Limiting losses from service failure?

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Limiting losses from service failure?

The loyalty potential of corporate social

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Table of Content

1.

Introduction ... 6

1.1 Aim of the research ...8

1.1.2 Research questions ... 9

1.2 Academic & Societal Relevance ...12

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Literature Review ... 14

2.1 Critical Incidents ...14

2.1.1 Severity ... 16

2.2 Service Recovery ... 17

2.2 Corporate Social Responsibility ...19

2.2.1 Corporate Benefits from the use of CSR ... 20

2.2.1.1 Effect of CSR on consumers’ attitude & behavior... 22

2.2.1.2 Effects of CSR on operational business ... 24

2.2.2. Interaction effects of CSR... 25

3. Research Design ... 29

3.1 Research method ...29

3.2 Participants & Design...29

3.3 Procedure ...30

3.4 Variables and covariate ...32

3.4.1 Dependent variable, Customer loyalty... 32

3.4.2 Independent variable, severity of the critical incident... 32

3.4.3 Independent variable, perceived satisfaction from the service recovery ... 33

3.4.4 Independent variable, communicated CSR of the company... 33

3.4.5 Covariate, CSR support scale ... 34

3.4.6 Demographic questions... 34

4. Analysis & Results ... 37

4.1 Descriptive statistics ...37

4.2 Reliability scores of variables ...38

4.3 Manipulation check ...38

5. Conclusion & Recommendations ... 42

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6. Limitations & Further Research ... 45

References ... 47

Appendices ... 55

Appendix 1 ...55

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Menno L.J. Koopman

Rijksuniversiteit Groningen

Faculty of Economics & Business

Thesis Msc. Business Administration - Marketing Management

Noord 67

1741 BC Schagen

tel. 0031-619079628

m.l.j.koopman@student.rug.nl

s1609645

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Management summary

Despite the fact that most service companies have the satisfied and loyal customer as one of their highest priorities and do their very best in order to achieve this goal, it often goes wrong somewhere in the process. If these mistakes are salient to the customer, then these errors (employee behavior, wrong or just bad service etc.) can be placed among the critical incidents and these can have negative outcomes for the firm like a diminished customer loyalty. A good service recovery ability is a vital skill for a company because these actions could increase this loyalty again after the corporate slips. The findings in this research confirm this and try with CSR to find a way to diminish the negative

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“Just trying to keep my customer satisfied”

1.

Introduction

“I want my life back”. That was the numerously quoted answer of the former BP chief executive officer on the question what he would like most after the oil spill in the Gulf of Mexico in 2011. The ecological catastrophe that followed the accident on the platform ‘Deepwater Horizon’, and the way BP reacted on it placed the company in a very negative perspective and had drastic financial implications that were partly caused by consumer boycotts (Cronin et al. 2011).

The consequences of this event and many others before them like Shells ‘Brent Spar’ or Nikes alleged child labor shows that customers are more and more concerned about how companies do business and that responsibility and ‘going green’ must not be neglected as a viable organizational strategy with specific implications for marketing as well. Besides the fact that corporate social responsibility (CSR) is almost a must for many well-known global businesses, Bhattacharya and Sen (2004) see in CSR an innovative and less imitable way to reach the so very important goal of strengthening consumer relations and create loyal customers. CSR is innovative because of the fact that the company is not only traditionally focused on the core business like the production of service delivery anymore but picks up new feelings and ideas from society. It is also less imitable because the implementation differs from company to company in order to benefit from the various positive outcomes as will be discussed further in this research.

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that these customers are known for their repeat business and they are less likely to shop around for the best deals (Bowen & Chen 2001).

Retention of the customer remains difficult because of heightened competition and the instant access of (product) information made possible by the use of internet and smart phones that may lower the price and quality tolerance of the customer (Lower prices paid by customers in established industries are found by Zettelmeyer et al. 2005).

It is even expected that frictionless commerce based on perfect information could lead to the erosion of profit (Brynjolfsson & Smith, 2000). But not only these changes that come from today’s increasing connected world challenge companies, also more straightforward ones. Even today many companies still have difficulties with the activities that belong to the very core of their raison d’être. Incidents with the sold product or service, slow service, inapt employee behavior and others fundamental errors can happen at any company and might never be fully eradicated, but they must be managed very carefully for they carry with them the risk of losing customers and repeat purchases.

The outcomes from these mistakes could be very harmful for the company, especially in this age where popular media like the Internet is filled with stories of outraged customers that are easily shared. Whenever an incident occurs this could have implications for the customer relation that consequently could affect customer behavior (Edvardsson & Strandvik 2000).

In order to cope better with these difficulties and to improve the recovery of these

8 1.1 Aim of the research

This research will focus on two main relations and the impact of CSR on these relations. The first relation is between the perceived severity of errors that sometimes happen in businesses and their impact on customer loyalty. The second relation is about the impact of the satisfaction that people get from companies’ actions that try to make up for these failures or the service recovery, on customer loyalty. The errors concerning the first researched relationship are often referred to as critical incidents. A critical incident, or CI makes a significant contribution to an activity or phenomenon (Grove & Fisk 1997), and these incidents distinguish what is and what is not essential to the customer, they can be good or bad and can be experienced as severe or less severe. The negative variant is used in this research and so these negative CI’s can be defined here as out-of-the-ordinary events during an interaction that customers perceive or recall as unusually negative (Roos 2002).

In trying to find possibilities to diminish the damage a company suffers from a CI (what could precede customer churn) the impact of CSR activities on this relation is researched. These activities, intended to portray an image of a company that is responsive to the needs of the society it depends on for survival (Smith 2003), might be remembered by customers when they are encountering a CI and so they might think twice before switching to another brand or company. The exploitation of these effects are ranged in the literature under the so called instrumental view on CSR where corporations do not attend CSR for altruistic reasons but just because of the fact that it is good for business (Buelens et al. 2011).

