Intellectual capital profit chain: Linking human resource management practice systems to customer orientation

Introduction

Within the overarching discipline of management, the increasing divergence and specialization within sub-disciplines has long inhibited integrative approaches to understanding organizations. ¹ Yet marketing and human resource management (HRM) are both areas of organizational practice focused on communication with understanding of other human parties. It is thus not surprising that a growing number of authors seek to connect the two, most commonly with employee customer orientation (CO) as the linchpin.^2,3 One area which requires disciplinary integration between HRM and marketing is CO, involving the engagement of the members of the organization in activities ⁴ and relationships that extend beyond its boundaries. Because of its impact on performance, CO is important for all functions in the company, including but not limited to marketing, HRM, finance, and therefore requires a cross-disciplinary approach. Research devoted to market orientation, since the founding work of Kohli and Jaworski ⁵ and Narver and Slater ⁶ has essentially probed the relationship between market orientation and organizational performance. The publication of two meta-analyses^7,8 and, more recently, the study of Pekovic and Rolland ⁹ have largely settled the issue, indicating that the company performance increases significantly when efforts are directed towards customer satisfaction. Hogreve et al. ¹⁰ have long sought to bridge this gap, calling for interdisciplinary research linking HRM and marketing practices through CO, conceptualizing internal service quality as systems of HRM practices. The most popular integrative framework conceptualizing this linkage is provided by the service profit chain (SPC) model, connecting the perspectives of HR, marketing, and finance. SPC links internal service quality and external service quality through employee satisfaction, which in turn leads to customer satisfaction and loyalty, generating revenue and profitability. The extended SPC model ¹¹ supplements the above path to profit with the social identification path, positing that employee-company identification positively affects customer orientation and customer-firm identification, feeding, along with the satisfaction-based path, customer loyalty, willingness to pay and performance. Yet this framework carries some shortcomings. Hogreve et al. ¹⁰ suggest that future research should pinpoint HRM systems that determine internal service quality, SPC models do not include upstream HRM practices ¹¹ and are based on marketing literature that may not be familiar to HR and finance managers. As a result, SPC has received limited attention from outside marketing. The SPC literature also remains largely silent on how specific HRM practices combine to enhance performance, and the original SPC model’s fit is not outstanding, indicating that SPC researchers should consider additional mechanisms that link internal and external marketing with firm performance. One of the reasons for this is that, despite their value, these previous studies propose essentially linear views of SPC, which are likely too simple and remote from the actual process. ¹⁰ Specifically, an improved model should include feedback loops within and between the different phases. There are, however, presently very few hints as to where these loops take place. The aim of this article is to fill this knowledge gap by identifying the various feedback loops existing and the role of Intellectual Capital (IC) to drive these loops. The core contribution of this study is to enhance and refine the current SPC models.

This article takes the form of a conceptual paper. More specifically, in Jaakkola’s ¹² typology of four approaches towards designing conceptual papers, it represents a theory adaptation of the SPC model. The latter is found to be incomplete based on literature review, as it fails to integrate human resource systems upstream of the internal relationships in the managed organization. The study introduces Intellectual Capital as an alternative frame of reference to extant conceptualizations. Analogical reasoning (see Holyoak ¹³ for the methodology and Micheaux et al. ¹⁴ for an application from the marketing literature) is used to support the viability of this new frame of reference, and social learning and group psychology theory are brought in as method theories for CO, enabling the study to integrate IC and SPC within a single model. The underlying assumption that structures the argumentation of this study is that the alignment of HR systems with IC and CO viewed as a system provides a coherent systemic overview that allows the identification of HR practice systems that increase CO through the components of IC. Figure 2 shows the alignment of the three systems (HR, IC, CO) discussed in this paper.

The remainder of this paper is as follows. The next section discusses SPC, its developments and shortcomings in more detail. The third section brings in insights from the work of the management studies pioneer ¹⁵ and shows that the IC approach to the relationship between CO and satisfaction is congruous with the SPC approach. This analogical reasoning shows that IC incorporates these relationships in a new conceptualization that fits the target domain. The study proposes the IC perspective further contributes a multilevel dynamic that is not explicit in the SPC. Beyond its role in mediating the relationship between HRM practices and performance, ¹⁶ IC encompasses and nurtures the customer orientation-satisfaction relationship. Drawing on evidence from extant empirical studies, the fourth section argues that HRM practices targeted at the growth of each IC component and at increasing interactions between the components will increase CO, customer satisfaction and thereby the performance of the company. The result of the study is the Intellectual Capital Profit Chain (ICPC) model, a multidisciplinary model which integrates insights from SPC but addresses its main shortcomings noted above. The new theoretical view of the relationship between HRM practices and CO through IC allows the elements of the process to be organized in a multidisciplinary model that best fits the service context and shows the pathway to increased customer satisfaction. As a multidisciplinary framework, it is better fitted to the collaborative context allowing managers to use it to improve current practices. By establishing a new association between Guest’s ¹⁷ broad HRM objectives and IC concept in the marketing services context, this article answers his unanswered question “what combinations of practices can be effective in given circumstances?” The paper concludes by summarizing the theoretical contribution and proposing managerial implications.

