Service Recovery in Transition Economies:
Russia and China
Wendy K. T. Gubler
Matthew W. McCarter
Kristie K. W. Seawright
Yuli Zhang
While processes for transition from planned to market economy vary,
there is one common outcome from the transition process - more dis-
criminating customers. Growing customer expectations increase the
possibility of failing to meet those expectations. In competitive mar-
ket economies service failures are accompanied by new consequences
of lost customer loyalty. These potential losses to service providers that
can result from service failures necessitate the implementation of ser-
vice recovery. In this study researchers investigated the role of service
recovery in two major economies that are currently in transition from a
planned to a market economy: Russia and China. Four recovery systems
were examined within the context of two levels of service failure criti-
cality. Service recovery system design was found to matter in customer
recovery in both Russia and China, but Chinese respondents reported
higher levels of recovery success. Interaction effects also suggest that the
common experience of transition from planned to market economy did
not produce exactly the same response to service recovery efforts.
Key Words: economies in transition, cross-cultural customer
perceptions, empirical research, service recovery
jEL Classification: F23, l8o
Introduction
Free market economies are driven by customer needs and interests. In
contrast, firms in command economies concentrate on producing man-
Wendy K. T. Gubler, Business Management Department,
Brigham Young University, usa.
Matthew W. McCarter, Department of Business Administration,
University of Illinois Urbana-Champaign, usa.
Dr Kristie K. W. Seawright, Associate Professor, Romney Institute
of Public Management, Brigham Young University, usa.
Dr Yuli Zhang, Professor, Faculty of Entrepreneurship,
Nankai University, China.
Managing Global Transitions 6 (1): 23-51
dated quantities of goods and services that are specified by central plan-
ners. Because customer needs are not always the primary focus of central
planners, customer expectations for service quality are minimized.
All economies in transition to market systems face some common ele-
ments of marketization. Service firms in such economies must alter their
focus from expected output quantity to include market demanded out-
put quality in order to meet intensifying customer demands.
Rising customer expectations will be accompanied by increased con-
sequences for service failures. Growing competition should amplify the
need for service firms to address these failures, providing appropriate
remedies to recover the loyalty of failed customers. The transition to a
market-based economy is expected to include design of service delivery
systems that provide service recovery.
The purpose of this research is to examine the role of service recov-
ery in two major economies that are in transition from planned to mar-
ket economies: Russia and China. This research answers two important
questions: (1) do recovery efforts make a difference in retaining customer
satisfaction and loyalty as market forces grow in importance in these
countries, and (2) do service criticality and/or nationality influence ser-
vice recovery success? The first section of this article presents background
on the process of transition from a planned to a market economy, fol-
lowed by a discussion of service recovery research. An examination of
service recovery in the Chinese and Russian economies includes a look
at the service sectors in those countries. The research methodology and
results of data analysis are then explained. The article concludes with a
discussion of the results, including implications for research and prac-
tice.
Transition From Planned to Market Economy
The focal point of firms operating in planned economies differs dramat-
ically from that of firms in market systems. The firm in a planned econ-
omy must satisfy the demands of central planners, while the market-
driven firm must satisfy needs of customers. Thus, transition of the
macroeconomy requires the microeconomic transition of the focus of
providers of goods and services.
PLANNED ECONOMIES
In command economies, firms focus on production of a specific amount
of goods or services that are sold at pre-established prices (Golden et
al. 1994). These prices and quantities are generally fixed by central plan-
ners (Chikan and Demeter 1995). Thus, in planned economies, output
quantity generally exceeds output quality in importance. Customer sat-
isfaction is not a primary decision criterion in service and production
planning.
The planned economies in both China and Russia were dominated
by large firms that produced few consumer goods and services (McMil-
lan and Woodruff 2002). Customer (especially consumer) information
rarely found its way into planning decisions. Even though customer
needs were not addressed, scarcity of supply created an environment
of excess demand. The limited assortment of outputs encouraged cus-
tomers to buy what was available rather than what was desired.
Service failures occur when customer needs and desires are not met. In
the planned economies of Russia and China customers - especially con-
sumers - regularly experienced disappointment in their efforts to obtain
high-quality goods and services. But these service failures did not result
in severe negative consequences for the producing or selling companies;
thus, service providers rarely perceived a need to rectify the failure.
TRANSITION TO A MARKET ECONOMY
All transitions from planned to market economies go through three
generic steps (Gungor and Yamak 2002). These steps include (1) polit-
ical and civic reform, (2) legal reform, and (3) economic liberalization.
While political and legal reforms are essential to economic transition,
they tend to take place at the macro level. Economic reform is also im-
plemented at the micro level as firms begin to focus on customer inter-
ests to achieve market survival (Golden et al. 1994). These changes in
the microeconomic sphere are often prompted by political and legal ad-
justments. For instance, profit incentives are encouraged by decreased
government subsidies (Fogel and Zapalski 2001). However, managers in
firms make the decisions that lead to marketplace success.
While all transition economies go through similar transition pro-
cesses, implementation of each step varies (Mueller and Goic 2002; Fogel
and Zapalska 2001). In Russia markets opened rapidly. This transition
method created a setting where increased imports quickly decreased de-
mand for locally produced goods. Hyperinflation was accompanied by
expropriation of profits through official and entrepreneurial corruption.
