an investigation into the linkage between organizational learning, internal service quality (isq)...

Pakistan Journal of Social Sciences (PJSS)

Vol. 35, No. 2 (2015), pp. 785-797

An Investigation into the Linkage between Organizational

Learning, Internal Service Quality (ISQ) and

Organizational Performance

Fawad Latif Lecturer

Abasyn University, Peshawar

[email protected]

Qadar Bakhsh Baloch, PhD Assistant Professor

Islamia College University, Peshawar

Abstract The increasing role of employees in service sector is uncontested. Yet

there is a lack of research in ISQ. The research seeks to identify the

linkage between organizational learning, ISQ and organizational

performance. Stratified random sampling technique was utilized to

gather data from banks that were divided into two strata, Large and

Medium sized banks. A total of 564 questionnaires were distributed in

80 branches, a total 404 questionnaires returned and 341 were usable.

The results indicate that organizational performance and ISQ is likely

to improve in presence of organizational learning initiatives.

Furthermore organizational performance is contingent to ISQ. The

results also revealed partially mediating relationship between

organizational learning and organizational performance. The research

is limited in terms of sample, increasing the sample size both in terms

of the sample size and cities can help safer generalization of findings.

Keywords: Internal Service Quality, Organizational Learning, and Organizational

Performance

I. Introduction The need for quality improvement continues unabated in both the manufacturing

and service sector (Longenecker & Scazzero, 2000). This is triggered by the fact that

organizations operate in a vibrant, challenging, and uncertain business environment.

Service quality is the only weapon that would not only ensure survival but growth in the

competitive environment. Realization of the potency of service quality has amplified its

importance (Vanniarajan & Subbash, 2011).

Human factors are critically important in service industries due to their intangible

nature (Longenecker & Scazzero, 2000). A number of employees may not have or

seldom have direct contact with external customers. The need to study ISQ is highlighted

by the fact that the quality of service employees provide to each other is reflected in the

external service delivery (Cook, 2008). External customers, the recipient of service are

substantially highlighted in research however limited research has concentrated on factors

that affect internal customers (employees) service quality and employees’ perception of

influence of co-workers service on their service delivery. ISQ has been research in

786 Pakistan Journal of Social Sciences Vol. 35, No. 2

diverse fields like Banks (Bellou & Andronikidis, 2008; Vanniarajan & Subbash, 2011),

Pharmaceuticals (ELSamen & Alshurideh, 2012), and Airline (Frost & Kumar, 2001).

However the aforementioned studies identified how ISQ influences other factors or is

influenced by other factors. The present study is different since it not only evaluates the

impact of organizational learning on ISQ and organizational performance but also

evaluates if ISQ mediates between the two variables. Although the connection between

learning and performance may be intuitively relative, the research suggests that there may

be a mediating variable more specifically, it stands to reason that performance will

improve on the basis of ISQ rather than organizational learning thus the study seeks to

ascertain if ISQ mediates between predictor and ultimate criterion variable,

organizational performance.

A. Research Objectives

i. To review relevant literature and generate a set of empirically testable

hypotheses that focus on organizational learning, ISQ, and Organizational

Performance.

ii. To investigate the influence of organizational learning on organizational

performance.

iii. To evaluate the influence of Internal Service Quality on Organizational

Performance

iv. To examine if ISQ acts as a mediator between organizational learning and

organizational performance.

II. Literature Review A. Internal Service Quality (ISQ)

Rarely do the management and staff in organizations understand that employees

and functions are actually customers of each other. Business organizations have been

complacent in recognizing the severe repercussions of their sluggish ISQ and its

influence on organizational performance (Vanniarajan & Subbash, 2011). The reason for

this management behavior is highlighted by Hays (1996) who noted that internal

activities of employees are overshadowed by the hype and frenzy that surrounds the drive

and excellence of external customer. However the slowness towards ISQ is changing,

organizations are realizing the fact that adequate level of internal service would translate

into satisfactory external service (Gunawardane, 2011). Accepting this notion that

employees are also customers involves managing people skills to make each employee

feel valued and also communicating the prominence of each position right across the

team. Successful quality of service received by the internal customers would lead to

efficient and effective external service since it would result in more effective

performance, lower waste and lower costs (Stanley & Wisner, 2001).

