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Operations as marketing: a competitive service strategy.

Albrecht, K. At America's Service. Homewood, IL: Dow Jones-Irwin, 1988.

ABA Banking Journal. "This Bank Believes Quality Pays." October 1987, 18.

Amatos, C.A. "Banks Focus on Service to Gain Competitive Edge." Columbus Dispatch, June 19, 1988, 2.

American Banker. "Eurobanks Head for One Market." March 17, 1988. INTRODUCTION

Contemporary strategic thinking argues that superior performance requires a business to gain and hold an advantage over competitors by developing new capabilities that are attractive to the firm's target market and by slowing the erosion of current competitive strength. As a critical element in business unit strategy, the role of operations is increasingly attracting attention from researchers and practitioners alike. Numerous articles suggest that a firm's ability to orchestrate its operations resources contributes to its marketplace competencies. While operations strategy frameworks are being subjected to empirical investigation in manufacturing, similar investigations arc scarce in service operations management. This paper presents a service strategy paradigm based upon the prevailing manufacturing strategy framework, and empirically addresses the various options a service organization has in determining factors critical to its success.

Recent attempts to delineate the strategic dimensions of service operations focus upon characteristics that distinguish service organizations from their manufacturing counterparts: few center on their similarities. One research stream analyzes service operations strategy in terms of core operations strategy content areas including quality, process technology, capacity, human resources, information systems, customer contacts and relationships, facilities design and location (Chase (1978, 1981), Collier (1987), Heskett (1986), Lovelock (1988), Thomas (1978)). Another research stream specifically considers the interplay between marketing and operations in designing and delivering services (Heskett, Sasser, and Hart (1990); Bowen, Chase, and Cummings (1990), Lovelock (1983, 1988), Sasser (1976). In fact, Heskett (1987) asserts that "the best companies integrate operations and marketing."

Following the second research stream, we propose that service marketing and operations must not only be structurally aligned for competitive advantage, but also that operations plays a pivotal role in effecting the marketing strategy. The marketing strategy embodies the management of demand, i.e., identifying, understanding and creating need satisfying products and services; and the operations strategy concerns the management of supply, i.e., the production and delivery of products and services. Correctly positioned, the firm's operational capabilities can proactively generate demand and retain existing customers.

This paper presents a new paradigm for research in service operations strategy. Within the paradigm. The paper explores how linking operations to marketing can be a formidable competitive strategy for service firms, particularly those in retail services. We present a set of propositions that describe how critical success factor capabilities of a service business may provide a competitive and sustainable advantage over the competition. The propositions are empirically examined on a sample of leading retail banks.

The remainder of this paper is organized into several sections as follows. First is an overview of related literature, followed, secondly, by a discussion of a competitive service strategy paradigm. Third, we provide an overview of the research data base. Fourth, we present our analysis and discuss a Consumer/Account (CAB) matrix which explores top-ranked critical success factors along two distinct dimensions, characterized as market-oriented and competitor-oriented. We describe how quadrants in the CAB matrix dovetail into the concept of stages of capability development. We conclude with an empirical illustration of how the contents of an operations strategy are linked to competitive priorities, and how they may vary by expected degree of customer contact, as suggested by our service strategy paradigm.


The literature on the effective management of service enterprises enterprises is rapidly proliferating (Albrecht (1988): Bowen et al, (1990); Carlzon (1987); Czepiel, Soloman and Suprenant (1985); Lovelock (1988 ); and Zemke and Schaaf (1989)). The seminal works in the area include those of Chase (1978, 1981). Chase and Tansik (1983), Fitzsimmons and Sullivan (1982), Levitt (1972), and Sasser, Olsen, and Wyckoff (1978). Heskett's work (1986) is exemplary in its treatment of operations strategy as a necessary ingredient of the overall service business strategy.

More recently, Heskett et al. (1990) and Bowen et al. (1990), in particular, have brought to the limelight the importance of operations as a competitive weapon in service organizations. Despite the increased number of articles and their valuable insights, most of the contributions to service operations strategy have been conceptual in nature or deal with only one or two strategy content areas. As such, many important questions remain in rigorously defining service operations strategy.

A service strategy must address how operations will support and mesh with the competitive marketing thrusts of a business. Since the preponderance of service operations research to date rests on case studies and the intuitive prescriptions of experienced individuals, we believe that broader-based empirical research is required to carry the field forward. Empirical research is important to verify the commonly recurring themes emanating from cases to build theory inductively, and to lay the groundwork for normative decision making and testing of theory.

In examining the service management literature, as a distinct area within operations, we found much of the disparity between manufacturing and service operations strategy pertained to the degree/role of customer contact in the service production function. We believe, however, that this distinction is becoming a moot point. For example, Chase and Garvin (1989) extended the notion of service and customer contact into the technical core of manufacturing. Another study of 759 leading manufacturing firms showed that the majority have incorporated a significant service component in their "strategic bills of materials" (Giffi, Roth, and Seal (1991)). On the other side, service firms have frequently considered physical "goods" in their service offerings (Sasser et al. (1978), Collier (1987)).

For these reasons, we believe that the manufacturing strategy literature provides some important insights concerning evolution of a service strategy paradigm. This notion was affirmed by Adam and Swamidass (1989), who, in their assessment of the operations management literature indicated that a promising area of inquiry lies in transferring many concepts from the manufacturing strategy literature to service strategy formulation. (See Anderson, Cleveland, and Schroeder (1989); Leong, Snyder, and Ward (1990); and Swamidass (1989) for in-depth reviews of manufacturing strategy literature.)