In contrast, China experienced state planned and controlled privatiza-
tion and foreign direct investment (fdi) to minimize negative social
costs. A small- to medium-size enterprise sector also emerged as rural
businesses run by local governments supplemented fdi and imports.
Regardless of the transition implementation process, there is one com-
mon outcome from the transition process: more discriminating cus-
tomers. Increased supply - especially of consumer goods - brings in-
creased customer expectations and demands. Firms providing quality
products that exhibit reliability and durability, combined with high levels
of customer service, become the marketplace survivors as competition
increases (Golden et al. 1994).
Growing customer expectations increase the consequences of service
failures for service providers. A marketplace-orientated manager who ac-
tively focuses on customer interests will realize that rising customer ex-
pectations increase the possibility of failing to meet those expectations.
As competition intensifies in transition economies, the need to retain
customer satisfaction and loyalty becomes apparent to service providers.
Thus, the increased costs of lost customers due to service failures neces-
sitate implementation of service recovery.
Service Recovery Research
In service industries, service failures unavoidably occur (Boshoff 1997).
Such failures vary in consistency and severity depending on the situation,
service, and stakeholders. Accepting this truth, service providers use ser-
vice recovery systems to intercept and amend service failures, and to re-
tain previously dissatisfied customers. Aside from retaining dissatisfied
customers for future business, effective service recovery minimizes po-
tential future losses of negative word-of-mouth to current and potential
customers (Forrester and Maute 2001; Rondeau 1994). Service recovery,
therefore, is vital to successful service systems.
Since service recovery scholarship was first introduced into academic
circles, scholars have found conflicting results in efforts to discern how to
achieve effective service recovery performance (Boshoff and Leong 1998;
Johnston and Fern 1999; Ranaweera and Prabhu 2003). Variations in ser-
vice recovery system design, customer perception of service criticality,
and research design may explain some of the discrepancies in reported
research results.
SERVICE RECOVERY DESIGN: PSYCHOLOGICAL
and tangible elements
Service providers use a combination of two types of system elements
in recovery strategy: tangible and psychological (Miller et al. 2000;
Schweikhart et al. 1993). Psychological actions employed in service re-
covery efforts are verbal and emotional responses to service failure that
appease dissatisfied customers (Carson and Carson 1998). Such actions
typically entail apologizing for the failure and expressing empathy (Bell
and Ridge 1992; Zemke 1994). Tangible actions involve physical steps
that appease dissatisfied customers for real and perceived damages (Bell
and Ridge 1992; Carson and Carson 1998; Chebat and Slusarczyk 2005;
Zemke 1994). Service firms may complete the service contract correctly
or cover the costs incurred by the customer (Clark et al. 1992; Hoffman
et al. 1995).
Some post-failure costs incurred by customers are psychological rather
than economic. Lost time, concern, and inconvenience are among the
sacrifices experienced by failed customers. Providing compensation for
these psychological costs by offering payments that exceed customers'
out-of-pocket losses can increase recovery success. This act of covering
psychological costs - termed value-added atonement - has been shown
to be effective in increasing customer satisfaction and loyalty (Hocutt,
Bowers, and Donavan 2006).
SERVICE CRITICALITY
In addition to psychological and tangible elements of recovery design,
criticality impacts the effectiveness of the recovery efforts (Levesque and
McDougall 2000). Criticality is defined as how important the service is
to the customer (Ostrom and Iacobucci 1995). This importance may be
due to cost, sacrifices to obtain the service or caused by failure, customer
need for the service, or any number of issues that deepen the customer's
perception of a service's importance. The more involved the customer is
in obtaining the service, the more critical or severe the impact that a ser-
vice failure has on that customer's service recovery expectations (Hoff-
man and Kelley 2000).
A high potential for customer dissatisfaction comes with failures in
high-criticality service (Verma 2001). Although the cost to compensate
dissatisfied customers varies from situation to situation (Miller et al.
2000), the criticality of the failed service is found to influence the cus-
tomer's recovery expectations (Bitner et al. 1990; Hoffman et al. 1995;
Hoffman and Kelley 2000).
UTILIZED RESEARCH METHODOLOGIES
There is a wide array of approaches available to researchers studying ser-
vice recovery. Many empirical studies thus far have used an ex-post facto
survey method called critical incident technique (Stauss 1993). cit is a
powerful tool because information regarding both the server's and the
customer's perceptions of the service encounter is obtained via qualita-
tive surveys (Bitner et al. 1990; 1994; Chung and Hoffman 1998). This
methodology has been used to establish many of the key constructs in
service recovery research.
However, Johnston (1995) suggests that cit is limited in two aspects:
(1) survey respondents' perceptions of the service failure may be re-
shaped due to an extended lapse of time between the failure and the
research report, and (2) respondents commonly report extreme service
failures, thus skewing collected data. Regardless of these challenges, the
richness of cit has been very effective in establishing the foundation of
service recovery research.
Other empirical research methodologies that control and manipulate
some of the important intervening variables can allow for testing of hy-
potheses. In recent years, scholars have begun using written scenarios
as the treatments in service recovery research based upon controlled ex-
perimental design (Bitner 1990; Larsen 1987; Maxham 2001; Ogden and
Turner 1997). These scenarios can control the design of the service fail-
ure, recovery effort, and potentially confounding variables - such as crit-
icality. After research subjects read the failure and recovery scenarios,
they provide data on their responses - primarily satisfaction and loyalty
- as a measure of recovery effectiveness. Extension of these studies can
assist in the exploration of service recovery efforts in countries in transi-
tion from planned to market economies.
