Quinn argues that the successful firms of the 1990s will be service oriented and will use innovative techonology to increase the range and improve the range of their services. Rapid response will be objective and flexibiltiy of management style will be the means. Quinn uses examples from companies such as Apple, Honda, ServiceMaster and Merck to show how a commitment to technological innovation married to a service-oriented outlook can produce impressive business results.
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James Brian Quinn is the William and Josephine Buchanan Professor of Management at the Amos Tuck School at Dartmouth College and a three-time McKinsey Award winner for the best Harvard Business Review article.Excerpt. © Reprinted by permission. All rights reserved.:
Services Restructure the Economy
This book is about managing intellect and the services, servicebased strategies, and service technologies that are revolutionizing competition in all industries, including manufacturing, today. Intellect is the core resource in producing and delivering services. Since World War II provision of services has become by far the largest component of the U.S. economy (see Figure 1-1) and dominates manufacturing in virtually all "industrialized" nations. In the United States, the service industries -- as broadly defined -- now account for 74 percent (or $3,345 billion) of the Gross National Product and 77 percent (or 92.6 million) of all jobs. Through 1990, the services sector continued to grow during recessions and booms alike, although there were some signs that its rate of growth might be slowing and that it too might become vulnerable to downturns. Reflecting its increasing dominance in the economy, during the 1991-92 recession services employment dropped for the first prolonged period since the early 1950s.
In contrast, total employment in manufacturing had declined erratically but in a continuous downward secular trend over the past fifteen years. While this represented some serious deficiencies in selected industries and a personal tragedy for many workers, the shift was not as radical as often portrayed (see Figure 1-1). The United States has long been the world's strongest manufacturing country, but it has never had a dominantly manufacturing economy. Figure 1-1 shows that services employment has always exceeded that of manufacturing in the United States.
Manufacturing employment remained relatively steady as a percentage of the total for a long period of time; what declined continuously was agricultural employment. Nevertheless, in recent years, some traditional and highly visible U.S. industries -- such as basic steel, automaking, and electronic appliances -- have experienced pronounced losses in both output volume and employment. And many others operating from a U.S. base have lost export sales since the mid-1980s.
In the meantime, service industries have grown steadily in scale, technological sophistication, and capital intensity. Why have services become so important today? Steady productivity increases in agriculture and manufacturing -- largely technology induced -- have meant that it took ever fewer hours of work to produce or buy a pound of food, an automobile, a piece of furniture, or a home appliance. While productivity improved, demand for goods was somewhat capped; people could consume only so many units of food, automobiles, sofas, houses, or washing machines. Meanwhile new technologies lowered services' relative costs and increased their variety and value. The relative utility of nonproduct purchases therefore went up for each individual. And in recent years, as people became more affluent, they began to seek increased satisfaction and improved life quality through more services.
The basic cause of this massive economic transformation is the emergence of intellect and technology -- particularly in services -- as highly leverageable assets. Leveraged intellect and its prime facilitator, service technology, are reshaping not only the service industries but also U.S. manufacturing, the country's overall economic and growth patterns, national and regional job structures, and the position of the United States in world politics and international competition. They are forcing totally new concepts of strategy and organization on both the services sector and the product industries -- nationally and globally. The manufacturing-services interface is now the key to most manufacturing strategies (Chapter 6). And the competitiveness of both nations and companies will increasingly depend upon carefully exploiting the new strategic potentials of better-managed intellect and service technologies. Based upon multiple years of research, this book will suggest how best to analyze and implement these new knowledge and service based strategies and the new organizations that support them.
