Telecom Competencies: Service Quality and Customer Loyalty

Introduction and Industry Background

Historically, service quality in the telecommunications industry was largely determined by monopolistic service providers. These suppliers operated either as private companies under government regulation or as government agencies themselves, leaving customers with minimal control over the quality of services they consumed. The evolutionary transformation of telecoms technology began with the simultaneous advent of telecoms liberalization in the United States, the United Kingdom, and Japan in the mid-1980s. Liberalization created greater flexibility and new opportunities for entrants competing with incumbents — AT&T, British Telecom, and NTT — in those three countries (Fransman, 2004). The telecommunications industry in the country under study similarly followed a path of liberalization, with the government opening up cellular service by issuing licenses to commercial operators. This liberalization required the previously monopolistic, government-linked service provider to compete in an open market, creating business competition and giving consumers more choices and better service.

Traditionally, the industrial organization (IO) approach to competitive analysis holds that organizations should seek to create and maintain barriers restricting potential competitors from entering an industry (Bharadwaj, Varadarajan, & Fahy, 1993; Hamel & Prahalad, 1989; Lei & Slocum, 2005; Porter, 1985). Firms should also strive to retain customers by making it less attractive for them to switch to competitors. The extent to which an organization accomplishes these objectives constitutes its market control dimension, which is a function of several factors including industry characteristics, firm size, and stage in the organizational life cycle.

Porter's five forces analysis of the telecommunications industry provides an overview of the competitive landscape (Barney, 1995). Entry barriers are high for new companies because government-issued licenses are limited and capital investment requirements are substantial. Customers (subscribers) hold medium to high bargaining power, particularly following the implementation of mobile number portability (MNP) (Buehler, Dewenter, & Haucap, 2006; Huan, Xu, & Li, 2005; Kim, Park, & Jeong, 2004). Suppliers hold relatively low power because better inter-operability between vendor equipment, driven by industry standardization, has reduced their leverage. Competition among incumbents is fierce in terms of price and service features. Substitution is emerging rapidly as more companies provide low-cost calling via VoIP and online chatting through smartphone applications — bundled with data packages — which erode traditional voice revenue.

In contrast, the resource-based view (RBV) focuses on identifying and developing a company's resources, capabilities, and competences following thorough competitive analysis and strategy formulation, in order to gain competitive advantage within the industry (Bowman & Ambrosini, 2003; Coyne, 1986; Coyne, Hall, & Clifford, 1997; Fahy, 2000; Hall, 1992). Rather than emphasizing the external environment, this approach directs the company inward — to define, measure, analyze, implement, and control its own resources, capabilities, and competences in ways that are valuable to customers. Following this logic, Bowman and Faulkner (1997) noted the importance of value-activity competitive strategies. Because buyers perceive price rather than cost, they argued that sustainable competitive advantage is achieved by offering products or services that customers perceive as: (1) better than those of the competition regardless of price; (2) equal to the competition but at a lower price; or (3) both better and cheaper. Xerox's intense focus on measuring customer satisfaction illustrates this logic: high-quality products and services designed to meet customer needs create high levels of customer satisfaction, which drives greater customer loyalty, which is the single most important driver of long-term financial performance (Jones & Sasser, 1995).

This research project explores the competitive landscape of the cellular telecommunications industry. It first describes the extensive literature on organizational competencies and strategy formulation in competitive environments. It then develops a model framework and postulates several hypotheses — based on the RBV approach — that service quality and network quality drive customer satisfaction and loyalty. Customer survey data were subsequently collected and analyzed to test the framework. Despite the intensely competitive landscape, cellular firms can benefit from understanding the competencies approach to developing sustainable competitive advantage.