Russia and China
Service industries are becoming more global in operations (Dicken 1991;
McLaughlin and Fitzsimmons 1996), and becoming a large and growing
portion of the Gross Domestic Product (gdp) for many developing and
developed economies (Zhu et al. 2004). The expansion of service firms
across national borders (Patterson and Cicic 1995) and the growth of ser-
vice sectors of most economies have led to greater emphasis on service
system design - especially for emerging markets (Bartlett and Ghoshal
2003; Thompson et al. 1998).
The majority of the current service recovery literature analyzes process
design through western perspectives (Aaker and Maheswaran 1997; Don-
thu and Yoo 1998; Maheswaran and Shavitt 2000). Yet, countries in tran-
sition to a market economy exhibit a growing focus on customer needs in
^ 7000
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3 3000
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China-Total GDP
2000 ______— - China-Services_
Russia-Total GDP
Russia - Services
1997 1998 1999 2000 2001 2002 2003 2004	Year
figure 1 Gross domestic product in Russia and China (Worldfacts book 1997; 1998;
1999; 2000; 2001; 2002; 2003; 2004)
service delivery (Chikan and Demeter 1995). Therefore, these countries
should be of particular interest to service recovery researchers. The two
largest economies in transition from a planned to a market economy are
Russia and China.
service sectors in russia and china
The Federal Republic of Russia and The People's Republic of China are
two emerging economies that fit this model of economic system tran-
sition. Russia's service industries represent an average of 55.83% of gdp
over a recent nine-year period for an average estimate of us$ 523 billion
(figure 1). The transition of the Russian economy has accelerated quickly
since the collapse of the Soviet Union in 1991. In contrast, economic tran-
sition in China has been more gradual. Although China's service sector
has only averaged 32.61% of gdp over the same nine-year timeframe, the
value of the sector represents an average estimate of us$ 1.63 trillion (fig-
ure 1).
As demand for Russian and Chinese services increase, so will ser-
vice competitors from within and outside the nations' boundaries. Be-
cause service recovery is an essential part of the service delivery sys-
tem, mangers must understand the needs and expectations (Bartlett and
Ghoshal 2003) in these new market economies.
service recovery in russia and china
Since service delivery design research rarely examines issues in transi-
tion economies, it is no surprise that studies of service recovery are lack-
ing in Russia and China. Thus, this research was initiated based upon
findings in Western research; this study is needed to determine if previ-
ous findings would apply to these newly-marketizing countries. The first
two research propositions suggest that consumers in Russia and China
will recognize the role of service recovery system design and criticality
as established in Western research studies. Once that is established, an
examination of potential differences between consumers in Russia and
China is studied in Research Proposition 3. Also examined are the inter-
action effects between sets of variables in this study.
Service Recovery Design
Service recovery systems vary across companies and industries. A re-
cent research observation suggests that effective service recovery design
should be affected by the unique needs and expectations of the customer
(Goldstein et al. 2002). As customer expectations increase in transition
economies, service recovery design should grow in importance. Thus,
varying the combinations of recovery elements should affect the success
of the service recovery effort in Russia and China. As service recovery
efforts increase through additional psychological and tangible elements,
service recovery success is expected to improve, regardless of the level of
criticality of the primary service or nationality of the consumers.
research proposition i Increased service recovery efforts will re-
sult in increased customer recovery success.
Service Criticality
In service encounters, customers have different expectations in relation
to the service's criticality (Webster and Sundaram 1998). A service that is
highly critical typically is more likely to have customers that see a service
failure as more serious (Ostrom and Iacobucci 1995). This is expected
to become important in transition economies. We expect that increases
in service criticality will be accompanied by decreased service recovery
effectiveness, regardless of recovery system design or nationality of the
consumer.
research proposition 2 Service recovery success will decrease as
service criticality increases.
Nationality of the Respondents
Consumers in both Russia and China have experienced economies in
which customer needs and desires were not primary considerations in
service delivery. As these economies transition from planned to mar-
ket economies, customer expectations increase. Yet, the differences in
implementation of economic transition to market systems may con-
tribute to dissimilar evolutions of customer expectations. Variations in
national environments - such as political climates, economic stability,
and cultural tendencies - may also influence the perceptions of con-
sumers. These differences may shape expectations that lead to variations
in customer satisfaction and loyalty with service encounters and recovery
efforts. The third research proposal captures these issues and recognizes
no a priori expectation for direction of the hypothesized differences:
research proposition 3 Service recovery success differs according
to the nationality of consumers.
Interaction of Variables
The literature suggests that recovery system design, service criticality,
and consumer nationality influence the effectiveness of service recovery
efforts. Because service criticality and consumer national origin have in
some studies been found to impact recovery effectiveness, there is reason
to suspect that they may interact with the service recovery system design
to impact effectiveness of the recovery effort. Thus, the fourth and fifth
research propositions are stated as follows:
research proposition 4 Level of service criticality interacts with
service recovery design in recovering customer satisfaction and loyalty
following a service failure.
research proposition 5 Nationality interacts with service recovery
design in recovering customer satisfaction and loyalty following a ser-
vice failure.
Since national environment and service criticality are expected to in-
fluence customer expectations regarding service recovery design, it is
possible that these two variables influence each other. As the fourth and
fifth hypotheses examine the interaction of criticality and nationality
with service recovery design, it is important to determine if these vari-
ables interact. This suggestion is captured in the sixth research proposal:
research proposition 6 Service criticality and consumer nation-
ality interact when examining service recovery success.
