Productivity, quality and relationship marketing in service operations

The Authors
Evert Gummesson, Professor of Service Management and Marketing, School of Business, Stockholm University, Sweden

Acknowledgements
Also published in the book, Service Management: Basics, Concepts, Experiences, Manfred Bruhn and Heribert Meffert Editors!, "abler #erlag, $iesbaden, %&&' ( Evert "ummesson)

Abstract
*he purpose of this article is to dra+ the reader,s attention to service productivit- and its connection to service .ualit- and eventuall- to profits) /n service operations the customer pla-s an active role in influencing productivit- and .ualit-) 0urthermore, contemporarcompanies are net+orks, not delimited hierarchies, and the productivit- and .ualit- issues affect all members of a net+ork, not 1ust the provider and the customer) *his is clear from the ne+ developments in relationship marketing and imaginar- virtual! organi2ations) /n order to assess the financial outcome, the concept of return on relationships is introduced based on the notions of intellectual capital and the balanced scorecard) *he article ends +ith challenging .uestions as +ell as recommendations for practising managers)

Article Type:
3esearch paper

Keyword s!:
3elationship marketing4 Service improvements4 Service .ualit-)

"ournal:
/nternational 5ournal of Contemporar- Hospitalit- Management

#olume:
%6

$umber:
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%ear:

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pp:
78%9

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6&9&8:%%& &ntroduction *his article addresses service productivit- and its connection to service .ualit- and profitabilit-) Compared to service .ualit-, service productivit- as +ell as the 1oint .ualit-8 productivit- conse.uences for profitabilit- have received little attention) /t has become obvious that profitable service operations and the service .ualit- and productivit- concepts re.uire ne+ mindsets and deeper insights into the nature of services, relationships, and measurement) Here, profitabilit- +ill be represented b- relationship marketing 3M! +hich stresses lo-alt-, customer retention, and long8term relationships as ke-s to profitabilit-) *he article is particularl- focused on the relationships bet+een service providers and customers as these stand out in the service encounter and the service production process) *he customers, role in creating both .ualit- and productivit- is crucial in services, +hereas it is less salient in goods manufacturing) 3M puts emphasis not onl- on relationships and interaction bet+een suppliers and customers, but also on relationships bet+een suppliers and other parties) *he modern corporation turns into a net+ork of relationships in +hich all members of the net+ork influence .ualit- and productivit-) *his vie+ is endorsed b- ne+ organi2ation theor-, particularl- the notion of imaginar- or virtual! organi2ations) /t is further supported b- the ne+ accounting practices of the balanced scorecard and the gro+ing interest in intellectual capital) *he article is focused on the micro level of service operations, and on +hat to measure rather than on ho+ to measure) *he article dra+s on long8term, basic research;%<) *he research currentl- provides more .uestions than ans+ers 8 but if +e cannot ask the germane .uestions, the ans+ers do not matter) Triplets, tribes and (inancial (actors *he follo+ing proposition forms the vantage point for the article: =>ualit-, productivit- and profitabilit- are triplets4 separating one from the other creates an unhapp- famil-? "ummesson, %&&%, p) :!) *he =triplets? all serve the purpose of making service operations efficient) *his vie+ is underscored b- the criteria of the .ualit- pri2es that are no+ common on international, national, local, industr-, and compan- levels) As an example, the first of the original goals of the Malcolm Baldrige @ational >ualit- A+ard in the ASA is =Helping to stimulate the American companies to improve .ualit- and productivit- for the pride of recognition +hile obtaining a competitive edge through increased profits? .uoted from Hart and Bogan, %&&B, p) %C!)

*he .ualit- thinking represented b- the a+ards is usuall- referred to as total .ualitmanagement, *>M) *he a+ards are the closest +e have come so far to an empiricall-8based, general .ualit- theor-) *he- embrace internal, technolog-8related .ualit- dimensions as +ell as external, customer8related dimensions) *he- include both goods and services and some of them include both private for8profit corporations, and not8for8profit government and voluntarorgani2ations) *>M and the a+ards criteria also serve to instil certain values and modes of operation) A main purpose is to implant the strateg- of =continuous improvements?, +hich like the 5apanese kaizen, covers all activities in an organi2ation to improve both .ualit- and productivit- as an ever-da- activit-, involving each and ever- one /mai, %&':, pp) C87!) Another purpose is evaluation of outcomes: ho+ +ell did +e succeed +ith regard to .ualit-, productivit-, and financial outcomesD B- measuring the triplets +e get a health reading of an organi2ation,s financial status, in private companies traditionall- referred to as return on investment, in the public sector referred to as the abilit- to fulfil societal goals +ithin a budget) Each triplet is the ob1ect of definition difficulties) *he difficulties include the selection of indicators of success or failure, the application of measurement techni.ues, the +a-s of reporting and communicating outcomes, and the performance of activities that lead to improvements) *his article +ill highlight aspects of the triplets and their interconnections that are part of the author,s perception of an ongoing paradigm shift in management and marketing) *echnicalities of measuring the triplets +ill not be treated) Service productivity Service productivit- has been sparsel- treated in the literature +ith a fe+ exceptions "ummesson, %&&Ba4 Eovelock and Foung, %&G&4 McEaughlin and Coffe-, %&&6!) Hroductivit- is a ratio bet+een output and input) *he more +e can reduce the input keeping up output, the better is our productivit-) *his is the guideline for the current trend 8 ma-be even cra2e 8 to do+nsi2e organi2ations both in the private and in the public sector) /n a future8 oriented and offensive spirit, the focus is on revenue enhancement rather than cost reduction) Hroductivit- in this sense can also be increased b- increasing output at a faster rate than input and conse.uentl- offer improved profitabilit- at the same time as cost goes up) *here is a +idespread notion that service productivit- has not improved over the -ears +hile the productivit- of manufacturing has improved steadil-) *here is also a political and ideological debate on the productivit- of the government sector compared +ith the private service sector) Before +e start measuring service productivit-, +e need to kno+ +hat to measure, +hether this is possible to measure, +hat techni.ues to appl-, and +hether the measurements can be of an- genuine assistance to us) An even more basic .uestion is +hether service productivit- is a viable concept at all Adam and "ravesen, %&&:4 B-lund and *horesson8Hallgren, %&&7!) Measurements of productivit- are often ambiguous and inade.uate, especiall- on an industrand national level) As a conse.uence, comparisons bet+een service industries and nations are difficult, ma-be even impossible, to make +ith meaningful accurac- see e)g) McIinse-, %&&B!) Service quality

