Employee satisfaction, customer satisfaction, and nancial performance:An empirical examinationChristina G. Chi *, Dogan GursoySchool of Hospitality Business Management, Washington State University, Pullman, WA 99164-4742, United StatesARTICLE INFOABSTRACTKeywords:Sen/iceprot chainEmployee satisfactionCustomer satisfactionFinancial performanceMediation effect of customer satisfactionThe purpose of this study is to examine the relationship between employee satisfaction and customersatisfaction, and to examine the impact of both on a hospitality companys nancial performance utilizingservice-prot-chain framework as the theoretical base. Specically, this study explores four majorrelationships: (I ) the direct relationship between customer satisfaction and nancial performance: (2) thedirect relationship between employee satisfaction and nancial performance: (3) the direct relationshipbetween customer satisfaction and employee satisfaction: and (4) the indirect relationship betweenemployee satisfaction and nancial performance. Furthermore, this study examines the mediating roleof customer satisfaction on the indirect relationship between employee satisfaction and nancialperformance. Data for this study was collected from employees, customers and managers ofthree- and four-star hotels. Structural equation modeling (SEM) with a two-step approach was utilized to empirically testthe proposed hypotheses and the relationships between the constructs. Findings suggest that whilecustomer satisfaction has positive signicant impact on nancial performance, employee satisfaction hasno direct signicant impact on nancial performance. Instead, there is an indirect relationship betweenemployee satisfaction and nancial performance. which is mediated by customer satisfaction. 2008 Published by Elsevier Ltd.1. IntroductionSeveral studies suggest that there is a positive relationshipbetween employee satisfaction and customer satisfaction (Bern-hardt et al., 2000; Harter et al., 2002; Koys, 2003; Tornow andWiley, 1991; Wangenheim et al., 2007). Because of this assumedpositive relationship, employee satisfaction has received signi-cant attention from researchers and became a critical issue withinthe last two decades (Matzler and Renzl, 2007). There is no doubtthat employee satisfaction is critical in the service industrybecause of the nature of the industry (Lam et al., 2001). Assuggested by the service-prot chain" providing employees witha superior internal working environment is likely to lead tosatised employees who are both loyal to the organization andable to provide the customer with an excellent service experience.Customers will recognize and value the outstanding service offeredto them. Over time, they will exhibit loyalty behaviors, such ascontinued purchasing and increased referrals. These loyaltybehaviors will generate both market share and protabilityincreases for the service rm (Heskett et al., 1994, 1997)." Corresponding author. Tel.: +l 509 335 7661; fax; +1 509 335 3857.E-mail address: cgengqi@wsu.edu (CG. Chi).02784319/K; see front matter 2008 Published by Elsevier Ltd.doi:10.1016/j.ijhm.2008.08.003Because of the assumption that satised employees will createsatised and loyal customers, which will result in higher sales and.therefore, higher nancial returns, service companies have beenallocating signicant resources for employee and customer satis-faction and retention. However, some researchers raise seriousconcerns about the heavy emphasis placed on both employeesatisfaction and customer satisfaction and whether or not they relateto bottom-line performance (Bernhardt et al., 2000; Zeithaml et al.,1990). Gursoy and Swanger (2007) suggest that in hospitality andtourism industry attention to sen/ice and customer satisfaction isconsidered to be a given factor, which is an expected and a naturalpart of day-today operations. Hospitality and tourism companiescannot survive without satised customers; however, havingsatised customers may not guarantee the success of any hospitalityand tourism business. In order to succeed, a company has to do abetter job in creating satisfactory experiences for both employeesand customers than its competitors. Even though both customersatisfaction and employee satisfaction and their retention have beenstudied extensively, impacts of employee satisfaction and customersatisfaction on nancial performance measures have not receivedmuch attention.The purpose of this study is to examine the relationshipbetween employee satisfaction and customer satisfaction, and toexamine the impact of both on hospitality company's nancial

246 CG. Chi, D. Gursoy/Iriterntitionnljoumal of Hospitality Management 28 (2009) 245-253Fig. 1. Proposed model: satisfaction and nancial pei'foi'mance. Note: X1 = Overall. I am satised with myjoh at ; X2 = l intend to keep working at the long into thefuture; X3 = I often [l"llk about quitting myjob (reverse coded): X4 = As soon as l canperformance measures. Specically, this study explores threedirect relationships and an indirect relationship between emp-loyee satisfaction and nancial performance and the mediatingrole of customer satisfaction on that indirect relationship. Fig, 1presents the three direct relationships examined in this study:(1) the relationship between customer satisfaction and nancialperformance; (2) the relationship between employee satisfactionand nancial performance; and (3) the relationship betweenemployee satisfaction and customer satisfaction. In the nextsection, the theoretical background for this study highlighting pastresearch linking employee satisfaction to customer satisfactionand their impact on nancial performance measures are presented.Once an understanding of the appropriate theoretical frameworkis presented, employee satisfaction, customer satisfaction andtheir relationships with nancial performance are established,appropriate hypotheses are presented, and the methodology andndings of the study are furnished. Finally, in Section 5, theconclusions and limitations are presented along with