Research Methodology and Results
Data were collected via a paper and pencil survey instrument that pre-
sented respondents with a service failure and a recovery scenario, fol-
lowed by questions that evaluated the success of the recovery effort. The
table 1 Establishment of Criticality levels
Criticality	Purchased	Cost Performance	Inconvenience
	item	expectation	
Low	Clothing	Low Will wear the	Travel to the store, exchange the
	(trousers)	item for a short	item, return home.
		to medium	
		length oftime.	
High Electronics High Will use the item Must arrange for transportation
(television)	for an extended to the retailer, leave the television
period of time. for several days and arrange for
return transportation to retrieve
the television set. This is an item
that cannot be transported on
public transportation.
first step in this research process was the selection of the scripted service
and the variations in criticality and recovery system design of that ser-
vice. We decided to study a consumer-oriented service to best align this
study with previous research in the field of service recovery. Since both
countries in this study - Russia and China - are extremely large, with nu-
merous regional cultures and environments, the populations were lim-
ited to one major city in each country: Tianjin, China and St. Petersburg,
Russia.
design of service failure scenarios
To identify a consumer service that is common in both countries, with
similarities in criticality levels, we formed a focus group with partici-
pants that were native to the selected regions of China and Russia. In a
one-hour meeting the group identified retail sales as a service that was
common in both environments. They also identified two products that
would be sold by different retail service providers in their countries: (1)
clothing (a pair of trousers) and (2) electronics (a television set). These
items were identified as merchandise that consumers could realistically
purchase, but that were perceived as different levels of criticality. Table 1
presents information developed by focus group members that explains
the importance of the two products that led to identification of these
scenarios as low and high criticality.
Criticality levels in the experiment are categorized in four ways: (1) the
purchasing cost for the customer, (2) the customer's expectation of the
product's performance, and (3) the customer's inconvenience of notify-
ing the service provider of the failure. The focus group considered the
purchase of trousers to be of low criticality due to the frequent purchase
of clothing, low monetary cost, and expectation of wearing the clothing
item for a relatively short period of time. To replace the trousers typi-
cally takes an hour or two to travel to the store, exchange the item, and
return home. The television purchase, in contrast, was considered to be
of high criticality because it is a less frequent purchase, has a relatively
high monetary cost, and there is an expectation of service performance
over many years. To repair a television may take several days; thus in-
convenience was considered higher. Contributing to the inconvenience
is the common use of public transportation by many consumers. It is far
easier to return a clothing item to a retailer than to transport a television
set, especially for those using public transportation.
Focus group participants highlighted increasing awareness of cus-
tomer needs in the new assumption that faulty products could be re-
turned to the retailer. The planned economic systems of these countries
often supported the adage of'buyer beware'. Consumers seldom expected
retailers to replace or repair defective merchandise. This report supports
the assumption that customer experience precluded expectations of ap-
propriate service delivery - at least in retail services.
service recovery design treatments
This research is designed based upon scenario descriptions of scripted
service failure and recovery activities. All experimental treatment sce-
narios designed for this study began with a service failure. Two retail
failure scenarios were scripted to reflect the focus group's identification
of a common failure for each product: (1) the zipper is broken on the
trousers, and (2) the television set malfunctions. These failure scenarios
reflect the two levels of criticality that were identified in the focus group.
Once the failure scenarios were scripted, the scenarios relating varia-
tions in service recovery system design were prepared according to rec-
ommendations from focus group participants. These participants sug-
gested that a typical recovery scenario experienced during times of the
planned economy would include no recovery effort accompanied by ser-
vice provider belligerence. They also described typical scenarios as (1)
psychological elements with no tangible recovery effort and (2) tangible
recovery effort with no psychological effort. The psychological elements
were defined as honest, respectful communication with the customer.
Tangible activities were defined as compensating the customer for their
table 2 Service recovery design: description of the treatments
Recovery design	Treatment			
	(1)	(2)	(3)	(4)
Psychological	-	0	+	+
Tangible	0	0	+	+
Value-added atonement	0	0	0	+
notes Column headings are as follows: (1) no recovery effort, with belligerence, (2) no
recovery effort, (3) standard recovery effort, (4) value-added atonement recovery effort.
loss through replacement of the defective item. These scenarios consti-
tuted the experimental treatments administered to the research subjects.
An additional treatment that included valued-added atonement (15%
return of the defective item's price) was also scripted. This scenario was
suggested to focus group members; all participants agreed that this was
a scenario that exceeded their expectations.
Through the vehicle of the written scenario treatments, the customer
communicated the failure to the service provider. The customer then re-
ceived one of the following recovery treatments:
treatment 1 The service provider responds negatively to the cus-
tomer and provides no tangible recovery.
treatment 2 The service provider does not take any psychological
or tangible recovery action toward the customer.
treatment 3 The service provider enacts a standard recovery effort
that provides both psychological and tangible recovery elements:
acknowledging the service failure (psychological), then offering to
replace the product (tangible).
treatment 4 The service provider acknowledges the service failure
(psychological), offers to replace the product (tangible), and finally
offers a 15% discount on the item (value-added atonement).
These service recovery elements that constituted each of the treat-
ments are summarized in table 2.
