Transformational Leadership in The Hotel Industry: A New Look at The Service-Profit-Chain Concept

  • Evelyn Devina Teguh Faculty of Business and Economics Petra Christian University Surabaya
  • Devie Devie Faculty of Business and Economics Petra Christian University Surabaya
  • Serli Wijaya Faculty of Business and Economics Petra Christian University Surabaya
Keywords: Service-Profit-Chain, Balanced Scorecard, transformational leadership, employee engagement, service quality, financial performance.


Employee engagement is essential to the Service-Profit-Chain concept as the factor to produce high quality service that would meet or exceed customer expectations. However, despite its suggested advantages, limited knowledge is known about what causes employee engagement. This study attempts to understand the Service-Profit-Chain concept more comprehensively, by encompassing transformational leadership as the preceding factor to employee engagement. It aimed to examine the role of transformational leadership in shaping employee engagement and service quality which lead to financial performance. The sample groups taken were among the star-rated hotels located in Surabaya, Indonesia. Each hotel was represented by three groups namely: hotel managers, staff, and hotel customers. The Partial Least Square-SEM method was applied to evaluate the hypothesized model. The results revealed that the effect of transformational leadership on financial performance is mediated by employee engagement. However, service quality cannot mediate the effect of transformational leadership on financial performance. It is interesting to note that Service-Profit-Chain has some limitations in practice, depending on the organization’s strategy. This study is among a few attempts to contribute to a better understanding of the Service-Profit-Chain concept application, with transformational leadership as the factor preceding employee engagement specifically in the hotel industry. It founds that the application of Service-Profit-Chain concept in the hotels have some constraints related to the business strategy that hotels select to penetrate the market.



Avolio, B. J. (1999). Full leadership development: Building the vital forces in organizations. Thousand Oaks, CA: Sage Publications.

Avolio, B.J., & Bass, B.M. (2004). Multifactor leadership questionnaire: Third edition manual and sampler set. Redwood City, CA: Mind Garden.

Badan Pusat Statistik Provinsi Jawa Timur. (2018). Direktori Hotel Provinsi Jawa Timur 2017 (No. 1305043.35). Surabaya, Jawa Timur: Teguh Pramono, MA.

Bakker, A. B., Albrecht, S. L., & Leiter, M. P. (2011). Key questions regarding work engagement. European Journal of Work and Organizational Psychology, 20(1), 4-28.

Bass, B. M. (1985). Leadership and performance beyond expectations. New York: The Free Press.

Bass, B. M., & Avolio, B. J. (1994). Improving organizational effectiveness through transfor-mational leadership. Thousand Oaks, CA: Sage Publications.

Bento, A., Bento, R., & White, L. (2013). Validating cause-and-effect relationships in the balanced scorecard. Academy of Accounting and Financial Studies Journal, 17(3), 44-55.

Bezuidenhout, A. & Schultz, C. (2013). Transfor-mational leadership and employee engagement in the mining industry. Journal of Contemporary Management, 10.

Bhatnagar, J. (2007). Talent management strategy of employee engagement in Indian ITES employees: Key to retention. Employee Rela¬tions, 29(6), 640-663.

Bitner, M. J. (1990). Evaluating service encounters: The effects of physical surroundings and employee responses. Journal of Marketing, 54(2), 69-82.

Burns, J. M. (1978). Leadership. New York: Harper & Row.

Cleveland, J., Stockdale, M., & Murphy, K. R. (2000). Women and men in organizations. London: Lawrence Erlbaum Associates.

Dedeoğlu, B.B. & Demirer, H. (2015). Differences in service quality perceptions of stakeholders in the hotel industry. International Journal of Contem-porary Hospitality Management, 27(1), 130-140.

Devie, D., Liman, L. P., Tarigan, J., & Jie, F. (2019). Corporate social responsibility, financial perfor-mance and risk in Indonesian natural resources industry. Social Responsibility Journal, https://doi. org/10.1108/SRJ-06-2018-0155

Ekinci, Y., Zeglat, D., & Whyatt, G. (2011). Service quality, brand loyalty, and profit growth in UK budget hotels. Tourism Analysis, 16, 1-12.

