The influence of service recovery on automobile industry in the global economy: a case of Honda

Author: Iloka Benneth Chiemelie
Published: 30th August 2015

Introduction

The current business environment is marred with increase in competitions. As companies continue to internationalize in order to maintain sustainability in their business offerings under the flag spot of the increasing globalization of the world economy, it becomes evident that businesses in the modern setting have mother than just their local competitor sot worry about. This threat created to business sustainability is also increased by the fact that adoption and penetration of information and communication technology has bridged all possible gap between companies in their home land and those in foreign nations in terms of serving customers within a given geographical sphere. For instance, you can order any products directly from EBay and have it delivered to your house in any part of the world. So, the question now is on how can companies fade off both the domestics and international competition in order to maintain sustainable business operations in their home land? This question is what this paper seeks to understand.

Increase in customer loyalty is without a doubt very important for continued growth in the business setting of modern business environment. This is because when a brand has high level of customer loyalty; sustainability is created through a subsequent increased in repeat purchase and recommendations for that particular brand from the loyal customers. In any case, the business sectors available across the world are very broad and this paper seeks to focus precisely on the automobile industry.

The purpose of this paper is to understand how service recovery influences profitability in the mobile industry. In order to better demonstrate this, Honda will be referenced with respect to the service recovery strategy adopted by the company in the modern business and how the strategy has help influence performance following service failure.

Literature review

Customer satisfaction

Before proceeding with this paper, it is important at this point that an understanding of customer satisfaction be gained. The phrase does only express a sense of happiness in the customers with respect to consumed goods or services, but it can also be more complex than that. Customer satisfaction a term that is widely adopted in business and commerce industry, and it has been conceived a global issue that has influence on organizations irrespective of their sizes. Customers’ satisfaction is defined as the perceived value that customers gain from using a particular product or service (Bolton and Drew, 1991; Churchill and Suprenant, 1982; LaTour and Peat, 1979; Oliver, 1980; Yi, 1990). The customer is said to be satisfied is the product or services has successfully meet the main object for which it was purchased by the customer whereby the higher the object has been meet the better the level of satisfaction  that the customers will have. It is a direct measure of the level of loyalty that customers have towards a brand because customers will only be loyal if they have experienced higher satisfaction with that particular brand.

Service quality

Just like the concept of customer satisfaction discussed above, the quality of service that a brand offers to its customers is also very important especially as marketers of customer satisfaction have been linked to quality of service (lacobucci et al., 1994). The implication is that customers will only be satisfied with a product or service if it meets the customers’ level of expectation with respect to the quality demand. Customers’ expectations are a believe about a product or services which serves as the standard from which the quality of such product is measured (Zrithaml et al., 1993); which is what the customers expect the service provider to offer instead of what might have been offered by the service provider (Parasuram et al., 1988). Quality of service is also a direct measure of the capability of the company because competent and capable companies will likely offer higher services than that of their competitors that are low in this sense. Basically, the perception of every customer is to receive a value that is worth the incurred expenses in which the value must always be equal to the amount paid or higher than the amount whereby the higher the value the better for the customers and the higher their level of satisfaction. As such, quality of service is a concept that cannot be neglected in any industry.

However, the perception of service quality is very difficult because of the uniqueness of the characteristics of services: intangibility, heterogeneity, perishability and inseparability (Bateson, 1985). As a result of these complexities, a number of models have also been developed to measure the perception of service quality (Bolton and Drew, 1991; Churchill and Suprenant, 1982; LaTour and Peat, 1979; Oliver, 1980; Yi, 1990). The SERVQUAL model of Parasuraman et al. (1988) is one of the mode widely adopted model for measuring the perception service quality by customers and it is built on five dimensional construct of perceived service quality; tangibility; reliability; responsiveness; assurance and empathy – with these items being a reflection of both what the customers expects from the service provider and their perceived performance of the service. Service quality has fast transformed into an important research topic as a result of its apparent relation to cost (Crosby, 1979), profitability (Bolton and Drew, 1991; Churchill and Suprenant, 1982; LaTour and Peat, 1979; Oliver, 1980; Yi, 1990) customer satisfaction (Bolton and Drew, 1991; Boulding et al., 1993), customer retention (Reichheld and Sasser, 1990), and positive word of mouth from satisfied customers.

From the above discussions, it is clear that service quality play significant role on consumers’ loyalty towards a brand a subsequent purchase and repurchase intention that is influenced by the value that customers obtain from services consumed.