managerialand research implications of the study nding.2. Review of the literatureGlobalization and free trade continue to change the businessenvironment and increase global competition. ln today's businessenvironment, to stay competitive and deliver satisfactory nancialreturns to the owners and shareholders, managers depend heavilyon how effectively they can cope with continuous and unexpectedchanges. The ability to respond quickly and effectively (time-basedcompetition) and to satisfy customer needs has become a deningcharacteristic of competitiveness and of success for manycompanies (Gursoy and Swanger, 2007). Therefore, customersatisfaction has been one of the most frequently examined topics inhospitality tourism literature. Findings of previous studies suggestthat employees are likely to play a signicant role on customersatisfaction (Spinelli and Canavos, 2000; Wu, 2007). Since mosthospitality and tourism products are heterogeneous and insepar-nd l'lE|li'll'_]0i) l am going to leave (reverse coded); Y1 = l am very satised with my stay' Y2 =1 am delighted with the services that offers; Y3 = Hotel 7 exceeded my expectations; Y4 = Protability; Y5 = Return on investment; Y6 = Net prot.able, hospitality and tourism employees tend to be more involvedwith hospitality service offerings. Their involvement and interac-tion with customers, therefore, tend to play a signicant role inquality perceptions and customer satisfaction due to the fact thathospitality and tourism products are often highly complex andpresents a summation of interaction, exchange and performancebetween employees and customers (Bitner et al., 1990).Since any service company's intangible assets reside inemployees know-how and skills, and the company's futuredepends heavily on employees and the perceived quality of inter-actions between customers and employees, employee satisfactionand retention has become one of the most critical issues facing thehospitality and tourism industry (Matzler and Renzl, 2007). Inrecent years, service companies have been allocating signicantresources for employee retention because most hospitality pro-fessionals and research suggest that lowering employee turnover islikely to have signicant impact on the bottom-line. Literaturefurther suggests that employee retention and customer retentionare closely correlated. Employees who are happy and satisedwith their work environment are more likely to stay with thecompany, This is likely to result in lower turnover and therefore abetter nancial performance clue to decreasing cost of attractingand training new employees. Furthermore, studies suggest thatsatised employees are likely to provide better services, which islikely to result in a satisfactory service experience for theircustomers. This satisfactory sen/ice experience, in return, is likelyto have signicant impact on repeat business and customerretention. Studies also suggest that customer retention is likely toincrease a companys protability because retaining an existingcustomer costs a lot less than attracting a new one.The service-prot chain (Heskett et al., 1997) was developedfrom an analysis of service organizations with the aim of linkingoperational resource investments to marketing, operational, andnancial outcomes. The service-prot chain combines threedistinct, but closely related streams of research: the cycle ofemployee capability, the customer quality/value equation, and the

CG. Chi, D. Gursay/Internationaljournal 0[Haspitality Management 28 (2009) 245-253 247cycle of customer loyalty. The cycle of employee capability takesa human resource perspective on the relationships betweenemployee satisfaction, turnover, and productivity. The quality/value equation describes how customers perceive and assessservice offerings. The cycle of customer loyalty examines the effectthat customer satisfaction has on customer loyalty and how theyboth play a vital role in determining nancial outcomes (Loveman,1998; Loveman and Heskett, 1999).As suggested by Heskett et al. (1994), the service-prot chainestablishes relationships between protability, customer loyaltyand satisfaction, and employee satisfaction, loyalty and produc-tivity. The model proposes that prot and growth are stimulatedprimarily by customer loyalty, which is a direct result of customersatisfaction Satisfaction is largely inuenced by the value ofsen/ices provided to customers, which is created by satised, loyal,and productive employees. Heskett et al. (1994) also argues thatthe service-prot chain can also be dened by a special kind ofleadership which emphasizes the importance of each employeeand customer. A close examination of the model supports theargument that satised employees are likely to provide betterservices, which is likely to result in a satisfactory serviceexperience for their customers, and better nancial performancefor the company. Therefore, this study primarily focused on therelationship between employee satisfaction, customer satisfaction,and nancial performance because, as the preceding discussionsuggest, the basic premise of the service-prot chain is thatsatised employees are likely to create satised customers andsatised customers are likely to create happy shareholders.Even though the service-prot chain and several studiessuggest that satised employees and customers are likely toresult in better nancial performance, testing this relationshipempirically has not received much attention Only a small numberof empirical studies have been conducted linking satisfaction andperformance (Bernhardt et al., 2000: Zahorik and Rust, 1992).However, those studies that examined the link between satisfac-tion and performance measures reported contradictory ndings(Anderson et al., 1994; Boulding et al., 1993).2.1. Customer satisfaction and nancial performanceAs suggested by the service-prot chain, the relationshipbetween customer satisfaction and nancial performance shouldbe positive and the higher the customer satisfaction, the morefavorable the performance measures should be. However, whilesome studies