Ennew, C. T. (2015). The service profit chain. Wiley Encyclopedia of Management, 9, 1-4.

Evans, N. (2005). Assessing the balanced scorecard as a management tool for hotels. International Journal of Contemporary Hospitality Manage¬ment, 17(5), 376-390.

Evelyn, D. & Hazel, G. (2015). Effects of transfor-mational leadership on employee engagement: The mediating role of employee engagement. International Journal of Management, 6(2), 1-8.

Farrell, A. M. (2001). The effect of leadership styles on service quality delivery. Doctoral Colloquium Submission, Aston Business School, Aston University, Birmingham, United Kingdom.

Fitzgerald, S. & Schutte, N.S. (2010). Increasing transformational leadership through enhancing self-efficacy. Journal of Management Develop-ment. 29(5): 495-505.9

Goyit, M. G. (2015). Service Quality and Financial Performance of Selected Banks in Nigeria. A Thesis, University of Jos, Plateau, Nigeria.

Grönroos, C. (1988). New competition in the service economy: The five rules of service. International Journal of Operations and Production Mana-gement, 8(3), 9-19.

Gwinner, K., Gremler, D. D., & Bitner, M. J. (1998). Relational benefits in services industries: The customer's perspective. Journal of the Academy of Marketing Science, 26(2), 101-114.

Hanushek, EA (1997). Assessing the effects of school resources on student performance: An update. Educational Evaluation and Policy Analysis, Vol., 19, 141-164.

Harter, J. K., Schmidt, F. L., & Asplund, J. W. (2010). Causal impact of employee work perceptions on the bottom line of organizations. Perspectives on Psychological Science, 5(4), 378-389.

Harter, J. K., Schmidt, F. L., & Hayes, T. L. (2002). Business-unit level relationship between em-ployee satisfaction, employee engagement and business outcomes: A meta-analysis. Journal of Applied Psychology, 87(2), 268-279.

Harter, J. K., Schmidt, F. L., & Keyes, C. L. M. (2003). Well-being in the workplace and its relationship to business outcomes: A review of the Gallup studies. In C. L. M. Keyes & J. Haidt (Eds.), Flourishing: Positive psychology and the life well-lived (pp. 205-224). Washington, DC: American Psychological Association.

Heskett, J. L., Jones, T. O., Loveman, G. W., Sasser, W. E. J., & Schlesinger, L. A. (1994). Putting the service-profit-chain to work. Harvard Business Review, 72(2), 164-174.

House, R. J., & Shamir, B. (1993). Toward the integration of transformational, charismatic, and visionary theories. In M. Chemers & R. Ayman (Eds.), Leadership theory and research: Perspec-tives and directions (pp. 167-188). San Diego: Academic Press.

Ismail, A., Halim, F. A., Munna, D. N., Abdullah, A., Shminan, A. S., & Muda, A. L. (2009). The mediating effect of empowerment in the relationship between transformational leadership and service quality. Journal of Business Mana-gement, 4(4), 3-12.

Jahanshahi, A. A., Rezaei, M., Nawaser, K., Ranjbar, V., & Pitamber, B. K. (2012). Analyzing the effects of electronic commerce on organizational performance: Evidence from small and medium enterprises. African Journal of Business Mana-gement, 6(15), 6486-6496.

Kahn, W. A. (1990). Psychological conditions of personal engagement and disengagement at work. Academy of Management Journal, 33(4), 692-724.

Kaplan, R. S. (2010). Conceptual foundations of the balanced scorecard. Working Paper, Harvard Business School, Harvard University.

Kaplan, R. S., & Norton, D. P. (1992). The balanced scorecard – measures that drive performance. Harvard Business Review, 71-79.

Kaplan, R.S., & Norton, D.P. (1996). The balanced scorecard: Translating strategy into action. Boston: Harvard Business School Press.

Kaplan, R. S., & Norton, D. P. (2007). Using the balanced scorecard as a strategic management system. Harvard Business Review, July-August 2007, 1-14.