*he second triplet, service .ualit-, is in the centre of attention for services marketing literature4 sometimes services marketing is made s-non-mous +ith service .ualitmanagement) Beginning in the late %&G6s, .ualit- thinking has gone through a metamorphosis) *he product sector in the $estern hemisphere neglected its .ualit- development, resting on the laurels of past performance) *he driving force for .ualit- came from 5apan, ironicall- based on the kno+ledge of Americans +ho got no response for .ualit- improvements in their home countr-) After having lost market share to the 5apanese in product areas +here Europe and the ASA traditionall- dominated, there +as a slo+ a+akening) 0or service .ualit- the tradition is different) 5apanese competition has not -et been particularl- noted for productivit- and .ualit- in services) *he driving force +as rather that service .ualit- got under heav- fire from dissatisfied customers and citi2ens) Service researchers found that there +as little on service .ualit- in the literature4 +hen the author first looked into this in %&G: nothing +as found) $hereas s-stematic approaches to .ualitmanagement in goods manufacturing started to develop in the %&B6s b- people in operations management, s-stematic approaches in service .ualit- lingered until the %&'6s and came from marketers Edvardsson et al., %&&74 "rJnroos, %&&64 "ummesson, %&&C4 Meffert and Bruhn, %&&9!) Although goods and services al+a-s appear in some kind of dependenc- in a customer offering, the understanding of the similarities and differences bet+een goods and services is rarel- found among the same people) *here is need for =holistic .ualit-? embracing simultaneous consideration of services and goods .ualit- dimensions, as +ell as .ualitdimensions of computer soft+are "ummesson, %&&Bb!) *here is usuall- an assumed causal connection bet+een customer perceived .ualit- and profitabilit-) *his connection is supported b- evidence from the H/MS research programme Bu22ell and "ale, %&'G!) /t is, ho+ever, increasingl- being .uestioned, for example b- 3ust et al) %&&7! +ho calculate =return on .ualit-? and b- 3eichheld,s %&&:! studies of the connection bet+een profits and customer lo-alt-) Profitability of service operations *he third triplet, profitabilit-, is al+a-s at the centre of attention) Stock exchanges and the media continuousl- report on the price of shares and companies are assessed b- short8term results) $ithin companies there are financial reports that ma- in some service businesses even be dail-, for example, in restaurant and retailing operations) Ho+ever, accounting practices, +hich are closel- allied +ith corporate la+, tax legislation, banking traditions, and methods of assessing the value of a compan-, primaril- emerged +ith manufacturing in mind) *here is, ho+ever, gro+ing opposition against the limitation to report onl- short8term financial and historical data) *he balanced scorecard is a current experiment to include other indicators such as the customer base, emplo-ee turnover, and development rate, thus measuring the intellectual capital of an organi2ation) *he triplets are related to financial factors +hich constitute the result of a compan-: cost, revenue, and capital emplo-ed) *he profile of the triplets, +ith consideration of these factors as the- are applied on the micro level, is summari2ed in *able /) *he interconnection bet+een productivit-, .ualit-, and profitabilit- 8 the =triplets at pla-? 8 is graphicall- sho+n in 0igure %) *he figure starts +ith .ualit-, defined as doing things right

