined.

Although much research in OM has been conducted to investigate the relationships

between quality, customer satisfaction and business performance (e.g., Balasubramanian et al.,

2003, Heim and Sinha, 2001, Nagar and Rajan, 2005), research on the impact of employee

attributes on operational performance is relatively scarce. In the last decade, the importance of

human resources to operational performance has been noted by a few researchers. Roth and

Jackson III (1995) revealed that organizational knowledge residing in employees is the primary

determinant of superior service quality, influencing market performance. Hays and Hill (2006)

demonstrated that service organizations with highly motivated employees would enhance the

level of service quality, customer satisfaction and loyalty.

Besides, examining the contextual factors that affect the relationships between

employee attributes and operational performance is another important and pertinent research

topic, which however has been under-researched for years. Loyal employees are presumed to

be positively correlated with high service quality in the S-PC (Heskett, Jones, Loveman, Sasser
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Jr. and Schlesinger, 1994). Nonetheless, Silvestro and Cross (2000) have identified an inverse

relationship between employee loyalty and organizational performance in the industry they

surveyed, where the interaction between employees and customers was not seen as a key driver

of service value. This suggests that the level of contact between employees and customers may

account for variations in the relationship between employee loyalty and business performance.

Chase (1981) considered the degree of customer contact to be a key dimension in classifying

service settings. This concept can help a service provider take appropriate measures to react

and customize the services it offers to its customers. Soteriou and Chase (1998) investigated

the influence of customer contact, in terms of communication time and intimacy between

employees and customers, on customers’ perceptions of the quality of the services that were

delivered. Strictly speaking, Soteriou and Chase’s (1998) study did not focus on investigating

the moderating effect of customer contact on the perception of the quality of services. However,

their study highlighted the significant impact of customer contact on customer perceptions of

the quality of an organization’s services. Based on the suggestion of Silvestro and Cross (2000),

we speculate that the contact, in particular the contact time, between employees and customers

may have a moderating effect on the link between employee loyalty and customer perception

of service quality.

The competitive environment of the service sector has been identified as a factor that

influences the link between customer satisfaction and loyalty (Jones and Sasser, 1995). In a

highly competitive market where there are many alterative products and services for customers

to select from and the cost of switching is low, customers are not loyal unless they are fully

satisfied. Conversely, in a monopolistic market, customer satisfaction seems to have very little

impact on loyalty. Jones and Sasser’s (1995) study inspired Lee et al. (2001) to examine how

switching cost affects the link between customer satisfaction and loyalty in the cell phone

market. Lee et al. (2001) postulated that the impact of switching cost on the relationship
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between customer satisfaction and loyalty is affected by market structure. Their findings

showed that switching cost plays a significant role in moderating the relationship between

customer satisfaction and loyalty. The link between customer satisfaction and loyalty is weak

for price-sensitive users. But the cost of switching does not affect customer loyalty in the group

of price-insensitive users. On the basis of Jones and Sasser’s (1995) and Lee et al.’s (2001)

studies, one may infer that market competitiveness, as reflected by the switching cost, affects

the relationship between customer satisfaction and loyalty. However, these two studies were

only limited to a particular industry and based on a small sample, so their findings may not be

generalizable to other service settings.

2.2 Development of Hypotheses

Hypotheses on main factors

Employee loyalty and service quality. The S-PC purports that employee loyalty affects

the customer’s perception of service quality (Heskett, Jones, Loveman, Sasser Jr. and

Schlesinger, 1994). Loyal employees who are satisfied with their job demonstrate their loyalty

to the employing organization by working hard and being committed to delivering services

with a high level of quality to customers. Loveman (1998) demonstrated that employee loyalty

is positively correlated with service quality.

Social exchange theory can be applied to account for the relationship between employee

loyalty and service quality. The norm of reciprocity in social exchange theory states that an

action by one party leads to a response by another party. A positive reciprocity orientation

involves the tendency to return positive treatment for positive treatment (Eisenberger et al.,

2004, Uhl-Bien and Maslyn, 2003). Furthermore, the norm of equity in social exchanges

suggests that people expect social equity to prevail in interpersonal transactions (Cropanzano

et al., 2003, Organ, 1977). An individual accorded some manner of a social gift that is
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inequitably in excess of what is anticipated will experience gratitude and feel an obligation to

reciprocate the benefactor. In the context of the social exchange theory, the employer is devoted

to building a relationship of long-term employment with his employees by fulfilling their needs

through offering them favourable working conditions; in return, employees will be loyal to

their employer by being committed to making extra efforts to offer services with a high level

of quality as a means of reciprocity to their employing organizations (Flynn, 2005, Wayne et

al., 1997). The employer’s willingness to build a relationship with his employees and the

employee’s commitment to delivering high-quality services are key characteristics of a social

exchange (Blau, 1964).

Drawing on the norms of reciprocity and equity of social exchange theory, we argue

that employees who are loyal to their employing organizations are prone to delivering services

of a higher level of quality. Therefore, we theorize that employee loyalty has a positive impact

on service quality. Hence,

Hypothesis 1: Employee loyalty has a positive influence on service quality.

Service quality and customer satisfaction. Yi (1990) stated that service quality is an

essential determinant of customer satisfaction. The conceptualization of the S-PC suggests that

external service value, i.e., the value of services perceived by customers, is linked with

customer satisfaction (Heskett, Jones, Loveman, Sasser Jr. and Schlesinger, 1994). The

rationale behind this is that high-quality services offered by a firm would lead to customer

satisfaction. This rationale is perceived as a common phenomenon in the service industry. In

the empirical study of Voss et al. (2005), service quality was shown to be positively related to

customer satisfaction in service organizations regardless of their being private or not-for-profit

organizations. In line with this phenomenon, we have

Hypothesis 2: Service quality has a positive influence on customer satisfaction.