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can have great impacts on satisfaction and purchase intentions, when indicated as (very) satisfactory (Maxham 2001).

Besides the influence of CSR on the CI link to customer loyalty, this research also looks at the possible influence of the companies’ CSR on the relation between customer satisfaction that comes from the firms’ compensatory actions and customer loyalty. With these concepts included the main issue researched here is stated as follows:

What is the influence of CSR on the relations between the severity of a CI and the service recovery on customer loyalty?

1.1.2 Research questions

In order to investigate this main question further, it needs to be divided into several smaller research questions. These questions are formed after the introduction and background knowledge on the concepts. These are then specified further in the form of researchable hypotheses on the basis of the literature review in chapter 2 and the following research design and results will provide further clarification and possible answers on the matters in chapter 3 and 4.

The first relation discussed here is the one between the severity of a CI and customer loyalty. How harmful negative critical incidents in the service sector can be is described inter alia by van Dolen et al. (2001). Here is stated that negative emotional responses to CI’s lead to diminished satisfaction, especially irritation can contribute to this, what in turn leads to unwanted behavioral responses like customer churn. For customers the CI’s regarding the product itself has a higher potential for evoking negative emotional

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retail negative experiences as critical incidents are a key cause of lost sales. This is around 10 to 30%, plus future lost sales because of switching behavior. (This loss could get even bigger if the additional cost to acquire a new customer is taken into account, that is around five times higher than retaining the old customer).

The loyalty of the customer after he or she encountered a negative CI is already

investigated by van Doorn & Verhoef (2008) under different relationship qualities, they state that customers with a low customer share will further lower that share or switch to a competitor after they encounter a negative CI. Edvardsson and Strandvik (2000) found only a minor impact on changes of behavioral reactions after hotel guests encountered different CI’s. Based on these researches, the first research question of the main issue is formed as follows:

Research question 1: In what way does the difference in severity of critical incidents impact the subsequent customer loyalty?

The second research question is about the impact that the service recovery process can have on customer loyalty. A service failure can happen at even the highest quality service providers and not all service providers take good care of this. There is still a wide

perception of dissatisfaction and ineffective service recovery in many modern service industries (Michel et al. 2009), and according to Berry and Parasuraman (1991) only 50-67% of the customers that experienced problems with a purchase from one of five different researched service companies were satisfied with the solution that was given by the provider. This lack of appropriate actions after a service failure by many providers can make the service recovery process a competence that successfully differentiates the company from its competitors. A valuable differentiation because a good service recovery, one that is indicated by the previously disappointed customer as (very)

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must shift ‘from the costs of pleasuring a customer, to the value of doing so’. This leads to the formulation of the second research question as follows:

Research question 2: In what way does the difference in service recovery satisfaction influence the subsequent customer loyalty?

The third and fourth research questions concern the concept of corporate social

responsibility. The awareness of these possibilities for companies and also indirect for consumers was boosted especially after the 2006 Oscar winning documentary on Al Gore’s campaign ‘An Inconvenient Truth’. The media attention for the environmental problems made major contributions to the awareness and willingness for both companies and consumers to reduce their “carbon footprint”. Through this way the green movement became an integral part of customer demand (Vandermerme and Ollif, 1990) with a customer base that is rapidly increasing (Bonini & Oppenheim 2008).

Kinnear et al. wrote already about a business opportunity in ecologically concerned consumers in 1974. The authors come up with the level of ecological concern a person demonstrates as a function of both his attitudes and behavior. They state that people high in tolerance and understanding form an ecologically concerned market segment that may exist in a size large enough to warrant exploitation (Kinnear et al. 1974). Today this segment is addressed by more and more mostly progressive and sustainable companies. The environmentally aware consumer chooses consciously for the often more expensive sustainable product and an important driver for this is researched under the title PCE, or perceived consumer effectiveness. It is an individual’s belief that he or she can make a difference or impact by purchasing environmentally friendly products, and is an important predictor of green consumption (Roberts 1996).

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Eisingerich et al. (2011) investigated the role of CSR already in a way that it makes customers resist negative information about the firm. This was only true for new customers and the experts within the customer base are more satisfied with a company focus on the service quality. Unlike the latter research where CSR might give insurance-like protection against negative publicity, the customers own experience with the company is crucial in this study. This leads to the third research question:

Research question 3: How does the communicated corporate social responsibility of a company influence the relation between the severity of a critical incident and customer loyalty?

The influence of CSR can also be significant on the relation between the service recovery satisfaction and customer loyalty when looked at the proven willingness of customers to reward a company that involves in ethical business. The positive feeling from a good service recovery can be enforced by the appreciation of the use of CSR by the customer that might also intensify the repaired customer – company identification that comes from the service recovery. The customer has then the chance to translate this into a higher loyalty score. The last research question can be stated as follows:

Research question 4: How does the communicated corporate social responsibility of a company influence the relation between the service recovery satisfaction and customer loyalty?

1.2 Academic & Societal Relevance

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demanding way during an interaction, and this facilitates a power shift from the provider to the customer.

This research could help service providers to better cope with the outcomes of CI’s, improve their service recovery outcomes with this showing another advantage of the implementation of CSR in business activities. Eventually it might even motivate more firms to produce and act in a more responsible and sustainable way. Letting the customer know of these actions (with carefully designed communication), the appreciation from customers could be expressed and might contribute to the customer relationship building. Besides this large possible customer retention benefit residing from the room for CSR activities in the budget and communication, green labels that come from a more

conscious way of doing business create advantages for society as well. A valuable insight that might turn the view for firms that still see CSR programs as a reaction to external pressure, and think that more spending is an irresponsible use of shareholders’ money (Porter & Kramer 2011).