ISQ refers to the level of service delivered by different departments or the

personnel working for them, to other department or workers within the organization

(Stauss, 1995). The superior the service received, positive would be the attitude of the

employees however failure on part of the internal supplier to provide quality service to an

internal customer would result in less than optimal service to the external customer

(Voss, Calantone, & Keller, 2005). The concept of ISQ used throughout this article

reflects Heskett et al.’s (1994) contention that ISQ is points to the attitudes of employees

Fawad Latif, Qadar Bakhsh Baloch 787

toward one another and the service received by people from each other while serving the

organization.

The role of providing quality service to internal customers is evident, despite its

far reaching benefits in helping business attain competitive advantage, the area has

received little attention (Jun & Cai, 2010). ISQ is critical in determining success in

today’s competitive environment (Anosike & Eid, 2011; Frost & Kumar, 2001). The first

step in the service-profit chain is ISQ (Williams, 2007), since the quality of service

delivered early in the production chain sets an absolute ceiling on the potential quality of

the final good/service to the external customer (Hays, 1996).

B. Measuring ISQ

Earliest attempts on modelling service quality came from Parasuraman, Zeithaml

and Berry (1985). They identified 10 determinants of service quality. Later Parasuraman,

Zeithmal, and Berry (1988) developed a multi-item scale for measuring customer

perceptions of service quality, from the original 10 determinants, utilizing factor analysis,

22 items revealed five dimensions. Although SERVQUAL has been widely applied for

measurement of external service quality, Zeithmal, Berry and Parasuraman (1990)

claimed that SERVQUAL, with appropriate adaptation can be used within a company to

ascertain the quality of service provided to the employees.

Utilization of SERVQUAL instrument to measure ISQ first came from Reynoso

and Moores (1995). Kang, James, and Alexandris (2002) also assert that SERVQUAL

could be mofidifed to guage the level of ISQ. In order to obtain feedback from its internal

customers in purchasing function Young and Varble (1997) utilized SERVQUAL scale,

the results showed that SERVQUAL is a useful tool for obtaining feedback from internal

customers. The study found tangibles to be least important by the internal customers

similarly Parasuraman et al. (1985) reported that the tangibles-dimension was only

important to external customer. Hence Tangibles dimension was not included in the

present study.

Lack of general agreement on measuring ISQ has resulted in the use of

SERVQUAL methodology. Brooks, Lings, and Botschen (1999) compared dimensions of

ISQ with the SERVQUAL dimensions proposed by Parasuraman, Zeithaml, and Berry

(1988). The results of the study found that out of 10, eight dimensions were important to

internal customers.

C. Banks and ISQ The focus of present study is on the banking sector. A number of advances are

being experienced in the field of service quality management, the focus on service quality

is dictated by the expectations that banking operations would be more dynamic and

competitive, since there is increased deregulation, liberalization, and globalization (Taap,

Chong, Kumar, & Fong, 2011). This is also necessitated by the fact that although the

contact time between employees and customers may be short, this contact happens quite

regularly, service provided to the customers most of the times come from variety of

employees working together, data and information is exchanged amongst the employees

to produce quality service to the customer, thus employers who effectively manage the

internal customers, it is expected that they would demonstrate similar behavior during

interaction with external customers (Bellou & Andronikidis, 2008).


Evaluating the influence of service quality on banks financial performance,

Mukherjee, Nath and Pal (2003), in their study of 27 Indian public sector banks and their

customers found that banks delivering better service are shown to have better

transformation of resource to performance using superior service delivery as the medium.

The results approve the relationship between resources, service quality and performance.