Measurement of service recovery success
For this study the dependent variable is service recovery effectiveness or
success. Since the purpose of service recovery is the recapture or main-
tenance of customer satisfaction and loyalty following a service failure
(Hart et al. 1990), we developed a composite measure of the service re-
covery success construct by evaluating customers' post-recovery satisfac-
tion and loyalty.
Two questions each were designed to measure customer satisfaction
and loyalty (Reichheld 2001; Zeithaml et al. 1990). These questions pro-
vided a five-point scale for participant response. Satisfaction was mea-
sured as: (1) an assessment of how the service performance aligned with
customer expectations, and (2) a respondent rating of the service quality.
Participants provided their perceptions of their own loyalty in response
to questions assessing: (1) likelihood of repeat patronization of the busi-
ness, and (2) probability of recommending this business to another.
Once the service failure scenarios, recovery treatment scenarios, and
post-treatment questions were written, the materials were translated and
back-translated into Chinese and Russian. Native speakers of the two lan-
guages, working closely with one of the researchers to discuss meaning
in all of the text, translated the materials into the target languages. Then,
native English speakers that are fluent in Chinese and Russian translated
the Russian and Chinese translations back to English. Both translators
then met with one of the researchers to adjust any translation discrepan-
cies to best reflect the original meaning of the work.
data collection
Given the difficulty of identifying populations and accessing sampling
frames for probability samples in social science research (Pedhazur and
Schmelkin 1991), we used a purposeful sampling approach. Trained pro-
fessionals - a university professor in Tianjin, China and an instruc-
tor with research training in St. Petersburg, Russia - thoughtfully se-
lected potential respondents. Consumers in major marketplace locations
throughout the cities were approached to request their participation in
the study. The survey reading materials and response instrument were
kept simple and short to encourage the resulting participation rate that
was in excess of 80 percent.
Once subjects agreed to participate in the research they were ran-
domly assigned to a group representing a failure scenario and a subse-
quent recovery treatment scenario. This quasi-experimental research de-
sign obviously does not allow for random assignment of nationality; yet,
the random assignment of subjects to treatment groups helps eliminate
some spurious interpretations that can result from personal variation in
participants. The demographics of the research subjects are presented in
table 3.
table 3 Demographics of subjects
	Tianjin, China	St. Petersburg, Russia	Total
Sample size	360	381	741
Gender			
Male	173	158	331
Female	175	223	398
Age			
18-28	66	180	246
29-39	96	142	238
40-50	90	39	129
51-61	64	18	82
62-72	43	1	44
73+	0	1	1
Non-response	1	0	1
Education			
Elementary	1	4	5
Middle school	22	24	46
High school	68	52	120
Some college	33	83	116
College degree	66	122	188
Some grad study	80	81	161
Graduate degree	89	15	104
Results of Data Analysis
The dependent variable - service recovery success - is measured based
upon the two sub-constructs of post-recovery customer satisfaction and
customer loyalty. Subjects responded to two questions regarding their
level of satisfaction with the service operation, and two questions regard-
ing their level of loyalty to the service provider.
The four responses were combined in one scale to measure service
recovery success as the combination of satisfaction and loyalty. The re-
liability of this scale, Cronbach's a = 0.9269, indicates a likelihood that
these are measures of the same construct. Due to the strong correlations
among all four of the variables, the dependent variable - service recov-
ery success - was measured as the additive function of the four responses
to questions regarding customer post-recovery satisfaction and loyalty.
table 4 Analysis of variance results
(1)	(2)	(3)	(4)	(5)	(6)
Corrected Model	8513.427	15	567.562	55.201	0.0000
Intercept	45306.435	1	45306.435	4406.485	0.0000
Treatment (T)	7625.427	3	2541.809	247.215	0.0000
Criticality (c)	12.665	1	12.665	1.232	0.2680
Nationality (n)	103.205	1	103.205	10.038	0.0020
c*t	95.489	3	31.830	3.096	0.0270
N*T	211.008	3	70.336	6.841	0.0000
n*c	345.029	1	345.029	33.557	0.0000
n*c*t	120.918	3	40.306	3.920	0.0090
Error	4976.373	484	10.282		
Total	59378.000	500			
Corrected Total	13489.800	499			
notes a = 0.05. Column headings are as follows: (1) source, (2) type 111 sum of
squares, (3) df, (4) mean square, (5) F, (6) p-value.
Since each question was based upon a five-point scale with responses
from 1 to 5, the combined scale had possible response ranges of 4 (mini-
mum) to 20 (maximum).
evaluation of the research propositions
The research propositions suggest the need to examine differences among
groups based upon three variables: service recovery system design (treat-
ments), criticality, and nationality. Thus, a three-way factorial Analysis
of Variance (anova) was used to examine these differences. Over 40
respondents from each nation were assigned to each cell. The anova
results are presented in table 4.
anova results were interpreted at a significance level of a = 0.05. Sig-
nificant differences in service recovery success were discovered for two
of the three main effects, providing support for two of the first three
research propositions. Proposition 1 was supported, as significant dif-
ferences were found among the treatments that represent the various
levels of service recovery design (p < 0.001). As service recovery design
(treatments) included more recovery efforts, recovery success scores in-
creased. Differences were not found in service recovery success based
upon criticality alone (p < 0.2680); thus, Research Proposition 2 was not
supported. Significant differences in service recovery success were identi-
table 5 Descriptive statistics
(1) (2)	(3)	(4)	(5)	(6)
Russia Low	1	5.9687	3.2872	32
	2	5.0323	2.4561	31
	3	11.1333	3.3086	30
	4	11.5000	5.3702	32
	Total	8.3920	4-7517	125
High	1	4.7879	1.4088	33
	2	6.4375	3.0047	32
	3	12.8438	3.9604	32
	4	14.9474	3-6977	38
	Total	9.9481	5.3439	135
Total	1	5.3692	2.5652	65
	2	5.7460	2.8168	63
	3	12.0161	3.7307	62
	4	13.3714	4.8250	70
	Total	9.2000	5.1178	260
Continued on the next page
fied between the two nationality groups of Russia and China (p < 0.001),
with recovery success scores higher for Chinese respondents than for
Russian respondents. This result was found across all treatments and
both criticality levels, providing support for Proposition 3.
