INFLUENCING INTERNAL CUSTOMERS THROUGH MARKET ORIENTATION: HOW IT LEADS TO EXCEPTIONAL SERVICE QUALITY AND SATISFIED CUSTOMERS Jodie Conduit and Justin Quigg Monash University

Abstract This paper proposes a conceptual model linking market orientation to customer satisfaction, through examining the role of employees and their provision of service quality. The organisational interface is a key research area, and this conceptual model addresses the nature of the influence of the internal market on customer satisfaction. The importance of recognising employees as internal customers and addressing their satisfaction is widely touted. However, the identification of service quality as an intervening variable in the relationship between internal customer satisfaction and external customer satisfaction provides an explanation of the relationship between the internal and external markets of a firm. The conceptual model provides a greater understanding of the role of employees in creating customer satisfaction. The creation of a market-oriented culture results in internal customer satisfaction and improved service quality, which leads to customer satisfaction and success in the external market.

Introduction Organisations who embrace the concept of market orientation within their firm believe that it will encourage appropriate behaviours for the creation of superior customer value and thus superior business performance (Narver and Slater 1990). Despite this, empirical evidence to demonstrate that the adoption of a market orientation results in customer-related benefits is limited. Relationships have been identified between market orientation and managers’ perceptions of customer service levels (Cole, Bacdayan and White 1993), customer retention (Balakrishnan 1996; Narver and Slater 1990), repeat business (Balakrishnan 1996) and sales growth (Slater and Narver 1994). However, these results do not translate into an increase in market share (Jaworski and Kohli 1993; Kordupleski 1993). It has been demonstrated that customer’s perceptions of a firm’s market orientation are more relevant predictors of its performance than managers’ perceptions of market orientation (Deshpande, Farley and Webster 1993). The goal of market orientation is to provide superior value for customers, as customer satisfaction leads to repeat purchases from the product or service provider and positive word-of-mouth to potential customers, hence impacting on business performance. It is therefore imperative that organisations fully understand the nature of the relationship between market orientation and customer satisfaction. This paper will explore the role of the internal customers in the relationship between market orientation and customer satisfaction. It will be proposed that market orientation creates an environment conducive with employee job satisfaction and internal customer orientation. Satisfied internal customers will provide superior service quality, hence directly impacting on the

satisfaction of external customers. A conceptual model will be developed to explain these relationships.

Role of Internal Customers A proposed relationship between market orientation and customer satisfaction is implied in the literature, but has not been addressed by empirical studies (Webb, Webster and Krepapa 2000). An idea that is gathering momentum is that satisfaction of the external customer is contingent on the satisfaction of the internal customer (Lings 1999; Siu and Wilson 1998; Reynoso and Moores 1995; Berry 1981). Hence suggesting that the relationship between market orientation and customer satisfaction may be mediated by the notion of internal customer satisfaction. An internal customer can be defined as anyone in an organisation who is supplied with products or services by others in the organisation (Gremler, Bitner and Evans 1994). This suggests that employees of an organisation can be considered internal customers, who, like external customers, are looking to have their needs and wants satisfied. Although, researchers agree on the definition of an internal customer, there are two distinct perspectives with respect to their importance. The initial conceptualisation from the human resource literature is based on Berry’s (1981) notion of the internal customer. This approach recognises the influence of the employee-customer transaction on the service experience of the customer, and is grounded in the belief that external marketing success is, in part, dependent on the firm having satisfied and motivated employees (Flipo 1986). Those highlighting this approach argue that happy and motivated employees are essential in the delivery of good service to customers (Flipo 1986). This approach is centred on the notion of employee job satisfaction. Schneider (1991) argued that job satisfaction and external customer satisfaction are positively correlated, and that the relationship holds across a number of industries. Both Tornow and Wiley (1991) and Wiley (1991) provided support for this argument, finding a strong relationship between employee job satisfaction and customer satisfaction when satisfaction was measured for service-oriented aspects of the organisation. However, when employee job satisfaction was measured using items such as pay and benefits, only a weak relationship was found between the constructs. Within the services literature, the argument that customer satisfaction is strongly influenced by the interaction between employee and customer is gaining increased recognition (Babin and Boles 1998; Siu and Wilson 1998; Boshoff and Tait 1996). It is argued that satisfied employees are more motivated and harder working than dissatisfied employees (Siguaw, Brown and Widing, 1994). Siu and Wilson (1998) support this argument by suggesting that employees exhibiting esprit de corps will respond by working towards the organisation's success. Gremler et al (1994) support this argument and suggest that satisfied internal customers will posit more pride in their jobs, leading to increased levels of customer satisfaction. It is therefore argued that employees with a high level of job satisfaction will exhibit behaviours that lead to satisfied customers. P1: Employee job satisfaction is positively associated with external customer satisfaction. The other interpretation of the importance of the internal customer comes from the total quality management (TQM) literature. This perspective considers all employees are simultaneously internal customers of, and internal suppliers to, other employees and departments in the firm. Protagonists of this view argue that the organisation consists of a network of customers and suppliers interacting together to satisfy customers (Reynoso 1999). To create superior value for