from the beginning and doing the things that customers need and +ant) /f .ualit- in this sense improves, it can have a positive impact on revenue left section of the figure!, cost middle section!, and capital emplo-ed right section!) $hen function and reliabilit- improve, theboost the image in the market, customer retention, and share of customer i)e) the percentage of a customer,s purchase of a certain product +hich is made from a specific supplier!) *hese changes stimulate sales volume gro+th, differentiate a provider from the competition and make the provider less dependent on price competition) Service costs for machiner- go do+n, and so do the costs of inspection, testing, re+ork, scrap, complaints, and +arranties) *he capital emplo-ed is reduced as less stock needs to be kept4 accounts receivable go do+n because pa-ment comes earlier and less pa-ment is dela-ed because of complaints4 and reduced processing time re.uires fe+er resources) As the cash flo+ becomes faster, the mone- can be used else+here and capital costs are reduced) /mproved productivit- becomes an antecedent to profitabilit- and some factors directl- affect profitabilit- through enhanced revenue) *he figure is general as there are no =pure? service companies nor an- =pure? goods companies) "oods and services al+a-s appear in a s-mbiotic relationship4 all providers combine momentar- activities services! +ith things goods!) Organi ational aspects! triplets and tribes *he triplets are all concerned +ith the same phenomenon, the +elfare of an organi2ation, but from different perspectives) *hese perspectives have given rise to =tribes? +ithin organi2ations) *he tribes represent different traditions and cultures4 each tribe,s a+areness of the total +elfare of the compan- is limited) *he three tribes are the productivit- tribe, the .ualit- tribe and the accounting tribe) Members of the productivit- tribe H*! are cost8obsessed and devote themselves to internal operations) *he members ma- be engineers, statisticians, accountants, or economists) *he .ualit- tribe >*! used to be internall- oriented and complacent in its o+n expert kno+ledge of design and manufacturing, and rarel- customer8oriented) *he past t+o decades have graduall- changed that4 its members are no+ oriented to+ards revenue and customer satisfaction) *he accounting tribe A*! is the most institutionali2ed of the tribes) /ts existence is partiallsecured b- la+, and its members are dedicated to measurement) Still accounting is primarilrestrained to reporting short8term and historical financial data) *he three tribes could all contribute valuable expertise, but the- each see things differentl-) Anfortunatel-, the- have also contributed to erect functional silos that obstruct collaboration and coherent processes) *he crucial matter is to see the contribution from all functions and utili2e their concerted kno+ledge) *his is the task of top management, the big chiefs) Anfortunatel- big chiefs all too often do not overvie+ the +hole or favour one perspective at the expense of another) *he >* has made the most far8reaching progress to break do+n barriers and territor- protection) *he .ualit- a+ards have alread- been mentioned4 theprovide total compan- audits +ith .ualit- in focus but the- also embrace productivit- and profitabilit-)

*he H* has not often taken the customer and services to its heart but rather treated customers and services as residuals) Hroductivit- statistics face a gargantuan problem as definitions of goods, services, and the combined offerings continuall- change through innovation and change of customer preferences) *his makes comparisons and time8series difficult) =Hedonic price functions? constitute an effort to include .ualit- changes b- using a specification of product characteristics and consider the changes in each item of the specification Assarsson, %&&%!) *his is, ho+ever, a resource consuming process and the still ver- fe+ applications of hedonic functions are confined to goods, primaril- durable goods such as household appliances and computers) The elusiveness o( services A recurrent statement in the service literature claims that service .ualit- is more difficult than goods .ualit-, both to manage and to assess) *he author strongl- disagrees +ith this statement4 managing and measuring goods .ualit- is not easier) But service .ualit- is different, and +e have to recogni2e ho+ and +h- it is different) An e.uallmisleading but recurrent statement claims that service productivit- is lagging behind goods and manufacturing productivit-) *he statement is based on lack of understanding for service productivit-, tr-ing to manage and measure it on the terms of manufacturing) "oods and services not onl- appear in tandem, but the distinction bet+een them is vague and confusing) *he- are sometimes supplements, sometimes substitutes) Services ma- even be the leftovers, those bits and pieces of production +hose productivit- cannot be increased) Services have been named residuals, invisibles, and intangibles in statistics) 0or example, the +ashing machine increased productivit- and replaced the heaviest parts of manual +ork performed b- house+ives, maids, and +orkers in laundries) Asing a term from Abbott %&99!, the +ashing machine is a child of innovative .ualit-) *he term refers to a step for+ard in .ualit-, a novel solution to a problem, +hich +ill graduall- make an extant product obsolete) A +ashing machine is ten to %9 -ears of built8in +ashing services, but its contribution to an increase in productivit- of +ashing services +ill never be credited to the service sector) Bthe same token the car replaced the horse, and +hen the car became easier to operate, there +as no need for a professional chauffeur) /t is reputed that, around %&66, Mercedes made a forecast of the +orld market gro+th for private cars and considered the lack of professional chauffeurs as the limiting factor) But the chauffeur,s 1ob +as taken over b- the passenger, driving became do8it8-ourself and never entered productivit- statistics) Mechanical and electronic components can be manufactured and assembled at an increasing speed and at lo+ered cost until the- reach a maturit- level) /n S+eden, in the %&96s, a car cost the same as t+o *# sets black and +hite!, in the %&:6s, three *# sets colour!, and in the %&'6s, C6 *# sets) Alread-, in the %&96s, the car +as a mature product +hile the *# +as not) *he experience curve pattern of continuous cost reduction through learning enhances productivit-) A classic example in t+o senses! of service productivit- is $olfgang Amadeus Mo2art) He composed :66 pieces of music although he died at the age of C9 5ohnson, %&':, p) '7!) *he productivit- in the composer industr- has probabl- not -et surpassed this eighteenth centur- record) @or can orchestras and singers perform the Magic Flute faster no+ than at its opening night in %G&%) So service productivit- has not improved) Kn the other hand, +e can bu- a CL pla-er and a disc that +ill give us access to an- +orld class orchestra and singer at our convenience in our homes) But CL pla-ers and discs are classified as goods,