Analysis of the interaction effects of the anova was required to evalu-
ate Research Propositions four through six. Each of these results was also
examined at the significance level of a = 0.05. All three interaction effects
were found to be significant. Descriptive statistics for each of the facto-
rial cells were calculated to allow for further evaluation of the interaction
effects. Table 5 contains these descriptive statistics.
Figures that present the graphical plot of the descriptive statistics pre-
sented in table 5 have been prepared to illustrate these interactions. The
y-axis of the graphs in figures 2 and 3 represents the service recovery suc-
cess measurement. The service recovery design treatment is represented
on the x-axis, with the intervening variable of interest plotted against
those axes. Figure 4, which illustrates the interaction between Nation-
ality and Criticality, contains Nationality plotted against the x-axis of
Criticality and the y-axis of service recovery success.
table 5 Continued
(1)	(2)	(3)	(4)	(5)	(6)
China	Low	1	6.6333	3.0567	30
		2	7.1333	3.0596	30
		3	13.2667	4.3226	30
		4	16.9000	2.5100	30
		Total	10.9833	5.4124	120
	High	1	5.4333	1.9061	30
		2	4.8667	1.1958	30
		3	10.0333	2.6325	30
		4	15.6667	3.2092	30
		Total	9.0000	4-9417	120
	Total	1	6.0333	2.5970	60
		2	6.0000	2.5710	60
		3	11.6500	3.9049	60
		4	16.2833	2.9233	60
		Total	9-9917	5.2661	240
notes Column headings are as follows: (1) nationality, (2) criticality, (3) treatment,
(4) mean, (5) std. deviation, (6) N.
Research Proposition 4 suggests that the level of service criticality in-
fluences the effectiveness of service recovery design. The interaction ef-
fect of Criticality and Treatment was significant (p < 0.05), providing
support for this proposition. This interaction is demonstrated in figure 2.
A significant difference (p < 0.01) in service recovery success between low
and high criticality services was found at service recovery design treat-
ment level 1.
The nationality of research subjects has also been found to influence
the effectiveness of service recovery system design. Research Proposition
5 was supported by the significance of the interaction effect of National-
ity and Treatment (p < 0.001). Figure 3 illustrates this interaction effect.
The divergence in service recovery success occurs at the highest level of
service recovery system design treatment with respondents from China
exhibiting significantly (p < 0.001) higher levels of recovery success.
Analysis of the differences between nationalities showed significant
differences (p < 0.001) at the low level of criticality, but not at the high
level. Of particular note are the differences in the direction of change
4
1	2	3	4	Treatment
figure 2 Interaction of Treatment and Criticality
Fi gure 3 Interaction of Treatment and Nationality
in recovery success for the two countries. Service recovery success in-
creased for Russian subjects as criticality increased, while Chinese re-
spondents reported decreases in service recovery success scores as criti-
cality strengthened. This difference in direction likely contributes to the
lack of significant differences on the main effect of criticality.
Although the direction of change in the recovery success mean score
varied by nationality, both groups produced significant differences in
criticality. The Russian group showed significant differences (p < 0.05) in
recovery success between low and high criticality. Significant differences
between criticality levels (p < 0.01) were also found in the group of Chi-
nese respondents. The interaction between Nationality and Criticality is
demonstrated in figure 4.
Discussion
In this study researchers investigated the role of service recovery in two
major economies that are currently in transition from a planned to a
market economy. Four recovery systems (treatments) were examined
-Russia
China
8
Low
High	Criticality
figure 4 Interaction of Criticality and Nationality
within the context of two levels of service criticality (table 1 and table 2).
A controlled quasi-experimental research design was used to eliminate
alternative explanations for research results that can emerge from stud-
ies that lack control and random assignment of subjects to treatments.
Our first finding is that service recovery system design matters in cus-
tomer satisfaction and loyalty in Russia and China. As service recovery
design (treatments) included more recovery effort, recovery success im-
proved. While this result is certainly expected, it was important to ini-
tially establish that results in transition economies correspond to re-
search findings in Western studies.
Another research result of interest to service researchers is the finding
that service recovery success differed across the two sampled nationali-
ties. When all service recovery treatments and service failure criticality
levels were considered concurrently, Chinese respondents in this study
reported higher levels of satisfaction and loyalty overall than did Rus-
sian respondents. The common experience of transition from planned
to market economy did not produce the same service recovery success.
