Lessons in Service Sector

Lessons in the Service Sector

by James L. Heskett

Reprint 87206

Harvard Business Review

HBR MARCH-APRIL 1987

Lessons in the Service Sector

by James L. Heskett

Alarge food and lodging company creates and

staffs more general management jobs than

any ten manufacturers of comparable size.

This company, like many others dispensing high customer-

contact services, has eliminated functional

lines of responsibility between operations and marketing.

In its planning the company routinely combines

operations and marketing with what I call a

strategic service vision.

The most profitable largeAmerican company daily

assumes the task of managing a work force of window

washers, cooks, and maintenance personnel. An almost

single-minded concentration on people--their

jobs, their equipment, their personal development--

accounts for much of its success.

The quality control process in a decentralized oilfield

services business involves careful selection, development,

assignment, and compensation of employees

working under varying conditions and in

widespread locations where close supervision is impossible.

In this prosperous company, the process

builds shared values and bonds people together.

An international airline, by paying more attention

to market economies than to production scale economies,

reduces the average size of its aircraft and

increases its net income.

Products introduced since 1982 by a well-known

financial service generated 10% of its revenues in

1985. The raw material for these products is data

already existing in other forms in the company's vast

data base.

These examples give a glimpse of forward-looking

management practice. When examined closely, they

offer insights into the ideas on which successful

competitive strategies have been fashioned in the

much-maligned and little-understood service sector.

It's no coincidence that dominant industries have

cutting-edge management practices. Some U.S. railroads

in the nineteenth century pioneered in divisionalized

management of their far-flung systems and

in good procurement procedures to support their sizable

construction and operational needs. At the turn

of the century, basic industries led the way in experimenting

with scientific management. Then the rise

of the large consumer goods manufacturer, epitomized

by the auto industry, spawned concepts of

decentralization and a full product line aimed at

carefully segmented markets.

Today service industries have assumed the mantle

of economic leadership. These industries--encompassing

trade, communications, transportation, food

and lodging, financial and medical services, education,

government, and technical services to industry--

account for about 70% of the national income

and three-fourths of the nonfarm jobs in the United

States. In generating 44 million new jobs in the past

30 years, they have absorbed most of the influx of

Copyright © 1987 by the President and Fellows of Harvard College. All rights reserved.

James Heskett is the 1907 Foundation Professor of Business

Logistics at the Harvard Business School. Currently

he heads an MBA course, Management Policy and Practice.

This article is an outgrowth of his latest book, Managing

in the Service Economy (Harvard Business School

Press, 1986).

women and minorities into the work force, softened

the effects of every post-World War II recession, and

fueled every recent economic recovery.

In view of this leadership role, now is a good time

to look at the exemplars in the service sector for

insights into ways of boosting productivity and altering

competitive strategies. Despite their diversity,

leading companies in many service industries display

some common themes and practices. And they yield

lessons for managers in any sector of business. Let's

look first at the way the best service companies are

structured.

INTEGRATED FUNCTIONS

Most goods-producing businesses follow the traditional

organizational