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IOURNAL OF OPERATIONS MANAGEMENTSpecial Issue on Linking Strategy Formulationin Marketing and Operatmns: Empirical ResearchVol. O.No.3.August 1991

Operations As Marketing: A CompetitiveService StrategyALEDA V. ROTH*MARJOLIJN VAN DER VELDE**

EXECUTIVE SUMMARY

This paper presents a competitive service strategy paradigm which explicitly considers the strategicrole of operations as a competitive weapon. This service strategy paradigm draws upon the prevailingmanufacturing strategy literature in its definition of strategic operations choices and critical successfactors. We show that to make a service delivery system a potential marketing tool, critical success factorcriteria must be based upon the explicit service task or mission which coincides with a service operationsstrategy. We illustrate how critical success factors are the linchpin between operations and marketing inservice organizations.

Assessing critical success factors is the first step of a process which determines the strategic role thatoperations can play in a service firm. Using a sample of I17 retail banks, our paper explores industrycritical success factors along two dimensions, one is market-oriented and the other is competitor-oriented.We derive a framework, which we label the Customer/Account Base (CAB) matrix, to serve as adecision-aiding tool to evaluate the relative competitive positioning of a service firm. Our analyses showthat quadrants on the CAB matrix coincide with four stages of capability development, similar to thosefound in manufacturing by Hayes and Wheelwright (1984). reflecting the strategic role a service deliverysystem design plays in meeting the competition.

We go on to empirically link the competitive priorities of retail banks with operations strategy contentsof structure, infrastructure and integration choices. Using our service strategy paradigm, we empiricallyshow that the pattern of operations choices varies by competitive priority. As anticipated, the pattern ofoperations choices linked to relationship banking, one of the most difficult capabilities to achieve and onethat requires a high degree of customer contact, is characterized by the most holistic and integrativeoperations strategy. In conclusion, our exploratory findings illustrate how the prevailing manufacturingstrategy framework can be adopted in service strategy delivery system design and the moderating rolethat customer contact exerts in service strategy formation.

INTRODUCTION

Contemporary strategic thinking argues that superior performance requires a business to gainand hold an advantage over competitors by developing new capabilities that are attractive to thefirms target market and by slowing the erosion of current competitive strength. As a criticalelement in business unit strategy, the role of operations is increasingly attracting attention from

Manuscript received March 6, 1990; accepted January 3, 1992, after two revisions*Duke University, Durham NC 27706

**Bank Administration Institute, Chicago IL 60606

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researchers and practitioners alike. Numerous articles suggest that a firms ability to orchestrateits operations resources contributes to its marketplace competencies. While operations strategyframeworks are being subjected to empirical investigation in manufacturing, similar investiga-tions are scarce in service operations management. This paper presents a service strategyparadigm based upon the prevailing manufacturing strategy framework, and empiricallyaddresses the various options a service organization has in determining factors critical to itssuccess.Recent attempts to delineate the strategic dimensions of service operations focus uponcharacteristics that distinguish service organizations from their manufacturing counterparts; fewcenter on their similarities. One research stream analyzes service operations strategy in terms ofcore operations strategy content areas including quality, process technology, capacity, humanresources, information systems, customer contacts and relationships, facilities design andlocation (Chase (1978, 1981), Collier (1987), Heskett (1986), Lovelock ( 1988) Thomas(1978)). Another research stream specifically considers the interplay between marketing andoperations 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 mustnot only be structurally aligned for competitive advantage, but also that operations plays apivotal role in effecting the marketing strategy. The marketing strategy embodies themanagement of demand, i.e., identifying, understanding, and creating need satisfying productsand services; and the operations strategy concerns the management of supply, i.e., theproduction and delivery of products and services. Correctly positioned, the firms operationalcapabilities can proactively generate demand and retain existing customers.