One finding that helps explain this country difference is produced
by the analysis of an interaction effect. The difference in service recov-
ery success identified between the two studied countries may not be
as discrete as would appear in the results of the main effect only. Fig-
ure 3, illustrating the interaction between treatment (recovery design)
and nationality, shows that patterns of recovery success are related. Both
countries exhibit increasing recovery success as the service recovery ef-
fort improves. There is no significant difference in recovery success be-
tween Russian and Chinese respondents at Treatment levels one through
three. The difference is shown only at the highest level of recovery (Treat-
ment 4) where the recovery effort that included value-added atonement
produced higher satisfaction and loyalty in Chinese respondents than in
Russian respondents.
This raises an important question: why did Chinese consumers re-
spond more positively to value-added atonement than their Russian
counterparts? This query indicates a need for further research.
Surprisingly, variations in criticality of service failure, when examined
across service recovery design treatments and nationalities, did not pro-
duce different levels of service recovery success. Respondents that vicar-
iously (through written scenario) experienced a service failure of higher
criticality did not report differences in their post-recovery satisfaction
and loyalty from the respondents that experienced the failure of a less
critical service. An equally unexpected result is the limited interaction
between treatment and criticality. While differences in recovery success
based upon criticality were reported for Treatment 1, no differences were
reported at any of the other treatment levels.
These unexpected results are likely explained by the final finding: the
interaction of nationality and criticality. When looking at each nation-
ality group separately, both groups reported different levels of recovery
success depending upon the criticality of the service failure. However,
the two groups reported changes in the opposite direction. As criticality
moved from low to high, the service recovery success for Chinese respon-
dents decreased, as expected. Under the same circumstances the Russian
subjects experienced an increase in service recovery success, contrary to
expectation. This interaction confounded the expected result of overall
differences in recovery success depending on criticality.
implications for research
In countries in transition to a market economy, understanding appropri-
ate service delivery systems is a relatively new field of inquiry. This study
builds upon a growing stream of research examining service recovery
and the design of the service recovery system in Western contexts. This
research has provided empirical evidence supporting some previously
suggested relationships in service recovery success. The body of knowl-
edge has been extended in the realm of economies in transition. Yet this
theoretical contribution represents the tip of the iceberg of needed study
in the field. The opportunity and need for further exploratory and con-
firmatory research in the field is extensive.
This research provides empirical evidence supporting conclusions that
the type of service recovery system design impacts resulting customer
satisfaction and loyalty. However, the findings of Webster and Sundaram
(1998), who found that service criticality impacts both customer satis-
faction and loyalty, were not upheld. This failure to find significant dif-
ferences based on service criticality is likely a result of the interaction
between nationality and criticality, which confounds the general finding.
Criticality was found to be important, but in differing manners across
the two countries.
These unexpected results suggest an important avenue for future in-
quiry. Researchers and practitioners in the field need to better under-
stand how criticality of the failed service influences the success of service
recovery efforts in different populations. What differing aspects of the
transition process influence consumer perceptions of service criticality?
Are there other environmental elements that need to be considered? How
does the criticality of a service influence service recovery success? Since
there is no current explanation for these results, further research is indi-
cated.
Another obvious question that arises from this research is the need
to understand the reason why recovery success with value-added atone-
ment was higher among Chinese consumers than Russian consumers.
Why did Chinese consumers respond to value-added atonement recov-
ery efforts more than Russian consumers? The answer to this question
may be important to other economies in transition from planned to mar-
ket economic systems.
While Russia and China are two of the largest countries undergoing
transition of economic systems, there are numerous other economies
currently experiencing such a transition. There are also several econo-
mies that may potentially transition at a future time. Thus, an important
extension of this research would be replication of this study in other tran-
sition economies, primarily Central and Eastern Europe. As noted above,
regional differences were found in service recovery success in the matters
of criticality and the impact of value-added atonement. Additional data
points from other transition economies will strengthen understanding
of these, and other, service recovery issues while enlarging our ability
to generalize findings to other economies in transition from planned to
market economy.
implications for practice
This study establishes some important considerations for service provi-
ders and service recovery system designers in two major countries with
economies in transition. The primary consideration is that service re-
covery matters in countries in transition to market economies. As cus-
tomer expectations increase, service providers can increase customer sat-
isfaction and loyalty by making efforts to compensate for service failures.
Managers in service firms operating in economies in transition need to
give additional attention to recovering customers that experience service
failures.
Service recovery system design is complex. While the level of recov-
ery effort makes a difference in a service provider's ability to succeed in
recovering failed customers, there are numerous variables that can influ-
ence - or even alter - the outcomes. In this study we identified two such
variables that are associated with varying levels of service recovery suc-
cess: response to value-added atonement efforts and recovery success in
conjunction with criticality of the failed service.
When a service failure occurs, service recovery success is expected to
increase when the service provider compensates for customer psycho-
logical costs, such as inconvenience and additional time investment to re-
ceive the anticipated quality of service. Yet, these value-added atonement
efforts are often costly. This research found that value-added atonement
efforts produced different levels of recovery success in the two countries
studied. The resulting recommendation from this finding is the need
for managers in transition economies to understand the role that value-
added atonement plays in encouraging recovery success in their environ-
ment. Service providers need to cost-effectively recover the satisfaction
and loyalty of customers without incurring unnecessary expenses that
do not contribute to recovery success.
Differences in consumer response to varying levels of service critical-
ity also resulted in dissimilar recovery success outcomes. The responses
of consumers in China were the opposite of responses in Russia. Thus,
service providers in transition economies need to understand consumer
perceptions regarding service criticality in the environment in which
they operate.