suggest that this positive relationship exists(Bernhardt et al., 2000: Nelson et al., 1992), others argue thatcustomer service quality perceptions and satisfaction are some-times, but not always, reected in prots (Schneider, 1991).Bernhardt et al. (2000) suggest that a positive and signicantrelationship exists between changes in customer satisfaction andchanges in nancial performance of a rm. However, in the shortrun, this positive and signicant relationship may be obscured bymany factors but it may be signicantly positive in the long run.Several other researchers suggest that the relationship betweencustomer satisfaction and nancial performance may not bepositive (Tornow and Wiley, 1991; Wiley, 1991). As suggested byBernhardt et al. (2000) that while these ndings might seemcounterintuitive, they may not be that surprising. For example,Gursoy and Swanger (2007) argues that while customer satisfac-tion is at the very core of hospitality operations, customersatisfaction may not result in higher nancial performancebecause it is considered as a given factor, which is an expectedand natural part of day-to-day operations. Because consumersexpect to be satised when they patronize any service busi-nesses, hospitality and tourism businesses cannot survive withoutsatised customers. ln addition, a multitude of factors could maskthe true relationship between these constructs. For example, whena business decides to increase its customer satisfaction, they mayend up spending a large sum of money to implement this. Becauseof the amount of investment on several factors such as training,upgrades of facilities, etc. a business may be able to increasecustomer satisfaction, but this may result in lower prot. On theother hand, internal cost-cutting measures such as loweringtraining expenses or postponing facility upgrades may make a rmseem more protable in any given time period, even if customersare not satised. It is true that a multitude of factors could mask thetrue relationship between customer satisfaction and nancialperformance if the examination was based on the data receivedfrom one business. lf the magnitude and the direction ofrelationship between these two constructs is examined utilizingdata obtained from a relatively large number of businesses, theresults should reveal the true relationships between these twoconstructs, Since the data for this study is obtained from 250properties, the sheer size of the sample should minimize theimpact of variables that are beyond the control of this study andreveal the true relationships between customer satisfaction andnancial performance. Even though many actions ofa company arebeyond the scope of customer satisfaction and may have asignicant impact on prots, customer satisfaction is still likely toplay a signicant role in a companys nancial success. Therefore,this study hypothesizes a signicant positive relationship betweencustomer satisfaction and nancial returns.Hypothesis 1. There is a signicant positive relationship betweencustomer satisfaction and nancial performance.2,2, Employee satisfaction and nancial performanceStudies suggest that employee satisfaction plays a primary rolein helping companies achieve nancial goals (Koys, 2003). Thelogic for this argument is ifa company takes care of its employees.the employees will take care of the customers. It is true thatcustomers tend to have a better experience with organizations thathave higher levels of employee satisfaction and engagement.Taking care of employees can be dened as providing better pay.ongoing training, and making employees feel secure (Gursoy andSwanger. 2007; Koys, 2003; Schneider. 1991). Satised employeesare more likely to be motivated and harder working thandissatised ones. However, even though company employeeswho are willing to work together, who are able to work beyondexpectations, and who put themselves into the managers shoestend to work more efciently, provide better services and,therefore, create higher customer satisfaction (Koys, 2003 ), severalstudies report that examination ofthe direct relationship betweenemployee satisfaction and nancial results tend to yield insignif-icant results suggesting an insignicant direct relationshipbetween employee satisfaction and nancial performance. Somestudies even suggest a negative relationship between employeesatisfaction and customer satisfaction. For example, Tornow andWiley (1991 ) reported a consistent negative relationship betweenemployee satisfaction (with such items as pay and benets) andnancial results, However, most other studies suggest an insig-nicant direct relation between employee satisfaction andnancial performance. For example. Wiley (1991) was unable tond any signicant direct relationship between overall employeesatisfaction and nancial performance. Similar ndings werereported by Bernhardt et al. (2000) that the relationship betweenemployee satisfaction and nancial performance was virtuallynonexistent." Based on the preceding discussion, the followinghypothesis is proposed:

248 CC. Chi, D. Uursay/Internationaljournal 0fHospitality Management 28 (2009) 245253Hypothesis 2. There is no signicant direct relationship betweenemployee satisfaction and nancial performance.This insignicant direct relationship may be explained by thefact that the relationship between employee satisfaction andnancial performance might be indirect. As suggested by theserviceprot chain. ifemployees feel that the company takes goodcare of them. they are. in return. likely to take time to providebetter service to meet and/or exceed customers expectations. Thisis likely to lead to higher satisfaction among those customers.which in return will lead to repeat business, positive word-of-mouth behavior and. therefore, higher sales and better nancialperformance (l(oys. 2003). As suggested by the preceding dis-cussion, the relationship between employee satisfaction andnancial performance is likely to be indirect and this indirectrelationship is likely to be mediated by customer satisfaction.Based on the preceding discussion, following two hypotheses areproposed:Hypothesis 3. There is a signicant indirect positive relationshipbetween employee satisfaction and nancial performance.Hypothesis 4. The relationship between employee satisfactionand nancial performance is mediated by customer satisfaction.2.3. Employee satisfaction and customer satisfactionThe relationship between customer satisfaction and employeesatisfaction is the one relationship that does not seem to yieldconicting results. Studies suggest that employee and customersatisfaction are positively correlated (Spinelli and Canavos. 