Marketing in Services Firm

IOURNAL OF OPERATIONS MANAGEMENT
Special Issue on Linking Strategy Formulation
in Marketing and Operatmns: Empirical Research

Vol.IO.No.3. August 1991
Operations As Marketing: A Competitive

Service Strategy
ALEDA V. ROTH*
MARJOLIJN VAN DER VELDE**
EXECUTIVE SUMMARY
This paper presents a competitive service strategy paradigm which explicitly considers the strategic
role of operations as a competitive weapon. This service strategy paradigm draws upon the prevailing
manufacturing strategy literature in its definition of strategic operations choices and critical success
factors. We show that to make a service delivery system a potential marketing tool, critical success factor
criteria must be based upon the explicit service task or mission which coincides with a service operations
strategy. We illustrate how critical success factors are the linchpin between operations and marketing in
service organizations.
Assessing critical success factors is the first step of a process which determines the strategic role that
operations can play in a service firm. Using a sample of I17 retail banks, our paper explores industry
critical 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 a
decision-aiding tool to evaluate the relative competitive positioning of a service firm. Our analyses show
that quadrants on the CAB matrix coincide with four stages of capability development, similar to those
found in manufacturing by Hayes and Wheelwright (1984). reflecting the strategic role a service delivery
system design plays in meeting the competition.
We go on to empirically link the competitive priorities of retail banks with operations strategy contents
of structure, infrastructure and integration choices. Using our service strategy paradigm, we empirically
show that the pattern of operations choices varies by competitive priority. As anticipated, the pattern of
operations choices linked to relationship banking, one of the most difficult capabilities to achieve and one
that requires a high degree of customer contact, is characterized by the most holistic and integrative
operations strategy. In conclusion, our exploratory findings illustrate how the prevailing manufacturing
strategy framework can be adopted in service strategy delivery system design and the moderating role
that customer contact exerts in service strategy formation.
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
Manuscript received March 6, 1990; accepted January 3, 1992, after two revisions
*Duke University, Durham NC 27706
**Bank Administration Institute, Chicago IL 60606
Journal of Operations Management 303

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 investiga-
tions are 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.
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 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
304 Vol. 10, No. 3

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.)
COMPETITIVE SERVICE STRATEGY PARADIGM
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

FIGURE 1
COMPETITIVE SERVICE STRATEGY PARADIGM
SEFIMCE
STRATEGY
FORMULATION
PERFORMANCE
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
306 Vol. 10, No. 3

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) presents 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 stagesin 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.
FIGURE 2
STAGES IN MANUFACTURING AND SERVICE CAPABILITY DEVELOPMENT
Manufacturing Capabilities* Service Delivery System Capabilities
Stage 1: Minimize Manufacturing’s Negative Potential Revolving Doors

Stage 2: Achieve Parity with Competitors Minimum Daily Requirements
Stage 3: Provide Credible Support to the Business Strategy Gateways
Stage 4: Pursue a Manufacturing Based Competitive Advantage Golden Handcuffs
*Adapted from Hayes and Wheelwright 1984
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 proac-
308 Vol. 10, No. 3

tively 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.
RESEARCH OVERVIEW AND DATABASE
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, $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 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.

TABLE 1
SELECTED CHARACTERISTICS OF SAMPLE RESPONDENTS
Distribution of Respondents
Asset Size
<$I00 Million 27.4%
$1004999 Million 35.0%
>$I Billion 31.6%
Primary Demographic Served Market
Consumer-Mass 29.1%
Consumer-Middle 41.9%
Consumer-Upscale 10.9%
Business and Other 18.1%
Mean Responses
Revenues
RBU $ 48. I Million
RBU-Parent Organization $ 200.9 Million
Assets
RBU $1,120 Million
RBU-Parent Organization $5,067 Million
Return on Assets I .6%
Annual growth in Deposits 8.57c
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 ofthe 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
310 Vol. 10, No. 3

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)).
ANALYSIS AND DISCUSSION
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 generic 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 relation-
ships 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)).

