Customer Satisfaction and Loyalty

THEORY AND DEVELOPMENT OF NATIONAL CUSTOMER SATISFAC-

TION INDEX: THE MALAYSIAN INDEX OF CUSTOMER SATISFACTION

Mokhtar Abdullah1 , Nooreha Husain,2 Amjad D. El-Nassir2

1,3
Universiti Kebangsaan Malaysia, 2AD-MACS Corp. Consultants (M) Sdn. Bhd.

Abstract

This paper presents the ideas behind the development and application of Malaysian
Cus- tomer Satisfaction Index (MCSI). The methodology is explained and the
estimation method is discussed. The application of the index is illustrated on a data set
collected for fourteen service industries involving forty companies in Malaysia. The
results are shown and the questions of integrating national customer satisfaction
indices and cross-national approaches such as the Asian Customer Satisfaction Index
(ASCSI) are discussed.

Introduction

For business organizations seeking major improvement, customers are the primary
driv- ing force. It is obvious that businesses cannot survive without customers.
Therefore, it is imperative for business organizations to have a framework for
understanding, analyz- ing, and evaluating the status of customer satisfaction.

The main objectives of this paper are:

(1) to highlight the framework of the Malaysian Customer Satisfaction Index
(2) to give a brief account of the methodology used for producing the national
index
(3) to illustrate the implementation of the national index for selected service in-
dustries in Malaysia

The Malaysian Customer Satisfaction Index (MCSI)

The Malaysian Customer Satisfaction Index (MCSI) is a national economic indicator

of customer evaluations of the quality of services from companies and government
agen- cies. Established for the first time last year, the MCSI is the only uniform, cross-
industry measure of service quality about the Malaysian economy. The MCSI provides
strategic information about customer satisfaction and evaluations of service quality. Its
establish- ment is a timely effort in order to provide the consumers information about
the value of a service they purchase or use. This quality-based economic indicator adds
up to what have been historically and traditionally measured such as Consumer Price
Index (CPI), productivity, employment/unemployment, GDP, income and savings, etc.
that have been in existence prior to introduction of the MCSI.

The MCSI Framework

The basic MCSI model (see Fig. 1) is a structural equation model with latent variables.
The model links customer satisfaction to its causes and, in turn, to its effects, namely

The 6th TQM World Congress, 2001, Saint Petersburg 1

customer loyalty and product/service image. The causes of customer satisfaction are
perceived quality, customer expectation and perceived value.

Product/ Service Image

Perceived Quality

Perceived Value Customer Satisfaction

Customer Loyalty
Customer Expectation

Fig. 1: The Malaysian Customer Satisfaction Index Framework

The six variables are seen as latent, i.e., non-observable. Each of the latent variables is
operationalized by a set of manifest variables or indicators, observed by survey ques-
tions to customers. The use of multiple questions for each latent variable increases the
reliability of the results, compared to use of a single question. This is a common ap-
proach adopted within satisfaction measurements (see Fornell and Cha, 1994; Ryan et
al., 1995; Fornell et al., 1996).

The Methodology

In many aspects the MCSI model is quite similar to that of the American Customer
Satisfaction Index, ACSI, (see Fornell, et al., 1996) and the European Customer Satis-
faction Index (see Gronholt et al., 2000), respectively. However, the MCSI’s
framework differs from the ECSI when it considers ‘product/service image’ as the
effect of cus- tomer satisfaction, while the ECSI considers this dimension as an
enabler. Unlike the MCSI, ‘customer complaint’ is used in the ACSI as the effect of
customer satisfaction, apart from the customer loyalty. Both the MCSI and ECSI do
not include ‘customer complaint’ as a significant effect of dissatisfied customers. The
MCSI adopts a slightly different approach in estimating the model and the instruments
used to measure cus- tomer evaluations. While the ACSI uses Partial Least Squares
(PLS) for estimating the model, the MCSI incorporates a much more reliable technique
than the PLS, called, Generalised Maximum Entropy (GME). In evaluating customers’
perceptions, the MCSI incorporates product/service quality dimensions that are
typically unique to certain types of product/service. Mokhtar Abdullah and Al-Nasser
(1999) and Mokhtar Abdullah et al.(2000) developed the GME method for estimating
the errors-in-variables model and
showed that this method is three times superior than the PLS. The GME also provides
a better alternative than the PLS when the sample size is small and it gives reliable
results in situations with limited or incomplete data and it is robust against departures
from classical assumptions on statistical distributions.