Although the importance of ISQ in banks is clearly highlighted, there has been very little

research on how ISQ influences bank’s performance.

D. Organizational Learning and Performance

Innovation, efficiency, and competitive advantage are one of the few valued

outcomes of organizational learning. A significantly positive and strong influence of

organizational learning on organizational performance was found in the research

conducted by Skerlavaj and Dimovski (2006). Similarly the results of the study by Ruiz-

Mercader, Merono-Cerdan, and Sabater-Sanchez (2006) found that both that the

individual and organizational learning significantly effects organizational performance.

Khandekar and Sharma (2006) in their study of Indian global organizations interviewed

100 managers and found a positive relationship between organizational learning and

performance. Kuo (2011) study of technological companies in Taiwan found direct effect

of organizational learning on organizational performance. Skerlavaj, Stemberger,

Skrinjar, and Dimovski (2007) in their study of Slovenian companies established a

statistically significant relationship between organizational learning culture and

organizational performance. Skerlavaj, Stemberger, Skrinjar, and Dimovski (2007) found

in their study that organizational learning significantly contributes towards improved

organizational performance in both financial as well as nonfinancial terms Based on the

aforementioned literature it is posit that

H1: There is a significant influence of organizational learning on organizational

performance

E. Organizational Learning and Service Quality

The question of how organizational learning relates to improvement in service

quality has not yet been sufficiently analyzed. Argyris and Schon (1978) define

organizational learning as “the detection and correction of errors”. Detection and

correction is the process that would most certainly improve the quality of service, hence

when an organization learns, it equips itself with the ability to solve its problems

resulting in timely delivery of service. This is also referred to as quality control (Hays &

Hill, 2001).

Pasebani, Mohammadi, & Yektatyar (2012) referred to organizational learning as

one of the essential elements that contribute towards ISQ. In his study of Chinese service

organizations Ming (2010) revealed a significant positive correlation between

organizational learning culture and ISQ. In another study Hays and Hill (2001) reported a

significantly positive correlation between organizational learning with perceived service

quality. It was concluded that attainment of supreme service quality can only be possible

if the organization has both motivated employees and organizational learning ability.

Hence based on the findings of aforementioned studies it is proposed that:


H2: There is a significant influence of organizational learning on ISQ

F. Service Quality and Organizational Performance

Performance of any organization is fundamentally reliant on its key resource

“people”. Studies have revealed that ISQ has a key relationship with organizational

performance. ISQ has come to be recognized as a strategic tool for attaining operational

efficiency and improved business performance (Jain & Gupta, 2004). Provision of quality

service to external customers is only possible through significant improvement in

organizations quality service to internal customers. Customers willingness to purchase

actually improves the financial bottom line of the business is highly contingent to better

service and empathy from employees (Getty & Getty, 2000). Bellou and Andronikidis

(2008) conducted a study on 16 big banks in Greece found that banks’ performance

eventually improved through improved ISQ that influenced the behavior and satisfaction

of the external customers which eventually improved banks’ performance.

H3: There is a significant influence of ISQ on organizational performance

G. Mediating Role of ISQ

Aforementioned literature suggests that organizational learning does have an

influence on organizational performance. Previous studies have separately investigated

the influence of organizational learning on ISQ, and ISQ on organizational performance,

hence there exists a causal relationship, however to the best of author’s knowledge no

research was found that evaluated the mediating role of ISQ The present study proposes

that the influence of organizational learning on organizational performance is not direct

but is mediated by ISQ. Banks have unintentionally ignored the mediating role of service

quality, Mukherjee, Nath & Pal (2003) reasoned that this is due to the fact that banks

have traditionally focused on how to transform physical resources to generate financial

performance. Based on this assertion it is hypothesized that

H4: ISQ mediates the relationship between organizational learning and organizational

performance

III. Research Methodology A. Population and Sample

The population frame was drawn from the banks listed in Karachi Stock Exchange

(KSE). The banks selected should have more than 5 branches in order to have a

representative sample. Banking sector was divided into two categories for the purpose of

this research. Banks with total assets over Rs. 500 billion were categorized as “Large