Organizations can display three types of market control: (1) control over market access available to prospective competitors (entry barriers); (2) control over suppliers; and (3) control over customer access to competitors (switching costs) (Jones, Mothersbaugh, & Beatty, 2000, 2002; Parnell, 2006). Many airlines, for example, attach future benefits to their tickets through frequent-flier programs that reward customers who fly with one or a limited number of carriers, effectively increasing the switching cost to another airline. In the deregulated telecommunications industry, such controls have been progressively removed. Before the introduction of mobile number portability, consumers were reluctant to switch operators because changing their phone number required notifying friends and business associates. With MNP in place, subscribers are no longer restricted to their current operator merely to avoid the inconvenience of changing numbers.

Customer loyalty can be measured through key performance indicators (KPIs). The number of subscribers and the average revenue per user (ARPU) serve as performance KPIs for cellular operators. Subscriber numbers can be grown through aggressive marketing using the four Ps: price/package, product features, place (coverage), and promotions. The ARPU — the monthly charge incurred by customers — has been declining steadily due to strong competition and the availability of VoIP for long-distance communication via computer and smartphone. Operators constantly develop new services such as MMS, 3G video calling, and internet data plans to offset falling ARPU. The erosion of ARPU will accelerate further as market penetration approaches 100%, a scenario already facing many operators today. Retaining existing customers thus becomes critical when MNP is in place, and the foundation of retention is total customer satisfaction and delight (Jones & Sasser, 1995). Customer satisfaction alone is not sufficient to predict customer behavior; customer loyalty is a better indicator of customer retention and therefore of firm performance (Bowen & Chen, 2001; Oliver, 1999; Sivadas & Baker-Prewitt, 2000).

Competencies, Strategies, and Competitive Advantages

The rise of the information age has renewed interest in firm resources. As physical boundaries have weakened in importance and transaction speed has increased, drawing clear industry and strategic-group lines as a basis for strategy formulation has become more challenging. Sustaining competitive advantage is a central concern in an environment where competitive and customer information seems freely available. Consequently, a focus on organizational resources that enable a firm to establish and sustain competitive advantage in a faster and more complex environment has become increasingly important (Parnell, 2006).

Resources and capabilities do not automatically confer competitive advantage on a business (Bharadwaj, Varadarajan, & Fahy, 1993). Realizing advantage requires coordinated exploitation of those resources. Capabilities are a special type of resource — firm-specific in nature — that enhance the productivity of a firm's other resources. Creating capabilities is not simply a matter of assembling a team of resources; capabilities involve complex patterns of coordination between people and between people and other resources (Grant, 1991). Competence is the ability of an organization to sustain coordinated deployments of resources and capabilities in ways that promise to help it achieve its goals (Sanchez & Heene, 1997). While resources are the source of a firm's capabilities, capabilities are the primary source of competitive advantage (Grant, 1991). When a competence serves as the source of a firm's competitive advantage over rivals, it is called a core competence (Hitt, Ireland, & Hoskisson, 2005).

The notion of core competences, particularly technological competences, has long been part of strategic thinking. As early as 1957, Selznick used the term "distinctive competence" to denote what a particular business was uniquely good at relative to its close competitors. A firm can utilize its resources and capabilities to build competences that provide competitive advantage and thereby achieve above-average returns for the same investment (Hitt, Ireland, & Hoskisson, 2005). Competitive advantage is sustainable when the capabilities and competences used to build it are valuable, rare, costly to imitate, and non-substitutable. As Grant (1991) argues, firms are likely to use a combination of resources and capabilities in the pursuit of sustainable competitive advantage. If a company's resources and capabilities lack durability or are easily transferred or replicated, the company must either adopt a short-term harvesting strategy or invest in developing new sources of competitive advantage. Capabilities and competences in managing service quality, network quality, and customer satisfaction are therefore important sources of competitive advantage for any cellular firm.

Why Quality and Customer Satisfaction Matter

Almost all organizational mission statements contain some commitment to excellence in service or product quality and customer satisfaction. Most companies engage in measurement to gauge customer perceptions of quality. Since perceived quality and customer satisfaction can be considered leading indicators of financial performance, systematic and valid measurement is critical. More importantly, it is essential for each organization to establish empirical linkages between these indicators and financial performance measures (Babakus, Beinstock, & Van Scotter, 2004). The best way for a company that produces goods or services high in experiential quality to win new customers is to thoroughly satisfy its existing customer base (Harvey, 1998).