2000;Matzler and Renzl, 2007; Tornow and Wiley, 1991: Wiley, 1991;Wu. 2007). As suggested by the service-prot chain. providingemployees with a superior internal working environment will leadto satised employees who are both loyal to the organization andable to provide the customer with an excellent service experience.which will result in satised customers. Therefore, the followinghypothesis is proposed:Hypothesis 5. There is a positive relationship between customersatisfaction and employee satisfaction.3. MethodologyData for this study were collected from the employees,customers and managers of three and four star hotels located inve destinations. In each destination, 50 three and four star hotelswere recruited to participate in the study using a snowballsampling methodology. A packet of materials were delivered toeach hotel by a member of the research team. Each packetcontained 10 employee surveys. 20 customer surveys and 1 surveyfor the manager. Before collecting the data, each property wasassigned a code to make sure that responses from the employeesand customers of each property were assigned to the rightproperty. Customer satisfaction data were collected through aseries of surveys conducted at each property. The nancial datawere collected from the managers of individual properties.Employee surveys were distributed to randomly selected 10employees who had been working for the hotel at least for 6months. To facilitate accurate responses, anonymity was guaranteed to all employees. Employees were instructed to ll out thesurveys, put them in envelopes, seal them to assure condentialityand, then. return them to the interviewer. In total, 2023 of the 2500eligible employees returned usable surveys yielding a responserate of 81%. Self-administered customer survey questionnaireswere distributed to randomly selected 20 customers staying ateach participating hotel. The research team member approachedevery eighth customer checking out from the hotel and asked themwhether they would like to complete a short survey regardingtheir satisfaction with their stay. Customers were instructed tocomplete the short survey, place the completed survey in theprovided envelope, seal it and return it to the research teammember. A total of 3346 usable customer surveys were returned,yielding a response rate of 67%. Since all the hotel managers agreedto participate in the study before data collection started. managersof all 250 hotels completed the nancial performance survey.After collecting customer, employee and nancial data fromeach property, a summated measure for each employee satisfaction and customer satisfaction variable (question) was created foreach property. For example. from Property A nine usable employeesatisfaction surveys and sixteen usable customer satisfactionsurveys were received. First. a summated measure for question oneof the employee satisfaction survey questionnaire was created byaveraging all nine responses to question one. The same procedurewas utilized to calculate the summated score for each employeesatisfaction and customer satisfaction items until a summatedscore was created for every single item (question) on employeesatisfaction and customer satisfaction survey questionnaires.Aften/vards, summated scores for each employee satisfactionand customer satisfaction variables (questions) and the nancialperformance data provided by the management of the Property Awere entered in a single data le yielding a single line presentingthe summated responses for Property A. The same procedure wasrepeated for each property. Results from each property were addedto the data le. Summated scores for employee satisfaction andcustomer satisfaction were utilized because it enables researchersto minimize to some extent the measurement error inherent in allmeasured variables.Since this study summated individual data into rm level datathrough a cross-level data transformation. it was necessary toensure that individual ratings are reasonably stable within eachrm set (Chen et al., 1993). Therefore, the estimate ofwithin-groupinterrater reliability for multiple-item scales was assessed byutilizing the interclass correlation coefcient (ICC) in order tomake sure that individual ratings are reasonably stable within eachrm set and to test whether there is consistency across employeeperceptions or customer perceptions. This reliability is interpretedsimilar to other reliability coefcients. A value of .70 or higherindicates a good level of within-group interrater reliability (Georgeand Bettenhausen, 1990). Findings indicated acceptable interraterreliability coefcients for both customer satisfaction and employeesatisfaction constructs; .81 and .68. respectively. Even though theinterrater reliability score of the employee satisfaction constructwas below .70 (.68). it was determined to be close enough becausereliability scores that are between .60 and .70 represent the lowerlimit of acceptability (Gursoy and McClealy. 2004).3.1. Measurement variablesFig. 1 presents the model tested in this study. The model isrepresented by one exogenous construct (employee satisfaction)and two endogenous constructs (customer satisfaction andnancial performance). As presented in Table 1, the employeesatisfaction construct was measured by four items, and thecustomer satisfaction and nancial performance were measuredby three-item measurement scales. Items that were used to assessboth customer satisfaction and employee satisfaction constructswere measured on a vepoint Likert-type scale ranging from1 =strong!y disagree to 5 =strongly agree. Financial performancewas assessed by asking managers to rate their company's nancial