Banks”, and those with total assets over Rs. 100 billion to Rs. 500 billion were

categorized as “Medium Banks”. Proportionate stratified random sampling technique was

adopted for the study. A total of 564 questionnaires were distributed in 80 different

branches. A total 404 questionnaires were returned, constituting the response rate of

71.63. A total of 63 questionnaires were rejected. The number of questionnaires deemed

usable was 341.

B. Measurement

In order to investigate the linkage between organizational learning, ISQ and

organizational performance questionnaire was used to collect primary data. Likert scale

with anchors from 1 = Strongly Disagree to 7 = Strongly Agree. Organizational learning

scale utilized was developed by García-Morales, Lloréns-Montes, Verdú-Jover (2007)


and Spicer & Sadler-Smith (2006). A few items were removed from Spicer & Sadler-

Smith (2006) scale after discussion with experts and bank executives since they weren’t

relevant to the banks. ISQ was measured using scale developed by Kang, James and

Alexandris (2002). They identified five dimensions namely Reliability, Assurance,

Tangibles, Empathy and Responsiveness. Tangibles dimension was not included in the

study. A total of 18 items made up ISQ scale. Subjective organizational performance was

measured using the scale developed by Tseng (2010).

C. Data Collection

Data was collected through questionnaires distributed through personal visits

made to the banks, emails and posts. The research setting for this study was Public and

Private Sector Banks in Peshawar, KPK. The respondents included branch bankers

working at different levels within the Banking sector.

IV. Data Analysis and Results A. Reliability

Reliability was measured using Cronbach’s Alpha. Constructs’ reliability ranged

between .890 and .938. Results indicate that reliability of all the constructs is well above

.8 (Fields, 2005) which indicated that good reliability was attained.

Table 1: Reliability analysis Constructs Cronbach’s Alpha

Organizational Learning .895

ISQ .938

Reliability .913

Empathy & Responsiveness .907

Organizational Performance .890

B. Convergent Validity

Convergent validity is established when the concepts that should be related to

each other are in fact related. Convergent validity through factor analysis is established

when block of items measuring the same construct strongly agree (i-e converge).

Convergent validity is established if an AVE of 0.5 or greater is achieved. Organizational

learning and organizational performance constructs are uni dimensional hence convergent

validity is established. Theoretically ISQ is made of four dimensions; however in the

present study factor analysis extracted two factors, reliability and empathy &

responsiveness. The results revealed that convergent validity for all constructs is

established since the AVE statistic is greater than .50.

Table 2: Constructs’ AVE Constructs AVE

Organizational Learning .61

ISQ

Reliability .60

Empathy & Responsiveness .52

Organizational Performance .75


C. Discriminant Validity

Discriminant validity determines the extent to which sufficiently distinct

constructs are not strongly correlated. It is established if square root of AVE for each

construct is greater than inter-correlations of other constructs. Table 3 compares AVE

square roots and inter-construct correlations. The results indicate that square root of AVE

of each construct is greater than other inter-construct correlations.

Table 3: Discriminant Validity OL REL OP EMPRES

OL (.78)

REL .516** (.77)

OP .610** .607

** (.86)

EMPRES .501** .720

** .618

** (.72)

D. Structural Equation Modeling

Measurement modeling and structural modeling or hypotheses testing are

discussed in this section. The measures were validated through confirmatory factor

analysis (CFA). The final step of the data analysis revolves around the issue of overall fit

of constructs using measurement models, relationship between the variables using

structural model to test the research hypotheses.

E. Evaluations of Measurement Models

Each construct was subjected to CFA to test if the data fits the measurement

model. Measurement models were validated using structural equation modeling.