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Customer satisfaction, customer loyalty and firm profitability. Customer satisfaction

has a long-term financial impact on the business (Nagar and Rajan, 2005). Previous research

has investigated the links between customer satisfaction and its various outcomes, such as

customer loyalty (Stank et al., 1999, Verhoef, 2003) and profitability (Anderson et al., 1994,

Mittal and Kamakura, 2001). Highly satisfied customers of a firm are likely to purchase more

frequently, in greater volume and buy other goods and services offered by the same service

provider (Anderson, Fornell and Lehmann, 1994, Gronholdt et al., 2000). Research in

accounting has also shown that customer satisfaction is an intangible asset and a leading

indicator of business unit revenues (Ittner and Larcker, 1998). More recently, Hays and Hill

(2006) strongly recommended that customer satisfaction and loyalty are integral to the

contribution of economic outcome.

Customer satisfaction has a positive impact on firm profitability due to a number of

reasons. First, customer satisfaction enhances customer loyalty and influences customers’

future repurchase intentions and behaviours (e.g., Stank, Goldsby and Vickery, 1999, Verhoef,

2003). When this happens, the profitability of a firm would increase (Anderson, Fornell and

Lehmann, 1994, Mittal and Kamakura, 2001). Second, highly satisfied customers are willing

to pay premium prices and less price-sensitive (Anderson, Fornell and Lehmann, 1994). This

implies customers tend to pay for the benefits they receive and be tolerant of increases in price,

ultimately increasing the economic performance of the firm. The last premise is that satisfaction

results in enhanced overall reputation of the firm, which in turn can be beneficial to establishing

and maintaining relationships with key suppliers and distributors (Anderson, Fornell and

Lehmann, 1994). Reputation can provide a halo effect on the firm that positively influences

customer evaluation. This discussion suggests that customer satisfaction generates more future

sales, reduces price elasticity, and increases the reputation of the firm. Thus, we hypothesize

that
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Hypothesis 3: Customer satisfaction has a positive influence on customer loyalty.

Hypothesis 4: Customer loyalty has a positive influence on firm profitability.

Hypotheses on potential moderating factors

The preceding discussion is concerned with developing hypothesized relationships

between employee loyalty, service quality, and service performance indicators, based on the

OM and OB literature. Another, relatively scarce, stream of work is the investigation of the

potential moderating effects on the hypothesized relationships. Not the dominant area of

research, this has attracted little attention (e.g., Ranaweera and Neerly, 2003, Silvestro and

Cross, 2000). In keeping with this trend, we examine the influence of employee-customer

contact time, market competitiveness, and switching cost as moderators of the postulated

relationships among employee loyalty, service quality, customer satisfaction and customer

loyalty, and firm profitability.

Employee-customer contact time: Up to this juncture, we have considered the service

context between employees and customers to be a relatively fixed phenomenon in

organizations as the prevailing condition that exists. However, Chase (1981) attempted to

classify service organizations into forms that are pure services, mixed services, or quasi-

manufacturing. Soteriou and Chase (1998) and Kellogg and Chase (1995) further advocated

the defining characteristic of a service context to be the existence of some form of contact

between employees and customers. The time spent for the contact between employees and

customers is recognized as a key dimension to operationalize customer contact (Kellogg and

Chase, 1995, Soteriou and Chase, 1998). It varies with various factors, including the servers,

the service and the environment (Kellogg and Chase, 1995). Thus, we argue that a more

realistic portrayal of the contact between employees and customers is to identify the service

environment according to the contact time between employees and customers in the service
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delivery process. Contact time reflects the interaction between a service employee and a

customer regarding the transaction in which they are engaged.

The contact time might moderate the relationship between employee loyalty and service

quality. When a service sector is characterized by high customer contact, the service context is

most potent, and thus the loyal employees would be more capable of having a greater control

of the level of quality in the services they offer. The longer the time a loyal service employee

interacts with a customer, the more time there will be for the customer to express his/her needs

to the loyal service employee, the easier the loyal service employee will understand and react

to the customer’s needs, and consequently the higher the quality of service the loyal service

employee will deliver to the customer. Hence, we suggest the following hypothesis

Hypothesis 5: The contact time between service employees and customers moderates the
relationship between employee loyalty and service quality in such a way that
the greater the contact time, the stronger the relationship.

Market competitiveness: The theories that provide the foundation for the relationship

between customer satisfaction and customer loyalty are useful for determining how customer

satisfaction influences loyalty in a monopoly or competitive market (Jones and Sasser, 1995).

Nevertheless, given the potentially negative repercussions of switching intention and behaviour

encouraged by competitors who offer a greater variety of products and services with better

quality, service firms typically have a strong interest in preventing such an intention and action,

even if switching is explicitly or implicitly encouraged in the market. For example, a service

organization may prevent its customers from forming the intention to switch and act on this

intention by delivering services of a high level of quality to satisfy customers’ needs and

introduce loyalty programs to retain customers. But competitors in the market are eager to

encourage switching by offering more products and better quality in services to customers. This
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contrast presents an interesting dilemma: if the market encourages switching, but a service firm

discourages this, will the customer respond by switching?

We expect that a service firm’s ability to retain customers will depend on how it

satisfies its customers and encourages its customers to make repeat purchases. Conditions that

diminish the level of customer satisfaction and/or enhance the switching intent and action of

customers would certainly weaken the firm’s influence on the customers’ decisions to make

repeated purchases. A competitive market often strengthens the switching intention and

behaviour of customers by making available to them a wider variety of products and services

of a higher level of quality to satisfy them. This, in turn, affects customers’ intentions to make

and behaviours of making repeated purchases and, ultimately, has an impact on their loyalty

towards the service provider. We consider that a firm’s influence on customers is limited by

market competitiveness. We suggest that market competitiveness would have a moderating

effect on the relationship between customer satisfaction and loyalty as postulated in the

hypothesis below.