TABLE 2
TOP 10 COMPETITIVE PRIORITIES OF RETAIL BANKS
(Descriptive Statistics)
Bank Asset Size

(Millions)
Less $1000
than $lOO- and F
Total $100 $999 Over Statistic
Courteous Service
Mean 6.45 6.63 6.38 6.39 I .32
Standard Error 0.07 0.10 0.13 0.11 Q= .21
Consistent Service
Mean 6.30 6.38 6.35 6.20 0.44
Standard Error 0.08 0.15 0.14 0.14 Q= .65
Enlarge Customer Relationships
Mean 6.1 I 5.28 6.20 6.64 15.58
Standard Error 0.11 0.28 0.16 0.07 Q=.oo
Accurate Information
Mean 6.04 5.91 6.05 6. I4 0.33
Standard Error 0.11 0.28 0.17 0.15 Q=.72
Timely Information
Mean 5.94 5.81 5.92 6.05 0.33
Standard Error 0.12 0.27 0.18 0.17 0.71
Efficient Bank Office Processing
Mean 5.73 5.84 5.55 5.82 0.80
Standard Error 0.10 0.18 0.21 0. I5 Q=.45
Price Services Adequately
Mean 5.70 5.63 5.57 5.88 I .07
Standard Error 0.10 0. I6 0.16 0.17 Q=.35
High Value Services
Mean 5.69 5.03 5.74 6.11 7.72
Standard Error 0.12 0.22 0.20 0.17 Q= ,001
Convenient Service (Easy Access)
Mean 5.52 5.22 5.57 5.68 1.51
Standard Error 0.1 I 0.25 0.15 0.18 p=.23
Highly Personalized Services
Mean 5.49 5.71 5.63 5.21 I .76
Standard Error 0.12 0.20 0.18 0.22 p=.18
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:
312 Vol. 10, No. 3

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 (pc.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,: 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 y’ = (Y,, Y,, . . ., Y ,,J and
the set of ten competitive gaps, as x’ =(X,, X2, ., Xi,). The observed canonical correlation
between the two multivariate sets was not statistically significant (R, = .58, p <. 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.
FIGURE 3
CUSTOMER/ACCOUNT BASE MATRIX: THE CAB MATRIX
Critical Success Factors

(Banking Industry Example)
I “Golden Handcuffs”
High Value
Personalized services
Back Office . Relationship
Banking
0 0
c:onvenient
Service l 0 Adequate Pricing
0 Consistent Service
0 Tbmely Information
Accurate courteous
0 Information Service
0
Low
“Revolving Doors” “Minimum Daily Requirements’
Low Relative Degree of importance to Customers High
Market Orientation
314 Vol. 10, No. 3

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:
(I) 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

FIGURE 4
VALUE-ADDED CONTRIBUTIONS OF CRITICAL
SUCCESS FACTOR CAPABILITIES
(Implications for an Individual Bank)
“Gateways” “Golden Handcuffs”
Account winners Account holders
Market differentiators Significant barriers to entry
Relationships w/current customers

Increased utility of bank’s
offering Expanded product/services
w/current customers
Cumulative revenue streams
“Revolving Doors” II
‘Minimum Daily Requirements”
l No/little value-added Account qualifiers
l No/little barriers to entry Minimized customer dissatisfaction
Enhanced ability to cross-sell

products/services to current
customers
.ow Relative Degree of /Inpoffance to Customers High

Market Orientation
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 staffing 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.
316 Vol. 10, No. 3

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 daily 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 Bunker (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 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 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 bunking. 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 (Table 3). 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, infrastruc-
tural, integration, and marketing choices associated with relationship banking and the provision
of high value services.
318 Vol. 10, No. 3