The service profit chain and its limitations

The SPC illustrates how investments in internal service quality translate into external service quality, in turn leading to satisfied and loyal customers the basis of superior firm performance.^10,18 The SPC model, particularly in its extended form (Figure 1), offers a useful framework for understanding how HRM practices can increase companies’ financial performance through employee CO. This model has two paths to performance: the satisfaction-based path found in traditional SPC models and a social identity-based path that integrates customer relationship characteristics. Internal service quality or supporting services and policies that enable employees to deliver results to customers, translates into service performance through mechanisms not limited to employee satisfaction.OPEN IN VIEWER

Nevertheless, SPC literature remains largely silent on how specific HRM practices combine to enhance performance. Hogreve et al.’s meta-analysis of 518 studies ¹⁹ shows that the empirical evidence on SPC remains fragmented and somewhat ambivalent, and the authors ask future researchers to provide empirical evidence on a broader range of internal service quality practices and direct links between internal marketing, external marketing, and organizational performance. While some of these shortcomings are addressed by the extended SPC model, this paper argues that the problem is wider, and that deeper rethinking is needed to account for the non-linear and feedback effects. Consequently, the study posits IC as the missing conceptual element. The SPC model has three parts, each with distinct mechanisms based on employee, customer, and financial data, suggesting specific roles for the managers of each functional department of the organization. However, the model does not encourage collective focus and investment decisions on common elements. Moreover, the call for defining the HRM practices that should be plugged upstream of the SPC has not yet been answered.^10,11 Saxe and Weitz ²⁰ (p. 344) define CO as “the degree to which salespeople implement the marketing concept by trying to help customers make purchasing decisions that meet their needs.” Satisfaction is defined as the satisfaction of customer expectations of a product or service. ²¹ Because customer-oriented employees are intrinsically motivated to engage in behaviours aimed at increasing customer satisfaction, the relationship between the two constructs is implicit in the definition of CO. CO can be conceptualized at the strategic organizational level ²² and at the individual employee level. According to the extended SPC, employees develop and adjust their service standards, and the customers do the same for their expectations through identification with the company, a social learning process that is rooted in self-esteem. ²³ Therefore, the customer-satisfaction relationship can be seen as a system of norms that is adjusted through multiple interactions within and outside the company. These interactions include one-on-one service interactions, digital marketing interactions designed to optimize the customer experience, ²⁴ employee collaboration, including through the digital tools that increasingly equip frontline workers. It follows that investments in HRM practices to increase customer orientation will have an impact at several levels: at the organizational, strategic level, to provide the corporate culture, structures and processes needed to promote the company’s customer orientation; at the individual level to equip employees with the knowledge and skills they need to provide high quality service; and at the social group level to encourage mutual learning among employees and foster the quality of relationships within and outside the company. Marketers and employees with specialist knowledge and skills design and produce these digital experiences. How these skills are developed and relate to customer orientation is not explicitly addressed in the SPC. Although implicit in the social identification process, the relationships between employees in the production and use of collective intelligence to improve the customer service experience are not mentioned. These shortcomings limit the operationalization of SPC. In traditional satisfaction-based SPC path, strategic CO assumes a “direct link between superior customer service and sustainable profit growth” through “employee engagement, customer satisfaction and retention, profitability and value creation” ²⁵ (p. 627). However, such a link has not been observed in practice or in follow-up studies. This study proposes the underlying dynamic is better represented through the lens of IC than through the SPC. Taking a broad systems view of the underlying mechanisms of IC that drive customer orientation and customer satisfaction allows to align HRM practice systems with the components of IC in a parsimonious model ²⁶ that better fits the service context and is more easily operationalized than plugging HRM practices directly upstream of the SPC. There already exists a well-established body of literature that justifies IC as a mediator between HRM practice systems and performance. ²⁷ But these contributions have not yet been explicitly included in the discussion around customer orientation and remain outside the scope of more marketing-focused reflections. Combining these theoretical streams allows for the contextualization of the HRM-intellectual capital-performance model in the service sector. Furthermore, IC, as an intangible asset, incorporates knowledge management ²⁸ and digital tools, whereas the SPC does not explicitly include these important contributors to high quality customer service.