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

The remainder of this paper is organized into several sections as follows. First is an overviewof related literature, followed, secondly, by a discussion of a competitive service strategyparadigm. Third, we provide an overview of the research data base. Fourth, we present ouranalysis and discuss a Consumer/Account (CAB) matrix which explores top-ranked criticalsuccess 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 ofcapability development. We conclude with an empirical illustration of how the contents of anoperations strategy are linked to competitive priorities, and how they may vary by expecteddegree of customer contact, as suggested by our service strategy paradigm.BACKGROUND

The literature on the effective management of service 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 ofChase (1978, 1981), Chase and Tansik (1983), Fitzsimmons and Sullivan (1982), Levitt (1972)and Sasser, Olsen, and Wyckoff (1978). Hesketts work (1986) is exemplary in its treatment of

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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 toservice operations strategy have been conceptual in nature, or deal with only one or two strategycontent areas. As such, many important questions remain in rigorously defining serviceoperations strategy.

A service strategy must address how operations will support and mesh with the competitivemarketing thrusts of a business. Since the preponderance of service operations research to daterests on case studies and the intuitive prescriptions of experienced individuals, we believe thatbroader-based empirical research is required to carry the field forward. Empirical research isimportant to verify the commonly recurring themes emanating from cases to build theoryinductively, 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 foundmuch of the disparity between manufacturing and service operations strategy pertained to thedegree/role of customer contact in the service production function. We believe, however, that thisdistinction is becoming a moot point. For example, Chase and Garvin (1989) extended thenotion of service and customer contact into the technical core of manufacturing. Another studyof 759 leading manufacturing firms showed that the majority have incorporated a significantservice component in their strategic bills of materials (Giffi, Roth, and Seal (1991)). On theother 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 someimportant insights concerning evolution of a service strategy paradigm. This notion wasaffirmed by Adam and Swamidass (1989), who, in their assessment of the operationsmanagement literature indicated that a promising area of inquiry lies in transferring manyconcepts from the manufacturing strategy literature to service strategy formulation. (SeeAnderson, Cleveland, and Schroeder (1989); Leong, Snyder, and Ward (1990); and Swamidass(1989) for in-depth reviews of manufacturing strategy literature.)COMPETITIVE SERVICE STRATEGY PARADIGM

The current service management paradigm suggests that the strategic role of operations is todevise a service delivery system that is congruent with the desired service concept. According toSasser et al. (1978) and Fitzsimmons and Sullivan (1982), the service concept is the set offacilitating goods and the explicit and implicit intangibles (services) that constitute a serviceproduct bundle. While the service concept is defined in the context of the service deliverysystem, little is known about how managers in service organizations systematically differentiatetheir businesses and how those advantages are developed. This void is where the manufacturingstrategy literature comes to play in service research. A new competitive service strategyparadigm is depicted in Figure 1 which incorporates a manufacturing strategy framework. Threekey 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 manufacturingfunction must accomplish. Rockart (1979) defined critical success factors as a limited set of

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FIGURE 1COMPETITIVE SERVICE STRATEGY PARADIGM

SEFIMCESTRATEGY

FORMULATION

PERFORMANCE

capabilities which, if developed satisfactorily, will ensure successful competitive performancefor an organization. It seems blatantly obvious that a service operations strategy must similarlybegin with the service task defined in terms of the critical success factors that the enterprisemust have in order to win and maintain customers.

In this paper, we distinguish between intended critical success factors or competitivepriorities and realized success factors or competitive capabilities. Competitive priorities arethose abilities which are needed to build and maintain future market share; they are planned, butnot necessarily yet obtained. Competitive capabilities reflect the firms relative areas of currentcompetitive strength vis-a-vis its primary competitors. Competitive capabilities in serviceorganizations coincide with the firms ability to deliver differentiated services or to deploysuperior skills and resources (distinctive competencies). By either definition, competitivecapabilities are an intricate part of the services perceived by customers. Competitive gaps occuras a result of differences between the firms current capabilities and those prioritized for futuresuccess.