TABLE 3
LINKING COMPETITIVE PRIORITIES AND INTENDED OPERATIONS
AND MARKETING STRATEGY CONTENTS
(Pearson Product Moment Correlations)
Courteous Accurate Timely Consistent Adequate Convenient Personalized Back Office High Value Relationship
CONTENTS/PRIORITIES Service Information Information Service Pricing Services Service Efficiencv Services Banking
OPERATIONS STRUCTURAL
CHOICES
PROCESS TECHNOWGY
lnc ATM Investments (-0.20)* .03 -.Ol -.05 -.08 .25* -.02 -.14 .Ol .20*
Inc Point of Sale (PCS) Investments (-0.22)* .05 .05 .06 .03 .18 .07 -.04 .21** .23*
Inc Home Banking Investments -.I8 .I1 .I4 .07 .I0 .21* -.08 -.05 .I3 .I3
FACILITIES AND RETAIL
OUTLETS
Inc Full Service Branches -.ll .03 .02 -.04 .oo .I1 .06 .09 .09 .26**
Inc Limited Service Branches -_ 1 I .06 .06 .06 .02 .I5 (-.25)** .06 .19* .22*
Inc ATM Mini-Branches -.08 .09 .04 .I3 -.02 .21* -.I2 .04 .25** .24**
Relocate Branches (-. 19)* ..07 -.05 -.05 -.04 .03 -.09 -.05 .I3 .26**
Downsize Branches -.ll .08 .06 -.06 .lO .I2 (-.29)** .08 .19* .22*
Shared Facilities -.02 .I6 .17 .05 .04 .02 .04 .12 .I5 .I8
lnc Specialized Facilities .Ol .07 .05 .06 .02 .Oo -.15 .lO .23* .21*
Imp Facilities Maintenance -.I2 .27* .26** .09 .05 .20* -.09 .24* .09 .I2
CAPACITY
Inc Dir Cust Contact Capacity -.08 .15 .I6 .23* -.I0 .13 .I4 .OO .I0 .31***
Deer Dir Cust Contact Capacity .08 .05 .Ol -.09 .I5 .22* -.I2 .13 .I4 .06
Imp Space Utilization .05 .I8 .14 .15 .I8 .I5 .Ol .30*** .21* .I1
Central Support Service Ctrs -.Ol .19* .14 .03 .03 .29** -.09 .I1 .33*** .37***
VERTICAL INTEGRATION
Tailored Distribution Channels .05 .20* .14 .02 .21* .26** -.I2 .I1 .39*** .27**
Inc Internal Tech Staff (-0.24)** .I4 .I1 -.09 .05 .13 -.02 .04 .20* .06
Inc Internal R&D -.02 .19* .I7 .I5 .21* .22* .04 .20* .41*** .26**
*p< .05, ** pG .Ol, ***p 6 ,001
TABLE 3 CONTINUED
CONTENTS/PRIORITIES Service Information Information Service Pricing Services Service Efficiency Services Banking
OPERATIONS INFRASTRUCTURAL CHOICES
INFORMATION SYSTEMS
New Software/Old Products -.14 -.02 -.05 -.02 -.Ol .09 .Ol .03 .19* .I0
Imp. Budgeting & Reporting .09 .02 .02 .05 -.02 -.04 .Ol .02 .23* .23*
HUMAN RESOURCES
Overall Invest Human Assets .04 -.03 -.05 .09 .03 .oo .05 .I5 -.04 .15
Inc. New Employee Training .03 .14 .I3 .14 .08 -.07 .12 .12 .07 .ll
Retrain for New Skills -.02 .19* .I8 .06 .I8 .lO .13 .20* .18 .13
Supervisor Training -.03 .15 .14 .13 -.03 .13 .06 .ll .03 .30***
Imp. Recruiting Efforts -.05 .20* .18 .oo .16 .I2 .09 .02 .14 .22*
Inc. Teller/Sup Sales Resp .03 .06 .03 .ll -.09 .14 .04 -.Ol .06 .30***
Job Enlargement for Tellers/Sup -.02 .09 .07 .20* -.02 .14 .I0 .Ol .05 .23*
PERFORMANCE MANAGEMENT
Imp. Fringe Benefits -.03 .21* .19* ,011 .Ol .21* .06 -.04 .22* .26**
Imp. Physical Work Conditions -.04 .2_5** .22* -.02 .14 .17 .I5 .07 .I0 .02
Inc. Financial Incentives -.16 .21** .24* .Ol .06 .I2 .lO .11 .25** .36*“*
Upgrade Wages/Salaries -.03 .32**” .33*** .12 .I7 .14 .19* .24* .24** .22*
Work Measurement -.I7 .23* .25** ‘.09 .12 .19* .06 .lO .23* .09
QUALITY MANAGEMENT
PROGRAM
Quality Control Procedures .oo .07 .05 .I6 -.07 .08 -.04 .12 .06 .28**
Standardize Procedures .07 .25** .23* .21* -.04 .23* .03 .09 .I7 .3x***
Quality Circles -.Ol .14 .I2 .I0 .05 .ll .02 .09 .21* .03
INTEGRATION CHOICES
Imp. Internal Communications .03 .lO .09 .03 .oo -.02 .25** .oo .09 .Ol
Reduce Mgt Levels -. IO .I2 .06 .Ol -.15 .08 -.lO .I2 .19* .19*
Chg LaboriMgt Culture -.09 .14 .09 .oo -.06 .Ol -.05 .ll .I2 .22*
*ps .05. ** < .Ol, *** pc ,001

