S-D Logic

Service-Dominant Logic: What It Is and What It Is Not

Presentation to the Otago Forum on Service-Dominant Logic
November 21, 2005
Stephen L. Vargo, University of Hawaii at Manoa Robert F. Lusch, University of Arizona

Precursors
S-D Logic

Historical treatment of services

Smiths (1776) bifurcation Bastiats (1848) reconsideration

Services are exchanged for servicesit is the beginning, the middle, and the end of economic science

Goods as distribution mechanisms for service Goods as embodied knowledge Strategic Role of Resource Management

Uneasiness with Dominant Model

S-D Logic

What is needed is not an interpretation of utility created by marketing, but a marketing interpretation of the whole process of creating utility (Alderson, 1957)
The historical marketing management function, based on the microeconomic maximization paradigm, must be critically examined for its relevance to marketing theory and practice. Webster (1992) The exchange paradigm serves the purpose of explaining value distribution (but) where consumers are involved in coproduction and have interdependent relationships, the concern for value creation is paramountThere is a need for an alternative paradigm of marketing. Sheth and Parvatiyar (2000) The very nature of network organization, the kinds of theories useful to its understanding, and the potential impact on the organization of consumption all suggest that a paradigm shift for marketing may not be far over the horizon. Achrol and Kotler (1999)

A Partial Pedigree
S-D Logic

Services and Relationship Marketing

Theory of the firm

e.g., Shostack (1977); Berry (1983); Gummesson (1994) ; Gronroos (1994); etc. Penrose (1959)

Core Competency Theory

Resource-Advantage Theory and ResourceManagement Strategies

(Prahald and Hamel (1990); Day 1994)

Network Theory

Hunt (2000; 2002); Constantine and Lusch (1994)

Service
S-D Logic

The application of specialized competences (knowledge and skills) through deeds, processes, and performances for the benefit of another entity or the entity itself (self-service)

Shift in Focus from Operand to Operant Resources

S-D Logic

Operand Resources

Resources upon which an operation or act is performed to produce an effect

primarily physical resources, goods, etc

Operant Resources

Resources that produce effects

e.g., primarily knowledge and skills competences

Evolution of Marketing Thought

S-D Logic

To Market (Matter in Motion)

Market To (Management of Customers & Markets )

Market With (Collaborate with Customers & Partners to Create & Sustain Value)

Through 1950

1950-2005

2005+

Foundational Premises
S-D Logic

FP1. The application of specialized skill(s) and knowledge is the fundamental unit of exchange.

Service (application of skills and knowledge) is exchanged for service

FP2. Indirect exchange masks the fundamental unit of exchange.

Micro-specialization, intermediaries, and money obscure the service-for-service nature of exchange

FP3. Goods are distribution mechanisms for service provision.

Activities render service; things render service (Gummesson 1995) : goods are appliances

Foundational Premises (2)

S-D Logic

FP4. Knowledge is the fundamental source of competitive advantage

FP5. All economies are service economies.

Operant resources, especially know-how, are the essential component of differentiation Service only now becoming more apparent with increased specialization and outsourcing

FP6. The customer is always a co-creator of value.

There is no value until offering is used experience and perception are essential to value determination

Foundational Premises (3)

S-D Logic

FP7. The enterprise can only make value propositions.

FP8. A service-centered view is inherently customer oriented and relational

Since value is always determined by the customer (value-inuse)it can not be embedded through manufacturing (value-in-exchange)

FP 9. Organizations exist to combine specialized competences into complex service that is demanded in the marketplace.

Operant resources being used for the benefit of the customer places the customer in the center of value creation and implies relationship.