Generalized Maximum Entropy (GME) Approach

Conventional work in information theory concerns with developing a consistent
measure of the amount of uncertainty. Suppose we have a set of events {x1,x2,…,
k
xk}whose
probabilities of occurrence are p ,p ,…,p such that  pi  1 . These probabilities are
1 2 k i 1
unknown but that is all we know concerning which event will occur. Using an
axiomatic method to define a unique function to measure the uncertainty of a
collection of events, Shannon (1948) defines the entropy or the information of entropy
of the distribution (discrete events) with the corresponding probabilities P = {p 1,p2,
k
…,pk}, as
H (P)   pi ln( pi )
i 1
where 0ln(0) = 0.

The amount (–ln(pi)) is called the amount of self information of the event x i.
The average of self-information is defined as the entropy. The best approximation for
the distribution is to choose pi that maximizes (1) with respect to the data Consistency
constraints and the normalization-additivity requirements.
Golan et al. (1997) developed GME procedures for solving the problem of recovering
information when the underlying model is incompletely known and the data are
limited, partial or incomplete. Mokhtar Abdullah and Al-Nasser (1999) and Mokhtar
Abdullah et al.(2000) developed the GME method for estimating the errors-in-
variables

The MCSI Equations

The general expression of the MCSI framework can be written as the general form of
Structural Equation Model (SEM). The general form of SEM is given as

      
where  and  are vectors of unobserved endogenous and exogenous variables, respectively.
 : Matrix of coefficient parameters for 
 : Matrix of coefficient parameters for 
 : Disturbance term

this implies that, E[ ] E[ ] E[ ]0 .

The corresponding equation that relates the latent variables in the model is:
 
  0 0 0 0  
 12  

1   
11

  1     1  1 
0 0 0 
 
 2  021 0      21 022  2    2

 3      3 
  3 
32 34
  0     
 4  
0 0   4  0 0   4
42 

where
Exogenous Variables Endogenous Variables
Perceived Quality  Perceived Value 1
1
Customer Satisfaction 2
Customer 2 Customer Loyalty 3
Expectation
Product/Service Image 4
The general equations for relating the latent variables to empirical variables are:

y   y  

x   x  

y and x are the measured endogenous and exogenous variables; respectively.  y

and  x are the corresponding regression coefficients. Assuming that there are three
manifest variables, empirically observed by three questions for each variable, then the
corresponding equation in the model are:

 y1 
y   0 0 0   1 
0 0 0  
1 

 2  2   2
 y 3  3 0 0 0   3 
 x   0     0  0 0   
y 
1
  4    4
x   1  1 4
0
 2  20  2  0 y5  50    5 
  
 x   0          0 0 1  
33  1 3 ,
y
6  
0
6   6 
x 0      2 
   y  0 0  0    
 4  4  2  4 7
   7
  3 
 7
 
 x 5  0 5   5   y 8  0 0  8 0     8 
       y  0  
0 
4
x 0  
 6  
  6   6   9  9

 9
0
 y 10  0 0 0  10   10 
     
 y 11  0 0 0  11   11 
 y 12   0 0  12  12 
0 
 The Implementation of MCSI : Experience from Service Industry in Malaysia