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2

Literature Review

In this chapter information and academic findings from the concepts related to the research questions will be presented and discussed. For the first research question these will be the critical incidents and the (perceived) severity of these by consumers. The process of service recovery is explored in order to structure and base the further examination of the second research question. This section ends with a detailed look at corporate social responsibility. Findings on CSR and their effects on business and

consumers will be discussed for the third and fourth research question. At the end of each section these will be narrowed down in hypotheses in order to make the matter in

question researchable and the chapter ends with an overview of the hypotheses together with the conceptual model.

2.1 Critical Incidents

The everyday challenge that service providers have is to meet -or better yet exceed- customer expectations. Though not often shown, the customer has certain minimum service level expectations before buying or undergoing the service itself. These standards are not always clear for the service provider and may stay subconscious until a service failure occurs and/or the customer starts complaining. For services, where often few tangible cues exist, it is more difficult to assess the quality objectively then for goods, where the objective quality standards easily can be checked and compared (Parasuraman et al. 1985).

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service and firm that remain in his or her long-term memory (Bejou et al. 1996). These CI’s are sources of customer dissatisfaction and nowadays widely used to explore marketing and management issues in the service context.

The first main relation used in this study is the one between the perceived severity of negative CI’s and customer loyalty. The CI - Loyalty relation is already investigated by van Doorn and Verhoef (2008), where “business as usual” is assumed in an ongoing exchange history by both parties. This relation is suddenly not so obvious after a CI and this disturbance can reposition the link between satisfaction and customer share. The impact of the negative CI on the satisfaction and customer share is depending upon the scores of these variables from the period before the incident occurred. Low scores will decline even further because of the CI, and higher scores beforehand will lower the impact of the incident because of the ‘positive barrier’.

In a research on e-commerce transactions to understand the factors that create satisfaction or dissatisfaction and their impact on the long-term customer – firm relations, 22% of the customers who experienced a negative CI when using the web sites to conduct

transactions said they were very likely to use the e-commerce site again (Oldenburger 2008).

Bitner et al. (1990) come up with a classification of 3 major groups of incidents in several high-contact service industries, i.e. employee service delivery failure, employee response to customer needs and unsolicited employee actions. They also indicate that CIs cause dissatisfaction with the customers that could turn into a switch in service provider because the confidence in the company becomes uncertain.

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Looking at the findings from researches on critical incidents, it would be plausible to state that a critical incident might very well have an impact on customer loyalty. But in order to gain a clearer insight into the first research questions another related notion must be discussed as well. The perceived severity indicates the impact the critical incident has on customers and differs from one person to another.

2.1.1 Severity

An errorless service at all times is practically impossible, the chance that a CI can occur is always present but some problems could be perceived by customers as more intense than others, with different behavioral and eventually financial consequences for the company. These differences are labeled as the severeness of a CI. (In the research by Chung-Hererra et al. (2004) the 5 different failure categories were all rated different in terms of severity and also Maxham & Netemeyer (2002) show that CIs can very well vary in content and severity)

When a severe CI occurs, it is very well possible that the likelihood of customer identification with the values of the service provider decreases as well as the desire to continue the relationship (Keaveney, 1995). Besides the actual happenings, specific conditions can also make a CI feel more severe than others. A service failure that happens in the early stage of the relationship with the company will have more impact than in a later stage because there are not yet many experiences to counterbalance that failure (Boulding et al. 1993), and if it is the second time that a CI occurs, this will be seen as more severe when the customer still remembers the first failure (Maxham & Netemeyer, 2002). Perceived severity can change between different parts of the service. Research by N’Goala (2007) showed that the most critical incidents in the financial service industry are those in the service encounter, or the contact with the employees. This led to the lowest resistance to switching behavior among customers, whereas customer

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The importance of preventing severe CI’s is shown in many studies, for instance Miller et al. (2000) state that when the incident becomes more severe to the customer, the problem is less likely to be resolved, and even an outstanding service recovery after the incident could fail to provide the customer with a sufficient level of satisfaction to counter the loss of time and money, inconvenience and frustration (Smith et al. 1999). In the research of Weun et al. (2004) is stated that severe service failure also have negative main effects on customer commitment, trust, and that it increases the likelihood of engaging in negative word-of-mouth after the service failure.

With these findings a more structured basis for the analysis of research question 1 can be made. A more severe critical incident could have a higher negative impact on the

customer loyalty then a less severe critical incident.

This research question must be more focused in order to turn it into researchable problem, and so hypothesis 1 is stated as follows:

H1: The perceived severity of a critical incident has a negative influence on customer loyalty.

2.2 Service Recovery

Although most service providers try to deliver high quality services and have a strong customer orientation, there is always a possibility that a service falls below the

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The task to try to satisfy the customer the second time could take more effort because Parasuraman et al. (1991) suggest that “will expectations”, the minimum performance level expected or adequate expectations from the customer, will rise when there are problems with the initial service delivery. Because of the heightened attention and

evaluation customers have after a service failure, the recovery process could also be more salient to consumers.

With compensatory actions (like extra attention and fixing the problem, or sincere apologies) a negative CI can very well be remembered as very satisfactory. This

secondary satisfaction is also known as the “service recovery paradox” and can raise the satisfaction level even higher than before the service failure (Bitner et al. 1990, Hart et al. 1990). Another advantage that the company could get from a moderate to high level of problem resolution is positive word-of-mouth spread by satisfied customers and a

significant increase of purchase intent (Maxham, 2001). The demonstrated effort in order to make a proper service recovery might even produce a “halo” effect for other

dimensions, like the fairness of actions or outcomes (McColl-Kennedy & Sparks, 2003). On the other hand, poor recovery can exacerbate the displeasure aroused by the service failure; Bitner et al. (1990) call this the “double deviation” from expectations, as it is the second time that a company fails in the service delivery. Smith & Bolton (1998) also point out that the cumulative effect of ignoring service recovery management can be staggering in terms of CLV (customer lifetime value).

