An empirical study of employee loyalty, service quality and firm performance in the service industry

Taking an operational perspective on the relations between employee loyalty and business performance, we examine the relationships among employee loyalty, service quality, customer satisfaction, customer loyalty and firm profitability, and the contextual factors influencing these relationships. We developed a research model grounded in the service-profit chain notion of Heskett et al. (1994) and empirically tested the model by conducting a survey of 210 high-contact service shops in Hong Kong. Using structural equation modeling (SEM), we observed that employee loyalty is significantly related to service quality, which in turn impacts customer satisfaction and customer loyalty, ultimately leading to firm profitability in high-contact service industries. Using multiple-group analysis of SEM, we found that the effect of employee loyalty on firm profitability through service quality, customer satisfaction and customer loyalty is robust under different scenarios of employee-customer contact level, market competitiveness, and switching cost in the sampled shops. This finding supports the generalizability of the observed relationships in various operating contexts.