A study on the implementation of the national index (MCSI) was started in January
2000 and completed in May 2000. It covers 40 companies and organizations and their
perfor- mance was measured in terms of satisfaction of their customers with the quality
of services they purchase and use. The national index calculates customer satisfaction
on a nationwide, multi-industry scale, through the survey approach. This new index
ranks the performance of 40 individual companies and 14 service industries in
Malaysia. A number of different representative services in each industry are selected to
cover a broad cross-section of customer purchases. A questionnaire was devised to
elicit information from respondents regarding their perceptions towards the quality of
services of a par- ticular organisation. Data were collected through personal interviews
with respondents of age 18 and above, who are screened and qualified as customers of
the measured organisations. Through random sampling, 250 customers of the selected
services are chosen, and are asked to assess the services on a 1 to 10 scale in a
specified number of
questions.
Based on the data collected, the GME was used to estimate the entire model and
compute the index scores. This results in three levels of scores; a national customer
satisfaction score, 14 specific industry scores, and the scores from 40 organisations
within those industries. The scores are on a 0-100 scale. The score provides a baseline
for determin- ing whether the marketplace is becoming more or less satisfied with the
quality of ser- vices provided by individual industry or company. A high MCSI score
would indicate a high level of service quality that makes customers happy.
The levels of customer satisfaction will be categorised as follows;
e
Score Category
the Between 80 and 100 ‘Excellent’
Between 70 and 80 ‘Good’
Between 50 and 70 ‘Moderate’
Less than 50 ‘Low’

The Results

Table 1 :The MCSI Averages for Service Sector/Industry

Ranking Sector/industry Score

1. Hospital 74.2
2. Hotel 72.3
3. Cinemas 70.8
4. Fast Food Restaurants 70.1
5. Cellular Phones 70.1
6. Bank 69.5
7. Transport 69.2
8. Internet 69.2
 9. Government Departments 68.5
10. Bookshops 67.2
11. Broadcasting (Radio) 62.2
12. Newspapers 62.0
13. Broadcasting (TV) 61.9
14. City Council 61.6
National Average 67.8

The results of the customer evaluations of service quality in the 14 service industries
(see table 1) indicate that the national average level of customer satisfaction is 67.8 (on
a 0-100 scale). Of the 14 industries, 35% received the MCSI scores below the national
average. This ‘moderate’ level of satisfaction may be attributable to the lack of
concerns for the welfare of consumers by the service providers in the industries. The
results also show that 35% of the industries are considered ‘good’ service providers
while 28% of them considered only ‘moderate’ by the consumers.

Private hospitals top the list of industries that provide quality services to their
customers, while hotel industry follows closely behind. The worst performance
belongs to City Councils, and the closest neighbour at the bottom is TV broadcasting
industry. It seems that companies and organizations in these group of industries may
have to look for better ways in serving their customers. If this can be linked with
customer expectations of the service providers, the results show that customers of City
Councils have low expecta- tions of the service quality they would receive from these
institutions. This sentiment seems to be shared by customers in newspapers industry.
In industries such as private hospitals, hotels, fast food restaurants, and cellular phones
the challenges in keeping customers happy are rather obvious as the expectations of
their customers towards hav- ing high quality service are relatively high compared to
those in other industries.

Hotel industry and private hospitals may have something to cheer up as their good
image seems to be have been endorsed by their customers, at least for a while. A more
difficult task is to sustain this image, which requires commitment and sincerity on the
part of the service providers. The industries that may be likely to have loyal customers
are private hospitals, hotels and fast food restaurants. One possible explanation for this
is that these industries have a higher proportion of satisfied customers than that in the
other indus- tries. On the other hand, the results indicate that unhappy and dissatisfied
customers of TV broadcasting may choose to ‘switch’ channels for more interesting
programmes. The possibility of losing customers is great if the current TV
programmes does not meet up with their expectations. In the case of City Councils the
customers may not have much choice even though they are unhappy with the services
they receive, and the ‘loy- alty’ issue does not arise here. However, the tendency for
them to complaint with bad services is high.

An interesting aspect of the MCSI modeling is that one can quantify the impact of a
particular factor on another. For instance, the findings show that satisfaction has high
impact on loyalty and image. An increase of 1% in the customer satisfaction may lead
to 2% increase in customer loyalty and image of a service provider.
Concluding Remarks

This paper presents the development and implementation of the Malaysian Customer
Satisfaction Index (MCSI). It serves as the first national economic indicator to measure
customer evaluation of the products/services purchased in the country. The MCSI
frame- work links the customer satisfaction to its causes (perceived quality,
expectation and perceived value) and , in turn, to its effects (Image and loyalty). The
entire model is estimated using Generalised Maximum Entropy (GME), a competitive
approach to the conventional method, i.e., Partial Least Squares (PLS).

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