The current service management paradigm suggests that the strategic role of operations is to devise a service delivery system that is congruent with the desired service concept. According to Sasser et al. (1978) and Fitzsimmons and Sullivan (1982), the service concept is the set of facilitating goods and the explicit and implicit intangibles (services) that constitute a service product bundle. While the service concept is defined in the context of the service delivery system, little is known about how managers in service organizations systematically differentiate their businesses and how those advantages are developed. This void is where the manufacturing strategy literature comes to play in service research. A new competitive service strategy paradigm is depicted in Figure 1 which incorporates a manufacturing strategy framework. Three key elements of this paradigm are critical success factors, service operations strategy contents, and stages in capability development.

Critical Success Factors

Skinner (1978) argued that an operations strategy must focus on what the manufacturing function must accomplish Rockart (1979) defined critical success factors as a limited set of capabilities which, if developed satisfactorily, will ensure successful competitive performance for an organization. It seems blatantly obvious that a service operations strategy must similarly begin with the "service task" defined in terms of the critical success factors that the enterprise must have in order to win and maintain customers.

In this paper, we distinguish between "intended" critical success factors or competitive priorities and "realized" success factors or competitive capabilities. Competitive priorities are those abilities which are needed to build and maintain future market share; they are planned, but not necessarily yet obtained. Competitive capabilities reflect the firm's relative areas of current competitive strength vis-a-vis its primary competitors. Competitive capabilities in service organizations coincide with the firm's ability to deliver differentiated services or to deploy superior skills and resources (distinctive competencies). By either definition, competitive capabilities are an intricate part of the services perceived by customers. Competitive gaps occur as a result of differences between the firm's current capabilities and those prioritized for future success.

Scrutiny of the critical success factor concept in manufacturing is common throughout the manufacturing strategy literature, where competitive capabilities and priorities are typically defined in terms of quality, delivery, flexibility and cost attributes.

From the practitioner literature, we found many service analogues for manufacturing success factors, including quality, price, convenience, customization, and/or customer relationships. The greater their fit with customers needs and expectations, the greater the competitive advantage.

A missing theme in the service operations literature pertains to the role of critical success factors in the design of a service strategy. Because they are intended to attract customers and hold accounts, competitive priorities are the linchpin between operations and marketing. Drawing upon the manufacturing analogy (Miller and Roth (1991)), competitive priorities can be thought of as proxy variables for the operations service task. They are similar to Hill's (1989) "order-winning and order-qualifying" criteria in manufacturing; and translated into services, competitive priorities become "customer/account winning and account qualifying" criteria.

Service Operations Strategy Contents

Wheelwright (1978) explicitly defined the content of a manufacturing strategy in terms of structural and infrastructural decisions which reinforce corporate strategy. Extending the Wheelwright model, we propose that the content of an operations strategy in services parallels its functional definition in manufacturing. Namely, a service operations strategy is the pattern of structural, infrastructural, and integration choices that support the business tasks (Hayes and Wheelwright (1984), Hill (1989), Giffi et al. (1991)). The structural components are the hard, or "brick-and-mortar," choices concerning process technology, capacity, facility design and location, and vertical integration. Infrastructural, or "soft" aspects of the operations are comprised of the management policies and systems that are linked to structural components. Integration choices describe how the operations function will strategically interface with internal and external boundaries.

Following the underlying logic presented by Minzberg and Waters (1985) in the strategic management literature, a service delivery system design can now be operationally defined by a "pattern stream of planned" or intended operations strategy contents; and the actual delivery of services can be behaviorally assessed by the "pattern stream of actions" realized operations strategy contents. Superior service delivery systems coincide with a pattern stream of realized operations strategy contents that build superior competitive capabilities.

Empirical developments in broad scale manufacturing strategy research illustrate the importance of linking manufacturing strategy contents and critical success factors (Ferdows and DeMeyer (1990), Roth et al. (1989), Roth and Miller (1990), Swamidass and Newell (1987)), Schroeder et al. (1986) relates competitive capabilities with the marketing function and manufacturing strategy contents. Heskett (1986) present a conceptual framework associating operations strategy contents and success factors in services.

We have empirically explored the connections among critical success factors, strategy contents, and performance in retail banking services. For example, the typical patterns of operations choices, including structural (technology, capacity, facilities, and vertical integration) decisions and infrastructural decisions (information systems, human resources, vertical control, performance management, and operations enhancement programs), and marketing strategy contents are explored in Roth and van der Velde (1990). The linkages between multivariate measures of nonfinancial performance and key operations action programs are reported in Roth and van der Velde (1988). In addition, the adoption of channel technology, a key component of a service operations strategy, was correlated with critical success factors in banking services (Roth and van der Velde (1989)). Most recently, Roth and van der Velde (1991)in a study of world class banks found that "'best-in-class' banks create high value ... by their relative competitive abilities in operations ... These banks have more agile, flexible operations."

Much of the seminal work in service operations strategy considers the concept of customer contact. How does customer contact enter in our service operations strategy formulation? We propose that customer contact, either required by the nature of the service or chosen by the decision maker, are important moderating variables in the formulation of the operations strategy. For example, Chase, Northcraft, and Wolf (1984) found that the degree of customer contact is associated with choices concerning technology (structural) and staffing (infrastructural) contents. Huete and Roth (1988) empirically show that different service contents and delivery system channels vary systematically along a customer contact dimension. Thus, we believe that decisions regarding customer contact moderate the operations strategy.