Hypothesis 6: Market competitiveness moderates the relationship between customer

satisfaction and customer loyalty in such a way that the higher the market
competitiveness, the weaker the relationship.

Switching cost: Switching cost is regarded as the costs that a customer has to pay during

the process of switching from one service firm to another. Compared with a customer who

perceives a low cost to be paid for switching, the customer who perceives a high switching cost

is likely to be loyal to his/her current service firm. This customer is, therefore, more likely to

make repurchases from his/her present service firm. The higher a customer perceives the

switching cost, the more likely that the customer has to consider repurchases from his/her

current service firm. Hence, we consider that switching cost would have a moderating effect
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on the relationship between customer satisfaction and customer loyalty, as stated in the

following hypothesis:

Hypothesis 7: Switching cost moderates the relationship between customer satisfaction

and customer loyalty in such a way that the greater the switching cost, the
stronger the relationship.

3. METHODOLOGY

3.1 Sample

This study focuses on the high-contact service industries in Hong Kong. High-contact

service industries typically involve activities in which service employees and customers have

close and direct interaction for a prolonged period (Chase, 1981). A high contact environment

of services is characterized by long communication time, intimacy of communications and

richness of information exchanged (Kellogg and Chase, 1995). Through high contacts, service

employees and customers have ample opportunities to build up their ties and exchange

information about purchase. This enhances the ability of service employees to deliver a higher

level of service quality to satisfy and retain customers, contributing to firm performance.

Researchers have argued that loyal employees are more committed to serving customers (e.g.,

Loveman, 1998, Silvestro and Cross, 2000, Yoon and Suh, 2003). In line with the above

arguments, loyal employees in a high-contact environment are more likely to have greater

influence on service quality, customer satisfaction and customer loyalty, and firm performance.

Thus, organizations in high-contact service sectors are particularly suited for examining how

employee loyalty affects organizational performance through direct customer contacts.

We identified 12 main shopping areas in Hong Kong (e.g., Tsimshatsui and Causeway

Bay) and randomly selected five major shopping centres or avenues from each area. We
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controlled firm size by choosing small service organizations with two to five service employees.

Service employees are defined as customer-contact persons whose major responsibility is sales

and customer services in a shop. Being small organizations, their employee loyalty level tends

to be more consistent (George and Bettenhausen, 1990) and easier to assess. We avoided

choosing large chain stores as the customer satisfaction and loyalty of such firms are more

likely reflected at the corporate level, rather than at the individual shop level. Nevertheless, we

intended to cover different types of service shops, except for those with extremely low

customer contacts (e.g., convenient stores), to enhance the generalizability of our study. Table

1 shows the major service sectors covered in our sample.

3.2 Data Collection Procedures

We conducted a pilot study in eight different types of service shops, through which we

verified the relevance of the indicators to their corresponding constructs, appropriateness of the

questionnaire wording, and clarity of the instructions to fill in the survey. Upon completing the

pilot study, we made minor modifications to the questionnaire in order to improve its validity

and readability. We prepared survey packets, which included a “shop-in-charge” questionnaire

and two “service employee” questionnaires. The persons in charge of a shop are responsible

for answering questions on customer satisfaction, customer loyalty, firm profitability,

employee-customer contact time, market competitiveness, and switching cost. They are

normally the shop proprietors or shop managers with the ultimate responsibility for profits and

a comprehensive understanding of the market situation, and thus are capable of providing very

reliable financial information. Although customers are more preferred to be informants of

customer satisfaction, empirical findings from similar studies have demonstrated that internal

and external measures of customer satisfaction are highly correlated (Goldstein, 2003,

Schneider and Bowen, 1985), justifying our study’s use of internal measures of customer

satisfaction (Soteriou and Zenios, 1999). Because of the proven high correlation between
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internal and external measures of customer satisfaction in particular and customer data in

general, we also used the internal measures of customer loyalty.

Service employees refer to employees responsible for service deliveries in shops. They

therefore are relevant informants of employee loyalty and service quality. We surveyed two

service employees in each shop. Although customers are more preferred to be informants of

service quality, empirical findings from relevant studies have established that employee

perception data are proxy for customer perception data to assess service quality (Hays and Hill,

2006).

Researchers of psychology and organizational behavior have advocated the use of

multiple informants from a business unit where subjectivity in judgment is anticipated (Becker

and Gerhart, 1996). Our questionnaire was developed in English and translated to Chinese. To

maximize translation equivalence, we followed Mullen’s (1995) suggestion to translate the

questionnaire items into a foreign language and then back-translate them to identify any

discrepancies in meaning on syntax.

We deployed a research team consisting of one of the authors as the leader, a research

assistant, and some student helpers to solicit the participation of service shops in our study.

From our experience, deploying a team rather than relying on individuals improves the

response rate. Our research team visited each shop in person to show our sincerity and clearly

explained our requirements of the survey. For instance, we required the shop-in-charge person

to fill in the questionnaire based on actual accounting data and recent customer survey data, if

available. To further enhance the response rate and reduce the non-response bias, we rewarded

each respondent a cash coupon of HK$50 (US$6.5), which is roughly the wage of two hours

of an unskilled service employee in Hong Kong. Experimental psychologists have shown that

recruiting participants with monetary rewards greatly improves the quality of responses (Brase
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et al., 2006, Camerer and Hogarth, 1999). To the best of our knowledge, there is no reason to

believe that such a practice would induce any systematic bias to the study. Our research team

distributed the questionnaires in person to each of the three respondents in each shop. The

respondents were allowed to complete the questionnaire at different time and various places

(e.g., work vs. home) at their convenience. This helped mitigate the problem of transient mood

state and common stimulus cues – a source of common method bias (Podsakoff and Organ,

1986). Our research team then collected the questionnaire from each respondent individually

at his/her convenient time with the cash coupon rewarded. The research team also re-visited

individual participants that had not returned the questionnaire by the due date to re-invite them

to participate. Re-visiting indeed helped improve the response rate.