BASIC RELATIONSHIPS: SERVICES, INTELLECT, AND ECONOMICS
What do services and managing intellect have to do with a sound economy? Economic texts barely mention either. Many executives and policymakers dismiss services as predominantly "taking in laundry" or "making hamburgers" for others. Such simplifications belie the complexity, scale, employment, and profit potentials of services in the 1990s. While there is not a complete consensus on definitions, most authorities consider that the services sector includes all economic activities whose output (1) is not a product or construction, (2) is generally consumed at the time it is produced, and (3) provides added value in forms (such as convenience, amusement, timeliness, comfort, or health) that are essentially intangible concerns of its purchaser. The Economist has more simply defined services as "anything sold in trade that could not be dropped on your foot." "Service technologies" are technologies developed by or primarily for use in the services sector. They include not just information technologies but transportation, communications, materials handling, storage, health care, and other technologies predominantly used by service enterprises.
The "service industries" include transportation, communications, financial services, wholesale and retail trade, most utilities, professional services (like law, consulting, and accounting), entertainment, health care and delivery systems, and so on in the private sector -- and government-social services in the public sector. "Service activities" include personnel, accounting, finance, maintenance, legal, research, design, warehousing, marketing, sales, market research, distribution, repair, and engineering activities, which may be performed as functions inside an integrated -- manufacturing or service -- firm or by a separate firm (like a market research or accounting firm). The common element among all these activities and industries is the predominance of managing intellect -- rather than managing physical things -- in creating their value-added. The key to productivity and wealth generation in over three-fourths of all economic activity is managing intellectual activities and the interface to their service outputs. As we shall show, this is just as true in manufacturing as in the service industries. Indeed, the lines between these two are rapidly being obliterated.
FOUR MYTHS ABOUT SERVICES
To develop a proper perspective about these changes, we first need to expunge some of the more misleading myths, held over from the past, about services.
The "Lower Value" Misconception -- perhaps first stated by Adam Smith -- regards services as somehow less important on a "human needs scale" than products. Since services are essentially marginal (so the argument goes), they cannot add the same economic value or generate the growth potentials manufactures can. Karl Marx made this a central part of his dogma. As a result, all his adherents so underinvested in services that their countries today tragically cannot store, transport, distribute, finance, communicate about, or repair the products they could otherwise produce in abundance. So prevalent are these misconceptions that many economists -- particularly in developing countries -- refer to services as "the tertiary sector."
In very elemental societies it is perhaps true that the first production to meet basic needs for food, shelter, or clothing do take precedence over all other demands. However, as soon as there is even a local self-sufficiency or surplus in a single product, the extra production has little value without further distribution, financing, or storage -- all "service" activities. In most emerging societies services like health care, education, trading, entertainment, religion, banking, law, and the arts quickly become more highly valued (high-priced or capable of generating great wealth) than basic production. And the positive wage differentials their practitioners receive tend to be even more marked as societies grow more affluent.
Far from being inferior economic outputs, services are directly interchangeable with manufactures in a wide variety of situations. Few customers care whether a refrigerator manufacturer implements a particular feature through a hardware circuit or by internal software. New CAD/CAM software can substitute for added production or design equipment, and improving transportation or materials handling services can lower a manufacturer's costs as effectively as cutting direct labor or materials inputs. These "services" improve productivity or add value just like any new investment in physical handling machinery or product features.
Even more fundamentally, products are only physical embodiments for the services they deliver. A diskette only delivers a software program or data set. An automobile delivers flexible transportation or a personal image -- both services. Electrical appliances deliver entertainment, dishwashing, clothes cleaning and drying, convenient cooking or storage -- all services. In fact, most products merely provide a more convenient or less costly form in which to purchase services. Although it is a surprise to some people, on a national basis value-added in services is much greater than that in manufacturing (see Table 1-1). In fact, value-added in the services sector accounts for approximately 74 percent of all value-added in the economy, while the total goods sector (including all manufacturing, construction, mining, agriculture, forestry, and fishery outputs) accounts for only 25 percent.
Although the total value-added per employee in private services nationally is slightly lower (at $38,069 per person) than that in manufacturing (at $40,622), in the strategic business units of the larger companies sampled by PIMS data, value-added per service employee is quite comparable to that in manufacturing (see Figure 1-2.) This suggests (1) that important economies of scale and scope may be available through technology investments in larger private service enterprises, and (2) that it is the government sector's $30,132 of value-added per person that poses the major problem.