Confirmatory factor models deals with the measurement models, I-e the relationship

between the observed measures, indicators or items and the latent variable or factors.

Several indices in SEM literature help evaluate the goodness of fit of a specified model to

the observed data. Hu and Bentler (1999) recommended reporting, SRMR, CFI, TLI, and

RMSEA. Each fit indices has designated cut-off value. Hu and Bentler identified a cutoff

value close to .08 for SRMR; and a cutoff value close to .06 for RMSEA however the

value should not exceed .08. Bentler (1990) suggest that CFI and TLI values in the range

of .90-.95 are indicative of acceptable fit.

Organizational learning comprised of seven items, one item was removed in

multicollinearity analysis. Initial loadings indicate low loadings for OL1 and OL2,

initially OL1 was removed and the model was run again, the fit indices improved but still

the results indicated a poor fit, the model was run again and OL2 was removed, Good fit

was attained on the removal of OL3.

Exploratory Factor analysis revealed two factors for ISQ namely reliability and

Empathy & Responsiveness. Only one item was removed since it failed to load

substantially. Final ISQ construct had a total of 12 items. Organizational performance had

a total of five items. One item was removed due to multicollinearity. The fit indices

indicate an adequate fit for the construct since RMSEA is a little higher.


The results of measurement models for all constructs reveal that a good fit was

obtained for all measurement models. The summary for all measurement models is

presented in table 4

Table 4: Measurement models summary

Fit Indices

CMIN SRMR CFI TLI RMSEA

OL .941 .00 1.00 1.00 .00

ISQ 2.56 .03 .97 .96 .06

OP 3.10 .00 .99 .98 .07

F. Hypotheses Testing

Further to the evaluation of the measurement models, different structural models

are proposed to test the hypotheses. The structural regression models resemble

confirmatory factor models; moreover they also hypothesize the relationships between

different constructs.

Structural Model A

Structural model A seeks to find out the relationship between organizational

learning and organizational performance. Initially hypothesized model A did show an

acceptable fit. Analysis of standardized residual covariance’s resulted in removal of one

item from organizational performance construct with covariance over the threshold value.

The fit indices attained are shown in table 5.

Table 5. Attained findings: Structural Model A CMIN SRMR CFI TLI RMSEA

2.56 .03 .98 .97 .06

Table 6: Organizational Learning (OL) and Organizational Performance (OP) Path Std loading C.R P Results

OL → O P .662 10.62 .000 Supported

Table 6 shows significant influence of organizational learning on Organizational

Performance. The estimation of hypothesis demonstrated that hypothesized link was

significant.

Structural Model B

The model evaluates the influence of organizational learning on ISQ. Model

showed an adequate fit with all indices attaining the required range. The following table

fit indices for model B.

Table 7: Attained findings: Structural Model B CMIN SRMR CFI TLI RMSEA

2.48 .03 .96 .95 .06

Table 8: Organizational Learning and ISQ Path Std. loading C.R P

OL → ISQ .60 8.62 .000


Table 8 shows that organizational learning had a significant influence on ISQ. The

estimation of hypothesis demonstrated that the hypothesized link was significant.

Structural Model C

Structural model C evaluated the relationship between ISQ and organizational

performance. The initial model revealed acceptable fit indices for SRMR, CFI and TLI,

however RMSEA showed mediocre fit. The factor loadings, modification indices and

standardized residual covariances were analyzed. One item, RES1 was removed. The

final model showed an acceptable fit.

Table 9: Attained findings: Structural Model C CMIN SRMR CFI TLI RMSEA

2.485 .03 .96 .96 .06

Table 10: ISQ and Organizational Performance Path Std loading C.R P

ISQ→OP .711 10.276 .000

Table 10 shows that ISQ had a significant influence on organizational

performance. The estimation of hypothesis demonstrated that the hypothesized link

between ISQ and organizational performance was significant.