The perception of a satisfactory service recovery can have a positive influence on customer loyalty. The hypothesis that follows from this second research question here is then stated as follows:

19 2.2 Corporate Social Responsibility

Letting the world see that a company is ‘doing good’ has become an integral part of daily business, sometimes highlighted in the media (like the use of free-range chicken in Unilever-products) but almost always projected on the corporate website under the name ‘corporate social responsibility’, or ‘CSR’. These activities are those that ‘reflect the organization’s status and activities with respect to its perceived societal obligations’ (Brown & Dacin 1997:68). It can take many forms, including philanthropy, cause-related marketing, environmental responsibility, and human employee treatment among others. The growth in the past decade of CSR activities and the significant amounts of money invested in order to be (perceived as) socially responsible shows off in the fact that over 90% of the Fortune US 500 companies engage in CSR actions (Eisingerich et al. 2011).

The neo-classical view of stockholder theory, where managers lead a company with the focus solely on the interests of the stockholders while confirming only to the basic rules of society, has a clear difference and potential conflict with the alive and flourishing stakeholder theory that currently has the upper hand at many companies.

This theory, made popular in 1984 by Freeman, takes a wider spectrum into account than only the stockholder (Agle et al., 2008). This ideology includes balancing the sometimes conflicting demands of stakeholders like customers, suppliers, unions and the community. The stakeholder theory can ‘point for a need for social controls to encourage the

beneficial effects of institutional behaviors and to regulate or prevent the harmful effect’ (Alge et al. 2008:162). Together with this theory the related concept of corporate social responsibility where firms contribute positively to society also gained a lot in popularity. The definition of CSR that is used here is the extent to which a firm benefits and

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Many corporations communicate their “doing good” through advertisements and packaging or have a CSR page on their website with regard to pollution, waste or charitable deeds for the community, but future guarantees for explicit targets in terms of impact are rare. Only few businesses like Ben & Jerry’s and The Body Shop

distinguished themselves through their long-term commitment (Porter & Kramer 2006). Even some question marks can be placed at the latter because The Body Shop, that became associated with perceptions of high quality products with its natural ingredients and environmental friendly practices, was in recent times bought by L’Oreal that still engages in limited animal testing. The Body Shop was despite the huge startup success financially suffering as a stand-alone entity at the time of the takeover (Devinney 2009). These two companies communicate their CSR to consumers very extensively and at many other firms this has become an important part of marketing as well. The reason for this is the fact that these actions have more effects than just the costs of the charitable deeds to address the customers’ social concerns as will be described in the following section.

2.2.1 Corporate Benefits from the use of CSR

Prior research on CSR activities came up with various company-favoring effects and to keep these orderly a division is made between two sections. After a further introduction of the evolvement of CSR in business the first section will discuss the effects of CSR on consumers that can be described on an array of cognitive, affective (e.g., beliefs, attitudes, attributions, identification) and behavioral (e.g., loyalty) outcomes (Sen & Bhattacharya 2006). The second section is about the operational benefits that have been found in the literature.

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(Chatterji & Levine, 2006), the involvement in this kind of activities is becoming

increasingly important for firms when looked at the possible paybacks that it brings along. CSR influences cognitive, affective and behavioral outcomes from consumers and

thereby also has the ability to influence long term stockholder value (as can be seen in the next section), countering the claim that is strongly identified with neo-classical

economics that CSR is merely a cost that competes for the firm’s limited financial capability (Aupperle et al. 1985). The complete rejection of CSR as proposed by Milton Freeman in his book Capitalism and Freedom (1962) can be called outdated as by some CSR is not even concerned as a luxury, but an imperative to secure stakeholders’

continued support.

In some cases the implications go even further than support. Firms may be forced to follow a competitor in the industry that starts off with certain CSR actions because of the fact that latecomers might incur huge disadvantages that could even put the survival of the firm at stake. When a certain company invests in CSR it could very well gain advantages from it in terms of cost savings (the change to environmental friendly food wrapping material at McDonalds reduced the company’s solid waste with 30% (Porter & Kramer, 2006)), innovation or product differentiation that could prove to be vital for survival in the industry. A classic example here is the case of DuPont that got policy-makers to phase out the use of chlorofluorocarbons (used in refrigerators) that damage the ozone layer. With a sustainable substitute they managed to create a strong competitive advantage (Buelens et al. 2011).

That CSR can be a double edged sword is also shown in the research by Luo &

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2.2.1.1 Effect of CSR on consumers’ attitude & behavior

In his research Peloza (2006) confirms the role of CSR for stakeholder support with the finding that corporate ethical behavior is expected by customers, and furthermore he states that CSR can be considered as a wise investment for companies because it provides incremental gain in good times and it diminishes negative publicity. In short it functions as some sort of insurance for the firm’s financial performance through their reputation. In the 2011 research of Eisengirch et al. is stated that this insurance from CSR is most effective for low expertise customers and that it does not shields firms from negative information that is related to the firm’s core service offerings.

The incremental gains include the fact that CSR affects consumers purchase motives by the willingness to pay higher prices, and that it “punishes” unethical companies by the willingness to pay only low prices, or even boycotting their products (Creyer & Ross 1997, Klein et al. 2004). There is a significant positive relationship between consumer awareness of CSR activities from the company and purchase intent, this occurs when there is a fit between the company’s core business and the selected cause and length of the commitment (Ellen et al. 2006).

Another company favoring behavioral outcome from CSR activities is very important for this research namely that consumers were willing to switch brands (Sen & Bhattacharya, 2001) in favor of the responsible company. Berens et al. (2007) come up with outcomes regarding to the customer relationship and say that the influence of CSR has a positive effect on product evaluations only when there is a high fit with the companies’ core business or low involvement of the customer. On the other hand, the evaluation of the company and the product could be downgraded by the company’s potential customer if he or she thinks that the CSR effort by the company is realized at the expense of the CA, or corporate ability to produce quality products (Sen & Bhattacharya, 2001).