The firm is an integrator of macro and micro-specializations

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Evolving Toward a Service-Dominant Lexicon

S-D Logic

Operand Resources Tangible Value Added Goods Products Transactional Units of Output Promotion Brand Equity Profit Maximization

G-D Focus

Operant Resources Intangible Co-creation of value Service Experiences Relational Processes Conversation/Dialog Customer Equity Financial Feedback

S-D Focus

Difficult Conceptual Transitions

S-D Logic Goods-Dominant

Concepts
Goods Products

Transitional Concepts
Services Offerings Benefit

Service-Dominant Concepts
Service Experiences Solution

Feature/attribute Value-added Profit maximization Price Equilibrium systems Supply Chain Promotion To Market Product orientation

Co-production
Financial Engineering Value delivery Dynamic systems

Co-creation of value
Financial feedback/learning Value proposition Complex adaptive systems Value-creation network/constellation Dialog Market with Service-Dominant Logic (Consumer and relational)
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Value-Chain
Integrated Marketing Communications Market to Market Orientation

Why Service?
S-D Logic

Accuracy: It is precisely service that we are talking about

What is exchanged is the application of specialized knowledge and skills (competences) for the benefit of another partyi.e., Service

Thought-leadership: Service marketing concepts and insights transforming marketing thought

Transaction Relationship (Manufactured) Quality Perceived (Service) Quality Brand Equity Customer Equity Consumer Prosumer (co-producer of value)
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Why Service?
S-D Logic

Continuity: Does not require rejecting the exchange paradigm

Just change in focus from units of outputs to processes

Normatively Compelling: The purpose of economic exchange is mutual service

Implies managerial, macro, and ethical standards

Implications of a ServiceExchanged-For-Service Paradigm

S-D Logic

Academic

Unifyingorganized around the common denominator (mutual service provision) Unique Marketing Origininternally generated, rather than inherited Resource-Centeredbuilds on relative resource-expanding nature of operand vs. resource-depleting nature of operant resources Value-definingshifts focus to value-in use Logically Divisible--Allows sub-discipline of direct service provision Promotes researchprovides clear links among firm, customer, society, value, etc

Micro implicationsMakes service-based concepts central/applicable to marketing Macro implicationsSocial role of Marketing

IHIP as it applies to value creation/all of marketing Valuecreating Resource-expanding

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Implications of a ServiceExchanged-For-Service Paradigm

S-D Logic

Practice

Managerially compellingfocuses on mission (service)

Demands customer orientation/value-in-use Implies relationship marketing Role of operant resources Implies better customer experiences/fairer treatment Marketing has social purpose

Promotes social responsibility

Education

Easily understandablerequires fewer adjustments Invitingincreased attractiveness off discipline

Normative prescripts (e.g., customer orientation/relationship) implied by framework

Society

Promotes social responsibilitypurpose is to:

Serve individuals/society/organizations Facilitate value enhancement/resource expansion through exchange

An S-D Logic Definition of Marketing

S-D Logic

Marketing is the process in society and organizations that facilitates voluntary exchange through collaborative relationships that create reciprocal value through the application of complementary resources.

Therefore marketing can be viewed as the means by which societies are able to create value through the voluntary exchange of knowledge and skills.

What S-D Logic is Not

S-D Logic

Reflection of the transition to a services era Justified by the Superior Customer Responsiveness of Service Companies Restatement Of The Consumer Orientation Alternative To The Exchange Paradigm Equating Service with Provision of Functional Benefits Suggesting that Financial Feedback equals Profit Applicable only to marketing management

What S-D Logic Might be

S-D Logic

Foundation of a paradigm shift in marketing Basis for a General Theory of Marketing Reorientation for economic theory Foundation for theory of the firm Perspective for understanding role of markets in societyTheory of Markets

S-D Logic

Thank You!
For More Information on S-D Logic visit: sdlogic.org
We encourage your comments and input. If you would like your working papers or teaching material and/or links to your research displayed on the website, please e-mail us Steve Vargo: svargo@sdlogic.net Bob Lusch: rlusch@sdlogic.net

S-D Logic Can Direct Macro/Public Policy

S-D Logic

From goods to service(s). Tax policy to encourage firms to retain tangible goods and sell service flows?

From tangible to knowledge resources. Tax policy to encourage investments in education and skill development vs. housing. From operand to operant From value in exchange to resources. value in use. Public policy to Public data collection on encourage collaboration vs. value in use and home competition. production.

The Inversion
S-D Logic

Goods Logic
Products
(units of output)

Service Logic
Service
(processesapplied competences)

Goods

Services
(Intangible goods)

Indirect
(Goods--Appliances)

Direct