the external customer, it is necessary that each actor in the chain of production perceive other employees as internal customers to whom optimal quality and value is to be delivered (Conduit and Mavondo 2001; Lukas and Maignan 1996). Increasing the quality of internal transactions will influence the quality of the transactions with the external market, and ultimately customer satisfaction. This perspective recognises the internal service encounter as a dyadic interaction between an internal customer and an internal supplier (Gremler et al 1994), and for the purpose of this paper is termed “internal customer orientation”. A proposed relationship between internal customer orientation and external customer satisfaction has been addressed in several studies (Harris 1990), with the suggestion that high levels of internal service quality are a pre-requisite for the satisfaction of external customers (Edvardsson, Larsson and Setterlind 1997; Hallowell 1996; Harris 1990). Harris (1990) found that the quality of service provided to a bank's customers was influenced by the quality of service provided within departments of the bank. Yet, there is little empirical support for this association beyond this study, which could be explained by the idea that there is a stronger link between internal customer orientation and service quality rather than internal customer orientation and external customer satisfaction. P2: Internal customer orientation is positively associated with external customer satisfaction.

Service Quality Despite the increasing amount of literature advocating a link between the internal market and the external market (George 1990; Flipo 1986; Berry 1981), there is little empirical evidence to support the relationship between internal and external customer satisfaction (Rafiq and Ahmed 1993; Schneider 1991). A primary advantage of focusing on the internal market is the direct improvements to perceived service quality, and thus the positive effect on external customer satisfaction (Heskett, Sasser et al. 1994). It is therefore proposed that a relationship between internal customer satisfaction, service quality, and external customer satisfaction might better explain the connection between an organisation's internal and external markets. Schneider (1991) identified a positive relationship between employee satisfaction and customer satisfaction. However, more importantly, he found that when firms reported that service delivery was a priority, customers reported higher levels of perceived service quality. Service quality research has found that employee job satisfaction could be one of the primary determinants of the service quality management gap (Zeithaml, Parasuraman and Berry 1990). This is the examination of the difference between management’s specifications for service delivery and the actual delivery of service to customers by employees (Bitner, Booms and Mohr 1994; Hartline and Ferrell 1993). This is a view shared by Kohli and Jaworski (1990) who found that esprit de corps is crucial in reducing the gap between service quality specification and actual delivery. There is little doubt that the attitude and behaviour of employees has a significant bearing on the level of service provided to the customer (Boshoff and Tait 1996; Bitner et al 1994; Gronroos 1982). Hartline and Ferrell (1996) argue that one way to increase service quality is to improve employee job satisfaction, as the attitudes of employees impact heavily on the customers' perception of service quality. Satisfied employees are believed to be more likely to engage in behaviours that assist customers (Hartline and Ferrell 1996). P3: Employee job satisfaction is positively associated with service quality