Stages in Capability Development

A useful way to conceptualize the impact of operations strategy in service businesses is to consider the four stages in the development of manufacturing's strategic role proposed by Hayes and Wheelwright (1984). Names for their service counterpart roles induced from our research are given in Figure 2. Moreover, Chase and Hayes (1991) present a related conceptual framework defining four stages in service competitiveness. In contrast, our research on the four stages, is empirically grounded, and provides systematic evidence of their existence in a sample of firms within a single industry and describes their linkages with operations strategy contents. In service management, we show that stages of strategy development may be directly related to the value-added contribution of operations to marketing or "customer/account winning" capabilities. Since customers receive many intangible products and services, the manner in which the products are delivered becomes especially important to both market share defenders and attackers.

Specifically, the four stages of service strategy development lead to the following propositions that are the subject of this research:

Proposition 1: "Revolving door" capabilities add no value in maintaining or building market share. They are used internally for control and tactical purposes.

Proposition 2: "Minimum daily requirements" are capabilities which help the firm achieve parity with competitors, and hence, they, are "externally neutral." They serve to retain existing customers, and avoid dissatisfaction. Operations supports marketing.

Proposition 3: "Gateway" capabilities are market attractants. Operations capabilities not only serve to maintain market share, but also provide significant market differentiation. They are primary marketing vehicles to draw new customers.

Proposition 4: "Golden handcuffs" are capabilities that pose significant barriers to entry; they represent relative state-of-art capabilities. Operations functions proactively to retain and attract customers. Operations is highly integrated with marketing.

To explore how these four stages may unfold in practice and to examine their linkages with operations strategy, a sample of retail banks was employed. Much of the operations management literature, using banking examples, pertains to the design of efficient back-room operations or effective front-room organization, but not both. For example, in the front-room, operations activities are oriented toward the quality of the service providers and their interface with the bank's customers; in back-room operations, the management of indirect customer contacts (via telephone and mail) and support systems is of major concern. In practice, front-room and back-room typically fall under different management structures.

We believe this separation of scope leads to a myopic view of the operations function, namely, one that is primarily tactical and does not explicitly consider the stages in competitive capability development. We would argue that the strategic role of operations should vary by the degree to which competitive capabilities are derived from the delivery system value chain as an integrated whole.

The pattern of operations choices when linked with the firm's competitive priorities, is part of an intricately woven system that strategically determines competitive advantage.


Our analyses are based upon the Retail Banking Futures Project that originated in 1986 by the authors (Roth and van der Velde, (1988, 1990, 1992)). In this longitudinal research project, the Survey of Retail Banking Delivery Systems' Strategies and Performance is administered to banking executives biennially through a mail questionnaire. The Retail Banking Futures Project is the first broad-scale empirical study, of which we are aware, where data following the manufacturing strategy framework has been applied to service management.

The Retail Banking Futures study was patterned after the International Manufacturing Futures Project (Miller and Roth (1988), Ferdows and DeMeyer (1990)). This parallel structure affords the opportunity to systematically gather comparative cross-industry data on competitive factors in service firms. In particular, one key objective of this complementary research was to scrutinize the evolution of an operations strategy from a "buffered" to an "unbuffered" customer contact environment (See Chase and Tansik (1983) for an overview of the progression of production from a quasi manufacturing to a pure service.)

Sample Description

The population of approximately 16,000 retail banks was stratified into five groups by bank asset size: less than $100 million, $100-$499 million, $500-$999 million. $1-$3 billion and over $3 billion. Mail surveys were sent to a stratified probability sample 1244 banks, resulting in 117 useable surveys. The overall response rate of almost 10% is comparable with those of other studies seeking similar participants (Greenberg et al. (1987)).

The unit of analysis for which each executive responded is the retail banking unit (RBU). The RBU represents the highest level in the organization where strategic delivery systems decisions are made. A RBU may be an entire bank, a holding company, a division/group, or department depending upon how the retail side of the bank is organized. The preponderance (73.5%) of the responding RBUs in this study are banks; divisions of larger institutions comprise 13.7% of the total; and the remainder of the RBUs are in other categories. Respondents typically held the title of vice president or president. Selected characteristics of respondents are given in Table 1.


A special follow-up study of nonrespondents indicated that our findings are systematically biased towards industry leaders. There is over representation of larger asset-sized banks. Banks with assets of $3 billion and over had a 31% response rate. This group of industry leaders accounts for less than 0.6% of all retail banks and 25% of the sample respondents. Furthermore, within each asset size category, participating banks on average exhibited significantly higher growth rates and return on assets (ROAs) than the general population of retail banks (Roth and van der Velde (1988)).

Survey Instrument

The surveys were designed and pilot tested both to provide descriptive statistics on the retail banks' competitiveness, and to test specific sets of hypotheses concerning the service operations strategy paradigm denoted in Figure 1. For this exploratory analyses, a list of 19 critical success factors was presented to survey respondents, who were asked to rate each factor's (a) relative importance as a competitive priority for successfully competing in the bank's target market, and (b) size of the gap between the banking unit's current competitive capabilities and those required over the next five years. Each competitive priority was measured on a seven point self-anchoring scale, from "1 = not important" to "7 = critical importance." The size of the gap was measured similarly, where "1 = no gap" to "7 = large gap."