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cause for every product that is sold. When the CSR actions are relevant or linked to the company’s existing products, the company is also seen as more favorable (Sen & Bhattacharya, 2001).

Most marketing actions undertaken by companies usually have the goal to let the customer like or admire the brand but communicated CSR goes deeper and lets people see the human side or character of the company and allows people to identify themselves with this (Bhattacharya & Sen 2003). Consumer-company or C-C identification, based on a substantial overlap of both perceptions, makes the customer care about the company and its products and leads to positive attitudes towards a company by attributing positive motives and high ethical standards to the firm.

Before trying to achieve this, companies first might want to question themselves if this identification is what they want because especially companies with a vast customer base can make a certain segment identify with the company what might lead to

dis-identification with other segments, and this could restrict the company’s strategic freedom (Elsbach & Bhattacharya, 2001; Bhattacharya & Sen 2003). The identification process happens only when the motives of the company come across as sincere (Yoon et al. 2006). Sincerity is also a necessary condition for improving the company’s image when it is troubled with a bad reputation, and depends on the benefit salience of the cause, the source through which customers get to know about the philanthropic deeds and the ratio of the CSR advertising – CSR contributions. Low sincerity perceptions can even lead to more negative company evaluations then before the CSR activities (Yoon et al 2006).

24 2.2.1.2 Effects of CSR on operational business

Besides the effect that CSR has on consumers that eventually shows off in the books like the increase of the firm’s market value through the mediator of customer satisfaction (Luo & Bhattacharya 2006), there are also direct benefits to the operational side.

Some examples are intentions to seek employment with the firm with a higher probability of accepting a job offer (Greening & Turban, 2000), an increase in cooperation between employees on the job (Bartel, 2001), and investors have a higher intention to buy the company’s stock (Sen & Bhattacharya 2006).

Environmental risk reduction by firms lead to operational savings, but also lowered the cost of equity capital and an increase of debt a company can take on (Sharfman & Fernando 2008). The intention to invest in the company’s stock after they became aware of the large company donation to a NGO or non-government organization by individuals also rises (Sen et al. 2006). This investment might also be a wise decision because of the fact that the firm’s corporate social performance, or CSP that is earned by engaging in CSR activities, has a strong impact on the lowering of the firms idiosyncratic-risk, or the risk associated with firm-specific strategies, of the stock price (Luo & Bhattacharya, 2009).

25 2.2.2. Interaction effects of CSR

After the introduction of the concept of CSR and the review on its benefits and applications, this last section is used to answer the last two research questions.

The customer that chooses consciously for the service of the provider that engages in CSR activities does this because he or she thinks that this aid or responsible way of doing business is the good thing to do and they can support this and show their appreciation by buying the particular service. A moderating effect of CSR on the main relation is

expected here because of a number of reasons. One of the effects of CSR as researched by Bhattacharya & Sen (2004) is the fact that the identification of customers with an organization engaged in CSR can clearly contribute to consumers’ self-esteem and general senses of well-being. The sense of well-being could be placed in a context that buying a CSR service gives a certain amount of pleasure to the customer, and this can be linked to Russells and Mehrabian pleasure-arousal hypothesis (1978), where increased pleasure is directly related to an approach tendency, in this case the CSR service. Wong’s 2004 research states that feelings of enjoyment serve as the best predictor of customer loyalty.

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The implementation of CSR by many companies indicates a change of focus or role. From a traditional exchange or production theory focus in a task environment companies change to seeing themselves more as an organic, indivisible part of the complex

environmental system in the institutional environment (Handelman & Arnold 1999). Customers neither see themselves solely as the individual economic actor but become increasingly aware of the fact that they are part of a wider community, where they take into account the general well-being of that community. With that in mind the CI at a CSR company could not have the big impact on loyalty but seem less important to the

customer. Combined with the findings of Kinnear et al. from 1974, that environmentally aware customer are high in tolerance and understanding, CSR actions could have a diminishing effect on the relation between CI and loyalty.

Another positive effect of CSR initiatives could be that a switching cost in the minds of the customers prevents customers (after a specific negative CI) from buying a different brand and stay with the sustainable brand even if the product experience was not that positive as that they had expected.

These so-called relational switching costs (mental instead of time, financial or effort related) (Burnham et al. 2003), are here the cost of a customer losing the idea of effectively counter the environmental or social problems, its perceived customer effectiveness or PCE, when choosing for a not sustainable product from a competitive brand. Not willing to incur this cost the customer might not make a big deal out of the CI and continue the relation with the company that corresponds with his or her moral values.

27 The hypothesis that follows this research question:

H3: Communicated CSR actions by a company will have a diminishing effect on the negative CI – Loyalty relation.

The final question that is researched here tries to give an insight into the influence of CSR actions on the relation between the service recovery satisfaction and customer loyalty. Besides the possible diminishing effect of the loyalty loss after a critical incident the CSR actions of a company could also make a difference when it comes to making up for the mistakes of the company. This moment is very important, as noticed earlier; the company must try to change negative perception of the critical incident. Creyer and Ross (1997) state that customers are willing to reward and encourage ethical business by companies. The effort that is done by the company to make up for the CI could lead to a moment where the customer can show this and appreciate the service recovery by judging it more positively.

The CSR that enhances customer satisfaction in the first time as found by Lou and Bhattacharya (2006) could very well also have a positive effect on the loyalty formation that comes from the service recovery. Companies that possess a strong CSR reputation are hold less responsible for a crisis and it reduces the risk of brand damage. (Klein & Dawar 2004) The consumer – company identification (Bhattacharya & Sen 2003) that is tried to be restored with the service recovery could very well benefit from CSR. The realization of the customer that on top of a satisfying service recovery the company does its best to care for society could also pay off in loyalty.