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

From the practitioner literature, we found many service analogues for manufacturing successfactors, including quality, price, convenience, customization, and/or customer relationships. The

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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 andhold accounts, competitive priorities are the linchpin between operations and marketing.Drawing upon the manufacturing analogy (Miller and Roth (1991)), competitive priorities canbe thought of as proxy variables for the operations service task. They are similar to Hills (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 ofstructural and infrastructural decisions which reinforce corporate strategy. Extending theWheelwright model, we propose that the content of an operations strategy in services parallelsits functional definition in manufacturing. Namely, a service operations strategy is the pattern ofstructural, infrastructural, and integration choices that support the business tasks (Hayes andWheelwright (1984), Hill (1989), Giffi et al. (1991)). The structural components are the hard, orbrick-and-mortar, choices concerning process technology, capacity, facility design andlocation, and vertical integration. Infrastructural, or soft aspects of the operations arecomprised of the management policies and systems that are linked to structural components.Integration choices describe how the operations function will strategically interface withinternal and external boundaries.

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

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

We have empirically explored the connections among critical success factors, strategycontents, and performance in retail banking services. For example, the typical patterns ofoperations 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 strategycontents are explored in Roth and van der Velde (1990). The linkages between multivariatemeasures of nonfinancial performance and key operations action programs are reported in Rothand van der Velde (1988). In addition, the adoption of channel technology, a key component of aservice operations strategy, was correlated with critical success factors in banking services (Rothand van der Velde (1989)). Most recently, Roth and van der Velde (1991) in a study of worldclass banks found that best-in-class banks create high value . . . by their relative competitiveabilities in operations . . . These banks have more agile, flexible operations.

Much of the seminal work in service operations strategy considers the concept of customercontact. How does customer contact enter in our service operations strategy formulation? We

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propose that customer contact, either required by the nature of the service or chosen by thedecision 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 isassociated with choices concerning technology (structural) and staffing (infrastructural)contents. Huete and Roth (1988) empirically show that different service contents and deliverysystem channels vary systematically along a customer contact dimension. Thus, we believe thatdecisions 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 toconsider the four stages in the development of manufacturings strategic role proposed by Hayesand Wheelwright (1984). Names for their service counterpart roles induced from our researchare given in Figure 2. Moreover, Chase and Hayes (1991) present a related conceptualframework defining four stagesin service competitiveness. In contrast, our research on the fourstages, is empirically grounded, and provides systematic evidence of their existence in a sampleof 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 tothe value-added contribution of operations to marketing or customer/account winningcapabilities. Since customers receive many intangible products and services, the manner inwhich the products are delivered becomes especially important to both market share defendersand attackers.

FIGURE 2STAGES IN MANUFACTURING AND SERVICE CAPABILITY DEVELOPMENTManufacturing Capabilities*

Stage 1: Minimize Manufacturings Negative PotentialStage 2: Achieve Parity with CompetitorsStage 3: Provide Credible Support to the Business StrategyStage 4: Pursue a Manufacturing Based Competitive Advantage*Adapted from Hayes and Wheelwright 1984

Service Delivery System CapabilitiesRevolving DoorsMinimum Daily RequirementsGatewaysGolden Handcuffs

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

Proposition 1:Proposition 2:

Proposition 3:

Proposition 4:

Revolving door capabilities add no value in maintaining or building marketshare. They are used internally for control and tactical purposes.Minimum daily requirements are capabilities which help the firm achieveparity with competitors, and hence, they are externally neutral. They serveto retain existing customers, and avoid dissatisfaction. Operations supportsmarketing.Gateway capabilities are market attractants. Operations capabilities notonly serve to maintain market share, but also provide significant marketdifferentiation. They are primary marketing vehicles to draw new customers.Golden handcuffs are capabilities that pose significant barriers to entry;they represent relative state-of-art capabilities. Operations functions proac-

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tively to retain and attract customers. Operations is highly integrated withmarketing.

To explore how these four stages may unfold in practice and to examine their linkages withoperations strategy, a sample of retail banks was employed. Much of the operations managementliterature, using banking examples, pertains to the design of efficient back-room operations oreffective front-room organization, but not both. For example, in the front-room, operationsactivities are oriented toward the quality of the service providers and their interface with thebanks customers; in back-room operations, the management of indirect customer contacts (viatelephone 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 capabilitydevelopment. We would argue that the strategic role of operations should vary by the degree towhich competitive capabilities are derived from the delivery system value chain as an integratedwhole.