Bankers were also presented with a list of 49 activities, tools or programs that could improve their banks overall effectiveness. Of the total, six were strategic marketing choices, and the remaining 43 programs represented behavioral measures of operations strategy. For each action program on the list, bankers indicated the relative degree of emphasis that they have firm plans to adopt or emphasize in the RBU over the next three years. The degree of managerial attention to each key action program was captured on a seven point self-anchoring scale, where "1 = none/little" and "7 = significant emphasis." The pattern stream of responses over the set of action programs are proxy variables for a bank's "intended" operations and marketing strategy contents. Tests of internal reliability were computed, and follow-ups with samples of banking executives were made to ensure construct validity (Roth and Van der Velde (1988)).


In our evaluation of the stages of capability development in retail banks, we first focus on those competitive priorities which bankers are pursuing for competitive advantage, and the relative strengths and weaknesses in current capabilities. Second, to investigate the various ways operations can be considered as a key marketing tool, we will assess the relationship between competitive priorities and capabilities. Third, we demonstrate the empirical association between competitive priorities and intended marketing and operations strategy contents.

Competitive Weapons

Listed in Table 2 are the top ten competitive priorities which banking executives in our study considered to be the most important competitive weapons for serving their target markets into the 1990s. Only two of the top ten competitive capabilities! high value services and relationship banking, varied significantly by asset size. With these exceptions, the general rank order of importance of critical success factors held for banks, regardless of their size. In analyzing the top priorities in retail banking delivery systems, three genetic operations service tasks emerged: external service quality, internal service quality, and relationship banking. These competitive priorities comprise the market-oriented dimension of the retail banking service tasks.

External Service Quality

Bankers are foremost directing their attention to external measures of quality; i.e., the quality perceived by the customers in their interaction with the bank. External service quality, as defined in the study, is the bank's ability to provide courteous and consistent customer services. Developing the capability to deliver a consistent level of quality is often referred to as conformance quality or reliability. Banks that compete on the basis of consistent quality must have delivery systems that ensure that customers' perceptions match their expectations with some established level of confidence. Courtesy reflects politeness and respect for customers, and is a highly qualitative expression.

Relationship Banking

Following external service quality, bankers ranked relationship banking (enlarging relationships with customers) as the second most important theme. Relationship banking is a fundamentally new approach in retail financial services. Banks prioritizing relationship banking must convert customers into clients, and develop account based capabilities that satisfy the total financial service needs of their clients. Relationship banking dictates that the delivery system design fully supports maintaining the client relationship.

Internal Service Quality

Other top ranked quality-related critical success factors depicted in Table 2 are associated with the provision of timely and accurate information. Accurate and timely information have been traditionally important to bankers due to the numerous regulations with which the banks must comply. They are typically regarded by bankers as measures of internal service quality that reflect the overall capabilities of their information systems infrastructure Moreover, accurate and timely information are also an integral part of the service bundle expected by a bank's customers (Collier (1990)).


Competitive Millstones

Where does a service firm hold a competitive advantage and where are the gaps? Strategic weaknesses, where capability gaps are large, are competitive millstones. They severely limit the service provider's ability to effectively penetrate its target market. In this study, these weaknesses are assessed by the size of the gap between the bank's current capabilities and those required to compete over the next five years. Competitive capability gaps portray the competitor-oriented dimension of success.

Outlined below are the top ten competitive priorities ranked by the size of the competitive capability gap, from largest to smallest gap:

COMPETITIVE MILLSTONES (Ranked from largest to smallest gap)

(1) Relationship Banking (2) High Value Services (3) Personalized Services (4) Convenient Services (5) Back Office Efficiency (6) Adequate Pricing (7) Consistent Service (8) Timely Information (9) Accurate Information (10) Courteous Service

With respect to strategic weaknesses two key survey findings are notable. First, the majority of bankers perceived relationship banking capabilities to be their greatest competitive obstacle. Defining and establishing core products and services around which such a relationship can be built is a major hurdle for many banks, and particularly, for the larger institutions. Second, the perceived size of gap between the typical RBU's current quality capabilities and the abilities the bank needs to compete successfully in the 1990s was relatively narrow. Roth and van der Velde (1988) report that the sizes of capability gaps for the competitive millstones do not vary by asset size. Two exceptions to this generalization are (a) small and mid-sized banks report narrower gaps in their ability to offer highly personalized services and (b) banks in the smallest asset category have less of a gap in their ability to offer relationship banking (p |is less than~.05).

Competitive Mapping

To determine how the various service delivery system capabilities may be used in assessing the stages of operations strategy development in services, we map the relationships between the relative degree of importance and the relative size of the gap attributed to each of the top ten critical success factors. We hypothesize that the bank's competitive positioning, with respect to the degree of importance attached to each competitive priority and to the size of the competitive capability gaps, is composed of two distinct dimensions. More formally stated:

|H.sub.o~: Market-orientation, as expressed by the set of competitive priority variables, and competitor-orientation, as represented by the size of the competitive capability gaps, are independent constructs.

To test this hypothesis, we assume that every individual bank's data can be represented by two row vectors, where the set of ten competitive priorities is expressed as |Mathematical Expression Omitted~ and the set of ten competitive gaps, as |Mathematical Expression Omitted~. The observed canonical correlation between the two multivariate sets was not statistically significant (|R.sub.c~ = .58, p |is less than~.13). As a result, we have insufficient evidence to reject the null hypothesis that no systematic relationship exists, and will explore the implications of the two strategic dimensions.