As is the case in hypothesis 3 the general attitude of people towards CSR has to be taken into account here as well in the form of a covariate. These findings lead to the formation of the following hypothesis:

28 2.3 Conceptual Model

This page comprises an overview of the explored hypothesis in this research and gives a visual representation of them in the form of a conceptual model.

H1: The perceived severity of a critical incident has a negative influence on customer loyalty.

H2: The perceived satisfaction from the service recovery has a positive influence on the up following customer loyalty.

H3: Communicated CSR actions by a company will have a diminishing effect on the negative CI – Loyalty relation.*

H4: Communicated CSR actions by a company will have a positive effect on the relation between perceived satisfaction of the service recovery and customer loyalty.*

Conceptual Model:

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3. Research Design

In this chapter the methodology of the research is explained and it specifies in detail how it will be conducted. The general research method that used here shall be discussed first. Then after the description of the research design, the procedure of the research is

explained and followed by a brief description of the survey as the respondents receive it. The chapter ends with clarification of the different concepts and variables used.

3.1 Research method

The main effects that are measured here is the perceived severity of the critical incident’s and the service recovery satisfaction influence on customer loyalty. Conclusive research is conducted as besides the main relations also moderating influences from the other hypothesis are tested to discover possible effects. As the purpose is obtaining evidence about these cause-and effect relationships this is a causal research design (Malhotra 2010). The method that is used to conduct the study is an experiment with data collected through a web-based survey-method. Using an experiment here has the advantage over the recall-based design, or for H1 the critical incident technique (Flanagan 1954) where people have to come up with their own CI’s, that it eliminates associations like time and expense, it reduces biases from memory lapse or more socially acceptable top-of-mind process perceptions (Edvardsson & Strandvik 2000).

3.2 Participants & Design

30

experiment and the legal age to drive a car in the Netherlands 18 year old.) received nothing but eternal gratitude from the researcher. The 2 (high vs. low severity) X 2 (low vs. high recovery actions) X 2 (communicated CSR vs. no communicated CSR)

experiment, resulted a total of 8 different conditions that were randomly assigned to the respondents. (To come up with a representative sample of every scenario, each scenario has to be answered by 25 respondents resulting in a total respondent’s demand of 200.)

An overview of the 8 different scenarios used in the data collection process:

CSR NO - CSR

1. High severity - High Recovery

3.

Low severity - Low recovery

5.

High severity – High Recovery 7. Low severity – Low Recovery 2. High severity – Low Recovery 4. Low severity – High Recovery 6.

High severity – Low Recovery

8. Low severity – High Recovery

3.3 Procedure

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Scenario: All participants were asked to imagine that they brought their car to the mechanic called “Keep’m Rolling” because of the yearly mandatory check-up (or APK in the Netherlands). This company charges a normal price for its service and the quality and time needed for the check-up is also consistent with the competition.

They either got confronted with a severe critical incident or a less severe incident, with a high or low service recovery and all this in a CSR context or not. The CSR context was described as follows:

“After a visit to the company’s website you notice that since the opening of “Keep’m Rolling” the mechanic hires and educates disadvantaged young people and dropouts from the mechanic school in your city in order to keep them out of trouble and to help them to be self-supporting.”

(This is left blank in the non-communicated CSR scenarios).

For the answering of the hypotheses respondents were asked to answer several questions with regard to loyalty to the company (the questions can be found in Appendix 1).

In order to check if the manipulation of the variables worked in the different scenarios, some questions on how the respondents perceived the CI severity, the service recovery and their general opinion on CSR were asked (as covariate) to eliminate any bias coming from people’s attitudes toward CSR.

32 3.4 Variables and covariate

3.4.1 Dependent variable, Customer loyalty

Loyalty is seen as a complex construct by multiple researchers, that has multiple outlooks. These different views are the behavioral loyalty that has the focus of many early studies, attitudinal loyalty, that has the emphasis at many later studies, and cognitive loyalty (de Ruyter et al. 1998). These authors state that the elements that are required to

operationalize loyalty are captured by Parasuraman at al. in their 1994 research. These behavioral intentions dimensions have 13 items that cover 5 components; propensity to switch, internal response to the problem, external response to the problem, willingness to pay more, and loyalty to the company (Yu & Dean, 2001). The construct of the 5 items of ‘loyalty to the company’ has an excellent internal consistency (Zeithalm et al 1996), and these are measured (see appendix 1) on a seven-point Likert scale.

3.4.2 Independent variable, severity of the critical incident

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3.4.3 Independent variable, perceived satisfaction from the service recovery

The effects of service recovery variables have a relatively greater effect than do original service outcome variables. It can have a high impact on customer satisfaction, deflect the spread of negative word-of-mouth, and ultimately improve bottom-line performance (Maxham, 2001).

The literature comes up with two recovery dimensions that are critical for successful service recovery, the (tangible) outcome and the process or the manner how the problem is handled by the service provider (McCollough et al. 2000). Justice perception (the satisfaction with the demanded restitution for the inequality of the exchange) of both these dimensions have been found to have an impact on customer satisfaction when evaluating the recovery (McCollough et al. 2000) and so these dimensions are both manipulated in the research. The manipulation-check for the perceived satisfaction with the recovery process consists of 5 items and these are measured on a seven-point Likert scale. After a manipulation check of the results the variable will be treated as either high-service recovery or low-high-service recovery in the further analysis. Respondents are

randomly assigned to either a high or low service recovery scenario.