not as services) As @orris +rote in %&7%: ="oods are +anted because the- can perform services? .uoted from Abbott, %&99, p) B&!) *he list can be expanded) A hotel room cannot become smaller, nor can a bed) $e cannot do a+a- +ith teachers and nurses 1ust because +e have computers and sedatives, but the configuration of services and products in an offering ma- change) *he increase in manufacturing productivit- is attributable to more use of technolog- and roboti2ation, better s-stems, and more skilled +orkers) Ho+ever, internal services in organi2ations are also conditional for manufacturing to be productive) *he- include production planning, computer soft+are maintenance, installation of /nternet and /ntranet, education and training of emplo-ees, secretarial services, etc) *hese services make it possible for emplo-ees in the factor- to speciali2e and concentrate on their core task and for machinerto function4 the- become necessar- support for productivit- in manufacturing) *his is not to sa- that service productivit- per se cannot be enhanced) /t is not unusual that emplo-ees +ho are urged to increase productivit- protest that .ualit- +ill go do+n) *his mabe true, but it ma- also not be true) Each case has to be tried on its o+n terms) Hauli %&&%! claims that G9 per cent of a manufacturing compan- is actuall- services, but it is still the productivit- of the remaining B9 per cent that is the ob1ect of attention4 the greater potential of productivit- improvements is thus underutili2ed) Services are also increasingl- deplo-ing technolog- and automation to improve their productivit-) But Hauli also stresses that lo+8tech is essential, perfecting services through =organisational technologies?: =*here is no high8tech implicit in cop-ing ke-s or cleaning factor- floors) Ho+ much information technolog- is needed to prepare a Big MacD? /n assessing service productivit-, the distinction bet+een the monetari2ed and non8 monetari2ed sectors is essential "iarini and Stahel, %&'&!) *he first sector is reported in official statistics, the second is not) *he non8monetari2ed sector mainl- consists of services performed in voluntar- organi2ations and households, including all kinds of do8it8-ourself activities such as driving -our car, repairing -our home, and latel-, doing -our banking via the /nternet, thus taking over the 1ob of the bank teller) /n service production, the provider,s input and output are measured as monetari2ed, the customer,s are not) *he balance of the roles in service production and deliver-, +here the customer can do more or do less, is thus crucial for the official measurements of service productivit-) The service encounter and co)produced value A look at service production and deliver- s-stems reveals a number of sources of service productivit- and .ualit-) @ot onl- is the distinction bet+een goods and services blurred but service production is different from goods manufacturing) *he most crucial operational characteristic of service management and marketing 8 +hich differentiates it from goods 8 is the service encounter) /t holds that in service production and deliver-, the customer enters the stage during the production process, starts the consumption of the service during the production, and continues to benefit from the service in the future "ummesson, %&&G!) /n goods manufacturing, the customer enters the stage onl- +hen the manufacturing of the goods is finished) *his leads to a different bu-ing and consumption behaviour pattern for services from that for goods) *he customers, contributions to the production of the service have a significant impact on productivit- and .ualit-) *he customer is a co8producer of value)

*+o basic t-pes of relationships and interactions of the service encounter +ill be anal-sed here: those bet+een the service provider,s contact personnel the front line! and the customer4 and customer8to8customer interaction, that is, interactions bet+een customers) "nteraction between the service provider#s contact personnel and the customer A passenger interacts +ith a flight attendant, a patient +ith nurses and doctors at a hospital, a product manager +ith the account manager, the art director, and the cop-+riter of an advertising agenc-) *he customer becomes a co8producer4 productivit- and .ualit- of the service are dependent on the contributions from both the customer and the service provider) *he interaction is sometimes extremel- intense and intimate and includes enormous stakes for the customer, such as in surger- or counsel in a divorce case) *he shared experience can cement or prevent long8lasting relationships) Kther service encounters can be trivial but regular, such as taxi and postal services, but because of the repeated need for the services, the- are important to the customer) /n this context, service productivit- and .ualit- emerge from three sources:

part of the provider,s +ork being done independentl- of the customer4 part of the customer,s +ork being done independentl- of the provider4 and +ork the t+o parties do in interaction)

0igure B sho+s three concepts of service .ualit- and three of service productivit-) *he terms customer induced productivit- and customer induced .ualit- denote the customer,s contribution to .ualit- and productivit-) *oda-, .ualit- is usuall- seen as customer perceived .ualit- based on the individuals, assessments of the value of the service for them 8 their satisfaction 8 but their contribution to .ualit- is not measured) *he provider,s contribution is defined as provider induced productivit- and provider induced .ualit-) Measures of productivit- traditionall- refer to provider induced productivit-) *hese measures are internalloriented and related to the provider,s cost4 the customer is treated as a free utilit- and not as a production factor) *he concepts of interactive productivit- and interactive .ualit- emphasi2e the interdependence and mutual benefit from interaction bet+een the provider and the customer) /nteractive .ualit- and productivit- are generated not onl- b- labour and capital as in traditional, internall- oriented measurements, but also b- customers and their kno+ledge and +illingness to participate in the service production and deliver- process) Examples of combinations of these three sources of productivit- and .ualit- are:

Skandia A0S Assurance and 0inancial Services! sells =unit linked insurance?) *he customers of this particular t-pe of insurance have the option to decide +here their pension mone- should be invested and thus take on the responsibilit- for the -ield) A customer can have the investment portfolio changed overda- through a phone call to Skandia, but can also consult its staff on alternative investments) Accounting firms and management consultants do much of their +ork in the offices of their clients and in interaction +ith client personnel) Customers of Kriflame suppliers of cosmetics for home part- selling! allo+ the provider to open up a store for a fe+ hours in their living rooms, +hile the provider offers a s-stem for deliver- of its retailing services)

/IEA,s packaged furniture 8 including nuts and bolts, tools for assembl- and an instruction 8 is collected and transported b- the customer and unpacked and assembled in the customer,s home)

*here are, ho+ever, exceptions to the interactive production of services) Examples are the courts, the defence, and road maintenance) $e onl- interact +ith these service providers in rare cases, but the- provide ongoing services and long8term benefits to all citi2ens) "oods manufacturing can also be interactive and is increasingl- so through outsourcing and the building of the net+orks of imaginar- organi2ations) /n business8to8business marketing, companies ma- develop, produce, and finance products in 1oint ventures) /n consumer goods marketing, 3M encourages the involvement of the consumer and a closer dialogue +ith the provider) /n the /IEA case, the consumer participates both in the production of the furniture, b- assembling the parts, and its deliver-) Based on the interaction and relationships bet+een suppliers and customers, there is a need to rethink the meaning of value $ikstrJm and @ormann, %&&7!) /n the accounting tradition the term =value added? is s-non-mous +ith cost added) Hroductivit- means the opposite, lo+ered cost, +hich could sometimes mean reduced .ualit-, sometimes that .ualit- remains unchanged, and sometimes that it goes up) $hereas production is traditionall- considered to add value, consumption is considered to destro- value) 0rom a consumer point of vie+ it could be argued that onl- +hen a product or service is consumed has it contributed value) 0urthermore, +aste and scrap are increasingl- being rec-cled and the rec-cling capabilit- of a service production and consumption process, such as the +aste from a restaurant, is being designed into a production8consumption s-stem) Hence it is no longer correct to call the consumer an =end8user?) /nstead, the consumer is an agent in an ongoing value8adding circle) $ustomer%to%customer interaction Customers sometimes produce a service bet+een themselves if the seller provides a service arena: the right s-stems, the right staff, the right environment, and the right products) An obvious example is a dance restaurant4 if the customers refuse to dance +ith each other, the core service +ill not be produced) *he choice of segmentation variables therefore becomes important, to get customers together that share a lifest-le or form an affinit- group +ith common interests and values) A concert or a sports game dra+s cro+ds because the customers create an atmosphere together +hich cannot be created b- a lonel- *#8+atcher) A negative side of the customer8to8customer relationship is .ueues, the- are usuall- disliked bcustomers) >ueues consist of customers blocking each other from access to a service because the- all +ant the service at the same moment) Again, customer performance is critical for productivit- and .ualit- through each customer,s independent input, as +ell as through the interactive customer8to8customer input 0igure C!) /n conclusion, customers pla- a pivotal role in the emergence of service productivit-, service .ualit- and hence also in the profitabilit- of the provider) $e have -et to learn ho+ to manage and measure the triplets and the effects on them caused b- customers and the co8production of value) *his calls for novel approaches to management) $ovel management approaches

Current management theor- and practices are not sufficientl- sensitive to the customer,s role in services) @ovel approaches in four areas of management +ill be treated here: relationship marketing, imaginar- organi2ations, the balanced scorecard approach to accounting and measurement, and intellectual capital) *he areas are chosen because of their relevance to the triplets, but the- all offer an exciting re1uvenation in management thinking in general) &elationship marketing /ncreasingl-, relationships and interactions bet+een suppliers, customers, competitors, and others are being considered in marketing under the label of relationship marketing, 3M) 3M is not onl- highl- applicable to services, but services marketing has also provided input to the general 3M paradigm) Kther significant contributions to 3M come from the net+ork approach to industrial marketing see e)g) "emMnden and $alter, %&&94 *urnball and #alla, %&': ! but also from *>M) 3M is a ne+ term for an ancient phenomenon, but its domain is not -et +ell laid out) *he author,s definition of 3M is general to all t-pes of marketing: =3elationship marketing is marketing seen as relationships, net+orks and interaction?) *he =parent relationship? of marketing is that bet+een a supplier and a customer) @et+orks are sets of relationships and in the relationships, the parties enter into interaction +ith each other) *his definition offers a perspective and a broad vie+ of 3M and translates into a recommendation: =Hut on the relationship e-e8glassesN? *hese e-e8glasses allo+ -ou to focus on relationships, net+orks, and interaction and help -ou to see these core variables more distinctl- and in more detail) *here are other definitions of 3M, most of them +ithin the spirit of the relationship e-e8glasses but phrased differentl-) 0or example, to Ballant-ne %&&7, p) C! 3M is =An emergent disciplinar- frame+ork for creating, developing and sustaining exchanges of value, bet+een the parties involved, +hereb- exchange relationships evolve to provide continuous and stable links in the suppl- chain?) See also Berr-, %&&94 Bund 5ackson, %&'9, p) %:94 Morgan and Hunt, %&&7, p) BB4 Horter, %&&C, p) %7!) *he broader vie+ of 3M includes all t-pes of marketing, both business8to8business marketing to fe+ bu-ers and consumer marketing to thousands or millions of consumers4 both services marketing and goods marketing4 and both distant contact through information technolog- and other media, and face8to8face contact) *he "ummesson approach to 3M identifies C6 business relationships, the C63s "ummesson, %&&G!) /n the C63 approach, a distinction is made bet+een three t-pes of relationships) *he first is market relationships +hich are relationships bet+een suppliers, customers, competitors, and others +ho operate directl- in the market) *he service encounter belongs to this t-pe, and among the others are the supplier8customer d-ad4 the triad of supplier8 customer8competitor4 the ph-sical distribution net+ork4 and the customer as member of a lo-alt- programme) *he next t+o t-pes are non8market relationships +hich indirectl- influence the .ualit-, productivit-, and profitabilit- of market relationships) Kne is mega relationships +hich exist above the market relationships4 the- concern the econom- and societ- in general) Among these are mega8marketing lobb-ing to influence public opinion and political decisions!4 mega8alliances such as the European Anion setting a ne+ stage for marketing!4 and social relationships such as friendship and ethnic bonds!) *he other is nano relationships +hich