CG. Chi, D. Gursoy/Internationaljournal o[Hospitality Management 28 (2009) 245-253 249Table 1Measurement scale properties based on SEM.Constructs and indicatorsCompletely standardized loadings Construct/indicator reliabilityError varianceFinancial successProtabilityReturn on investmentNet protCustomer satisfactionl am very satised with my stay at _I am delighted with the services that _ offersHotel _ exceeded my expectationsEmployee satisfactionOverall, I am satised with my job at _I intend to keep working at the 7 long into the futureI often think about quitting myjobAs soon as I can nd another job I am going to leave0.830.800.580.910.770.670.720.630,540.58790,690.640.348320.830.590.45710.520.400.290.3421"0.310.360.6617"0.170.410.5529"0.480.600.110.652 The composite reliability of each construct. The composite error variance of each construct. Reverse coded.performance relative to their three major competitors during thelast 12 months using a ve-point Likert-type scale ranging from1 = much lower to 5 = much higher. Similar measures were utilizedby Gursoy and Swanger (2007) to assess the hospitality companiesnancial performance.3.2. Data analysisThe properties of the items of the constructs in the proposedmodel were testecl using the LISREL 8 structural equation analysispackage with maximum likelihood (ML) method of estimation(Anderson and Gerbing, 1988). in combination with the two-stageprocess recommended by Sethi and King(1994) and Anderson andGerbing (1988).First, a conrmatory measurement model that species theposited relations of the observed variables to the underlyingconstructs, with the constructs allowed to intercorrelate freely,was tested. The adequacy of the individual items and thecomposites were assessed by measures of reliability and validity.The composite reliability as calculated with LISREL estimates, isanalogous to coefcient alpha and is calculated by the formulaprovided by Fornell and Larcker (1981). Further, convergentvalidity and discriminant validity were assessed. Convergentvalidity was assessed from the measurement model by determin-ing whether each indicators estimated pattern coefcient on itsposited underlying construct factor is signicant (greater thantwice its standard error). Discriminant validity was assessed forevery possible pair of constructs by constraining the estimatedcorrelation parameter between them to 1.0 and then performing aX2 difference test on the values obtained for the constrained andunconstrained models (Anderson and Gerbing, 1988; Joreskog.1993). A signicantly lower X2 value in an unconstrained modelindicates that discriminant validity is achieved.Afterwards, the structural model was tested. The structuralportion of the structural equation modeling (SEM) allows for thetesting of multiple equations with multiple dependent variables.This statistical method provides parameter values (i.e., pathcoefcients) for each of the proposed relationships and determinestheir respective signicance. ln addition, the mediation effect ofcustomer satisfaction was assessed using the causal step approachrecommended by Baron and Kenny (1986).As t indices, the X2 statistics (and associated Pva|ues) andother t indices are recommended by numerous researchers from anumber ofdifferent disciplines. These selected t indices were thegoodness-of-t index (GFI), the normed-t index (NFI), theparsimonious normed-t index (PNFI), the non-normed-t index(NNFI), the comparative t index (CPI), and the critical N statistic.Values ofGFl, NFI, CFI, NNFI, and PNFI range from zero to 1.00 witha value close to 1.00 indicating good t (Byrne, 1989).4. ResultsDetails on the properties of the measurements are provided inTable 1. As shown in Table 1, all of the composite reliabilities areabove .70. The overall t ofthis nal measurement model is X232, :85.27 (P = 0.0); GFI = .98; NFI = .97; CFI = .98; and IFI = .98. Further.the root mean square residual (RMR) is .028 and the standardizedRMR is .038.Two types of validity measures discriminant and convergent were examined. Discriminant validity addresses the concept thatthe measures (observed indicators) of dissimilar constructs thattheoretically should not be related to each other, in fact, areobserved to not be related to each other (Zikmund, 1997). Thismeans that observed indicators that measure one construct shouldnot be related to the measures of other constructs in themeasurement model if the constructs in the proposed measure-ment model have discriminant validity.To ensure that the constructs are not measuring the sameconcept or ideas, the discriminant validity was assessed for eachconstruct in the measurement model by examining the constructsin sets of two (joreskog, 1993). For example, the employeesatisfaction" construct was tested against the customer satisfac-tion" construct to establish these two constructs have discrimi-nant validity (not measuring the same concept). Then, theemployee satisfaction" construct was tested against nancialperformance" construct, and nally the customer satisfactionconstruct was tested against the "nancial performance con-struct. Two models were thus tested for every possible pair ofestimated constructs. The rst model was the constrained modelwhere the correlation parameter was constrained between eachpair of constructs to 1.00. The second model was the uncon-strained model (i.e., free model) where the correlation parameterbetween two constructs was not manipulated (not xed at 1.00)(]oreskog,1971).The X2 value was generated forboth constrainedand unconstrained models with the respective degrees of free-dom. Afterwards, a X2 difference test was performed on the twomodels.Asignicantly lower X2 value fortheunconstrained(free)model indicated that discriminant validity has been achieved(Anderson and Gerbing, 1988). Table 2 indicates that all of theconstructs possess discriminant validity.