3.4.4 Independent variable, communicated CSR of the company

In the survey used in this research the communicated CSR of the company is manipulated as either present or not. The way that CSR is communicated in the surveys’ scenario is consistent to the efficient use of CSR described in the literature (related to the companies’ core activities, not too much ‘pushed’ communication and a longtime effort or

34 3.4.5 Covariate, CSR support scale

In order to check if the communicated CSR does not biases the outcomes of the research, three questions are asked to indicate the opinion of people towards CSR and CSR

initiatives. This covariate shows the general attitude on CSR and gives an insight in why people would or would not respond to the CSR manipulation and this is taken into account at the statistical tests. If for example respondents do not care about CSR it is likely that their CI – loyalty response would presumably not be altered by communicated CSR actions by the service provider. One of the three questions comes from Sen & Bhattacharya (2001), and all are measured on a Likert scale from 1 to 7.

3.4.6 Demographic questions

Finally, several demographic questions were asked such as age, gender, education and income (For an overview of these questions see appendix 1). This could give more detailed information about the differences in the relationship strengths between different segments or groups of customers. Studies showed that demographic factors are related to pro-social behaviors (Andreoni & Versterlund, 2001, Wilson & Musick, 1997). These specific variables have been chosen in this research because of earlier findings in the CSR literature that gave insights on possible variances in CSR related outcomes. Youn & Kim (2008) found for example that younger people show greater willingness to support cause-related marketing and Tian et al. (2011) found that in China, customers with a middle level of age and income respond more positively to CSR. The existence of significant positive relationships between both levels of education and income concerning CSR support was found in the 2010 research by Ramasamy et al.

35

acquaintances. This is done for two reasons, first of all to reach more people in the relatively short amount of time and second for the demographic variance of the sample. Different groups that fill in the survey lead to a more accurate reflection of society that eventually is needed for the representability and possible implication of the findings.

An overview of the different constructs and related items to measure the three variables and the covariate (general attitude towards CSR):

Construct Items Source

Customer loyalty (5)

- Say positive things about the company - Recommend the company

- Encourage friends to do business with the company

- I Consider the company my first choice - Do more business with the company the next few years

Zeithalm et al. (1996)

Service recovery satisfaction

(5)

- Overall, the received service response was good

- Overall, I was not happy with the way the problem was handled (reversed)

- Overall, I’m satisfied with the way my complaint was resolved

- Overall, I was displeased how ___ handled the service problem (reversed)

- Overall, I was pleased with the service I experienced

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CI severity (3)

- I consider the problem as severe

- The problem would make me feel angry - The problem would be unpleasant to me

Weun et al. (2004)

Support scale or covariate for the respondents’ general attitude towards CSR: General opinion and

support CSR

(3)

- I think it is important that companies practice CSR

- The fact that more and more companies engage in CSR is a positive development - I support CSR actions that deal with social or environmental issues (passive or active)

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4. Analysis & Results

In this chapter the results from the statistical analysis will be discussed. First the

descriptive statistics of the sample is described in detail, after that the performed analysis is explained in order to test the hypotheses.

4.1 Descriptive statistics

After the questionnaire being online for 2.5 weeks a total of 195 surveys were filled in completely and were usable for the research. The age of the respondents varied between 18 and 87 year old (mean = 29,8). The distribution male/female was 112/83, or 57.4/42.6 percent. The other two demographic variables, education and income have the following distribution:

E33.000 per year or E 2.750, monthly before taxes is about average*, for students is the average income per year is E9.240, the average income per month is about E 770,- ** * Estimated for 2012 by the CPB ** Nibud research 05-201

Highest level of education High school or lower Vocational education (MBO) Higher education / University of applied sciences (HBO) University bachelors / Masters Total Nr./pct. 10/5.1% 8/4.1% 52/26.7% 125/62.7% 195/100% Income level

Below average Average* Above average Total

38 4.2 Reliability scores of variables

For the measurement of the internal consistency of the constructs, the Cronbach’s Alpha is tested for each of them. The dependent variable, customer loyalty, was measured on a 5 item scale in total, and these combined showed a Cronbach’s Alpha of 0.944. The

coefficient varies between 0 and 1, and below 0.6 reflects an unsatisfactory internal consistency (Malhotra 2010), the customer loyalty construct here has a good level of internal consistency.

The perceived severity of the critical incident that was measured with 3 items showed a Cronbach’s Alpha of 8.16 and so the construct also has a satisfactory internal consistency. The perceived satisfaction of the service recovery outcomes that was measured with 5 items indicated a Cronbach’s Alpha of 8.67 that also indicates an internally consistent construct. The analysis was done after question 10 and 12 were recoded because of the reversed questioning. The last test that was done to check the reliability of the internal consistency was for the CSR support scale for the general opinion towards CSR

(AVGsCSR). These 3 items also show an adequate internal consistency score of 8.57 (see appendix 2, tables 1, 2, 3 and 4).

4.3 Manipulation check

39

severe/less severe manipulations) there is no reason to check the manipulation for this variable. The hypotheses-testing and the further research will be done with the two different conditions of the variables, i.e. either high or low conditions, transformed to 0/1 in the statistical tests. Before the testing of the models hypothesis 2 one-way-ANOVA’s were executed to see whether CSR had an influence on severity and service recovery. As can be seen in table 7 and 8 of appendix 3 no effects were found here and the model testing can be continued.

4.4 Hypotheses testing

To test the hypothesis as stated earlier in this research the Analysis of Covariance or ANCOVA test is performed. The influence of the independent variables on the dependent variable, customer loyalty here, is explored and the possible differences between the manipulated scenarios or customer groups. This test includes the use of the covariate CSR support scale. This variable could affect the relationship between the dependent variable customer loyalty and the independent variable CSR. The ANCOVA test is controlling for this possible influence of the general opinion towards CSR (initiatives) of customers and thereby filters out errors that occur at for example CSR scenarios

undertaken by respondents who do not care about these initiatives.

The support scale for the CSR that was measured with 3 items shows a sufficient internal reliability (see section 4.2 or appendix 2 table 4) and so the AVGsCSR was created for this variable used as covariate.