TABLE 3 CONTINUED
CONTENTS/PRIORITIES Service Information Information Service Pricing Services Service Efficiency Services Banking
OPERATIONS INTEGRATION CIIOICES Continue

Overall Systems Integration (.22*) .24** .I8 -.02 .02 .08 -.14 .07 .25** .31***
Central OpsiCommunications .05 .24* .19* .I3 .Ol .14 -.OS .09 .21* .36***
MARKETING CHOICES
Product Line Expansion .02 .29** .25** .I0 .19* .04 .I5 .ll .24* .24*
Supplementary Services -.03 .33*** .29** .04 .25** .23* .I6 .20* .30*** .42***
Product Bundling/Packaging -.02 .17 .12 .03 .24* .I4 .08 .14 .32*** .19*
Customize Products/Target Market .05 .20* .18* .lO .32*** .20* .I6 .16 .34*** .24**
* p 4 ‘05, **p < .Ol, ***p s ,001

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 jlexible 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
322 Vol. 10, No. 3

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 manage-
ment, 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 POS 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, and 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 supple-
mentary 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 finding, 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 (Table I). 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.
CONCLUSIONS
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 ( I99 I )).
324 Vol. 10, No. 3

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 manufactur-
ing. 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 relation-
ships 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.
ENDNOTE
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.
ACKNOWLEDGMENT
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
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IOURNAL OF OPERATIONS MANAGEMENT

Special Issue on Linking Strategy Formulation

in Marketing and Operatmns: Empirical Research

Operations As Marketing: A Competitive

Journal of Operations Management 303

304 Vol. 10, No. 3

COMPETITIVE SERVICE STRATEGY PARADIGM

Critical Success Factors

Journal of Operations Management 305

capabilities which, if developed satisfactorily, will ensure successful competitive performance

306 Vol. 10, No. 3

Service Operations Strategy Contents

Journal of Operations Management 307

Stages in Capability Development

Manufacturing Capabilities* Service Delivery System Capabilities

Stage 1: Minimize Manufacturing’s Negative Potential Revolving Doors

*Adapted from Hayes and Wheelwright 1984

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RESEARCH OVERVIEW AND DATABASE

Journal of Operations Management 309

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ANALYSIS AND DISCUSSION

External Service Quality

Internal Service Quality

Journal of Operations Management 311

Bank Asset Size

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(1) Relationship Banking

Linking Priorities and Competitive Abilities

Journal of Operations Management 313

Critical Success Factors

314 Vol. 10, No. 3

Journal of Operations Management 315

(Implications for an Individual Bank)

“Gateways” “Golden Handcuffs”

Account winners Account holders

Market differentiators Significant barriers to entry

Relationships w/current customers

Cumulative revenue streams

l No/little value-added Account qualifiers

l No/little barriers to entry Minimized customer dissatisfaction

Enhanced ability to cross-sell

.ow Relative Degree of /Inpoffance to Customers High

316 Vol. 10, No. 3

Journal of Operations Management 317

Linking Competitive Priorities and “Intended” Strategy Contents

318 Vol. 10, No. 3

OPERATIONS INFRASTRUCTURAL CHOICES

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OPERATIONS INTEGRATION CIIOICES Continue

* p 4 ‘05, **p < .Ol, ***p s ,001

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Journal of Operations Management 323

324 Vol. 10, No. 3

Journal of Operations Management 325

326 Vol. 10, No. 3

Journal of Operations Management 327

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