250 CG. Chi. D. Gursay/Internationaljournal of Hospitality Management 28 (2009) 245-253Table ZResults of discriminant validity tests.Correlation value X2 with correlation xed d.f. X2 with correlation free d.f. Change in X2 Change in d.f. Signicance levelma...mwlv 0.29 71.45 14e 0.17 59.22 14e 0.32 63.80 935.7547.2811.58I 3 1 3 5.70 0.001 3 1 1 1,94 0.008 1 52.22 0.00d.f.: degrees of freedom; 1: employee satisfaction; 2: customer satisfaction: 3: n Signicant at 0.05 signicance level.Convergent validity is the overlap between alternative mea-sures that are intended to measure the same construct but havedifferent sources ofundesired variation (Judd et al., 1991). In otherwords, if several observed indicators are utilized to measure atheoretical construct (i.e., latent variable). those observed indica-tors should share a good deal of variance (converge together). Inestimating convergent validity for structural equation modelingstudies, examining the standardized conrmatory factor analysis(CFA) parameters estimated pattern coefcient is one methodoften used (Marsh and Grayson, 1995). Convergent validity can beassessed from the measurement model by determining whethereach indicators estimated pattern coefcient on its positedunderlying construct factor is signicant (Anderson and Gerbing,1988). That is, ifthe values in the offdiagonal are large, convergentvalidity is achieved. Statistically signicant large factor loadingsindicate convergent validity.Table 3 presents the standardized parameter estimates for theproposed three-factor measurement model produced by LISREL.There are three lines of information for each observed indicator.Table 3Parameter estimates for the proposed three-factor measurement model.ancial performance.The rst line represents the estimate. the value in parenthesis onthe second line represents the standard error, and the third linerepresents the t-value. An examination of the standardizedparameter estimates in Table 3 reveals all estimates exhibit thecorrect sign and size and be consistent with the underlying theory.Table 3 also presents that all of the estimated pattern coefcientson their posited underlying construct factors are signicant at the.05 signicance level (i.e., each had a t-value > 11.96). Therefore,the convergent validity is achieved.Fig. 2 shows the estimated path coefcients and signicantlinks between the exogenous construct and endogenous con-structs. As presented in Fig. 2, this study examined three majordirect relationships: (1) the relationship between customersatisfaction and nancial performance; (2) the relationshipbetween employee satisfaction and nancial performance; and(3) the relationship between customer satisfaction and employeesatisfaction in addition to indirect inuence of employee satisfac-tion on nancial performance and the mediating role of customersatisfaction on that relationship. The theoretical model's X2 valueLAMDA XFinancial success Customer satisfaction Employee satisfactionEstimateS.E.t-ValueProtabilityEstimateS.E.t-ValueReturn on investmentEstimateS.E.t-ValueNet protEstimateS.D.t-ValueI am very satised with my stay atEstimateS.D.t-ValueI am delighted with the services that offersEstimateS.D.t-ValueHotel exceeded my expectationsEstimateS.D.t-ValueOverall, 1 am satised with my job atEstimateS.D.t-Val ueI intend to keep working at the long into the futureEstimateS.D.t-ValueI often think about quitting my jobEstimateS.D.t-ValueAs soon as I can nd another job I am going to leave0.83(0.04)22.780.30(0.03)21.680.58(0.03)15.670.91(0.03)27.190.77(0.03)22.190.67(0.03)19.100.72(0.04)17.880.63(0.04)15.300.54(0.03)13.360.58(0.04)14.32 Reverse coded.