Findings in this study should encourage service operations managers
in transition economies to evaluate the environments in which their ser-
vice recovery systems are put into practice. This is also important for
multinational firms that are expanding service operations across na-
tional borders. The service recovery system that is effective in one en-
vironment may need adaptation to achieve appropriate levels of success
when exported.
limitations of the study
While this research has established some important theoretical relation-
ships in the design of service recovery systems, it would not be appropri-
ate to generalize these findings across environments, products, or even
recovery system designs. Specific implementation recommendations are
beyond the scope of this study.
It is not possible to generalize the results of this study across coun-
tries, or even to the entire populations of each of the nations studied.
The populations studied were consumers residing in one city in each of
the two countries. These samples were examined to provide a context
within transition economies rather than to provide results typical of the
entire nations from which the samples were drawn. Likewise the prod-
ucts selected to represent retail service failure were selected to represent
variation in levels of service criticality rather than product-specific mar-
keting research. Conclusions drawn concerning each of these products
would not be supported by this study.
In this study the researchers have examined various levels of service
recovery system design. However, they did not exhaust all design possi-
bilities nor identify optimal combinations of service recovery elements
in the system. As scholars identify new elements of service recovery sys-
tem design, and test combinations of these elements within realistic en-
vironments, the body of knowledge in the field will continue to expand.
Unlike critical incident technique, written scenarios do not allow respon-
dents to describe personal recovery failures and their service provider's
recovery efforts (Goldstein et al. 2002). However, the controlled, quasi-
experimental research design of this study encourages reliable establish-
ment of theory rather than results that can be generalized beyond the
studied populations and questions. Further research is needed to build
upon the findings of this study in exploring the salient issues and princi-
pal relationships in service recovery efforts.
conclusion
Growing customer expectations are an important hallmark of progress
in transition to a market economy. This expansion of customer desires,
enhanced by greater quantity and improved quality of consumer goods
and services, increases the consequences resulting from service failure -
the failure of a service provider to meet the expectations of one or more
customers. The competition fostered by a market system amplifies the
need for service providers to find a way to recover these customers that
have been failed.
This research highlights the effectiveness of well-designed service re-
covery systems in retaining customer satisfaction and loyalty in two
economies in transition to a market economy. While recovery success
was not identical in the two countries studied - Russia and China -
recovery efforts were found to assist in customer retention. It is not sur-
prising that research outcomes in these marketizing economies closely
reflected results of studies conducted in established market economies.
Thus, service providers in transition economies must include recovery in
their service system design in order to regain the satisfaction and loyalty
of customers that have experienced service failure.
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Appendix: Survey Instrument
failure scenario and recovery process treatment
scenarios: low criticality
Failure Scenario
You hear that a store close to your home is having a sale on pants. You
think you could use another pair of pants, so you take a few minutes to
go to the store and buy them. When you return home, you notice that the
zipper does not work.
Recovery System Design Treatment Scenarios
1.	You return to the store that sold you the pants and tell the owner about
your problem. The owner says that the problem is the manufacturer's
fault and the store cannot do anything about it. He acts angry with you
for approaching him.
2.	You return to the store that sold you the pants and tell the owner about
your problem. The owner says that the problem is the manufacturer's
fault and the store cannot do anything about it.
3.	You return to the store that sold you the pants and tell the owner about
your problem. The owner replaces your defective pants with a new pair.
4.	You return to the store that sold you the pants and tell the owner about
your problem. The owner replaces your defective pants with a new pair
and returns 15% of your money to repay you for the inconvenience.
failure scenario and recovery process treatment
scenarios: high criticality
Failure Scenario
Your old television has broken and you want to buy a new one. You spend
an entire week shopping in many different stores looking for a television.
Finally, in a store far from your home, you find a very expensive televi-
sion. You purchase it after the proprietor demonstrates that it works. The
television does not have a warranty but the owner assures you that it is in
very good condition. You take it home and discover that it doesn't work.
Recovery System Design Treatment Scenarios
1.	You call the store that sold you the television and tell the owner about
your problem. The owner says that the problem is the manufacturer's
fault and the store cannot do anything about it. He acts angry with you
for approaching him.
2.	You call the store that sold you the television and tell the owner about
your problem. The owner says that the problem is the manufacturer's
fault and the store cannot do anything about it.
3.	You call the store that sold you the television and tell the owner about
your problem. The owner offers to replace your defective television
with a new one.
4.	You call the store that sold you the television and tell the owner about
your problem. The owner offers to replace your defective television
with a new one and return 15% of your money to repay you for the
inconvenience.
survey questions
Please answer the following questions about this service:
1. How was the performance of this service, with regard to your expecta-
tions?
a)	Greatly exceeded your expectations.
b)	Somewhat exceeded your expectations.
c)	Met your expectations.
d)	Somewhat short of your expectations.
e)	Far short of your expectations.
2.	What is the likelihood that you will again patronize this service provider?
a)	No chance.
b)	About a 25% chance.
c)	About a 50% chance.
d)	About a 75% chance.
e)	Will definitely patronize this business again.
3.	How do you rate the quality of this service?
a)	Extremely high.
b)	Somewhat high.
c)	Average.
d)	Somewhat low.
e)	Extremely low.
4.	Would you recommend this business to your friends or associates?
a)	No chance.
b)	About a 25% chance.
c)	About a 50% chance.
d)	About a 75% chance.
e)	Will definitely recommend this business to others.