40

is not significant (p = 0.28) and the homogeneity of regression holds. This means the ANCOVA can be executed.

The ANCOVA output with the dependent variable average customer loyalty, independent variables perceived severity (0/1), the service recovery (0/1) and CSR (0/1) and as

covariate the CSR support scale (AVGsCSR) shows that there is a significant difference, p-value < 0.01 between the high severity scenarios and the low severity CI scenarios on customer loyalty (see appendix 2 table 10). This leads to the confirmation of hypothesis 1 that the higher perceived severity of a critical incident has a negative influence on

customer loyalty.

Hypothesis 2 can also be confirmed when looked at the outcome of the ANCOVA. The direct relationship between the perceived satisfaction of the service recovery has a

significant relation with customer loyalty with a p-value of < 0.01. Not hypothesized here is the direct impact of CSR on customer loyalty, but here is also a significant effect of p < 0.05 (see appendix 2 table 10).

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Independent Variable df Mean square F Sig.

AVGsCSR 1 10.679 6.383 .012 SEV 1 12.490 7.465 .007 REC 1 72.194 43.147 .000 CSR 1 7.227 4.319 .039 SEV * CSR 1 .086 .051 .821 REC * CSR 1 1.377 .823 .366

Dependent variable: Customer loyalty

To see whether the confirmed hypothesis 1 and 2 could give a more thorough insight in terms of demographic variables a univariate analysis of variance was performed with the variables “gender”, “education” and “income”. Because of the fact that a very large amount of the respondents (almost 65%) were in the relatively small age group of 20 – 27 years old (see appendix 2, table 11) a skewed representation of the demographic variable “age” would arise and so this variable is excluded for further tests. The results of these other demographic variables do not show any significant interaction (also not for income after further analysis) with the supported hypothesis (see appendix 2, table 12 & 13) so unfortunately we cannot derive any more specific information here.

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5. Conclusion & Recommendations

The service sector demands a greater intensity of customer interaction than the manufacturing business (Zeithaml et al, 1985). Partly because of this the failures that occur in the service process are far more difficult to forecast and prevent (Choi & Mattila, 2008). The failures that can be grouped under critical incidents, negative variants can form certain quality perceptions of the service and firm that remain in his or her long term memory (Bejou et al. 1996). A more drastical consequence was found by Keaveney (1995), where the desire to continue the relationship with the provider decreases after a CI. These negative outcomes are supported here by the outcomes of the first hypothesis that concludes that the higher the perceived severity of a critical incident is, the lower the following customer loyalty will be. For the second hypothesis, the positive influence of a successful or high service recovery on customer loyalty, empirical evidence is found in this research as well that is consistent with the existing literature.

Instead of forecasting or prevention, the aim of this research was to find possible ways to cope with the outcomes of these failures and to see whether the loyalty relation with the service recovery can be strengthened. The service recovery research literature explores ways to diminish negative effects on satisfaction and loyalty scores after critical incidents and even comes up with possibilities to elevate the satisfaction scores above the ones before the actual CI (Bitner et al. 1990, Hart et al. 1990).

To find possible moderation for the (diminishing) customer loyalty outcomes this

43

or implementation of CSR does not always come up with positive results. Montoro-Rios et al. (2008) show in their research that environmental information or independent certification on products does not increase brand attitude or purchase intentions. The outcomes of this research is then also consistent with earlier findings by Berens et al. (2007) that conclude that CSR actions cannot compensate for poor corporate abilities when these are of personal relevance. The communicated CSR had no significant

influence on the CI – customer loyalty relationship or on the service recovery – customer loyalty relationship.

Before the limitations are discussed in the following section an important aspect must be noticed that could have had something to do with the research outcomes. Although it is not the case in this research, ‘green’ or sustainable products from companies that invest in CSR tend to come at a higher price in the market. In the 2011 research of Oberseder et al. is found that customers assume that products of a corporate social responsible firm are more expensive than alternatives. Combined with the global economic crisis and the recession that is felt by consumers that makes them cut their spending’s the green products “loose allure” (Clifford & Martin, 2011). This might be one of the reasons for not finding a significant interaction of the CSR here. The scenario sketched in this research stated a price that was consistent with the competition but people might have had the feeling that with the CSR implementation they did not get the best price or were even paying more than average what could make them reluctant to reward the company in these times.

5.1 Managerial implications

Where partial self-blame for the CI resulted in a significant higher satisfaction rating (Choi & Mattila, 2008), the perceived controllability of the company over the CI leaded to the lowest satisfaction scores. In correspondence with earlier research it is suggested to stay on top of the controllable service process in order minimize critical incidents,

44

The fact that more and more people are shopping online could be a chance for

communication of companies’ CSR activities. Besides information about their products and their business in general this platform is perfectly suited to bring these actions under the attention of customer with a much lower risk of adverse reactions of a too aggressive communication. This is still a good option when looked at the numerous other positive outcomes that the literature comes up with.

Haytko & Matulich (2008) suggest that green advertisement should be targeted to customers who are already practicing green behaviors. The fact that the power of

45

6. Limitations & Further Research

Although the research was executed with the upmost care before, during and after the experiment there are several limitations that should be taken into account when judging the outcomes.

The experiment that was done to reveal a possible relationship between critical incidents and customer loyalty and between service recovery and customer loyalty with the influence of communicated CSR was executed with only one type of critical incident. The incident involved wrong billing by the company that, in the CSR scenario, hired disadvantaged young people. This combination may have caused some suspicion with respondents. For further research it is recommended to use several sorts of critical incidents for the experiment. This is also shown to be of importance in the research of N’Goala (2007). Here is stated that the customer switching resistance depends on the kind of critical incident that occurs. For future research it is wise not only to use procedural incidents, like lacking or defaulting services, but for example also the

incidents that happen during the service encounter as described in the research by Bitner et al. (1990).

46

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