A growing body of empirical work supports the fundamental logic that customer satisfaction positively influences customer retention (Anderson, Fornell, & Mazvancheryl, 2004; Anderson & Sullivan, 1993; Boulding, Kalra, Staelin, & Zeithaml, 1993; Gerpott, Rams, & Schindler, 2001; Oliver, 1993; Rosenberg & Czepiel, 1983). Increasing retention secures future revenues (Anderson, Fornell, & Lehmann, 1994) and reduces the cost of future customer transactions such as those associated with communications, sales, and service (Reichheld & Sasser, 1990). Greater customer retention also indicates a more stable customer base — one that provides a relatively predictable source of future revenue and is less vulnerable to competition and environmental shocks (Anderson & Sullivan, 1993).

Telecommunication as a Field of Study

The telecommunications industry has undergone profound global changes over recent decades. Fransman (2004) analyzed the transformation of the "old telecommunications industry," which was fundamentally restructured in the mid-1980s with the dismantling of dominant monopolies in countries such as Japan, the United States, and the United Kingdom. This wave of liberalization reached Europe and Latin America in the 1990s. Even more significant was the technological advance that gave rise to the "infocommunication industry," supported by a triad of technologies: packet-switching, internet protocol, and the World Wide Web (Fransman, 2004).

In the country under study, the state acted as the sole provider of telecommunications services until the mid-1980s. The privatization process saw a strong movement of local companies partnering with foreign technology suppliers seeking to position themselves in the local market. The industry was subsequently liberalized and opened to competition. The lower entry cost and faster deployment of cellular service compared to fixed-line service provided new players with the opportunity to capture market share from the entrenched state company quickly. The competitive landscape of this industry therefore serves as a rich field for the study of competitiveness, customer satisfaction, service quality, and customer loyalty.

Significance of the Study, Research Questions, and Hypotheses

In the highly competitive telecommunications service industry, incumbents must be increasingly innovative in setting competitive strategies to maintain their position. Understanding the reasons behind one firm's success over its competitors enables managers to chart a better course for their companies. Failing to identify, develop, and exploit competitive advantages hinders growth and profitability and renders managers ineffective.

The research questions guiding this study were: (1) What makes a telecommunications firm more competitive than others? (2) What is the relationship among perceived service quality, network quality, customer satisfaction, and customer loyalty of cellular service providers? The corresponding objectives were: (1) to understand the resource-based view of firm performance through a literature review of organizational competences in order to determine what makes a firm more competitive; and (2) to identify and empirically prove the relationships among perceived service quality, network quality, customer satisfaction, and customer loyalty of cellular service providers.

For perceived service quality, the following hypotheses were formulated based on the SERVPERF framework:

H1a: Tangibles have a positive influence on perceived service quality. H1b: Responsiveness has a positive influence on perceived service quality. H1c: Reliability has a positive influence on perceived service quality. H1d: Empathy has a positive influence on perceived service quality. H1e: Assurance has a positive influence on perceived service quality. H1f: The regression of perceived service quality on the five dimensions is significant.

For perceived network quality, five dimensions were posited — speed, accuracy, availability, reliability, and security:

H2a: Speed has a positive influence on perceived network quality. H2b: Accuracy has a positive influence on perceived network quality. H2c: Availability has a positive influence on perceived network quality. H2d: Reliability has a positive influence on perceived network quality. H2e: Security has a positive influence on perceived network quality. H2f: The regression of perceived network quality on the five dimensions is significant.

For customer loyalty, an integrated framework linking perceived service quality, perceived network quality, and customer satisfaction was adopted:

H3a: Customer satisfaction has a positive influence on customer loyalty. H3b: Perceived service quality has a positive influence on customer loyalty. H3c: Perceived network quality has a positive influence on customer loyalty. H3d: The regression of customer loyalty on service quality, network quality, and customer satisfaction is significant.