IC and social learning as a complement to SPC

While minor differences exist in defining IC, Subramaniam and Youndt’s broad description of the concept as “the sum of all knowledge firms utilize for competitive advantage” ²⁹ (p. 451) can serve as a useful starting point. Since the notion of useable knowledge covers a wide variety of forms of knowing and of holding knowledge, three forms of IC are commonly distinguished in management literature: human, social, and organizational capital. ²⁹ This study follows this delineation. Despite gaining some traction within the domain of HRM, the concept of IC is still little used in marketing other than for the measurement of intangible value such as buyer-seller relationships, ³⁰ competitive intelligence ²⁸ or marketing assets. ²⁶ Despite apparent compatibility of the concept with business perspective, there is a need for pedagogy because managers can use IC concept without really understanding it. ³¹ IC is composed of human, social and organizational capital. It is a form of “disinterested” capital in Bourdieu’s ³² sense. In other words, although IC is built on economic capital through mercantile transactions and self-interested exchanges, its economic root is concealed. IC includes, through the collective dimension of human capital, Bourdieu’s cultural capital, i.e., the knowledge embodied by individuals, derived from early exposure to art, literature, etc., objectified in terms of the production of writings, paintings, monuments, etc. and institutionalized in the form of academic qualifications. It includes Bourdieu’s social capital in the form of connections, the collectively owned resources constructed through relationships that involve mutual recognition, enriched by the collective dimension of cultural capital that the network incorporates. The human, social and organizational components of IC form the set of intrinsically linked cognitive structures and processes on which firms build their performance.^16,33 Youndt and Snell ²⁷ distil from the literature the following definitions of the components of IC: Human capital “refers to individual employees’ knowledge, skills and expertise” and organizational capital “represents institutionalized knowledge and codified experience stored in databases, routines, manuals and structure.” Importantly, social capital includes the value of all relationships, including those with customers^34,35 and other stakeholders, such as suppliers, the government or related industry associations. With this preliminary understanding of the IC perspective, it is useful to consider Murthy and Mouritsen’s ²⁵ study of a bank whose attempt to invest in customer data technology did not yield positive results. This contradicts SPC expectations, but, from an IC perspective, the failure can be recast as a failure to recognize that the relationship between human, social, and organizational capital and to realize that performance is a long-term concern, ³⁵ whereas the implementation of customer-oriented technologies generates short-term costs. Murthy and Mouritsen highlight the interweaving of IC’s components and its dynamic nature. “The mobilization of IC involves, surprisingly, first its decomposition to make it manageable, then its continuous reconstruction to make it practicable” ²⁵ (p. 623). In this dynamic and iterative view of IC development and its impact on performance, each component is affected by structural links and repeated interactions with other components. The contribution of information technologies and digital business tools is assessed in terms of human and social capital. Organizational capital cannot be developed without human input. Customer relationship quality depends on employee expertise, ³⁶ supported by the network of employee interactions. It seems difficult to distinguish, as Bontis ³⁵ does, between IC and the continuous organizational learning process that constitutes it. As Bourdieu ³² underlines, all forms of capital are interlinked and are accumulative in nature. Murthy and Mouritsen’s ²⁵ study suggests that, rather than disaggregating investment in each component of IC, it would be more efficient to target investment in combined elements of IC while aiming to increase human capital. A recent study by Bamahros ³⁷ highlights also that external influences, including personal characteristics of significant organizational stakeholders, play an important role in constituting IC within the organization.