The global automobile industry and competition: a sleek preview

Professor Andrew (1993) presented arguably the one of the most concise preview on the history of the automobile industry. It was made in the known in the paper that the automobile industry is present over 100 years old and has in most cases been viewed as the main factor behind the industrialization experienced in the 20^th century (1). The industry was described t be complex and comprised of ever-changing system of manufacturing, sub-contractors and alliance; couple with both assembles in the supply networks that serve as the main source of employment in the industrialized economies (Andrew, 1993). Slowly but surely, the industry transformed into a world marvel as a recognition of man’s ingenuity and now boost the most sustainable employment scheme with outstanding technologies that are continuously innovated to meet the constant change in consumers’ taste. Andrew (1993) made known that the reason for its high influence on employment is because the required materials needed in the industry stretches throughout the mining, petro-chemical, engineering and electronic sectors – thus providing employment opportunities in these sectors. Even when fully produced, the products and services delivered in this industry also helps to provide employment in order sectors like business management, maintenance, insurance and retailing.

In any case, just as the industry grows, there is also a subsequent increase in the demands of customers and such increase is influenced by adoption of information and communication technologies. This raises new stakes on what must be included in the industry in order to ensure that service delivery is done with customers’ needs at heart and that the customers are happy with the final products turned out. However, this is not easy because innovation comes at a very high cost and sometimes new innovation ends up failing after implementation. It is this issue of service failure and the influence of service recovery following a failed service that this paper seeks to understand as it related to the automobile industry.

Service recovery: a literature review

In the earlier statement, it was made known that service failure is likely to occur at some point in the process of service delivery within any given organization. For this study, service failure is defined as any form of services mishaps or problems that occurs during a consumer’s experience with an automobile manufacturer. While the potential of firms eliminating service failure seems quite unlikely especially in the automobile industry where numerous technologies need to be wielded together in order to produce the best cars, it should be understood that the manufacturers in this industry should learn how to effectively respond to the failures in the industry once they occur. This response is what is often referred to as service recovery, and it has been defined as the process by which a given organization comes out to rectify failed services (Kelley and Davis, 1994).

A number of researchers have also laid down the suggestion that the recovery strategy adopted by a firm will either enhance the level of customer satisfaction or actually compound the problem that the firm is trying to solve (Hoffman et al., 1995; Smith et al., 1998). Other suggestions also exist that more than half of service recovery measured adopted across the globe did actually compound the problem (Kelley et al., 1993). The implication now becomes that poor service recovery strategy will impound consumers to actually rate the firm lower than they did following the service failure.

Contrasting with the notions of poor service recovery strategy, literatures also exist that have laid down suggestions of the potential of a proper service recovery strategy towards enhancing the satisfaction of customers and promoting referrals for future purchases (Goodwin and Ross, 1992). Additionally, it should be noted that proper service recovery has the power or reducing the “paradoxical” scenario that occur following the service failure in which the consumers rated a firm lower as a result of poor service recovery than they did following the firm’s initial service failure (Hart et al., 1990; Kelley et al., 1993). As support to the above argument, Goodwin and Ross (1992) made known that the level of customer’s satisfaction is increased when complaints made by the customer are handled by the company as compared with the level of satisfaction the customers experienced prior to the complaints. This is because the customer feels a sense of belonging with the company in view that the company values him or her and as such the level of loyalty and recommendation is also influenced positively. This is known as “recovery paradox” (McCollough and Berry, 1996; McCollough and Bharadwaj, 1992).

Kelley et al. (1993) also presented recommendations in their research in which it was made know that firms should adopt whatever attempt possible in order to recover from failed services, because effective service recovery strategies will help enhance the level of customer loyalty irrespective of the form of failure experienced by the firm. This recommendation was based on their finding in the study in which it was made known that 70% of retention was enhanced due to customers’ perception of quality service recovery.

From the above analysis, a number of discoveries can be made with respect to the influence of service recovery. The indication presented is that just like any other industry, quality and effective recovery in the automobile industry will result to a subsequent increase in the level of consumers’ loyalty, preference and recommendation for the product (Bolton and Drew, 1991; Churchill and Suprenant, 1982; LaTour and Peat, 1979; Oliver, 1980; Yi, 1990). This is based on the understanding that when companies effectively recover their failed services, consumers will be more satisfied with the company for taking into consideration issues that affect their lives negatively. On the same ground, since the issue has been successfully handled through an effective service recovery strategy, the consumers will be happy with the service delivery of the company. As such, an increase will be experienced in terms of loyalty, preference and recommendation towards that particular brand. The overall outcome from such is a subsequent increase in productivity and profitability for the company.