Linking Priorities and Competitive Abilities

The top ten critical success factors are arrayed by the sample banks' average scores on dimensions of competitive priorities and competitive capability gaps in Figure 3, which we call the Customer/Account Base (CAB) Matrix. If we are willing to assume that competitive priorities are planned sources of differentiation advantage (Porter (1985), Wheelwright (1978)), this market-oriented dimension exemplifies the sample banks' collective source of positional advantage relative to the group average. The size of gap dimension on the CAB matrix represents the conversion of sources of advantage into competitive capabilities, or lack thereof. We assume that banks with superior delivery systems are more adept at converting their human and capital assets into competitive capabilities, resulting in narrower competitive gaps. Therefore, capabilities for which the size of the gaps are large may pose significant barriers to market entry for a typical bank.

That the market shares of various competitors are proportional to their shares of total marketing effort is a fundamental theorem of market share determination (Kotler (1984)). By analogy, it is reasonable to postulate that lower competitive gaps arise due to operations strategy choices which are both more congruent with and part of the marketing effort. There is sufficient case-based literature on service firm winners to support our assertion (Heskett et al. (1990), Lovelock (1988), Bowen et al. (1990), Chase and Hayes (1991)), and the manufacturing literature is replete with such examples. It is not our intention in this paper to test this assertion empirically, as this is the focus of future research.

Given these caveats, the CAB matrix provides an intriguing empirical way to operationalize the building of competitive advantage in services. Notice that the CAB matrix is divided into four quadrants which we believe characterizes the four stages of capability development described in Figure 2:

(1) Revolving Doors. Critical success factors that are both relatively lower in importance for meeting the competition and lower in competitive gaps (barriers to entry).

(2) Minimum daily requirements. Critical success factors which are perceived to be highly important for meeting the competition and which display minimal capability gaps among competitors.

(3) Gateways. Critical success factors which are perceived by the majority of organizations as less important for competing and which display relatively large competitive gaps.

(4) Golden Handcuffs. Critical success factors which are perceived to be both highly important to competing and which exhibit large competitive gaps.

Since both market positioning and barriers to entry have profound implications for attracting or maintaining market share, the CAB quadrants are descriptive of the relative value of each strategic capability from a "customer/account" winning perspective. Accordingly, each CAB quadrant reflects a different degree of positional advantage which might be best understood by Porter's (1985) value chain concept. The value chain represents sets of discrete value-creation activities which are performed from the design of a product/service through their production and ultimate delivery to customer. Likewise at the various stages of capability development in Figure 2, different sets of operations strategy choices are deployed, each building upon one another. Superior service delivery systems add value as operational choices create capabilities which are differentiable in the marketplace and which competitors have difficulty imitating. Using the service strategy paradigm, the strategic role of operations can be parlayed into the stages of capability development through the value-added contribution to critical success factors. Examples of these are highlighted in Figure 4 and further discussed in the next subsections.

Our presentation, thus far, is consistent with the emerging view of market share which results from the choice of strategic business unit options which differentiate products and services (Gale and Buzzell (1988)); and it parallels recent research in the manufacturing strategy. Using the retail banking data and the CAB matrix, we review critical success factors in each stage with respect to their relative value-add contributions to the bank's target market and their implications for service delivery system design. For aggregate data, however, the points in the CAB matrix define industry critical success factors. To the extent that our database reflects leading retail banks, our discussions can be generalized to industry pacesetters. Our interpretation of the matrix extends beyond the survey data; it is also based upon our knowledge of the banking industry and the service literature.

Revolving Doors. "Revolving doors" are clearly factors which may make a bank vulnerable in terms of its long-term market positioning. From a consumer perspective, they do not afford the firm any customer allegiance. In our sample, they are capabilities which are common to most banks, which are not difficult to achieve, and/or which have no significant value for customers. Notice in Figure 3, none of the top ranked critical success factors fell into this quadrant. An example of a lower rated critical success factor (not in the top ten) reported by bankers in this study is the ability to make rapid stalling changes. At the time of our study, this capability was viewed by the industry leaders as more tactical and posed no significant barrier to entry.

Operations role with respect to revolving door capabilities provide little value-added contribution to service delivery system design beyond minimizing its negative potential. Also note that a "revolving door" capability for one type of service may fall into a different stage in another. For example, the, ability to make rapid staffing changes is very important for a hospital emergency room.

Minimum Daily Requirements. Minimum daily requirements are success factors that are the ante to enter the competitive game; they serve to maintain parity with competitors. Service firms have little choice but to devise delivery systems which can efficiently execute the minimum requirements expected by customers. Exploring the CAB matrix, service quality appears to be a minimum dairy requirement for leading banks. Both internal and external service quality success factors reside within this quadrant. Over the past decade, service quality has been high on the operations agenda for retail banks.

It is not surprising that quality is not only important, but also displays a rather narrow capability gap. Providing internal quality has traditionally been important to bankers. Bankers have been compelled to develop systems and operating efficiencies in these areas, and therefore, have lessened the size of the gap due to their vast experience. With respect to external quality, consumers will typically rely on experience when evaluating service quality. Supporting the bankers perceptions on the lower size of service quality gaps found in our research, studies of consumer ratings of banks indicate that very few customers are dissatisfied with service quality (American Banker (1987)).

Like recent manufacturing research (Ferdows and De Meyer (1990), Roth and Miller (1990 and to appear)), quality may be rapidly becoming an "account qualifier"--a precondition to opening its doors. All banks are expected to deliver a competent level of quality. In our own analysis of this data, we found that quality as a competitive capability was undifferentiated, and did not correspond with target markets in expected ways. For example, there were no significant differences in the relative degree of importance or size of the gap associated with quality by banks having different asset sizes or target markets, including executive, upscale, middle and mass (Roth and van der Velde (1989)). For these reasons, it is unlikely that the service quality alone will be sufficient to attract new customers. Seeking competitive advantage through service quality alone may be a risky long-term positioning strategy.