Investment in organizational capital in the form of digital tools that help employees in their daily work life will increase job satisfaction, creating positive effects on employees’ customer orientation, consistent with the satisfaction based SPC path. Moreover, if these tools truly lighten employees’ workload, they create motivation to adopt prosocial behaviours ³⁸ that benefit both colleagues and customers. Furthermore, prosocial behaviours are fostered by servant leadership, which is anchored in social identity theory, ³⁹ consistent with the social-identification path of the extended SPC. Bontis ³⁵ (p. 66) defines structural capital as “the mechanisms and structures of the organization that can help support employees in their quest for optimum intellectual performance and therefore overall business performance.” However, Bontis ³⁵ transcends the emphasis on tools and processes to focus on transforming an organizational culture into a people-centred culture. “An organization with strong structural capital will have a supportive culture that allows individuals to try, fail, learn and try again.” Encouraging risk-taking and the right to make mistakes and giving employees the freedom of action are transformational and servant leadership behaviours (see Eva et al. ³⁹ for a review) that provide employees with a sense of psychological security, fostering creativity and effective teamwork. ⁴⁰ A servant leader ⁴¹ is primarily concerned with serving the employees with whom he or she interacts. Servant leadership influences the service quality, customer-oriented citizenship behaviour and customer-oriented prosocial behaviour of employees in contact with customers. ⁴⁰ Consistent with Homburg et al.’s ¹¹ finding that customer satisfaction is not very strongly dependent on employee job satisfaction, the relationship between organizational capital and customer satisfaction is better explained by the development of a corporate culture and leadership style that values front-line employees and fosters their intrinsic motivation to satisfy customers. The satisfaction based SPC path can be understood at an individual or collective level. The social identity based SPC path pertains to individual psychology in relation to the group. The IC concept integrates this multilevel construction: customer orientation is forged in the singular competencies that form human capital, develops as social capital, and is structured through investment in organizational capital. Follett’s ¹⁵ group psychology theory provides further insight into the pivotal role of social capital in fostering customer orientation. Similarly, the social identity branch of the extended SPC ¹¹ uses self-categorization through group membership to describe the process of employee-firm and customer-firm identification. However, Follett’s ¹⁵ concept of the “circular response” further contributes to the integrative properties of the dynamics of social capital: the frequency and diversity of interactions within social capital build identity and strengthen or degrade self-esteem. During each person’s actions and interactions, the “relational arcs” from each individual to his or her set of norms adjust and self-regulate, offering, with all the intelligence and effort required, the possibility of “integrating desires” into a new creation rather than creating a compromise that cannot be satisfied. When members of a group use strategies of “power with” rather than “power over,” they create new ideas that respond to the desires of each individual rather than denying desires or making compromises. Thus, customer orientation operates as “power with,” and the relationship between employee customer orientation and customer satisfaction can be defined as a system that integrates desires. Conceptualizing the employee-customer encounter as a system of paired norms that synchronize to create joint employee and customer satisfaction contributes a systemic view of the service encounter, consistent with HRM practice systems and IC as a dynamic, multilevel system. Follett’s group psychology theory can also be used to conceptualize the interdependence of individual and collective levels of IC and the transfer between these levels. In their multilevel study, Wang, Yen, and Liu ⁴² show the positive relationship between increasing IC and individual performance (human capital) under conditions of interdependence (social capital); increasing collaborative interactions strengthens both the autonomy and the interdependence of individuals. This collaboration leads to the construction of shared cognition, contingent on effective teamwork. The synchronization of the employee’s and the customer’s behavioural norms constitutes an integrative cognitive construction. This creative process embodies the “power with” approach and forges, through their intertwined relational arcs, the union of the employee and the customer with the whole. Therefore, HRM practices aimed at increasing the transfer dynamics between the levels of human and social capital, the interdependence of the actors, the frequency of their interactions and promoting the co-construction of shared cognition will favour the process of employee and customer identification with the organization. Similarly, under the condition of the interdependence of stakeholders, investments in structural capital will promote stakeholders’ autonomy and performance for successful co-construction. Because it integrates both the reinforcement of the employee’s self-concept in relation to that of the customer and the collective process of social identity construction, IC is congruent with and can substitute for the social identity path elements between HRM practices and customer satisfaction in the SPC. Moreover, through its dynamic properties and multilevel structure, IC better reflects the interactions, interdependence and transfers between individuals and groups in the organizational context. As a parsimonious, transdisciplinary concept used in accounting and finance ³⁷ as well as systems and knowledge management it provides a better collective representation and common investment focus for managers from different disciplines.