exist belo+ the market relationships4 the- concern the internal operations of an organi2ation) Examples are the relationships bet+een internal customers, and the relationships bet+een internal markets that arise as a conse.uence of the increasing use of independent profit centres, divisions, and business areas inside corporations) 3M sets the spotlight on collaboration and in the author,s vie+ this is its most important contribution to marketing) 3M belongs to the triplet famil- and +ill be used here to stress that profitabilit- in service operations is highl- dependent on collaboration bet+een parties such as in the service encounter) /t has been a +idespread postulation that improvement in customer perceived .ualit- +ill increase customer satisfaction, lo-alt-, and profitabilit-) A number of authors have suggested customer relationship lifec-cles +ith virtuous circles or profit chains, all follo+ing a similar pattern: good internal service .ualit- O satisfied emplo-ees O emplo-ees sta- O good external service .ualit- O satisfied customers O customers sta- O high profitabilit"rJnroos, %&&64 @ormann, %&&%4 Schlesinger and Hallo+ell, %&&74 Schlesinger and Heskett, %&&%!) *he logic seems indisputable but the outcome is not automatic4 satisfaction does not b- itself lead to retention and profits) *he provider must activel- maintain the customer relationship to make it sustaining and provide incentives for repurchase lo-alt-) Kf particular interest here is the conclusion that customer retention and repurchase is a ke-, ma-be even the ke-, to profitabilit- 3eichheld, %&&:!) *he longer the customer sta-s +ith a supplier, the better the profitabilit- provided of course that the customer is contributing to profits in the first place!) 3M has a series of profound conse.uences for the triplets:

*he rationale for 3M is usuall- presented to be increased customer lo-alt- and customer retention) 0ocus has shifted from investing the ma1or marketing resources into attracting ne+ customers, to caring for existing customers and providing them +ith incentives for repurchase) /t can be expressed b- the slogan: =Court -our o+n customers before -ou start courting -our competitors, customersN? /n caring for existing customers, the interest in customer share 8 in contrast to market share 8 is gro+ing) /t means that -ou +ant existing customers to fill more of their needs of a product or service from -ou, thus exploiting the customer base for more sales) /ncreased customer retention and duration of a relationship +ill lo+er marketing costs and conse.uentl- enhance marketing productivit-) Maintaining existing customers is usuall- less costl- than attracting ne+ ones) *he relationship must be +in8+in if it is going to be a long8term and constructive relationship4 all parties involved co8produce value and must derive individual value out of the relationship) @o happ- marriage is based on a +in8lose relationship) /n a relationship, it is not 1ust one part- that takes initiatives, it is an interaction on e.ual and respectful terms) Suppliers, customers and all others involved in a net+ork of relationships have a responsibilit- to be active parties) /ncreased customer retention and duration, as +ell as the building of more stable relationships +ith other parties, increase securit- and help to establish trust and commitment over a longer period) *his facilitates marketing and makes the outcome more predictable)

Eong8term service customers become better co8producers, +hich facilitates production and deliver-) >ualit- defects go do+n and it becomes easier to clear up misunderstandings and complaints) Service providers can graduall- build up kno+ledge about their customers and target their offerings to individual customer needs) $ithin limits, customers become less price8sensitive)