If service quality is becoming an "account qualifier," as our data suggests in retail banking, then the only sustainable service quality strategy for bankers is one that establishes a major difference in the kind of quality perceived by customers, such as those mentioned by Hart (1988) including features, status, service guarantees, and delight; and not in terms of conformance to requirements (Crosby (1979)).

From a more theoretical perspective, minimum daily requirement factors contribute to success by minimizing customer dissatisfaction. Like Herzberg's (1966) "hygiene factors," they act primarily to dissatisfy customers when not present; and when present no dissatisfaction is felt. They are an expected component of the service bundle; they are not market attractants, per se. The primary utility of minimum daily requirements is to maintain share by holding onto current customers. Having a strong customer base provides opportunities for improved margins by increasing revenues from cross-selling and gaining cost advantages due to scale economies and experience.

Moreover, our analysis suggests that service managers must determine the minimum threshold level of these capabilities that their target markets perceive is necessary, and they must bear in mind that the minimum threshold levels are dynamic. They will fluctuate due to a host of exogenous variables demographic profiles, and established "price-service value" expectations of the marketplace at any given time. The strategic role of operations is to construct service delivery systems that are responsive to changing thresholds requirements. A clear understanding of basic customer requirements and their fit with operating choices is necessary. Quality function deployment, a technique widely used by leading firms, may be especially helpful for establishing minimum daily requirements and devising congruent delivery system strategies.

Gateways. Our CAB model suggests that gateway capabilities provide a high degree of product/service differentiation for attracting new customers to the service firm. Because the size of the gap is relatively large and because they are believed to be of lessor importance to the majority, banks having achieved gateway capabilities are better able to provide differentiable services. As a result, they have better market share and profitability (Roth and van der Velde (1992)). Over time, weaknesses in gateway factors are more likely to lose share as customers are drawn to other service providers who are closing these gaps.

In our sample, "gateways" are represented by a bank's ability to differentiate its offerings to customers by personalized services, high value products, convenience, back-office efficiency (low cost), and adequate pricing. Since our sample banks represent industry leaders, capability gaps for more typical banks are likely to be significantly wider on these competitive variables. In general, typical retail banks have not done an adequate job of segmenting their markets and responding to competitive needs (American Banker (1988)). The gateways which, if developed through proper delivery system design, can create a service niche.

Golden Handcuffs. Customer retention is critically important to service businesses. Each year companies spend millions of marketing dollars in attracting new customers. As we have suggested, investments in gateway capabilities enhance the market attractiveness of service products; however, the real challenge is to proactively retain existing customer bases. Only by keeping existing customers that it has worked hard to attract in the first place can the service firm be deemed "world class," and its profitability can be dynamically defined in terms of its future revenue streams of cumulative rather than event-based purchases (Reicheld and Sasser (1990)). In the CAB matrix, we propose that the golden handcuff quadrant will contain a set of success factors that not only imposes significant barriers to entry but also that are perceived to be important to customers. For this reason, the term golden handcuffs is applied to describe success factors which are most likely to contribute to long-term customer loyalty.

In our study, relationship banking appears to be the sole "golden handcuff." From a service delivery system design perspective, higher levels of direct customer contact are currently viewed as prerequisite for relationship banking. Banks with strength in relationship banking have enlarged account bases of "clients" from whom they can command premium prices for the perceived valued-added of their offerings. We hypothesize that operations will play a significant role in developing relationship banking capabilities, and hence, will impose significant barriers to entry for competitors.

Linking Competitive Priorities and "Intended" Strategy Contents

In applying these CAB matrix results to our model of competitive service strategy, we anticipate that competitive priorities and "intended" operations and marketing strategy contents should be systematically linked. To explore this proposition further, we computed the bivariate correlations between key action programs and competitive priorities of our sample banks. The patterns of significant correlations between action programs and priorities are proxies for "intended" strategies. Careful examination of the patterns of operations and marketing choices given in Table 3 reveals their differential associations with varying competitive priorities. Perhaps, most noticeable is the extensive pattern of structural, infrastructural, integration, and marketing choices associated with relationship banking and the provision of high value services.


Delivering Golden Handcuffs

Relationship banking requires a high degree of customer contact capabilities, many of which require that customers have access to the bank's employees. Our findings corroborate those of Chase et al. (1984), who found that significant emphasis on delivery system infrastructural choices were required to support relationship banking capabilities. In the production and consumption of retail services with high customer contacts, managers have less control over the consistency of the delivery system performance. High contact services pose significant difficulties since performance outcomes vary from service provider to service provider and from customer to customer (Chase and Tansik (1983), Chase (1978, 1981)). In this sense, each customer contact experience is unique in relationship banking.

The operations strategy for delivering client relationships requires that flexible people exist within the organization. New skills are demanded of the workers since the job content is transformed in complex ways. Along these lines, our data illustrate relationship banking's systematic associations with people-related infrastructural choices marked by attention to job design of workers and tellers, performance management programs pertaining to financial and fringe benefits, and quality management procedures.

Our research depicts that banks seeking relationship banking are planning investments in structural choices as well, including expensive brick and mortar branches to deliver these high contact services. But the new branches tend to be streamlined cousins to those of yesterday and their facades and interial designs are being radically altered to reflect a "retail" operation. While increasing their customer contact capacity to bolster sales, they are off-loading transactions through ATMs and POS process technology and through centralization of customer service support. Their vertical integration plans call for internal, as opposed to external, development of core technical and R&D competencies.