Kavanagh, M. J., Gueutal, H. G., & Tannenbaum, S. I. (1990). Human resource information systems: Development and application. Boston, Massa-chusetts: PWS-KENT Publishing Company

Kelloway, E. K., Barling, J., Inness, M., Francis, L., & Turner, N. (2010). Loving one's job: Construct development and implications for individual well-being. In P. Perrewe & D. Ganster (Eds.), New Developments in Theoretical and Concep¬tual Approaches to Job Stress" Research in Occupational Stress and Well-Being (Vol. 8). London: Emerald Publishing.

Lado, A. A., Boyd, N. G., & Wright, P. (1992). A com-petency-based model of sustainable competitive advantage: Toward a conceptual integration. Journal of Management, 18(1), 77-91.

Lau, R. S. M. (2000). Quality of work life and performance. International Journal of Service Industry Management, 11(5), 422-375

Levy, P. E., Cober, R. T., & Miller, T. (2002). The effect of transformational and transactional leader¬ship perceptions on feedback-seeking intentions. Journal of Applied Social Psychology, 32(8), 1703-1720.

Linsner, S. (2009). Transformational leadership and 'flow': The mediating effects of psychological climate (Unpublished dissertation). Kansas State University.

Lytle, R. S., Hom, P. W., & Mokwa, M. P. (1998). SERV*OR: A managerial measure of organiza-tional service-orientation. Journal of Retailing, 74(4), 455-489.

Macey, W. H., & Schneider, B. (2008). The meaning of employee engagement. Industrial and Orga-nizational Psychology, 1(1), 3-30.

Maiga, A., & Jacob, F. (2009). Leadership, nonfinan-cial, and financial outcomes: the case of commu-nity hospitals. Accounting and the Public Interest, 29, 166-190.

Maslach C. & Leiter, M.P. (1997). The truth about burnout. San Francisco: Jossey-Bass

Meindl, J. R., Ehrlich, S. B., & Dukerich, J. M. (1985). The romance of leadership. Administrative Science Quarterly, 30(1), 78-102.

Murasiranwa, E. T., Nield, K., & Ball, S. (2010). Hotel service quality and business performance in five hotels belonging to a UK hotel chain. Inter-national CHRIE Conference-Refereed Track, 11.

Muterera, J. (2012). Leadership behaviors and their impact on organizational performance in govern-mental entities. International Journal of Sustai¬na-ble Development, 19-24.

Myrden, S. E. (2013). From leadership to customer loyalty: Reconceptualizing the Service-Profit-Chain. A Dissertation, Saint Mary's University, Halifax, Nova Scotia.

Nair, G. (2016). Impact of service quality on business performance in hospitality industries: An empi-rical study. Journal of Tourism, Hospitality, and Sports, 17, 10-28.

Na-Nan, K., Sanamthong, E., & Sulong, M. (2015). Employees engagement, quality of service and customers satisfaction affecting customer loyalty of hair and beauty salon business. International Journal of Applied Business and Economic Research, 13(5), 3409-3421.

Obiwuru, T. C., Okwu, A. T., Akpa, V. O., & Nwank-were, I. A. (2011). Effects of leadership style on organizational performance: A survey of selected small-scale enterprises in Ikosi-Ketu council development area of Lagos State, Nigeria. Aus¬tra-lian Journal of Business and Management research, 1(7), 100-111.

Othman, A., Albert, F. I., Safiah, S., Nur, M. M., & Hasan, S. (2014). Transformational leadership and customer service performance of hotel indus¬try in Melaka. European International Journal of Applied Science and Technology, 1(5), 31-42.

Parasuraman, A., Zeithaml, V., & Berry L. (1985). A conceptual model of service quality and its implications for future research. Journal of Mar-keting, Fall, 41-50.

Parasuraman, A., Zeithaml, V. A., & Berry, L. L. (1988). SERVQUAL: A multiple item scale for measuring consumer perceptions of service quality. Journal of Retailing, 64(1), 12-40.

Patiar, A., & Mia, L. (2015). Drivers of hotel depart-ments' performance: evidence from Australia. Journal of Human Resources in Hospitality & Tourism, 14(3), 316-337.

Patiar, A., & Wang, Y. (2016). The effects of trans-formational leadership and organizational com-mitment on hotel departmental performance. International Journal of Contemporary Hospita¬lity Management, 28(3), 586-608.

Pfeffer, J. (1977). The ambiguity of leadership. The Academy of Management Review, 2(1), 104-112.