The pattern of operations choices when linked with the firms competitive priorities, is part ofan intricately woven system that strategically determines competitive advantage.RESEARCH OVERVIEW AND DATABASE

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

The Retail Banking Futures study was patterned after the International Manufacturing FuturesProject (Miller and Roth (1988), Ferdows and DeMeyer (1990)). This parallel structure affordsthe opportunity to systematically gather comparative cross-industry data on competitive factorsin service firms. In particular, one key objective of this complementary research was toscrutinize the evolution of an operations strategy from a buffered to an unbufferedcustomer contact environment (See Chase and Tansik (1983) for an overview of the progressionof 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 bankasset size: less than $100 million, $lOO-$499 million, $500-$999 million, $1-$3 billion and over$3 billion. Mail surveys were sent to a stratified probability sample of 1244 banks, resulting in117 useable surveys. The overall response rate of almost 10% is comparable with those of otherstudies seeking similar participants (Greenberg et al. (1987)).

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



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TABLE 1SELECTED CHARACTERISTICS OF SAMPLE RESPONDENTS

Asset Size$I Billion

Primary Demographic Served MarketConsumer-MassConsumer-MiddleConsumer-UpscaleBusiness and Other

RevenuesRBURBU-Parent Organization

AssetsRBURBU-Parent Organization

Return on AssetsAnnual growth in Deposits

Distribut ion of Respondents27.4%35.0%31.6%29.1%41.9%10.9%18.1%

Mean Responses$ 48. I Million$ 200.9 Million

$1,120 Million$5,067 MillionI .6%8.57c

A special follow-up study of nonrespondents indicated that our findings are systematicallybiased towards industry leaders. There is over representation of larger asset-sized banks. Bankswith assets of $3 billion and over had a 31% response rate. This group of industry leadersaccounts 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 highergrowth rates and return on assets (ROAs) than the general population of retail banks (Roth andvan der Velde (1988)).Survey Instrument

The surveys were designed and pilot tested both to provide descriptive statistics on the retailbanks competitiveness, and to test specific sets of hypotheses concerning the service operationsstrategy paradigm denoted in Figure 1. For this exploratory analyses, a list of 19 critical successfactors was presented to survey respondents, who were asked to rate each factors (a) relativeimportance as a competitive priority for successfully competing in the banks target market, and(b) size ofthe gap between the banking units current competitive capabilities and those requiredover the next five years. Each competitive priority was measured on a seven point self-anchoringscale, from 1 = not important to 7 = critical importance. The size of the gap wasmeasured similarly, where 1 = no gap to 7 = large gap.

Bankers were also presented with a list of 49 activities, tools or programs that could improvetheir banks overall effectiveness. Of the total, six were strategic marketing choices, and theremaining 43 programs represented behavioral measures of operations strategy. For each actionprogram on the list, bankers indicated the relative degree of emphasis that they have firm plansto adopt or emphasize in the RBU over the next three years. The degree of managerial attentionto 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 ofaction programs are proxy variables for a banks intended operations and marketing strategy

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contents. Tests of internal reliability were computed, and follow-ups with samples of bankingexecutives were made to ensure construct validity (Roth and Van der Velde (1988)).ANALYSIS AND DISCUSSION

In our evaluation of the stages of capability development in retail banks, we first focus onthose competitive priorities which bankers are pursuing for competitive advantage, and therelative strengths and weaknesses in current capabilities. Second, to investigate the various waysoperations can be considered as a key marketing tool, we will assess the relationship betweencompetitive priorities and capabilities. Third, we demonstrate the empirical association betweencompetitive 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 studyconsidered to be the most important competitive weapons for serving their target markets intothe 1990s. Only two of the top ten competitive capabilities, high value services and relationshipbanking, varied significantly by asset size. With these exceptions, the general rank order ofimportance of critical success factors held for banks, regardless of their size. In analyzing thetop priorities in retail banking delivery systems, three generic operations service tasks emerged:external service quality, internal service quality, and relationship banking. These competitivepriorities 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 qualityperceived by the customers in their interaction with the bank. External service quality, as definedin the study, is the banks ability to provide courteous and consistent customer services.Developing the capability to deliver a consistent level of quality is often referred to asconformance quality or reliability. Banks that compete on the basis of consistent quality musthave delivery systems that ensure that customers perceptions match their expectations withsome established level of confidence. Courtesy reflects politeness and respect for customers, andis a highly qualitative expression.Relationship Banking