As 3M offers a fundamental focus shift in marketing, it cannot 1ust be pasted on existing organi2ational structures) 3M must 1oin forces +ith an organi2ation theor- that corresponds to its re.uirements and recogni2es net+orks of relationships and interactions as the foundation for business) *he ne+ theor- of imaginar- organi2ations provides such a partner) "maginary organi ations According to Hedberg et al. %&&G!, the imaginar- organi2ation is a s-stem +here crucial resources, processes, and actors are found and managed not onl- inside but also outside of a compan-,s legal boundaries, official accounting reports, and organi2ational charts) *he imaginar- organi2ation is a net+ork of relationships) /t has a core consisting of a leader compan- and an =imaginator? the leader, the entrepreneur! and hisPher strategic map4 a customer base +hich is tied to the leader compan- through production, deliver-, market communications, and pa-ment s-stems4 partnering companies and others that contribute resources4 and shared interests and a mission that keeps the net+ork together) Because of the extensive use of outside resources resourcing or outsourcing!, an imaginarorgani2ation is larger than it seems from the organi2ational chart and more resourceful than the balance sheet indicates) /t is an inclusive organi2ation, not exclusive as the tradition prescribes as it involves customers in co8production of value, treating customers as part8time and temporar- members of the organi2ation) 0urthermore, it dissolves tribal territories and knocks do+n +alls erected b- functional specialists as +ell as +alls bet+een hierarchical tiers) /t is based on processes rather than functional structures) /nformation technolog- often helps to create totall- ne+ and imaginar- organi2ational designs) *he imaginar- organi2ation is a pulsating net+ork that continuousl- changes shape and is perceived differentl- b- each and ever-one, depending on +here and ho+ the participant is engaged in the net+ork *he aforementioned Skandia A0S is an imaginar- organi2ation consisting of %,B6G,666 customers4 G6,666 contracts +ith independent brokers and banks4 B,BCG emplo-ees spread globall- in =competence centres?4 and a central core competence of :6 people Skandia, %&&G!) /t co8produces services +ith its customers and gro+s through alliances +ith customers and distributors) Allies, not o+n personnel, constitute the ma1orit- of those engaged in the compan-) /n order to make 3M and its organi2ational base 8 the imaginar- organi2ation 8 manageable, suitable ke- indicators of success and failure are needed) $e have to find out ho+ to measure return on relationships "ummesson, %&&G!) *he balanced scorecard and the notion of intellectual capital are conducive to that ver- task) &eturn on relationships! applying the balanced scorecard and intellectual capital *raditionall-, the balance sheet consists of tangible assets: mone-, inventor-, machines, and buildings) /t is not particularl- informative about service companies and kno+ledge8intensive

companies) /n the 1argon of the balance sheet, the human being is +orthless, +hile the chair on +hich she sits represents a value +hich is onl- slo+l- depreciated according to some accounting principle) *he customer represents no official value) Ho+ever, +hen a compan- is sold or its stock is traded on an exchange, bu-ers pa- for intangible assets =good+ill?! and expected future earnings) Accounting s-stems do not measure the profitabilit- of relationships Storbacka, %&&7!) *here is, ho+ever, gro+ing dissatisfaction +ith the accounting tribe and its preoccupation +ith short8term return on investment and tangible assets) /n order to make 3M and the imaginarorgani2ation +ork, there is a need to rethink the financial indicators and broaden them) *his is done in the balanced scorecard, +hich registers not onl- financial capital but also other t-pes of capital) /ts original version contains indicators in four groups of capital Iaplan and @orton, %&&:!: financial, customer, internal business process, and learning and gro+th) *hese added groups of capital are named intellectual capital Edvinsson and Malone, %&&G4 Sveib-, %&&G!) /ntellectual capital can also be divided into individual and structural capital) /ndividual capital consists of emplo-ees and their .ualities) /t includes kno+ledge, skills, behaviour and motivation, but also an individuals, net+ork of market, mega, and nano relationships) *hese relationships are personal and have been established over a long period +hen an emplo-ee has gained the trust and confidence of customers and other net+ork parties) *he po+er and prestige of individual capital is evident for an advertising agenc- or a partnership of la+-ers +ho thrive on their personal interaction +ith clients) *here is also capital built into an emplo-ee +ho has the abilit- to gain a customer,s confidence .uickl-, a personalit- trait +hich is particularl- precious in a salesperson) 0or example, the top performing Electrolux door8to8door vacuum cleaner salesman of all times sa-s that knocking on doors gave him onl- B6 seconds to gain the confidence of the consumer) /f an emplo-ee leaves a compan-, the individual capital vanishes4 the emplo-er borro+ed the emplo-ee from nine to five, one da- at a time) /ndividual capital is migrator-, it can be transported) Structural capital on the other hand is embedded in a compan- or net+ork and is inseparable from its environment) /n an 3M sense, structural capital consists of relationships +hich have been established b- a compan- as such and are tied to culture, s-stems, contracts, image, and the net+ork to +hich the compan- belongs) *he more successfull- a compan- ties its relationships to the structure, the less dependent it is on an individual emplo-ee) *he European computer consultant $M8data, +hich has been exceptionall- successful +ith sustainable profits and gro+th over a long period of -ears, sa-s that =Kur structural capital embraces the abilit- of our emplo-ees to use their professional and personal .ualities to create and maintain superior relationships to the environment) *herefore, it is prestigious for a $M consultant to establish and maintain customer relationships? $M8data, %&&B!) 0or man- -ears, Skandia has been experimenting +ith its o+n special variant of the balanced scorecard and intellectual capital indicators) Among indicators that are no+ reported in a supplement to the official annual report are availabilit- on the telephone4 an index of customer satisfaction4 number of customers4 retention rate4 the ratio bet+een cost for business development and total cost4 the ratio bet+een number of emplo-ees and information technolog- investment4 number of ideas for improvements4 and revenue from ne+ services Skandia, %&&G!) After some -ears, time8series can be developed and trends be discerned) 3eichheld %&&:! convincingl- outlines the connection bet+een the triplets and the need for ne+ indicators) According to his findings, companies +ho stimulate customer, emplo-ee, and