Almost 300 shops were visited over a twelve-month period. However, because of

company policies of not responding to surveys or confidentiality of the information sought, we

only obtained 677 questionnaires from 232 shops. We dropped the returns of 22 shops because

data on either the shop-in-charge or one of the service employee questionnaires were missing

or the questionnaires were not duly completed, leaving 210 sets of usable questionnaires from

630 participants (Table 1).

(------ Table 1 about here ------)

3.3 Variable Measures

The measures used in this study were drawn from well-established instruments in

psychology, human resources management, marketing, or operations management. A complete

list of the items used is exhibited in the Appendix.

Employee loyalty: Employee loyalty refers to a service employee’s feeling of

attachment to his/her employing organization. We assessed this construct by psychological

measures that are able to capture a service employee’s feelings towards his/her service shop.
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We included four indicators for employee loyalty, namely intention to stay, willingness to

perform extra work, sense of belonging, and willingness to take up more responsibility

(Mccarthy, 1997). A seven-point Likert-type scale anchored at 1 = “totally disagree” and 7 =

“totally agree” was used.

Service quality: Service quality is concerned with the overall perception of the

performance of the services offered by the service employees within a service shop. We

adopted the SERVQUAL instrument developed by Parasuraman et al. (1988) and Parasuraman

et al. (1991). The SERVQUAL instrument suggests that there are five dimensions of perceived

service quality, namely tangibles, reliability, responsiveness, assurance, and empathy. Since

the items under each of these dimensions are not equally appropriate in the service context of

this study, we chose the most relevant item from each of the five dimensions for this study,

instead of using all the 22 items. This is consistent with previous research in service quality

(e.g., Gotlieb et al., 1994). Respondents were asked to rate these five items on a seven-point

Likert-type scale with 1 = “totally disagree” and 7 = “totally agree”.

Customer satisfaction: Customer satisfaction is defined as the pleasurable emotional

state of a customer from his/her experience with the shop, i.e., a summary evaluative response

(Anderson, Fornell and Lehmann, 1994, Fornell, 1992). This summary response contains

evaluations of the key facets that customers consider important in the service context (Oliver,

1997). Compared with more transaction-specific measures of performance, an overall

evaluation is more likely to influence customer repurchase (Gustafsson et al., 2005). Four

questions related to feature performance that drive satisfaction were developed, including

enquiry service, price, customer service in transactions, and service of handling of

dissatisfaction (Gustafsson, Johnson and Roos, 2005, Heskett et al., 1997, Oliver, 1997). A
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seven-point Likert-type scale anchored at 1 = “totally disagree” and 7 = “totally agree” was

used.

Customer loyalty: We referred customer loyalty to the feeling of attachment that a

customer has to the service shop. Following past relevant research of marketing, we selected

consideration of the service shop as the first priority for purchase, recommendation to others,

speaking good words, and encouragement of others to purchase (Gronholdt, Martense and

Kristensen, 2000, Liao and Chuang, 2004, Zeithaml et al., 1996). Respondents were asked to

rate each item on a seven-point Likert-type scale anchored at 1 = “totally disagree” and 7 =

“totally agree”.

Firm profitability: Firm profitability reflects the financial performance of a shop.

Consistent with previous research, we chose return on assets (ROA), return on sales (ROS),

and return on investment (ROI) as indicators (Schneider et al., 2003, Staw and Epstein, 2000).

Perceptual data were obtained. We asked shop-in-charge persons to assess their shops’

profitability relative to industry norms (Delaney and Huselid, 1996, Sakakibara et al., 1997)

with regard to the above three indicators on a seven-point Likert-type scale ranging from 1 =

“much lower” to 7 = “much higher”. Although perceptual data may impose limitations through

increased measurement error, the use of such measures is not without precedence (Delaney and

Huselid, 1996, Powell, 1995). Research has found measures of perceived organizational

performance data to correlate positively (with moderate to strong associations) with objective

measures of firm performance (Dollinger and Golden, 1992, Powell, 1992).

Employee-customer contact time: Contact time is defined as the perceptual time that

service employees and customers contact and communicate directly for the purposes of

personal selling and service delivery within a transaction. We measured contact time by asking
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the respondents to estimate the average times they spend for personal selling and service

delivery within a transaction.

Market competitiveness: We referred market competitiveness to the degree to which

the market of the service industry is competitive. Jones and Sasser (1995) suggested measuring

market competitiveness by the availability of alternative products and services. To capture a

particular characteristic of the market in the service industry, we added the indicator of

“availability of attractive benefit plans in the market” to assess market competitiveness. Thus,

we included three questions related to the availability of alternative products, services and

attractive benefit plans to measure market competitiveness in this study. Respondents were

asked to rate these three items on a seven-point Likert-type scale anchored at 1 = “totally

disagree” and 7 = “totally agree”.

Switching cost: Switching cost is concerned with the costs that a customer has to pay

during the process of switching from one service provider to another. It covers the costs of

switching in terms of economics, psychology and marketing aspects (e.g., Guiltinan, 1989,

Jones et al., 2002). Based on the six indicators developed by Jones et al. (2002) for switching

cost, we chose four indicators that are relevant to the service environment. The selected

indicators are pre-switching cost for search and evaluation, post-switching cost for learning

new services, after-switching cost for building a relationship with new service provider, and

lost performance cost due to switching (Jones, Mothersbaugh and Beatty, 2002). We adopted

these four dimensions since they are more relevant to our studied context. A seven-point Likert-

type scale anchored at 1 = “totally disagree” and 7 = “totally agree” was used.