Following external service quality, bankers ranked relationship banking (enlarging relation-ships with customers) as the second most important theme. Relationship banking is afundamentally new approach in retail financial services. Banks prioritizing relationship bankingmust convert customers into clients, and develop account-based capabilities that satisfy the totalfinancial service needs of their clients. Relationship banking dictates that the delivery systemdesign fully supports maintaining the client relationship.Internal Service Quality

Other top ranked quality-related critical success factors depicted in Table 2 are associated withthe provision of timely and accurate information. Accurate and timely information have beentraditionally important to bankers due to the numerous regulations with which the banks mustcomply. They are typically regarded by bankers as measures of internal service quality thatreflect the overall capabilities of their information systems infrastructure. Moreover, accurateand timely information are also an integral part of the service bundle expected by a bankscustomers (Collier (1990)).

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TABLE 2TOP 10 COMPETI TIVE PRIORITIE S OF RETAIL BANKS

(Descriptive Statistics)Bank Asset Size

(Millions)

TotalLessthan$100

$lOO-$999

$1000andOver

FStatistic

Courteous ServiceMeanStandard Error

Consistent ServiceMeanStandard Error

Enlarge Customer RelationshipsMeanStandard Error

Accurate InformationMeanStandard Error

Timely InformationMeanStandard Error

Efficient Bank Office ProcessingMeanStandard Error

Price Services AdequatelyMeanStandard Error

High Value ServicesMeanStandard Error

Convenient Service (Easy Access)MeanStandard Error

Highly Personalized ServicesMeanStandard Error

6.45 6.63 6.38 6.39 I .320.07 0.10 0.13 0.11 Q= .216.30 6.38 6.35 6.20 0.440.08 0.15 0.14 0.14 Q= .656.1 I 5.28 6.200.11 0.28 0.16

6.64 15.580.07 Q= . o o

6.04 5.91 6.05 6. I4 0.330.11 0.28 0.17 0.15 Q= . 7 25.94 5.81 5.92 6.05 0.330.12 0.27 0.18 0.17 0.715.73 5.84 5.55 5.82 0.800.10 0.18 0.21 0. I5 Q=.45

5.70 5.63 5.57 5.88 I .070.10 0. I6 0.16 0.17 Q=.355.69 5.03 5.74 6.11 7.720.12 0.22 0.20 0.17 Q= ,0015.52 5.22 5.57 5.68 1.510.1 I 0.25 0.15 0.18 p=.235.49 5.71 5.63 5.21 I .760.12 0.20 0.18 0.22 p=.18

Competitive MillstonesWhere 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 theservice providers ability to effectively penetrate its target market. In this study, theseweaknesses are assessed by the size of the gap between the banks current capabilities and thoserequired to compete over the next five years. Competitive capability gaps portray thecompetitor-oriented dimension of success.

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

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COMPETITIVE MILLSTONES(Ranked from largest to smallest gap)

(1)(2)(3)(4)(5)(6)(7)(8)(9)(10)

Relationship BankingHigh Value ServicesPersonalized ServicesConvenient ServicesBack Office EfficiencyAdequate PricingConsistent ServiceTimely InformationAccurate InformationCourteous Service

With respect to strategic weaknesses two key survey findings are notable. First, the majorityof bankers perceived relationship banking capabilities to be their greatest competitive obstacle.Defining and establishing core products and services around which such a relationship can bebuilt is a major hurdle for many banks, and particularly, for the larger institutions. Second, theperceived size of gap between the typical RBUs current quality capabilities and the abilities thebank 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 assetsize. Two exceptions to this generalization are (a) small and mid-sized banks report narrowergaps in their ability to offer highly personalized services and (b) banks in the smallest assetcategory have less of a gap in their ability to offer relationship banking (pc.05).Competitive Mapping

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

H,: Market-orientation, as expressed by the set of competitive priority variables, andcompetitor-orientation, as represented by the size of the competitive capability gaps, areindependent constructs.