Pfeffer, J. (1998). The human equation: Building profits by putting people first. Boston, MA: Harvard Business School Publishing.

Podsakoff, P. M., MacKenzie, S. B., & Bommer, W. H. (1996). Transformational leader behaviors and substitutes for leadership as determinants of employee satisfaction, commitment, trust, and organizational citizenship behaviors. Journal of Management, 22, 259–298.

Porter, M. E. (1980). Competitive strategy. New York: Free Press.

Prieto, I. M., & Revila E. (2006). Learning capability and business performance: A non-financial and financial assessment. The Learning Organiza¬tion, 13(2), 166-185.

Pritchard, M. & Silvestro, R. (2005). Applying the service profit chain to analyze retail performance: The case of the managerial strait-jacket? Inter-national Journal of Service Industry Manage¬ment, 15(4), 337-356.

Richard, P. J., Devinney, T. M., Yip, G. S., & Johnson, G. (2009). Measuring organizational perfor¬mance: Towards methodological best practice. Journal of Management, 35(3), 718-804.

Richer, S. F., & Vallerand, R. J. (1995). Supervisors' interactional styles and subordinates intrinsic and extrinsic motivation. The Journal of Social Psychology, 135(6), 707-722.

Rowe, W. G. (2001). Creating wealth in organizations: The role of strategic leadership. Academy of Management Executive, 15, 81-94.

Saks, A. M. (2006). Antecedents and consequences of employee engagement. Journal of Managerial Psychology, 21(7), 600-619.

Salanova, M., Agut, S., & Peiró, J. M. (2005). Linking organizational resources and work engagement to employee performance and customer loyalty: The mediation of service climate. Journal of Applied Psychology, 90(6), 1217-1227.

Schalkwyk, R. D. (2011). The impact of leadership practices on service quality in private higher education in South Africa. A Thesis, University of South Africa.

Schaufeli, W. B., Salanova, M., Gonzalez-Roma, V., & Bakker, A. B. (2002). The measurement of engagement and burnout: A two sample con-firmatory factor analytic approach. Journal of Happiness Studies, 3(1), 71-92.

Schneider, B., & Bowen, D. E. (1985). Employee and customer perceptions of service in banks:

Repli¬cation and extension. Journal of Applied Psycho¬logy, 70(3), 423-433.

Schneider, B., White, S. S., & Paul, M. C. (1998). Linking service climate and customer perceptions of service quality: Test of a causal model. Journal of Applied Psychology, 83(2), 150-163.

Shaikh, U. A A., & Khan, N. R. (2011). Impact of service quality on customer satisfaction: evi¬dences from the restaurant industry in Pakistan. Management& Marketing, 9(2), 343-355.

Slåtten, T, & Mehmetoglu, M. (2011). Antecedents andeffects ofengaged frontline employees: A study from the hospitality industry. Managing Service Quality, 21(1), 88-107.

Solomon, M. R., Surprenant, C., Czepiel, J. A., & Gutman, E. G. (1985). A role theory perspective on dyadic interactions: The service encounter. Journal of Marketing, 49(1), 99-111.

Tarabishy, A., Solomon, G., Fernald Jr., L. W., & Sashkin, M. (2005). The entrepreneurial leader's impact on the organization's performance in dynamic markets. Journal of Private Equity, 8(4), 20-29.

Towers-Perrin. (2003). Working today: Understand¬ing what drives employee engagement. Stamford, CT: Author.

Xanthopoulou, D., Bakker, A. B., Demerouti, E., & Schaufeli, W. B. (2009). Work engagement and financial returns: A diary study on the role of job and personal resources. Journal of Occupational & Organizational Psychology, 82(1), 183-200.

Yuan, J., Cai, L. A., Morrison, A. M., & Linton, S. (2005). An analysis of wine festival 6 attendees' motivations: A synergy of wine, travel and special events? Journal of Vacation Marketing, 11(1), 41-58.

Zeithaml, V. A., Berry, L. L., & Parasuraman, A. (1996). The behavioral consequences of service quality. Journal of Marketing, 60(2), 31-46.

Zeithaml, V. A., & Bitner, M. J. (1996). Services marketing. New York: McGraw-Hill.