3.4 Interrater Agreement and Reliability

We obtained responses on employee loyalty and service quality from two service

employees in each shop. We estimated within-shop interrater agreement following suggestions

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in psychology research (James et al., 1984, Lindell and Brandt, 1999). The average within-

group interrater reliability values, rwg(j), for the constructs of employee loyalty and service

quality were 0.919 and 0.950, respectively. The interrater reliability values are higher than

research studies of similar types (e.g., Ryan et al., 1996, Schneider, Hanges, Smith and

Salvaggio, 2003) and than the commonly accepted criterion of 0.7 (James, 1982), suggesting

sufficient within-group agreement to aggregate the data to the shop level for analysis.

To further justify aggregation to the shop level, we used intra-class correlation (ICC)

statistics, ICC(1) and ICC(2), to assess interrater reliability (Bartko, 1976, Schneider et al.,

1998, Shrout and Fleiss, 1979) within shops. ICC(1) compares the variance between units of

analysis (shops) to the variance within units of analysis using the individual ratings of each

respondent. ICC(2) assesses the relative status of between and within variability using the

average ratings of respondents within each unit (Bartko, 1976, Schneider, White and Paul,

1998). The ICC(1) values were based on a one-way analysis of variance (ANOVA). In this

study, the ICC(1) values were 0.428 and 0.435 for employee loyalty and service quality,

respectively, which are much higher than the cutoff value of 0.12 (James, 1982), indicating a

sufficient inter-shop variability ratio. The ICC(2) values were acquired from Spearman-Brown

formula. The ICC(2) values of this study were 0.600 and 0.606 for employee loyalty and service

quality, respectively, which are equal to or slightly higher than the cutoff point of 0.60

recommended in fields of psychology (Glick, 1985) and OM (Boyer and Verma, 2000),

rendering sufficient interrater reliability within the shops for further analysis at the shop level.

Taken together, the rwg(j), ICC(1), and ICC(2) values justified the aggregation of the data of

employee loyalty and service quality to the shop level.

 20

3.5 Common Method Variance

When two or more variables are collected from the same respondents and an attempt is

made to interpret their correlation, a problem of common method variance could happen

(Podsakoff and Organ, 1986). In our study, there are two relations that might be affected by

this problem, namely the relations between (1) employee loyalty and service quality, and (2)

customer satisfaction, customer loyalty and firm profitability. One proactive approach to avoid

common method variance is to separate the measurement items within the questionnaire, which

was adopted in this research. We also applied Harman’s one-factor test to assess the influence

of common method variance (Podsakoff and Organ, 1986) in our collected data. We conducted

Harman’s one-factor test on items for employee loyalty and service quality. We also combined

all items of customer satisfaction, customer loyalty and firm profitability for another Harman’s

one-factor test. All the tests yielded clearly separate factors, except the pair of customer

satisfaction and loyalty. This suggests that common method bias might exist in the pair of

customer satisfaction and loyalty. However, the major objectives of this research are not to find

out the relationship in this pair. Thus, common method bias should not cause serious problems

to our research. In addition, referring to the test of discriminant validation conducted for

customer satisfaction and loyalty, the results provide strong evidence that customer satisfaction

and loyalty are different and unique constructs. As a whole, we believe that common method

variance was not serious in this research. In particular, there was no sign of common method

variance among the five key components, i.e., employee loyalty, service quality, customer

satisfaction and loyalty, as well as profitability.

4. DATA ANALYSIS AND RESULTS

We applied structural equation modelling (SEM) to examine the proposed model and

multiple-group analysis of SEM to investigate the influence of moderator variables, using

 21

Analysis of Moment Structures (AMOS). Similar to relevant studies (e.g., Fynes et al., 2005,

Skerlavaj et al., 2007), we followed Anderson and Gerbing’s (1988) two-step approach to

estimate a measurement model prior to the structural model. In what follows, we present the

results of measurement model analysis, structural model analysis, hypothesis testing, and

analysis of moderating effects.

4.1 Measurement Model Results

We assessed the convergent and discriminant validity of the scales by the method

outlined in Fornell and Larcker (1981) and Chau (1997). Convergent validity can be assessed

by the significance of the t-values for item loadings, construct (composite) reliability, and

average variance extracted (AVE) (Chau, 1997, Fornell and Larcker, 1981). All the item

loadings for the constructs were significant, with t-values higher than 7.66 (p < 0.001). In

addition, as shown in the Appendix, all the measures of our instrument were found to be highly

reliable with construct reliability greater than 0.8 (Nunnally, 1978). The values of construct

reliability ranged from 0.827 for service quality to 0.954 for switching cost. The AVE values

were all above the suggested criterion of 0.5 (Fornell and Larcker, 1981), except the one for

service quality, with a range from 0.623 to 0.838. The AVE value for service quality was 0.492,

which is only marginally below the suggested criterion. These results provide sufficient

evidence of convergent validity of the scales.

Discriminant validity can be evaluated by fixing the correlation between any pair of

related constructs at 1.0, prior to re-estimating the modified model (Chau, 1997, Segars and

Grover, 1993). A significant difference in the chi-square statistics between the fixed and

unconstrained models indicates high discriminant validity. By fixing the correlation between

any pair of related constructs in the measurement model to the perfect correlation of 1.0, the

chi-square values increased by at least 259.285. With an increase in one degree of freedom,
 22

these chi-square values were highly significant at p = 0.01 (Δχ2 ≥ 6.635). In addition,

discriminant validity exists if the AVEs of two constructs are greater than their squared

correlation (Chau, 1997, Fornell and Larcker, 1981). For example, the AVEs for employee

loyalty, service quality, customer satisfaction, customer loyalty, firm profitability, market

competitiveness and switching cost were 0.728, 0.492, 0.711, 0.805, 0.816, 0.623 and 0.838,

respectively, while the highest value of the squared correlation between any pair of those

constructs was only 0.287.