Intellectual capital as a mediating factor integrating HRM and CO

The literature describes HRM as a set of practices that impact the competencies of individuals in such a way as to positively affect organizational performance ⁴³ by ensuring a high learning capacity. ⁴⁴ HRM emphasizes the human factor, thus promoting the company’s sustainability. The achievement of the company’s objectives depends fundamentally on the effective collaboration of its employees. An employee who is fully integrated into the company is an employee who cares about the company’s future and is aligned with it. The company’s success is his or her own success. Snell and Dean ⁴⁵ (p. 473) noted that the primary way in which firms invest in their employees is through their human resource practices. Rather than directing HRM efforts to increasing internal service quality or company-employee identification, according to the SPC, this paper proposes that HRM practices should be targeted at each of the components of IC. The growth of each IC component and the increase in interactions between the components will increase customer orientation, customer satisfaction and thereby the performance of the company. By introducing IC as a mediating construct, Youndt and Snell ²⁷ demonstrate how HRM systems drive organizational performance. They suggest that HRM activities do not directly improve performance at the organizational level but enhance IC through its components, which in turn drive organizational performance. The influence of HRM practices on customer satisfaction is mediated by IC. Satisfaction is linked to performance at the organizational level through the company’s customer-oriented strategy. ⁴⁶ This strategic consideration leads the company to invest in the different components of IC. Each of these components can play a role in customer and performance orientation. ⁴³ The work of Lin et al. ⁴⁶ is encouraging when considering the relationship between HRM and customer orientation, although it does not integrate the components of IC. Lin et al. emphasize the role of individuals in developing customer orientation and show how HRM influences citizenship behaviour. Therefore, HRM practices can strengthen employees’ customer orientation by increasing IC. HRM is not only the primary means by which firms can influence and shape the skills, attitudes and behaviour of individuals, ⁴⁷ it also creates a supportive organizational structure and environment in which firms can develop knowledge and resources. ⁴⁸ The mediating role of IC allows to integrate both the direct effects of customer-oriented HRM practices on human capital (e.g., training), social capital (e.g., deployment of corporate social networks) and organizational capital (e.g., customer databases) and the indirect effects via the increase in interlevel dynamics, promoting social identification ²³ and creativity ⁴⁰ ; through the interactions of the individual employees with the group. ¹⁵ Soo et al. ⁴⁷ point out that theoretical inputs are still lacking to guide the transfer of human capital inputs between the individual and organizational levels of IC. Conceptualizing the relationship between IC and employee customer orientation in a marketing context helps clarify this shift in level. Mirroring the human, social and organizational levels of IC, consistent with Follett’s group psychology theory, marketing focuses on three levels of analysis, represented by individuals, groups, and society as a whole. The relational arcs formed between these entities and the cross-level dynamics of the circular response concept are precursors to Bandura’s ²³ social learning theory, included in self-concept identity construction theory. As argued supra, these processes are implicit in IC. Because of its multilevel structure and intrinsic relational nature, IC is positioned at the point of contact between consumers and the company agents that serve them, including all the actors that produce its products and services as well as the customers’ relationships with them.

Conclusion

This paper highlights the role of IC as a set of social and organizational learning processes that promote not only the strategic customer orientation of the company but also employee customer orientation, thus integrating the satisfaction and social identity facets of the service-profit chain. ¹¹ Rather than adapting individual practices to the components of the SPC model, the association of HRM practices with IC allows for a more synthetic indicator ²⁶ and for a broad HRM practice approach. In this, the firm is considered as a nurturing organization that helps grow human capital in a service context where new employees can arrive with a primary time-handicap in acquired cultural capital. The issue has become all the more important, as the recent, COVID-19 health crisis highlighted the importance of social capital for human capital development. ⁶⁹ Drawing on the dynamic nature of intellectual capital, the ICPC model allows integration of HRM and marketing practices through social learning implicit in the conversion processes between the components of IC and economic performance. The development of the ICPC model forms the main contribution of this paper, as it can serve as a framework for building and managing HRM configurations that align with human, social, and organizational capital to promote customer orientation. By proposing a parsimonious model with concepts that can be observed in the field, this article attempts to accommodate Guest’s ¹⁷ unanswered question, “what combinations of practices can be effective in given circumstances?” At the organizational level, exploratory learning that is necessary for dealing with new situations that occur in customer relationships is complementary to the exploitative learning processes that are linked to specialist human capital and cooperative social capital. ⁴⁸ Therefore, synergistic HRM systems that combine to increase specialist human capital, cooperative social capital and organic organizational capital are adapted to operational service contexts. Consistent with prior research, three HRM systems have been identified. The HR development system combines skills requirements, job specification, rotation, and training to target human capital, which is essential to customer orientation. In the services context, social capital requires a relational HRM system that privileges the internal labour market and promotes collaboration. Finally, organizational capital fosters and benefits from the reciprocal, social relations embedded in the company. These extend beyond the boundaries of the organization to include dyadic relationships and cross-border employee-customer teams. There is scope at this level for HRM that promotes quality and employee flexibility. To this end, a high-commitment HRM system contributes to the supportive, error-embracing corporate culture that builds organic capital. For the high-commitment HRM configuration, the ICPC promotes integration of servant leadership that could eventually reduce the costs of the HRM system while improving QWL, affective commitment, and psychological empowerment and promoting organizational citizenship behaviours, among which customer orientation. Providing digital tools and customer databases that help front-line workers in the service encounter, with an emphasis on improving their quality of working life, also contributes to organizational capital and promotes customer orientation within the scope of the high commitment configuration. This framework may be useful to researchers and managers seeking to relate HRM practices to customer orientation.

Statements and Declarations