To test this hypothesis, we assume that every individual banks data can be represented by tworow vectors, where the set of ten competitive priorities is expressed as y = (Y,, Y,, . . ., Y ,,J andthe set of ten competitive gaps, as x =(X,, X2, ., Xi,). The observed canonical correlationbetween the two multivariate sets was not statistically significant (R, = .58, p


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market-oriented dimension exemplifies the sample banks collective source of positionaladvantage relative to the group average. The size of gap dimension on the CAB matrixrepresents 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 humanand 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 tomarket entry for a typical bank.

FIGURE 3CUSTOMER/ACCOUNT BASE MATRIX: THE CAB MATRIX

Critical Success Factors(Banking Industry Example)

High ValuePersonalized services Back Office

0 0convenientService l 0 Adequate Pricing

I Golden Handcuffs

0

. RelationshipBanking

0

Tbmely nformation

0 AccurateInformation

Consistent Service

courteousService0

Low Revolving Doors Minimum Daily RequirementsLow Relative Degree of impo rtanc e to Custom ers High

Market Orientation

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That the market shares of various competitors are proportional to their shares of totalmarketing effort is a fundamental theorem of market share determination (Kotler (1984)). Byanalogy, it is reasonable to postulate that lower competitive gaps arise due to operations strategychoices which are both more congruent with and part of the marketing effort. There is sufficientcase-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 manufacturingliterature is replete with such examples. It is not our intention in this paper to test this assertionempirically, as this is the focus of future research.

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

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

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

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

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

Since both market positioning and barriers to entry have profound implications for attractingor maintaining market share, the CAB quadrants are descriptive of the relative value of eachstrategic capability from a customer/account winning perspective. Accordingly, each CABquadrant reflects a different degree of positional advantage which might be best understood byPorters (1985) value chain concept. The value chain represents sets of discrete value-creationactivities which are performed from the design of a product/service through their production andultimate delivery to customer. Likewise at the various stages of capability development in Figure2, 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 aredifferentiable in the marketplace and which competitors have difficulty imitating. Using theservice strategy paradigm, the strategic role of operations can be parlayed into the stages ofcapability 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 resultsfrom 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. Usingthe retail banking data and the CAB matrix, we review critical success factors in each stage withrespect to their relative value-add contributions to the banks target market and their implicationsfor service delivery system design. For aggregate data, however, the points in the CAB matrixdefine industry critical success factors. To the extent that our database reflects leading retailbanks, our discussions can be generalized to industry pacesetters. Our interpretation of thematrix extends beyond the survey data; it is also based upon our knowledge of the bankingindustry and the service literature.Revolving Doors. Revolving doors are clearly factors which may make a bank vulnerablein terms of its long-term market positioning. From a consumer perspective, they do not afford



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FIGURE 4VALUE-ADDED CONTRIBUTIONS OF CRITICAL

SUCCESS FACTOR CAPABILITIES(Implications for an Individual Bank)

GatewaysAccount winnersMarket differentiators

Increased utility of banksoffering

Revolving Doorsl No/little value-added

l No/little barriers to entry

II

.ow Relative Degree of /Inpoffance to Customers High

Golden HandcuffsAccount holdersSignificant barriers to entryRelationships w/current customersExpanded product/servicesw/current customersCumulative revenue streams

Minimum Daily RequirementsAccount qualifiers

Minimized customer dissatisfaction

Enhanced ability to cross-sellproducts/services to currentcustomers

Market Orientationthe firm any customer allegiance. In our sample, they are capabilities which are common to mostbanks, 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. Anexample of a lower rated critical success factor (not in the top ten) reported by bankers in thisstudy is the ability to make rapid staffing changes. At the time of our study, this capability wasviewed 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-addedcontribution to service delivery system design beyond minimizing its negative potential. Alsonote that a revolving door capability for one type of service may fall into a different stage inanother. For example, the ability to make rapid staffing changes is very important for a hospitalemergency room.