The service delivery process is built upon an internal network of services supported by internal customer-supplier relationships (Reynoso 1999; Reynoso and Moores 1995; Gronroos 1990). Every service operation comprises internal service functions that support one another, and if poor internal service exists the final service to the customer will be flawed (Gronroos 1990). Employees who do not interact directly with customers impact upon the perceived service quality because they directly influence the service providers (George 1990). Good internal relationships and the delivery of superior value to internal customers are crucial for the provision of good service quality to external customers (Gummesson 1995). Therefore, internal customer orientation is paramount in the delivery of service quality to the customer. Recent empirical research has found support for this relationship (Lings 1999; Lings and Brooks 1998). They found that an internal customer orientation is associated with high quality service delivery to external customers, and that superior external customer service comes from better service internally along the supply chain. P4: Internal customer orientation is positively associated with service quality

Link with Market Orientation Recognition of the role of internal customers in the delivery of service quality and the resultant customer satisfaction raises the query of how an organisation can achieve a suitable level of job satisfaction and internal customer orientation. Siguaw et al (1994) argue that a firm could influence its workforce, resulting in behaviours that respond to the customer in a manner congruent with the firm's level of market orientation. Market oriented firms will exhibit behaviours that result in psychological and social benefits for employees (Menguc 1996; Reynoso and Moores 1995; Siguaw et al 1994; Kohli and Jaworski 1990). Market oriented firms are more likely to recognise the needs and requirements of employees and treat them as internal customers (Reynoso and Moores 1995). In addition, market oriented firms communicate the purpose of the organisation and identify the role of employees, hence improving the work environment and leading to an increase in job satisfaction among employees (Siguaw et al 1994; Kohli and Jaworski 1990). Being encouraged to pursue a market orientation often results in employees feeling that they are making a worthwhile contribution to the firm (Kohli and Jaworski 1990). Employees adopting a market orientation often derive a sense of pride from pursuing an organisational goal and consequently employee job satisfaction is enhanced (Menguc 1996; Siguaw et al 1994; Kohli and Jaworski 1990). P5: Market orientation is positively associated with employee job satisfaction. According to Kohli and Jaworski (1990), market intelligence dissemination ensures that information regarding customers’ current and future needs are shared and communicated across all departments. It is argued that employees and departments will therefore be able to provide optimal product quality to their successors in the chain of production, because they have a greater understanding of the customer’s needs. Narver and Slater (1990) propose that a key element of a market-oriented strategy is interfunctional coordination. This would facilitate interaction and encourage the exchange and utilisation of information. If this was to occur, it could be conceived that this coordination of departments could lead to an increase in the quality of service being provided within departments, thus improving internal customer orientation.

P6: Market orientation is positively associated with internal customer orientation.

Conclusion The preceding propositions give rise to the following conceptual model (Figure 1). This model provides a greater understanding of the role of employees in creating customer satisfaction, through the creation of a market-oriented culture and a focus on employees. The initial propositions that market orientation, employee job satisfaction, and internal customer orientation influence customer satisfaction have been further clarified by the introduction of service quality as an intervening variable. Figure 1: Conceptual Model of the Relationship between Market Orientation and Customer Satisfaction Employee Job Satisfaction

Market Orientation

Service Quality

Customer Satisfaction

This paper provides further insight into the relationship between market orientation and customer satisfaction. A conceptual model developed, which demonstrates that this relationship is Internal is Customer mediated by the influence of the Orientation internal customers and in particular their ability to provide service quality. The identification of service quality as an intervening variable in the relationship between internal customer satisfaction and external customer satisfaction provides an impetuous for further empirical testing to consolidate the relationship between the internal and external markets of a firm. The organisational interface is a key research area, and this conceptual model explains the nature of the influence of the internal market on customer satisfaction. Future research needs to empirically examine and test the viability of this conceptual model*. This model highlights the need for management to focus on the internal market and create an environment that leads to internal customer satisfaction. This will ensure greater service quality will ensue, resulting in increased customer satisfaction.

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