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.