Table 2 shows the results of the analysis of the individual measurement models (Chau,

1997) of the seven constructs. The values of absolute fit measures for employee loyalty, service

quality, customer satisfaction, customer loyalty, firm profitability, market competitiveness and

switching cost were above their corresponding acceptable criteria, suggesting the measurement

models are capable of predicting the observed covariance or correlation matrix. The values of

comparative fit measures were also above the acceptable criteria, providing evidence against

the hypothesis of a null model. All the results of absolute fit measures and comparative fit

measures supported the belief that the measurement models achieve satisfactory fit and are

ready to be used in the analysis of structural models.

(------ Table 2 about here ------)

4.2 Structural Models Results and Hypothesis Testing

Table 3 shows the goodness-of-fit statistics for our hypothesized model. The overall fit

of our structural model is good: χ2 = 218.896 (p = 0.004), χ2/df = 1.319, GFI = 0.908, AGFI =

0.883, CFI = 0.983, NFI = 0.934, NNFI = 0.981 and RMSR = 0.039. All the four hypothetical

relationships were supported at the significance level of p = 0.001. The estimate of the

standardized path coefficient (P) indicates that the linkage between employee loyalty and

service quality (Hypothesis 1) is highly significant (P = 0.531, t = 6.286, p < 0.001). Service
 23

quality has a significant and direct impact on customer satisfaction, supporting Hypothesis 2

(P = 0.388, t = 4.768, p < 0.001). The relationship between customer satisfaction and loyalty

(Hypothesis 3) is also highly significant at p = 0.001 (P = 0.818, t = 11.215). The association

between customer loyalty and firm profitability (Hypothesis 4) is highly significant (P = 0.300,

t = 4.190, p < 0.001). The hypothesized model and its path estimates are depicted in Figure 1.

(------ Figure 1 about here ------)

4.3 Results of Moderating Effects Testing

After the analysis of the main effects shown in the hypothesized model, we examined

the hypothesized moderating effects to gain a deeper understanding of the relationships

between employee loyalty and service quality, customer satisfaction and customer loyalty, as

well as firm profitability. We assessed the influence of three moderator variables on different

relationships depicted in the previous section using multiple-group analysis of SEM. To

conduct multiple-group analysis, we followed Homburg and Giering’s (2001) suggestion. We

first conducted separate median splits in the collected sample, based on the values of an

individual moderator valuable. We then performed multiple-group analysis by comparing the

two sub-samples (i.e., high versus low values of the moderator variable). Accordingly, we

compared three pairs of models, each of which included different moderators and relationships.

The first hypothesis test was concerned with the moderating effect of employee-customer

contact time on the effect of employee loyalty and service quality. The other two investigations

were concerned with the moderating impacts of market competitiveness and switching costs

on the relationship between customer satisfaction and customer loyalty.

Multiple-group analysis of SEM involves the comparison of a general model with a

restricted model. The general model normally has one degree of freedom less than the restricted

model. The chi-square value is also always lower for the general model than that of the
 24

restricted model. If the improvement in chi-square value is significant when moving from the

restricted model to the general model, it indicates the existence of differential effects of the

moderator on the corresponding relationship in the two sub-samples. This provides statistical

support for the hypothesis of a moderating effect.

The results of the multiple-group SEM analysis are shown in Table 3. Regarding the

moderator of employee-customer contact time, the chi-square difference (∆χ2 = 0.055, p <

0.001) did not indicate the presence of a significant moderating impact on the relationship

between employee loyalty and service quality (since ∆χ2 < 3.841). Thus, Hypothesis 4 was not

supported. Hypothesis 5 and Hypothesis 6 consider the moderating effects of market

competitiveness and switching cost on the relationship between customer satisfaction and

customer loyalty. As shown in Table 3, the differences of chi-square (∆χ2 = 0.563 for market

competitiveness and ∆χ2 = 0.581 for switching cost) were not significant at p = 0.001. These

results did not support Hypothesis 5 or Hypothesis 6.

In sum, the chi-square differences in the multiple-group analysis for each of the three

suggested moderator variables were not significant with one degree of change. Thus, this study

does not offer statistical support for the suggested moderator variables on the corresponding

relationships. In other words, Hypotheses 4, 5 and 6 were not supported by the results of this

empirical study.

5. DISCUSSION AND CONCLUSIONS

In this study we developed and tested the relationships among employee loyalty, service

quality, customer satisfaction and customer loyalty, and firm profitability in the context of

high-contact services. The results lend strong support for the assertion that employee loyalty is

an important determinant of firm profitability. The findings are consistent with the popular S-
 25

PC concept that the key driver of firm performance is employee attributes, such as employee

loyalty, in service organizations (Heskett, Jones, Loveman, Sasser Jr. and Schlesinger, 1994).

Similarly, anecdotal evidence from service firms, such as Domino’s pizza, where researchers

found that an increase in employee loyalty triggers a corresponding change in customer

satisfaction; in turn, this leads to a dramatic increase in sales revenues.

According to the social exchange theory, service employees who are loyal to their

employing organizations will be committed to delivering services with higher levels of quality

to customers. It seems quite logical to consider that customer contact time is a moderator on

the relationship between employee loyalty and service quality. As the duration of the service

encounter in a transaction increases, the intimacy between the employee and the customer may

be also enhanced. In this case, during the encounter time, a loyal employee has more

opportunities to understand and fulfill the specific needs of his/her customers, leading to a

greater impact of employee loyalty on service quality. Surprisingly, the result of the sampled

firms in this study did not support this argument. A possible cause was homogeneity, in terms

of the overall customer contact level, of the sampled firms of this study.