On that ground, it can  be stated that effective service recovery is very important in the automobile industry because of the fact that it would led to increase in loyalty, preference and recommendation; which will directly increase the performance of the company as a result of subsequent increase in repurchase intentions.

SERVICE RECOVERY: A CASE OF HONDA’S 2012 RECALL OF 18,000 VEHICLES (Toyota, 2012)

Why is it an issue/how is it an issue?

This is an issue because it directly influences the image of the company, with a direct influence on profitability as recalling the cars will mean that they will have to refund the customers when such demands arises and it reduces the chances of the customers to make choice for Honda in the future.

Strategies used by the companies to solve this problem

Following the discovery made by the company as a number of its cars - affected vehicles include model-year 2006-2007 Honda S2000 and model-year 2006 Acura RSX – have some brake related issues, further investigation was conducted in order to understand the cause of the issue and the finding from the company is that the issue is as a result of manufacturing error.

As such, Honda proceeded immediately to recall the cars that were affected by contacting the customer in order to notify them of the issue at hand and request that they take precautionary measure to minimize risk by returning their cars. In any case, it was noted that this is not the first time the company is recalling car for mechanically related issues and as such it points in line with earlier statement that such approach will damage the image of the company and will also have a direct influence on their profitability as the company will be viewed by the customers to be unreliable. 

Was the strategy successful?

With the focus from discussions above highlighting that the recalling of cars for mechanical related issued in the company will have negative influence on profitability, it is important to understand that the strategy adopted by the company is very successful and this is based on the fact that the affected cars were effectively recalled and as such limiting the potential risk that lack of such might pose to the lives of the customers

Justification of the strategy

While the fact that the company has recalled too much cars in recent years have been linked to lose of consumers’ confidence in the brand, it is also important to understand that such an approach is justifiable. The first of such is based on the understand that it communicates the value of the brand positively to the customers in the sense that it lets customers to understand that Honda is a trustworthy brand. This is because by recalling the affected cars, consumers will be able to increase their confidence in the brand in the sense that it will positively influence their taught of the company being affectionately dedicated towards meeting their safety and security needs with respective to transportation.

Additionally, it communicates value in the sense that it lets the customers to understand that Honda is not just about buying the cars but also about conducting further researches on sold cars in order to identify issues with such cars and made necessary amendments with the notion to resolve those issues. Still on that account, it lets the customers understand that the brand value their business ethics by not scarifying the lives of customers for their own financial gains.

 Recommendation

The indication from the above analysis is that the need for auto-manufacturers to look deeper into the demands of their customers can never be overemphasized. This is because they will be gain a better understanding on how to deal with these demands and subsequently increase customers’ satisfaction. An increase in satisfaction has been linked to increase in performance of the company due to increase in the brand loyalty, repurchase intention and positive word-of-mouth. One way to increase this level of satisfaction as noted form the above discussion is by adopting an effective service recovery strategy (Bolton and Drew, 1991; Churchill and Suprenant, 1982; LaTour and Peat, 1979; Oliver, 1980; Yi, 1990). This is because the customers will always measure the quality of services obtained against their actual expenses to obtain such services and if they are not satisfied with their valuation, then the chances of being loyal to the brand is reduced and it will have negative influence on the performance of the company.

From the above case, it can be seen that Honda has been able to prove the importance of service recovery in the auto-mobile industry. This is because they have successfully waved out the negative influence of their recall on their brand image and customers loyalty by associating it with higher care for consumers’ safety. In essence, the automobile industry is a highly safety conscious industry and this is based on the understanding that when things go wrong it can be very disastrous. Thus, the safety measure provided by an auto-manufacturer will have a direct influence on purchase and the performance of the company.

On that note, it is recommended that auto-maker should be mindful of the services they deliver to their customers and ensure that such services are designed with the objective of increasing customers’ satisfaction. In cases where their services fault in any way, it is recommended that they design and implement the right service recovery strategy.

Conclusion

From the above analysis, a number of understanding has been gained based on the service recovery is very important in the auto-mobile industry just as it is in other industries. It has been proven in the above analysis that is influences performance positively as well as help rebuild damaged corporate image as can be seen form the case of Honda analysed above. Service recovery is very important because it will help rebuild a damaged corporate image and increase consumers’ trust for a specific brand following fallout with that brand.

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