investor lo-alt- are ampl- re+arded) 0or example, the advertising agenc- Eeo Burnett onlloses B per cent of its customers per -ear and its productivit- is %98B6 per cent higher than that of its principal competitors) Chick8fil8A, a chain of :66 .uick service restaurants has a turnover of store operator of 78: per cent per -ear +hile the industr- average is 76896 per cent) Moreover, the store operators earn 96 per cent more than those of competing restaurants) Compared to industr- average, State 0arm /nsurance agents sta- t+ice as long, it has a productivit- +hich is 76 per cent higher, and the customer retention rate is &9 per cent) Eexus, *o-ota,s luxur- car, has the highest repurchase rate in the premium car bracket4 it is B per cent of *o-ota sales but accounts for CC per cent of *o-ota profits) /n a comparison bet+een nine industries 8 among them credit card services, industr- laundr-, and auto repair 8 in +hich the defection rate +as reduced b- 9 per cent, the profits gre+ b- B9 to '9 per cent) Credit card compan- MB@A America reduced the defection rate from %6 per cent to 9 per cent +hich +as half of the industr- average and profitabilit- +as dramaticall- improved) An average cardholder +ho sta-s one -ear causes a loss of Q9%, one +ho sta-s for five -ears a profit of Q99, and one +ho sta-s for B6 -ears a profit of Q9B9) 0or industr- laundr-, the profit for -ear one +as Q%77 and for -ear five QB9:4 for auto repair, QB9 for -ear one and Q'' for -ear five) /f defection rates go do+n from B6 per cent to %6 per cent per annum and further to 9 per cent, the duration of the customer +ill increase from five to ten to B6 -ears +ith a conse.uent increase in customer lifetime profits) /f a customer is lost, the +hole of the future profit potential goes do+n the drain) Getting it all together and asking the di((icult questions 0igures B and C sho+ed simple, d-adic and interactive relationship bet+een providers and customers) 3M re.uires the building of strategic net+orks including customers but also competitors, research institutes, government agencies and others) *hese are both market relationships and mega relationships) But 3M also re.uires the building of nano relationships, those =inside? the organi2ation, to make sure that these internal customer relationships end up in external customer relationships) $e have then left the d-ad for more complex net+orks of relationships +hich expand into imaginar- organi2ations) 0igure 7 sho+s the principle of a net+ork of relationships) /t is perhaps a be+ildering picture 8 but it is a realistic one) /n such net+orks, all parties affect each other and conse.uentl- the evolution of productivit- and .ualit- becomes much more intriguing than toda-,s simplistic models suggest) $ithin the theme of this article, a series of challenging .uestions arises:

Ho+ should service productivit- and .ualit- be defined in a complex net+ork of relationshipsD Ho+ should +e manage service productivit- and .ualit- +hen so man- independent parties are involved and influence the outcomeD $hat indicators should +e use to monitor service productivit- and .ualit- in a net+orkD Ho+ should +e measure return on relationships and ho+ should +e evaluate the contributions to profits from the various actors in a net+orkD

$e are struggling +ith these .uestions in our research) *he appearance of a series of novel approaches to management indicates a gro+ing interest in providing ans+ers) *he notions of the service encounter, relationship marketing, imaginar- organi2ations, the balanced scorecard, and intellectual capital ma- currentl- provide more confusion than solution)

Ho+ever, +e need to deal +ith them, the- attempt to capture phenomena that do exist 8 +hether +e approve of their existence or not) *ecommendations Although +e onl- partiall- kno+ the ans+ers to the .uestions that have been raised in this article, +e venture to present some recommendations for service business:

both at independent provider and customer contributions to the triplets and at interactive contributions) if more of a service can be produced b- the customer, thus unloading costs 8 but not at the expense of service .ualit-) $hen customers do more, sometimes the .ualit- is enhanced at the same time as service productivit- goes up) ho+ customer8to8customer interaction can enhance productivit- and .ualit-) service production and marketing as interactive events +here relationships are established +ith the customer, and +ork on the reinforcement of these relationships) Eo-al customers contribute more to profits and cost less than temporar- customers) service production +e need both technolog- and the human touch to maintain and improve service productivit- and .ualit-) Although information technolog- +ill exert a ma1or influence on service businesses, it is not a panacea) a compan-, its customers, and all others in the compan-,s net+ork as allies and partners) *he- are all parents to the triplets)

$ote % >ualit-, productivit-, and profitabilit- in service operations *he >HRH 3esearch Hrogramme! as +ell as 3M and ne+ organi2ation theor- 8 imaginar- organi2ations 8 are themes for ongoing research at Stockholm Aniversit-, S+eden)

'able "Profile of the triplets

(igure )The triplets at play

(igure *Service productivity and service quality induced by the provider and the customer as ell as by the interaction bet een the t o

(igure +!ustomer"to"customer interaction in hich service productivity and service quality are induced by customers individually and in interaction ith each other