For the service sector in which the contact time between employees and customers is

very short (e.g., convenience stores and postal services), the quality of the service encounter is

relatively less important, and so is the commitment of service employees to offering high levels

of quality in their services. Thus, given the short contact time, loyal employees would have

limited influence on service quality. At the other extreme, for service firms that operate in a

very high employee-customer contact environment (e.g., estate agencies and beauty services),

the intimate relationship between employees and customers in service delivery allows a loyal

employee to deliver a higher level of service quality through the environment where he/she can

be in contact with customer in a prolonged time. Nevertheless, service organizations with

 26

extremely low customer contact (e.g., convenience stores and postal services) were not

included in this study because they are not in the scope of this research. Given this result, we

speculate that the relationship between employee loyally and service quality would diminish

only in a service context that is characterized by extremely low customer contact.

Jones and Sasser (1995) suggested that the relationship between customer satisfaction

and customer loyalty is affected by the level of market competitiveness. However, the results

of this study showed that market competitiveness does not have a significant moderating

influence on this relationship in the sampled firms. Neither did we find that switching cost

moderates the relationship between customer satisfaction and loyalty. Similarly, we suspect

that this is because the operating environment of the investigated sample was in fact rather

homogenous in terms of market competitiveness and switching cost. As a whole, the service

sectors we examined operate in a rather competitive business environment. Unlike service

sectors that require professional skills (e.g., legal, architectural and medical services) or high-

capital investment (e.g., electricity and broad-band services), we focused on labour-intensive

service sectors with a relatively low initial capital investment. In other words, these service

sectors in the sample of this research are generally operating in a competitive market with low

switching cost. As a result, we did not find any significant moderating effects. Furthermore, as

can been seen in the hypothesized model, the relationship between customer satisfaction and

customer loyalty is very strong (P = 0.818). This suggests that satisfied customers always tend

to be loyal to their service providers. For this reason, other environment factors, such as market

competitiveness and switching cost, may not have a significant moderating effect on such a

strong relationship between the satisfaction and loyalty of customers.

Our findings bear some practical implications for service operations management.

Employee loyalty is an essential factor for operations managers to boost service quality,
 27

customer satisfaction and customer loyalty, and plays a significant role in enhancing the

performance of organizations in high-contact service sectors. It seems essential that

management commitment to enhancing employee loyalty through such means as facilitating

employee training, empowerment, compensation and so on – influential factors for building

employee loyalty to organizations – be strengthened. Employee loyalty to an organization

promotes a favourable work environment where employees tend to be committed to serving

customers with a high level of quality in their services, which leads to enhanced firm

profitability. Furthermore, this work environment can also satisfy customers’ needs and retain

customers, with an increase of organizational profitability being the ultimate consequence.

The findings suggest the payoff to build employee loyalty in service organizations. The

test results of the hypotheses on the moderating factors recommend that the performance effects

induced by employee loyalty are not contingent upon customer contact, market

competitiveness, and switching cost. Consequently, managers need to determine their expected

return from the payoff for building employee loyalty. This is helpful for the firm to optimize

its resources expended and the return achieved.

As mentioned in Section 3.2, we followed previous studies to assess the levels of service

quality, as well as satisfaction and loyalty of customers by using internal customer data. We

therefore intended to validate whether the use of internal measures by employees, instead of

external measures by customers directly, was reliable in this study. We collected the data of

service quality, customer satisfaction and customer loyalty from both employees and customers

from an extra sample of 38 service shops. In each shop, we surveyed three service employees

and five randomly selected customers. We examined the correlations between the averaged

ratings obtained from employees and from customers. We found that, given the small sample

size (n = 38), the correlations of all the items of service quality, customer satisfaction and
 28

loyalty between the two sources were highly significant at p < 0.1, providing empirical support

for the use of internal measures of service quality, customer satisfaction and loyalty in this

study. Table 4, 5 and 6 show the results of these correlation tests.

In this study our focus was on investigating the impact of employee loyalty on firm

performance; however, the need for employee learning in organizations is likely a success

factor of businesses in the service industry. For future research, we believe that it would be

interesting to find out the relationships between employee loyalty, organizational learning and

firm performance. For example, would a lack of employee loyalty impede organizational

learning, hindering operational efficiency? We also examined the contingent effects of

customer contact, market competitiveness and switching cost on the hypothesized relationships

in this study. Further research can explore the impacts of other potential moderators on the

hypothesized relationships, such as employee retention package and customer reward program.

For instance, would employee retention package moderate the relationship between employee

loyalty and service quality? Would customer reward program be a moderator of the relationship

between satisfaction and loyalty in customers? We hope this research will provide an impetus

to OM researchers to more critically examine the relationships between employee attributes

and operational performance. We also hope that further research will seek to move beyond the

demonstration of main effects to an investigation of how and why employee attributes are

related to operational performance and organizational outcomes under different operating

contexts in the service industry.

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 34

Figures and Tables

0.531*** 0.388*** 0.818*** 0.300***

(t=6.286) (t=4.768) (t=11.215) (t=4.190)

Employee Service Customer Customer Firm

loyalty quality satisfaction loyalty profitability

***p<.001

Figure 1. Hypothesized model and its path estimates.

Table 1. Distribution of sampled shops.

Service Sector Number of shops
Agency service (e.g., estate agencies and travel agencies) 45
Beauty care services (e.g., salons and beauty shops) 40
Catering (e.g., steakhouses) 22
Fashion retailing (e.g., dress shops) 40
Optical services (optometry shops and optical shops) 22
Retailing of health care products (e.g., cosmetic shops) 10
Retailing of valuable products (e.g., jewelry shops) 10
Others 21
Total 210
 35

Table 2. Goodness of fit indices for measurement models.

