Beefing Up Operations in Service Firms

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A national preoccupation with U.S. international industrial competitiveness, driven by our continuing enormous balance of payments deficit, has tended to focus media and political attention during the 1980s on manufacturing. A torrent of books and articles has inundated business managers, offering guidance on how to improve manufacturing performance. Terms like “world class manufacturing” and “dynamic manufacturing” sprinkle discussions in college classrooms, corporate boardrooms, and the halls of Congress. The concept of “manufacturing strategy,” considered somewhat esoteric only a few years ago, gets increasing attention from both top managers and academics.

There is, however, another battlefield of economic competitiveness where operations effectiveness is just as crucial to success as it is on the factory floor. This less visible battlefield is that huge, ill-structured arena called the “service sector,” which employs 76 percent of our workforce and accounts for 68 percent of our real GNP. It is also, unfortunately, a sector––comprising activities such as banking, engineering, transportation, communication, and myriad others––whose trade surplus went negative for the first time in mid-1989 and is now barely in the black.

We have no quarrel with the assertion that the United States needs a strong manufacturing base in order to maintain and improve its standard of living. But we have to get serious about service competitiveness as well. Just as our machine tool and semiconductor industries should have studied the successful attacks of foreign steel, auto, and consumer electronics producers on our domestic market-and prepared themselves for similar onslaughts–so should our service industries study and learn from our manufacturing sector’s decline. Those manufacturing firms that have remade themselves or sustained their leadership position have shared a common approach: they have focused attention on their most important markets and then mobilized their operations organization, through a well-planned strategy, to squarely meet those markets’ needs.

In this article we will discuss how to make operations in service organizations more competitive. We will examine ideas that have emerged from successful manufacturers and outstanding service firms. Our key conclusions are that service firms, like manufacturing firms, can structure their operations according to a four-stage model of competitiveness and that they can apply the manufacturing strategy concepts of ocus and integration as they move from lower to higher stages.

Before developing this perspective, however, it is useful to first review some basic concepts.

Service Firm Management: The Basics

Service firm management, especially of operations, is best understood within the context of three key constructs.


1. J. Heskett, Managing in the Service Economy (Boston: Harvard Business School Press, 1986), p. 1.

2. Heskett (1986), p. 2.

3. There are, of course, other dimensions by which services differ from manufacturing, particularly at the point of encounter. Services are intangible, perishable (they can’t be inventoried), and heterogeneous (no two are exactly alike), and they are produced and consumed simultaneously. See:

W.E. Sasser, R.P. Olsen, and D.O. Wyckoff, Management of Services Operations, Text and Cases (New York: Allyn & Bacon, 1978), pp. 8–18.

4. S.C. Wheelwright and R. H. Hayes, “Competing through Manufacturing,” Harvard Business Review, January–February 1985, pp. 99–109.

5. At this point in the model’s development, positioning of a firm within it must depend upon managerial judgment rather than a formal scoring methodology.

6. R. Hill, “How the Business Traveler Changed the Economics and the Bottom Line at SAS,” International Management, February 1985, pp. 61–68.

7. One of the authors of this article had the unique experience of leading a service quality seminar for 103 members of the LAPD, including the chief, in June. The seminar focused on people as customers of police services.

8. See B. Ives and R.O. Mason, “Can Information Technology Revitalize Your Customer Service,” Academy of Management Executives 4 (1990): 52–69; and

R.E. Walton, Up and Running, Integrating Information Technology and the Organization (Boston: Harvard Business School Press, 1989).

9. G. Hector, “It’s Banquet Time for Bank of America,” Fortune, 3 June 1991, pp. 69–78.

10. W. Skinner, “The Focused Factory,” Harvard Business Review, May–June 1974, pp. 113–121.

11. W. Skinner, “Manufacturing—The Missing Link in Corporate Strategy,” Harvard Business Review, May–June 1969, p. 141.

12. R.B. Chase, “Where Does the Customer Fit in a Service Operation?” Harvard Business Review, November–December 1978, pp. 137–142.

13. Example provided by Dr. John Bateson of the MAC consulting group.

14. The reasons: Attentive customer service and free drinks and movies provided by foreign carriers. While U.S. airlines carp that “foreign service isn’t really better, just different from what they usually get,” passengers are voting with their seats, resulting in a two percent drop in one year in market share for U.S. carriers in trips between the U.S. and Europe. See:

“Patrons Are Defecting to Foreign Carriers,” Wall Street Journal, 15 May 1990, p. B2.

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