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More than a decade after the deregulation of the leading service industries, consumers are accustomed to service providers competing on price. Now consumers demand increasingly higher levels of service quality. For service companies, staying competitive in the new market environment means not only offering products at reasonable prices but also tailoring these products to meet individual customers’ needs.1
Some companies have moved quickly to take advantage of this market shift.2 Delta Dental Plan of Massachusetts, a health insurance provider, and MBNA, a credit card provider, have both used quality service delivery to transform mediocre businesses into industry leaders. Merrill Lynch, a brokerage house, and IKEA, a Sweden-based retailer active in many parts of the United States, have relied on quality-oriented service strategies to turn their companies into high-performing, competitive organizations. All four companies have redesigned their work practices to leverage information among different products and provide customers with quick, customized, price-competitive service offers. The companies have trained and empowered employees directly involved in service delivery to undertake a broad range of tasks. They have given priority to minimizing labor turnover on the theory that employees with long tenure better understand both a firm’s customers and its internal work processes and so are better able to meet individual client’s needs.
Yet these companies are the exception. Most service-sector firms have been slow to redesign work practices. From hotels to banks to retail outlets, service-sector managers continue to rely on an “industrial model” of service delivery. They have organized work so as to tolerate low skills and short employment tenures and continue to concentrate on cutting costs rather than adding value.3 By thinking mainly about price competition, most service managers have invested minimally in their employees. Downward pressure on wages, minimal training expenditures, and heavy use of part-time workers have reduced personnel costs and maintained managers’ flexibility to cut the work-force when demand slackens.
Most explanations for service-sector firms’ failure to compete on quality have focused on managerial decision making. Unwarranted faith in the powers of information technology, a commitment to scientific management, and historical antipathies between management and labor are all said to have discouraged managers from designing their competitive strategies around high-skill and high-quality organizations.4 In this view, reorienting business strategies to take advantage of consumers’ new quality consciousness is assumed to be primarily a function of changing managerial attitudes.
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1. B. Pine, D. Peppers, and M. Rogers, “Do You Want to Keep Your Customers Forever?,” Harvard Business Review, volume 73, March–April 1995, pp. 103–114.
2. N. Venkatraman, “IT-Embedded Business Transformation: From Automation to Business Scope Redefinition,” Sloan Management Review, volume 35, Winter 1994, pp. 76–77;
F. Reichheld, “Loyalty-Based Management,” Harvard Business Review, volume 71, September–October 1993, pp. 64–73; and
T. Raffio, “Quality and Delta Dental Plan of Massachusetts,” Sloan Management Review, volume 33, Fall 1992, pp. 101–110.
3. L. Schlesinger and J. Heskett, “The Service-Driven Service Company,” Harvard Business Review, volume 69, September–October 1991, pp. 71–81; and
L. Waldstein, Service Sector Wages, Productivity, and Job Creation in the United States and Other Countries (Washington, D.C.: Economic Policy Institute, 1989), pp. 24–25.
4. L. Schlesinger and J. Heskett, “Breaking the Cycle of Failure in Services,” Sloan Management Review, volume 33, Spring 1991, pp. 17–27; and
J. Pfeffer, Competitive Advantage through People (Boston: Harvard Business School Press, 1994).
5. D. Finegold, “Institutional Incentives and Skill Creation: Preconditions for a High-Skill Equilibrium,” in P. Ryan, ed., International Comparisons of Vocational Education and Training for Intermediate Skills (London: Palmer, 1991).
6. Five of these banking institutions were full-service commercial banks, four were federal savings banks, and three were independent wholesalers.
7. For all data on private holdings, see:
“Flow of Funds Accounts—Assets and Liabilities of Households: 1980 to 1992,”Statistical Abstract of the United States (Washington D.C.: U.S. Department of Commerce, 1992), p. 506.
8. “America’s Little Fellows Surge Ahead,” The Economist, 3 July 1993, pp. 59–60;
A. Barrett, “It’s a Small Business World,” Business Week, 17 April 1995, pp. 96–101; and
W. Glasgall, “The Global Investor,” Business Week, 11 October 1993, pp. 54–59.
9. L. Mayne, “How Big Banks Nurture Relationship Banking in the Middle Market,” Journal of Commercial Bank Lending, volume 72, October 1989, p. 23.
10. T. Davenport and N. Nohria, “Case Management and the Integration of Labor,” Sloan Management Review, volume 35, Winter 1994, pp. 11–21.
11. This phrase came from a conversation with Jeffrey Pfeffer.
12. B. Keltner, “Comparative Patterns of Adjustment in the U.S. and German Banking Industries: An Institutional Explanation” (Stanford, California: Stanford University, unpublished dissertation, 1994), Table 3.1.
13. “American Banking: Roped Together,” The Economist, 28 October 1995, p. 92; and
R. Hylton, “Merger Mania and Fat Profits Make the Big Banks Look Good,” Fortune, 7 August 1995, pp. 259–261.
14. Of the nine thrifts and full-service banks in our study, only two of eight had cross-trained tellers into new accounts, only two of eight were integrating the new accounts and investment banking services at the branch level, and only one of the eight was attempting to offer integrated delivery of all retail products in their branches offices. In another study of branch level work organization, Chip Hunter found a similar pattern of fragmentation in service delivery. See:
C. Hunter, “How Will Competition Change Human Resource Management in Retail Banking? A Strategic Perspective” (Philadelphia, Pennsylvania: The Wharton Financial Institutions Center, working paper #95-04, February 1995).
15. Bureau of Labor Statistics, “Public Use Microsamples of the Census, 1980 and 1990” (Washington, D.C.: Bureau of the Census, 1993); own calculations.
16. S. Vitols, “Banks and Industrial Finance in Germany and the U.S.: An Organizational Perspective on Long-Term Lending” (Wissenschaftszentrum, Berlin: Institutions of Advanced Capitalism, paper presented at conference, March 1994).
17. “Take Our Money, Please,” Business Week, 18 July 1994, pp. 66–67.
18. Vitols (1994).
19. “When to Throw ’em Back,” The Economist, 12 March 1994, pp. 81–82.
20. B. Keltner, “Relationship Banking and Competitive Advantage: Evidence from the U.S. and Germany,” California Management Review, volume 37, Summer 1995, pp. 45–72.
21. J.C. Svare, “Forging Profitable Relationships,” Bank Administration, volume 65, November 1989, pp 14–24; and
J. Kotkin, “The New Small Business Bankers,” Inc., May 1984, pp. 112–125.
22. “A Survey of International Banking,” The Economist, 30 April 1994, p. 9;
E. Sipple, “When Change and Continuity Collide: Capitalizing on Strategic Gridlock in the Financial Services,” California Management Review, volume 31, Spring 1989, pp. 51–74.
23. J. Hargroves, “The Basic Skills Crisis,” The New England Economic Review, 1 September 1989, pp. 56–58; and
P. Lunt, “Entry-Level Workers Get Extra Help,” ABA Banking Journal, volume 82, June 1990, pp. 37–39.
24. K. Holland, “A Chastened Chase,” Business Week, 26 September 1994, pp. 106–109.
25. V. Torres, “Taking Account of the Little Guys,” Los Angeles Times, 27 March 1995, pp. D1–D2.
26. W. Grubb, T. Dickinson, L. Giordano, and G. Kaplan, “Betwixt and Between: Education, Skills, and Employment in Sub-Baccalaureate Labor Markets” (Berkeley, California: University of California at Berkeley, National Center for Research in Vocational Education, December 1992).