One of the world's most unusual hospitals is found in a suburb of Toronto.

Although Shouldice Hospital Ltd. is extremely profitable, its prices are a comparative bargain. Patients are charged roughly one-third to one-half the customary rate at traditional Canadian and U.S. hospitals.

For this bargain price, Shouldice patients receive surgical care that is many times more effective than other hospitals typically provide, based on the success rates of Shouldice's operations, according to James L. Heskett, a professor at the Harvard Business School.

The treatment of patients also sets Shouldice apart. Nearly all of them walk away from the operating table on the supporting arm of their surgeons.

And they apparently leave loving the place. As many as 1,500 former patients return to the hospital for annual reunions, although they had had no association with the hospital before their surgery.

The story of Shouldice Hospital is one of the important cases at the business school. Heskett will use it to open up an advanced management course for top executives this spring.

It is one of the popular electives among the MBA candidates.

And it is an opening chapter in Heskett's new book, "Managing in the Service Economy" -- his look at some truths and half-truths about the fast-expanding service economy.

The first lesson from the Shouldice Hospital story involves a careful strategic decision about the kind of service the hospital would offer.

Shouldice confines itself to repairing abdominal hernias, a lump in the stomach or groin area caused by an opening in the abdominal muscle wall. During World War II, hospital founder Dr. Earl Shouldice developed a surgical technique for closing or mending these holes that could be done, in most cases, without a general anesthetic.

This simple operation, however, is carried out under an elaborate, tightly controlled approach that puts Shouldice in a class with Marriott Corp., People Express, Brooks Fashion Stores and other companies that are defining success in the fast-growing service sector of the economy, Heskett says.

The competitive power of these companies is owed in large part to a careful blending of external and internal strategies, Heskett says.

The external marketing strategy aimed at the customer must interlock with an internal operational plan involving employes and managers, and the two approaches must reinforce one another, he adds. At Shouldice, the way patients are treated results directly from the attitudes that surgeons and staff have about their jobs, Heskett says.

The marketing strategy is based on a screening of patients to admit only those in good health who won't require general anesthesia and a complicated recovery -- a key factor in Shouldice's lower costs.

To minimize the risk of complications, Shouldice Hospital operates only on otherwise healthy patients who are not overweight.

Because patients receive painkillers and sedatives, not a general anesthetic, they remain conscious during the operation and can walk away from the operating table. They walk to meals, to showers, to use the telephone or watch television. They help brief the incoming "class" of patients. Thanks to the exercise, most are ready to go home by the fourth morning after surgery, helping to reduce the expense of hospital stay.

The surgeons are specialists. While a general surgeon in a traditional hospital may perform no more than 25 to 50 hernia repairs a year, Shouldice surgeons average three a day.

Although a hernia operation is considered a mundane, simple procedure, Shouldice surgeons are required to perfect a tested method that produces the high success rate. A surgeon "learns when he can go fast and when he must go slow. He develops a pace and a touch. If he encounters something unusual, he is encouraged to consult immediately with other surgeons," says Dr. Byrnes Shouldice, a vice president of the hospital and son of Earl Shouldice, who died in 1965. "We teach each other and try to encourage a group effort," Shouldice says in Heskett's account.

Surgeons receive more than $100,000 a year, roughly half in salary and half through profit sharing, which is less than most general surgeons receive.

But most days, they are able to leave for home at 4 p.m. with no further demands on their time. Nurses and staff are paid somewhat more than their counterparts at traditional hospitals and receive profit sharing, too.

The high success rate, the patients' enthusiasm and the absence of the most stressful parts of hospital work contribute to strong morale, Heskett says.

The method of surgery is time-tested and standardized. Quality is controlled by peer supervision (and by referring unsuccessful operations back to the doctor who performed the surgery, for correction).

The approach has parallels in the way Marriott instructs its staff to clean hotel rooms or the way McDonald's serves hamburgers.

"Go down the list of leading firms in service industries, invariably you find many of those things happening," says Heskett.

If he is right, the Shouldice story and others like it demonstrate ways of working out better, more satisfying relationships among customers, employes and people in general, making it an example that embattled American manufacturers ought to study.

There are plenty of problems that the Shouldice approach does not solve. Conceivably, it may add to them. It doesn't offer help for patients who are overweight, are suffering from other ailments or are unable to afford to travel to Toronto.

It represents an example of cream-skimming, the differentiation in the quality of a basic service such as health care based upon selective factors such as income and physical condition.

If the easy, low-cost cases are handled outside a basic system of medical care, what happens to the tough, costly cases?

The Harvard Business School stresses to its classes of future managers that they cannot ignore the public and political implications of business decisions. The Shouldice story may well be a good starting point for that discussion, too.