The "Low Capital Intensity" Perception asserts that service industries are much less capital-intensive and technologically based than manufacturing. While this may be so for small-scale retailing and domestic services, many service industries today are extremely capital- and technology-intensive. The prime examples have been communications, transportation, pipelines, and electric utilities. But the banking, entertainment, health care, financial services, auto rental, package delivery, wholesaling, and retailing industries also increasingly qualify.
Stephen Roach, Chief Economist of Morgan Stanley, has calculated that total capital investment -- and in particular hightechnology investment -- per "information worker" (mostly employed in service industries) has been rising rapidly since the mid-1960s and now exceeds that for workers in basic industrial activities. Similarly, Kutscher and Mark's data show that nearly half of the thirty most capital-intensive industries (of 145 studied) were services. And certain service industries -- notably railroads, pipelines, broadcasting, communications, public utilities, and sea and air transport -- were among the most capital-intensive of all industries. Surprisingly, few service industries were found in the three lowest capital-intensity deciles. PIMS data, collected on a different basis, show aggregate capital intensity in larger service entities to be comparable to -- although slightly less than -- that in manufacturing. Fortune 500 data, which often contain large service units like GM's $115 billion (asset) GMAC within an "industrial" company, do not break investments out to the SBU level as PIMS data do. Fortune's more aggregated figures show large industrial companies to be more capital-intensive than their predominantly services counterparts. But total capital investment in the service industries has been growing much more rapidly than that in manufacturing. Even excluding the heavy investments of the transportation and public utilities sectors (usually considered services), aggregate annual investment in services now surpasses that of manufacturing (see Figure 1-3).
The "Small Scale" Misconception considers the services sector too small in scale and too diffuse to either buy major technological systems or to do research on its own. Although complete Herfindahl indices of concentration are not available, PIMS and Fortune 500 data suggest that concentration and scale among larger service units are comparable to that in larger manufacturing units (see Figure 1-4). In fact, as we shall demonstrate shortly, many companies in the services sector are much larger than their manufacturing suppliers.
Large banks, airlines, utilities, financial service institutions, communications companies, and hospital, hotel, or retail chains now not only have the scale to be lead purchasers of technology, they also contribute extensively to its initial design, early financing, reduction to practice, and wide diffusion. In addition, such companies acting in intermediary roles (like distributors) often force new technologies out into smaller service and manufacturing companies (through their just-in-time systems), further assisting diffusion. Many large service institutions now also support extensive R&D activities, creating or guiding major new technological developments themselves. AT&T-Bell Labs, Federal Express, COMSAT, Arthur Andersen, Citicorp, Arthur D. Little, Microsoft, EPRI, and Rand Corporation are just a few among many such organizations.
The "Services Can't Produce Wealth" Viewpoint holds that services are not capable of producing the ever higher levels of real income and personal wealth that have been the hallmarks of the "industrial" era. This argument assumes, in part, that services inherently cannot achieve the productivity increases available through automation in manufacturing. If not, services cannot possibly provide the inflation-free income growth rates manufacturing can. While many past measures of productivity in services have tended to support this view at the macro economic level, there is increasing evidence that the measures themselves may have serious flaws. Productivity in services is notoriously difficult to measure because of problems in numerically defining output units and quality levels. For example, how does one evaluate medical procedures that may use greater resources but may substantially decrease patients' pain or morbidity levels? Of what validity are the standard economic productivity measures that ignore the output value of many public services (like sewage treatment plants or air depollution) and assume that the output value of critical services (like fire departments, police forces, some aspects of banking, and many welfare services) is equal only to their cost inputs? One should be very careful in interpreting aggregate productivity data about services and should look behind the numbers to the measurement methodologies used. Chapter 11 will deal with this issue in much more detail.
Productivity measures are more valid in competitive arenas, where customers can make direct purchase tradeoffs between one class of service and other services or manufactures. Here the s...
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