To the casual observer, Wachovia and Banc One have two key elements in common: They are both regional banks, and both have enviable performance records.

Wachovia Corp. of Winston-Salem, N.C., enjoys one of the lowest loss experiences in the industry and has consistently been one of the highest and most stable earners. Banc One, based in Columbus, Ohio, has grown its earnings at 15% per year since 1985 and has increased earnings per share consistently for 23 years.

Both banks trade around 15 times earnings and enjoy a market capitalization greater than Citicorp's.

The Common Denominator

A closer look at both companies reveals even deeper similarities: They both run their businesses using a form of management we call "capabilities-based competition."

While their applications of this management style are different, the fundamentals are constant, transferable, and help explain both banks' success.

Beyond banking, companies in other industries that compete on capabilities are outmaneuvering or overtaking their more established rivals: Wal-Mart surpassing K mart and Sears, Honda challenging U.S. auto makers, and Canon's assault on Xerox's market share

Four Steps to Success

To become capabilities-based, a company must take four steps:

* Determine its most important capability in providing value to customers. It may be, for example, speed in responding to customers demands, consistency in producing product quality, or success in generating new ideas or products.

* Organize its business functions as an interlocking series of activities. The more steps in the process and the more complex the process, the harder it is for competitors to duplicate the capability.

As an example from the retail industry, instead of focusing its strategy on improving a single business function, like purchasing or merchandising, the organization would learn to perfect a complicated logistics technique -- like continuous product delivery using its own transportation system.

* Empower large numbers of employees with decision-making responsibilities formerly given to their superiors.

* Support employees with massive amounts of shared information, along with top-quality training and incentive programs.

The Strategy in Action

A look at Wachovia and Banc One shows how each banking company competes on capabilities and how each follows these four steps successfully but differently.

Wachovia's key capability is understanding and serving the needs of individual customers. It probably sells, on average, more products per customer than any other bank in the country. The bank's capability is achieved through a complex process of information gathering and retrieval and service delivery.

The bank maintains a data base of customer preferences, personal history, and purchase behavior. That information enables bankers at Wachovia to see the customer's entire pattern of banking usage, to develop a much fuller picture of customer needs, and to build a far stronger personal relationship.

Private Banking Service

Through this capability, Wachovia provides a mass market version of the personalized services previously enjoyed only by private banking clients.

Wachovia's approximately 650 personal bankers in North Carolina each service a portfolio of about 1,200 customers.

The bankers are accountable for daily decisions about underwriting loans, providing customer service and referrals for specialized investment products, and in general serving as the primary interface with the customer.

How can service to so many be so personal? How can Wachovia rely on a such a large group of employees to effectively deliver personal service?

Wachovia has in place an extensive two-year personal banker training program and a career track for personal bankers that allows them to become branch managers and provides training to deal with small business customers.

The personal bankers are assisted by a customer-information file that has complete, accurate, and timely information about all of the customers' relationships with the bank. This customer orientation is continually reinforced within the Wachovia culture through the "sundown rule," which specifies that every customer's request must be responded to, if not resolved, by day's end.

Tailoring to the Locale

Banc One's capability is responsiveness to the needs of the separate communities it serves. The affiliate presidents have an unusually high level of autonomy in tailoring pricing, credit, marketing, and staffing decisions to the needs of the local community.

To quote a Banc One video, the bank's strategy is to "out local the national banks and out national the local banks." All this is done in the context of a highly centralized and detailed financial reporting system.

Like Wachovia, Banc One collects detailed information on each affiliate bank's performance.

Weaker performers are expected to learn from "best practice" throughout the system. "League tables" of various measurements are regularly published, with worst performers listed first to focus on improvement by the laggards rather than competition among the leaders. The most successful process improvement projects are documented and widely circulated throughout the system.

Sharing Information

Further, Banc One recently streamlined its data base for even stronger financial and administrative support. The new system will allow Banc One to store and update data at a local office, connecting the information that is unique about a specific affiliate's departments and allowing it to be shared by users in other locations.

Wachovia and Banc One both compete on capabilities. Their senior managers view these processes as key strategic tools and components of competitive advantage.

Each institution has strengths the other cannot match: Wachovia's revenues per retail customer will probably remain higher than Banc One's, but Wachovia's local expansion seems limited by the amount of time it takes to train new personal bankers.

Banc One has been able to grow quickly by acquisition since it can rely on its performance measurement systems and needs only to extensively train a smaller number of senior officers in Bank One's unique, autonomous culture.

Capabilities-based competition is not for the uncommitted. Consider, for example, what Banc One's new president, Donald L. McWhorter, says will see him through his new assignment. Besides relying on his roots as a small-town banker, he says he will be devoted to "a culture that is truly a religion among our management people."

Realigning Business Units

Becoming a capabilities-based competitor requires a shift in culture. The organization is no longer looked at traditionally, as a grid of business units and support functions. A vertical linkage of interlocking steps replaces it.

Traditional profit-and-loss analysis carries less meaning, since substantial "up-front" systems expenditures to support the entire process are required. Finally, traditional line and staff roles are reversed: senior management becomes support, providing measure, control, and information systems that allow larger numbers of employees -- like personal bankers or affiliate presidents -- to make credit, merchandising, and marketing decisions.

Capabilities-based competition must have the full support of the chief executive officer. Only the CEO can focus the entire company's attention on identifying the capability that serves the customer best. And only the CEO can authorize the sizable investments and changes required for success.

Traditional bureaucratic management systems have proven too rigid and cumbersome for today's localized, personalized service economy. As Wachovia and Banc One suggest, a CEO's success in building a capabilities-based system will be a major test of banking management in the 1990s.

Mr. Evans and Mr. Mehta are vice presidents of the Boston Consulting Group, which provides advice on business strategy. Mr. Evans is based in Boston, and Mr. Mehta in Los Angeles.

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