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

It is not surprising that quality is not only important, but also displays a rather narrowcapability gap. Providing internal quality has traditionally been important to bankers. Bankershave 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 thebankers perceptions on the lower size of service quality gaps found in our research, studies ofconsumer ratings of banks indicate that very few customers are dissatisfied with service quality(American Bunker (1987)).

Like recent manufacturing research (Ferdows and De Meyer (1990), Roth and Miller (1990and to appear)), quality may be rapidly becoming an account qualifier-a precondition-toopening its doors. All banks are expected to deliver a competent level of quality. In our ownanalysis of this data, we found that quality as a competitive capability was undifferentiated, anddid not correspond with target markets in expected ways. For example, there were no significantdifferences in the relative degree of importance or size of the gap associated with quality bybanks having different asset sizes or target markets, including executive, upscale, middle andmass (Roth and van der Velde (1989)). For these reasons, it is unlikely that the service qualityalone will be sufficient to attract new customers. Seeking competitive advantage through servicequality 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 majordifference 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 torequirements (Crosby (1979)).

From a more theoretical perspective, minimum daily requirement factors contribute tosuccess by minimizing customer dissatisfaction. Like Herzbergs (1966) hygiene factors, theyact primarily to dissatisfy customers when not present; and when present no dissatisfaction isfelt. They are an expected component of the service bundle; they are not market attractants, perse. The primary utility of minimum daily requirements is to maintain share by holding ontocurrent customers. Having a strong customer base provides opportunities for improved marginsby increasing revenues from cross-selling and gaining cost advantages due to scale economiesand experience.

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

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Gateways. Our CAB model suggests that gateway capabilities provide a high degree ofproduct/service differentiation for attracting new customers to the service firm. Because the sizeof the gap is relatively large and because they are believed to be of lessor importance to themajority, banks having achieved gateway capabilities are better able to provide differentiableservices. 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 aredrawn to other service providers who are closing these gaps.In our sample, gateways are represented by a banks ability to differentiate its offerings tocustomers by personalized services, high value products, convenience, back-office efficiency(low cost), and adequate pricing. Since our sample banks represent industry leaders, capabilitygaps for more typical banks are likely to be significantly wider on these competitive variables. Ingeneral, typical retail banks have not done an adequate job of segmenting their markets andresponding to competitive needs (American Banker (1988)). The gateways which, if developedthrough proper delivery system design, can create a service niche.

Golden Handcuffs. Customer retention is critically important to service businesses. Eachyear companies spend millions of marketing dollars in attracting new customers. As we havesuggested, investments in gateway capabilities enhance the market attractiveness of serviceproducts; however, the real challenge is to proactively retain existing customer bases. Only bykeeping existing customers that it has worked hard to attract in the first place can the service firmbe deemed world class, and its profitability can be dynamically defined in terms of its futurerevenue s&earns 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 successfactors that not only imposes significant barriers to entry but also that are perceived to beimportant to customers. For this reason, the term golden handcuffs is applied to describe successfactors 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 servicedelivery system design perspective, higher levels of direct customer contact are currently viewedas prerequisite for relationship bunking. Banks with strength in relationship banking haveenlarged account bases of clients from whom they can command premium prices for theperceived valued-added of their offerings. We hypothesize that operations will play a significantrole in developing relationship banking capabilities, and hence, will impose significant barriersto entry for competitors.Linking Competitive Priorities and Intended Strategy Contents

In applying these CAB matrix results to our model of competitive service strategy, weanticipate that competitive priorities and intended operations and marketing strategycontents should be systematically linked. To explore this proposition further, we computed thebivariate correlations between key action programs and competitive priorities of our samplebanks (Table 3). The patterns of significant correlations between action programs and prioritiesare proxies for intended strategies. Careful examination of the patterns of operations andmarketing choices given in Table 3 reveals their differential associations with varyingcompetitive priorities. Perhaps, most noticeable is the extensive pattern of structural, infrastruc-tural, integration, and marketing choices associated with relationship banking and the provisionof high value services.

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