G. Mediation Analysis

Mediation analysis was performed using Baron and Kenny (1986) causal

approach. Conditions highlighted by Baron and Kenny are

1. A significant total relationship between the independent and dependent variable

2. A significant influence of independent variable on mediating variable

3. A significant influence of mediating variable on dependent variable

The mediation analysis results reveal that the total effect of OL on OP was

significant, p< .001. OL was significantly predictive of hypothesized mediating variable,

ISQ; p< .001, when controlling for OL, ISQ was significantly predictive of OP, p< .001.

The estimated direct effect of OL on OP, controlling for ISQ, was also significant, p <

.001. The indirect effect was .256. This was judged to be statistically significant using

Sobel (1982) test, z = 7.71, p< .0001. The direct effect from OL on OP with mediator was

also statistically significant. Since the Sobel test results were significant, indicating that

the effects of OL on OP were partially mediated by ISQ.

Table 11: Mediation results OL – ISQ ISQ -

OP Direct without

Mediator Direct with Mediator

Results

Est Est Est Sig Est Sig

.526 .487 .633 .000 .377 .000 Partial Mediation

H. Discussion


The research investigated the linkage between organizational learning, quality of

internal services, and organizational performance. The results reveal a significant level of

organizational learning and satisfactory level of ISQ prevalent in the banks. The finding

can be attributed to realization of value of internal operations and procedures.

A significant positive relationship between learning and performance was

revealed; indicating that learning initiatives would positively effect on organizational

performance. Skerlavaj and Dimovski (2006) demonstrated that from the employee

perspective there was a statistically significant and strong impact of organizational

learning on organizational performance. The results proved here support the findings.

Findings offer support for the existence of a business case for the concept of learning

organization. The significantly positive influence suggests that there is a payoff for

businesses that hold close practices and strategies consistent with the organizational

learning. The learning process can help the organization readjust itself to the dynamic

environment and improve performance (Wang & Ellinger, 2011).

Analysis revealed significant influence of OL on ISQ. The results are similar to

the findings of Pasebani, Mohammadi, & Yektatyar (2012) who also found a significant

influence similarly study by Bellou and Andronkidis (2008) has shown significant

positive influence of ISQ on performance. The results of the present study attested the

findings of earlier research and found a significant relationship between ISQ and

performance.

There is no literature available that explicitly investigates the mediating role of

ISQ. Thus this study appears to be the first to analyze is ISQ mediates the relationship

between organizational learning and organizational performance. Mediation analysis

proved partial mediation between organizational learning and perceived organizational

performance. The results defeated the common perception that banks do not emphasize

about learning and ISQ. A plausible explanation for the phenomenon is the fact that in

increased competition the value of ISQ cannot be ignored.

V. Conclusion The research examined the linkage between organizational learning, ISQ and

organizational performance. Dearth of research in this area highpoints a knowledge gap.

The pivotal role of the three constructs in the banking sector is clearly highlighted in the

research and is proven in the present study. Organizational learning significantly

influenced ISQ and organizational performance. Adding more vigor to the assertion that

organizations shall continue to invest in learning. Based on the findings the research

concludes that the better the level of learning the higher would be the level of service the

coworkers provide to each other and result would be an improved performance. The

results indicated that ISQ had a significant influence on performance. The finding

strengthens the assertion that unless organization focus on the service received by

coworkers the organization cannot attain adequate level of profitability. Furthermore the

research evaluated if ISQ acts as a mediator between learning and performance. The

finding showed partial mediation.

VI. Limitations and Practical Implications The research is limited in terms of sample, increasing the sample size both in

terms of the sample size and cities can help safer generalization of findings. The present

study has a number of practical implications. Findings suggest that management of ISQ


shall be considered as a priority for bank executives. Organizational learning can be

beneficial in fostering ISQ. In addition, banks should try to select employees who value

quality, appropriately carry on activities that enhance organizational learning and manage

performance based on the quality of service provided. This will ensure not just quality of

service but would also enhance organizational performance.

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