CG. Chi. D. Gursoy/Itttematiottuljournal ofHospitulity Management 28 (2009) 245-253 251Fig. 2. Employee satisfaction. customer satisfaction and nancial performance. Note: X1 = Overall, I am satised with myjob at ; X2 =1 intend to keep working at thelong mm the future; X3 = l often think about quitting myjob (reverse coded); X4 = As soon as 1 C nd anotltetjob l am going to leave (reverse coded); V1 = 1 am very satisedwith my stay at __; Y2 = l am delighted with the services that offers: Y3 = Hotel _,__ exceeded my expectations: Y4 = Protability: Y5 = Return on investment; Y6 = Netprot.with 32 degrees of freedom is 85.27. All of the other t indicesexamined in this study indicated that the proposed theoreticalmodel is acceptable (GFI = .98: NFl = .97; CFI = .98: IFI = .98).Further, the RMR is .028 and the standardized RMR is .038.Five hypotheses were proposed to examine the direct andindirect impact of customer satisfaction and employee satisfac-tion on nancial performance, the direct relationships betweenemployee satisfaction and customer satisfaction and the mediatingeffect of customer satisfaction on the indirect relationshipbetween employee satisfaction and nancial performance. Therst hypothesis proposed a signicant direct relationship betweencustomer satisfaction and nancial performance. This hypothesiswas supported (completely standardized b= .24; t-value=6.30).The second hypothesis, which proposed that there is no signi-cant direct relationship between employee satisfaction andnancial performance. was also supported (completely standar-dized b = .09; t-value = 1.80). The third hypothesis that proposeda signicant indirect positive relationship between employeesatisfaction and nancial performance was also supported(completely standardized indirect b = .08: t-value = 4.40). The fthhypothesis that proposed a direct positive relationship betweencustomer satisfaction and employee satisfaction (completelystandardized b = .34; t-value = 5.93) was also supported.The mediation effect of customer satisfaction on the indirectrelationship between employee satisfaction and nancial perfor-mance was assessed using the causal step approach recommendedby Baron and Kenny (1986). The overall purpose of the causal stepmethod is to establish the conditions for mediation rather than astatistical test of the indirect effect (Macl(innon et al., 2007). Kennyet al. (1998) suggest four criteria for complete mediation. First, theindependent variable should have a signicant inuence on thedependent variable. Second, the independent variable must besignicantly related to the potential mediator. Third, the mediatormust have a signicant relationship with the dependent variable.Finally. the initially signicant relationship between the indepen-dent and dependent variable must become insignicant once therole of the mediator is accounted for in the process to establishcomplete mediation. If only steps one through three are met, thenpartial mediation is established.In order to test the mediation effect, zero-order correlationsbetween variables were calculated. Zero-order correlation assessesthe relationship between two variables. while ignoring theinuence of other variables in prediction. First the zero-ordercorrelation between employee satisfaction and nancial perfor-mance was calculated (completely standardized b = .17: t-value = 3.50). Second, the zero-order correlation between emplo-yee satisfaction and customer satisfaction (potential mediator)was calculated (completely standardized b= .29; t-value=5.96).Third, the zero-order correlation between customer satisfactionand nancial performance was calculated (completely standar-dized b=.32: I-value=7.l9). Findings suggested that all threezero-order correlations were signicant at .05 signicance level.Finally, the full model presented in Fig. 1 was tested. As presentedin Fig. 2, the initially signicant relationship between theemployee satisfaction and nancial performance became insig-nicant once the role of the mediator (customer satisfaction) isaccounted for in the process. This nding provides support for thefourth hypothesis by clearly indicating that the relationshipbetween employee satisfaction and nancial performance ismediated by customer satisfaction.5. Discussion and implicationsWithin the last few decades, customer satisfaction has emergedas one of the most important factors for the nancial success ofhospitality and tourism industry (lacobucci et al., 1994). Assuggested by others, this study found that level of customersatisfaction plays a signicant role in a company's nancialperformance. Basically, this study suggests that the higher the levelof customer satisfaction the better the nancial performance.