In this environment, people must undertake more responsibility in maintaining customer relationships and in using integrating automation; must have a greater intellectual capacity to grasp complex processes; and must possess the capacity to formally and informally cooperate in a number of interdependent tasks. Adler (1984) suggests a critical examination of the work requirements along three dimensions (responsibility for production, abstractness of tasks and goals, and the nature of job interdependence) be made as banking services become more automated and integrated.

An essential operations question posed by Chase et al. (1984) is how to balance requirements for maintaining customer relationships and productivity. A pattern of integration choices in the intended operations strategy signals a strong commitment to coordination through overall systems integration, reduced bureaucracy, improved employee relationships, and centralization of operations and communications. The intended operations strategy of those competing on relationship banking is the most holistic and integrative of all. As a result, the behavioral underpinnings of an operations strategy must be modified by requirements for high levels of nonstandard, customer contact services.

Aligned to their balanced operations balance strategy, relationship banking dovetails with the simultaneous development of strong marketing ventures. These include the development of supplementary products and services, product line expansion, product bundling, and customized products for target markets.

Building Gateways

Like relationship banking, differentiation through high value services was heavily skewed with strong patterns of operations and marketing strategy contents. Of all the gateway capabilities, the ability to deliver high value services calls for an elaborate deployment of operations options. The provision of high value implies that the delivery system design be flexible and adaptable to changing customer expectations The operations strategy coalescing customer-perceived value must embark upon several routes simultaneously. Operations must be capable of delivering a wide variety of product/services with a variety of options. Value-minded customers want to select from a "menu," a particular set of product/services and the specific options which are best suited to their own personal needs (Suprenant and Solomon (1987)). Bankers emphasizing high value offerings plan to capitalize on their delivery system design with complementary marketing choices. They are likely to plan product line expansions, develop supplementary service, customize for target markets, and consider strategies for their product packaging of services.

For delivering high value, the delivery systems must develop effective infrastructures. The infrastructural choices linked to high value service focus on information systems and performance management, including work measurement and financial and fringe benefits. Quality circles are the guiding force behind quality management. Reduced levels of management, overall systems integration and centralization of operations and communication form the backbone of the high value group's integration choices.

The dominant structural choices for high value services include PUS technology as the process choice; more streamlined and specialized facilities centralized capacity and better use of space; and a high degree of internal capability development. As future technological alternatives become available, operations must prepare banks for the new revolution occurring in computer and communications technology. In the foreseeable future, integrating technology will provide banks the opportunity to increase value through mass customization of products (Davis (1987), Watts (1987), and Huete and Roth (1988)).

Operations choices for other gateway priorities, back-office efficiency, personalized services, adequate pricing, anti convenience, exhibited fewer systematic linkages. Banks are still struggling with the ways to better differentiate themselves. The ability to provide convenient services to customers is characterized by process technology choices, including ATMs and home banking. Vertical integration will occur as bankers prioritizing convenience begin to tailor their distribution channels and to increase internal R&D capabilities. These banking executives intend to increase customer access through ATM mini-branches and to ensure availability through better facilities maintenance practices. At the same time, they will decrease direct customer contact capacity. Because of the dominant emphasis on providing convenient access through channel technology, these banks' infrastructural choices are spotty. They will emphasize work measurement, procedure standardization and improved fringe benefits. Their marketing strategy contents are directed toward customization for target markets and developing supplementary products and services.

Only three structural choices for developing low cost, back office operations were observed, namely, improved space utilization, better facilities maintenance, and increased internal R&D support. Retraining for new skills and upgrading wages and salaries entered the set of infrastructural decisions to improve back-office efficiency. Those executives seeking to more adequately price their products are clearly relying on market-oriented strategies. Bankers in this study who emphasized personalized services. tended to highlight upgrading salaries and wages and improving internal communications. They were less apt to invest in ATM mini-branches and downsized branches.

Maintaining Minimum Daily Requirements

Providing internal quality, timely and accurate information, appears to be more heavily influenced by infrastructural decisions covering all components of performance management. Procedure standardization is the primary means by which quality will be systematically managed for this group. Information accuracy is also associated with employee retraining for new skills and better recruiting. Requirements for timeliness and accuracy are linked to centralized operations and communications, and accuracy is tied to overall systems integration. In terms of structural decisions, both requirements are linked to improved facilities maintenance. Accuracy, however, appears to require centralized support of customer services, tailored distribution channels and increased R&D abilities. Notably, internal quality is associated with marketing choices of product line expansion, development of supplementary services and customization for target markets.

External service quality, the provision of courteous and consistent services, shows relatively few systematic linkages with operations strategy contents. This findings, in part, may be due to the low variability in the responses to these two measures. Overall, courtesy and consistency were the highest rated competitive priorities. However, for those few significant associations that exist, courteous service is characterized by a relative lack of emphasis technology, namely, on the use of process technology (ATMs and POS), the development of internal technical capabilities, and overall system integration. The inverse correlation between relocating branches and courtesy probably is related to familiarity with customers and a sense of community. While prioritization of consistent services is related to increasing customer contact capacity and job enlargement, an emphasis is given to standardization of procedures.


This paper has presented a service strategy paradigm which explicitly considers the strategic role of operations as a competitive weapon. The service strategy paradigm draws heavily from the prevailing manufacturing strategy literature in that it identifies and rationalizes the way in which the pattern of operations choices define the delivery system design, and from the service literature in the role that customer contacts play and product definition. We propose that to make a service delivery system a potential marketing tool, critical success factor criteria must be assessed based upon the explicit service task, or mission. Critical success factors are a limited number of areas in which satisfactory achievement will ensure successful competitive performance for an organization. We illustrate how critical success factors are the linchpin between operations and marketing in services organizations, and how they are related to operations strategy formulation.