Goodness of Fit Measures Criteria Employee Service Customer Customer loyalty Market
loyalty quality satisfaction and firm competition
profitability and switching
cost
Absolute Fit Measures
Distinct Parameters - 2 5 2 13 15
Chi-square (χ2 ) of Estimated Model - 5.307 7.594 5.111 21.895 15.129
Probability of χ2 p ≥ .05 .070 .180 .078 .057 .299
Chi-square/Degree of Freedom ≤ 3.0 2.654 1.519 2.556 1.684 1.164
Goodness of Fit Index (GFI) ≥ .90 .988 .986 .989 .971 .981
Root Mean Square Residual (RMSR) ≤ .10 .089 .050 .086 .057 .028
Comparative Fit Measures
Normed Fit Index (NFI) ≥ .90 .991 .979 .991 .984 .987
Non-normed Fit Index (NNFI) ≥ .90 .984 .985 .983 .989 .997
Comparative Fit Index (CFI) ≥ .90 .995 .993 .994 .993 .998
Adjusted Goodness of Fit Index ≥ .80 .938 .957 .943 .937 .958
(AGFI)
 36

Table 3. Results of multiple-group analyses.

Moderator variable Low value of High value of Chi-square difference

moderator moderator (∆df = 1)
Employee-customer 0.528 0.533 0.055
contact time (t = 4.239) (t = 4.693) (= 440.593 – 404.538)

Market 0.784 0.827 0.563

competitiveness (t = 6.898) (t = 8.638) (= 383.488 – 382.925)

Switching cost 0.865 0.726 0.581

(t = 8.921) (t = 6.449) (= 481.311 – 480.730)

Table 4. Results of zero-order correlations for the items of service quality by the
data of employees and customers.

Items Employees
1 2 3 4 5
1. Tangibles .368*
Customers

2. Reliability .418** .332*

3. Responsiveness .296 .250 .360*
4. Assurance .503** .350* .339* .381*
5. Empathy -.143 -.218 -.142 -.054 .312†

p<0.1
*p < 0.05
**p < 0.01

Table 5. Results of zero-order correlations for the items of customer satisfaction

by the data of employees and customers.

Items 1 2 3 4
Customer satisfaction
1. Price .379*
2. Enquiry service .271 .323*
3. Customer service in transactions .245 .332* .424**
4. Service handling of dissatisfaction .240 .212 .345* .441**
*p < 0.05
**p < 0.01
 37

Table 6. Results of zero-order correlations for the items of customer loyalty by the
data of employees and customers.

Items 1 2 3 4
Customer loyalty
1. Considering as their first choice .534**
2. Recommending to people .433** .387*
3. Saying good words (.141) (.141) .308*
4. Encouraging friends and relatives to .492** .489* (.035) .429*
purchase
*p < 0.05
**p < 0.01
 38

The Appendix

(a) Service employee questionnaire

Responses to the following questions ranged from “1=totally disagree” to “7=totally
agree”.

Employee loyalty [Cronbach’s α=0.909, rwg(j)=0.986, ICC(1)=0.428, ICC(2)=0.600,

AVE=0.728, Construct reliability=0.914]
EL1* be absent from work.
EL2 continue our employment in this company. (0.760)
EL3 contribute extra effort for the sake of this company. (0.943)
EL4 become a part of this company. (0.904)
EL5* turn down other jobs with more pay in order to stay with this company.
EL6 take any job to keep working for this company. (0.792)

Service quality [Cronbach’s α = 0.820, rwg(j) = 0.950, ICC(1) = 0.435,

ICC(2) = 0.606, AVE = 0.492, Construct reliability = 0.827]
SQ1 Our appearance is neat and appropriate. (0.705)
SQ2 We provide services at the time we promise to do so. (0.780)
SQ3 We provide prompt services to our customers. (0.623)
SQ4 We can be trusted by our customers. (0.803)
SQ5 We do not understand our customers’ needs. (0.567)

(b) Shop-in-charge questionnaire

Responses to the following questions ranged from “1=totally disagree” to “7=totally
agree”.

Customer satisfaction [Cronbach’s α=0.907, AVE=0.711, Construct

reliability=0.908]
Our customers are satisfied with …….
CS1 the price of their purchased product(s) in this company. (0.772)
CS2 the enquiry service provided by this company. (0.887)
CS3 the customer service in transactions. (0.881)
CS4 the service of handling customer dissatisfaction in this company.
(0.828)

Customer loyalty [Cronbach’s α = 0.942, AVE = 0.805, Construct reliability = 0.943]

Our customers intend to ……
CL1* do more transactions with this company in the coming years.
CL2 consider this company as their first choice for purchases. (0.858)
CL3 recommend this company to people who seek their advice on
purchases. (0.928)
CL4 say something good about this company to others. (0.914)
CL5 encourage their friends and relatives to purchase from this company.
(0.888)
 39

Market competition [Cronbach’s α = 0.828, AVE = 0.623,

Construct reliability = 0.831]
Characteristics of the current market:
MC1 High availability of alternative products offered in the market.
(0.718)
MC2 High availability of alternative services offered in the market. (0.867)
MC3 Attractive benefit plans offered in the market. (0.776)

Switching cost [Cronbach’s α = 0.954, AVE = 0.838,

Construct reliability = 0.954]
SC1 Customers have to pay a high cost for searching and evaluating
information of alternative service providers before changing service
provider. (0.919)
SC2 Customers have to pay a high cost to learn new services after changing
service provider. (0.953)
SC3 Customers have to pay a high cost to build new relationships after
changing service provider. (0.912)
SC4 Customers have to pay a high cost for the benefits lost by changing
service provider. (0.876)

Responses to the following questions ranged from “1=much worst”, through “4=no
change” to “7=much better” for financial performance of the firm as compared to
industrial norms.

Firm profitability [Cronbach’s α=0.961, AVE=0.828, Construct reliability=0.930]

FP1 Return on assets (0.912)
FP2 Return on sales (0.923)
FP3 Return on investment (0.908)

Responses to the following question by estimation.

Contact time
Average total time for personal selling and service in a
transaction in your company (i.e. time spent on direct
contact and communication with customers): hour(s)___ minutes

1
Standardarised path weight from the latent variable to the measurement item.
*Deleted item.