252 CG. Chi. D. Gursoy/Internationaljournal of Hospitality Management 28 (2009) 245-253Findings of this study also suggest that employee satisfaction isone of the signicant determinants of customer satisfaction andemployee satisfaction indirectly inuences nancial performance.Customer satisfaction is especially important for servicebusinesses because satisfaction is a prerequisite for loyalty andword-of-mouth behavior (Spinelli and Canavos, 2000). lt has beensuggested that retaining an existing customer costs a lot less thanattracting a new one (TARP, 1986; Gursoy et al., 2007) and thatrepeat customers are considerably more protable than singletransaction customers (Reichheld and Sasser, 1990). Since thendings suggest that customer satisfaction is crucial for a betternancial performance, providing exceptional customer service byexceeding customers expectations is likely to offer opportunitiesfor growth. Clifford and Cavanagh (1985) suggest that high growthcompanies exist even in declining industries as long as theyidentify and pay attention to key success factors. How is it that acompany like Southwest Airlines can survive, and even thrive.when the rest of the industry is in nancial turmoilmany oftheircompetitors on the verge of bankruptcy? Conversely, how can acompany like l(rispy Kreme go from being the darling of WallStreet" just a short time ago to being in nancial chaos and underinvestigation by the Securities and Exchange Commission? Assuggested by the Steroid Theory, the answer to these questions isthat some companies do a better job in identifying and utilizinginternal strategic success factors, taking advantage of externalopportunities while minimizing the threatsthey focus onperformance-enhancing factors or otherwise called core compe-tencies (Gursoy and Swanger, 2007). Findings of this study suggestthat customer satisfaction is a key internal performance-enhan-cing success factor for any service company,While the ndings suggest that customer satisfaction has asignicant impact on nancial performance, ndings also suggestthat employee satisfaction has no direct impact on nancialperformance because the relationship between employee satisfac-tion and nancial performance is an indirect one. which is mediatedby customer satisfaction. Results clearly indicates that there is adirect relationship between employee satisfaction and customersatisfaction and between customer satisfaction and nancialperformance. This nding suggests that satised employees arehighly motivated to provide good sen/ice to customers. Resultsreported in this study are consistent with previous studies, whichsuggest that employee satisfaction plays a primary role in helpingcompanies achieve nancial goals because ifa company takes care ofits employees, the employees will take care of the customers(Loveman, 1998), Findings ofthis study suggest that the relationshipbetween employee satisfaction and nancial performance is likely tobe mediated by customer satisfaction. Satised employees are likelyto be more motivated and work harder to provide a satisfactoryservice to customers than dissatised ones (Paradise-Tornow.1991). As suggested by the service-prot chain, if employees feeltheir company takes good care of them, they are, in return, likely totake time to provide better service to meetand/or exceed customer'sexpectations. This is likely to lead to higher satisfaction amongthose customers, which in return will lead to higher prots (Koys,2003). This nding suggest that even though it is hard to observedirect impact of employee satisfaction on nancial performance,sen/ice companies cannot survive without satised employeesbecause satised employees are the ones who provide satisfactorysen/ice experience to customers.Therefore, companies need to makesure that their employees are happy and satised with what they do.5.1. Limitations and recommendations forfuture researchLike any other study, this study is not free of limitations. Thisstudy examined the relationship between employee satisfactionand customer satisfaction, and the impact of both on a hospitalitycompany's nancial performance utilizing service-prot-chainframework as the theoretical base. As discussed earlier, thesen/ice-prot-chain framework provides an integrative frameworkfor understanding how a rms operational investments intoservice operations are related to customer perceptions andbehaviors, and how these translate into prots. Due to thecomplexity of the framework and the purpose of this study, onlythe links between employee satisfaction, customer satisfaction,and nancial performance were examined. In other words, thisstudy did not examine the impacts of other constructs/variablesincluded in the framework such as internal service quality,productive behaviors of service employees, customer value andcustomer loyalty. It is possible that those constructs maysignicantly inuence the relationships among the variablesexamined in this study, and therefore, change the direction andmagnitude of the relationships examined. Therefore, future studiesshould examine the factors that are likely to inuence therelationships examined in this study.One of the main limitations of this study is that both customersatisfaction and employee satisfaction were examined as a uni-dimensional constructs. However, other studies suggest that bothcustomer satisfaction and employee satisfaction are multi-dimensional constructs. Measuring them as unidimensionalconstruct is likely to limit the generalizability of the ndings.Future studies should utilize multi-dimensional constructs tocapture the true essence of both employee and customersatisfaction. Furthermore, a company's nancial performancemay be inuenced by several factors including satisfaction.However, this study did not examine other factors that mayinuence the nancial performance of a company,6. ConclusionThis study examined the relationship between employeesatisfaction and customer satisfaction, and the impact of bothon hospitality companies nancial performance utilizing theservice-protchain framework as the theoretical base, which linksservice operations. employee satisfaction, and customer satisfac-tion to a rm's nancial performance (Heskett et al., 1994). Theservice-prot chain provides an integrative framework for under-standing how a rms operational investments into sen/iceoperations are related to customer perceptions and behaviors,and how these translate into better nancial performance. Thisstudy explored three major direct relationships and an indirectrelationship between customer satisfaction and nancial perfor-mance. In addition, this study examined the mediating role ofcustomer satisfaction on the indirect relationship betweenemployee satisfaction and nancial performance. Findings sug-gested a direct relationship between customer satisfaction andnancial performance, and between customer satisfaction andemployee satisfaction. Findings also indicated that the relationshipbetween employee satisfaction and nancial performance may notbe easily identiable due to the fact that it is mediated by customersatisfaction.