There is obviously no clear algorithm which will assist a manager to develop an optimal delivery system strategy. But assessing business critical success factors is the first step of a process which determines the strategic role that operations can play in a service firm. We propose that by defining critical success factors along dimensions of their perceived relative importance to customers and the size of the gap between current competitive capabilities and those required for future advantage, a useful evaluation framework emerges. This empirically derived framework, which we label the CAB matrix, helps make explicit the relative market positioning of a competitive priority and the firm's relative capabilities from a "customer/account" winning perspective. Quadrants on the CAB matrix, coinciding with market-oriented and competitor-oriented positioning, reflect each of the four stage conceptual typology of capability development, similar to those found in manufacturing (Hayes and Wheelwright (1984)) and in services (Chase and Hayes (1991)).

Our model suggests that the stages of service capability development may influence the business outcomes. These stages reflecting increasingly greater levels of delivery system capabilities are labelled: revolving doors, minimum daily requirement, gateways, and golden handcuffs, respectively. Firms with Stage 1 "revolving door" capabilities have no discernable operations advantages over competitors. Operations plays an externally neutral role by achieving parity with the competition in Stage 2 service firms. These firms use operations to provide customers with "minimum daily requirements." Stage 3 operations capabilities are "gateways" which draw customers to the business. Stage 4 service firms proactively use their operations capabilities as "golden handcuffs" to bond and hold customers. The four stages illustrate the strategic purpose of the service delivery system design as a competitive weapon.

While it is evident that operations strategies should be developed in the context of the marketing strategy, there is a paucity of empirically based research in the area of service operations strategy. This exploratory study adds to the empirical literature base in service operations management. We show, using a sample of 117 leading retail banks, how the stages of operations strategy development in services may indeed parallel those observed in manufacturing. Our findings have profound implications for the role that operations can play in meeting business objectives and service strategy formulation. They suggest that critical success factors enable service operations managers to better understand their markets, to organize their strategic planning so that marketing and operations can be linked, and to offer insights into the development of superior delivery system designs.

Additionally, the traditional top ranked critical success factors in manufacturing, namely, quality, delivery, flexibility, and cost, have counterparts in service organizations. For example, we found service quality, convenience, high value services, and price to be the foremost critical success factors for banks. In addition, bankers also emphasized capabilities to build relationships with customers.

The pattern of operations choices in service firms that coincides with its competitive priorities defines its "intended" operations strategy and reflects the degree of customer contact required for delivering services and achieving desired competitive capabilities. This assertion was empirically evaluated by the pattern of operations strategy content choices observed when various critical success factors were prioritized by retail bankers. As expected, due to its myriad inherent difficulties, relationship banking was systematically associated with most holistic and integrative operations strategy contents. The provision of high value services, another area with a large competitive gap, also exhibited a different, but comprehensive, operations strategy. Other competitive priorities, however, had more sparse patterns of strategic choices. These findings may, in part, be due to such diverse factors as the degree of difficulty that bankers have in evaluating the potential benefits of their strategic options or the lack of related action programs on our questionnaire. Future research is required in this area.

Overall, we believe that a good operations strategy is not sufficient to guarantee business success. It must be linked with marketing, and the firm must be able to execute its strategy to develop capabilities required to maintain and win accounts. As reflected in our service strategy paradigm, the entire service/product bundle must be delivered to satisfy the customer's needs. Regarding further theoretical development of the service strategy paradigm, a number of other intriguing questions remain. We have shown that critical success factors are not all equal, but we have not addressed the issue of business performance measurement. Nor have we considered the service strategy paradigm in service industries other than retail banking. Which strategic operations choices best build competitive strength? For which service types? Future empirical operations service strategy research should address the multivariate fit between the operations choices, and critical success factors, and business performance.


Inquiries about this paper should be addressed to Prof. Aleda V. Roth., Fuqua School of Business, Duke University, Durham NC 27706 (919)-660-7849 and FAX (919) 681-6245.


This research is based upon data collected from the 1987 Retail Banking Delivery Systems Survey with support from the Bank Administration Institute, Chicago IL. The authors would also like to acknowledge the contributions of Prof. James Fitzsimmons and Prof. Curtis McLaughlin for their suggestions on an earlier draft of this paper, and to the anonymous reviewers for their useful comments.


Adam, E.E., Jr., J.C. Hershauer, and W.A. Ruch. Productivity and Quality, Measurement As a Basis for Improvement. Englewood Cliff, NJ: Prentice-Hall, 1981.

Adam Jr., E.E., and P.M. Swamidass. "Assessing Operations Management from a Strategic Perspective." Journal of Management, vol. 15, no. 2, 1989, 181-203.

Adler, P. "Rethinking the Skill Requirements of New Technologies." Harvard Business School Working Paper Series, Harvard University, Cambridge, MA, 1984.

Albrecht, K., and Edwin T. Crego, Jr. "What Every Customer Wants." Laventhol and Horwath, vol. 13, no. 2, 1988.
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Title Annotation:Special Issue on Linking Strategy Formulation in Marketing and Operations: Empirical Research
Author:Roth, Aleda V.; Velde, Marjolijn Van Der
Publication:Journal of Operations Management
Date:Jul 1, 1991
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