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

1. 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

2. Precursors • Historical treatment of services • Smith’s (1776) bifurcation • Bastiat’s (1848) reconsideration • “Services are exchanged for services…it 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

3. Uneasiness with Dominant Model • 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 paramount…There 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)

4. A Partial Pedigree • Services and Relationship Marketing • e.g., Shostack (1977); Berry (1983); Gummesson (1994) ; Gronroos (1994); etc. • Theory of the firm • Penrose (1959) • Core Competency Theory • (Prahald and Hamel (1990); Day 1994) • Resource-Advantage Theory and Resource-Management Strategies • Hunt (2000; 2002); Constantine and Lusch (1994) • Network Theory

5. Service • 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)

6. Shift in Focus from Operand to Operant Resources • 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

7. Evolution of Marketing Thought Market With (Collaborate with Customers & Partners to Create & Sustain Value) To Market (Matter in Motion) Market To (Management of Customers & Markets ) Through 1950 1950-2005 2005+

8. Foundational Premises • 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

9. Foundational Premises (2) • FP4. Knowledge is the fundamental source of competitive advantage • Operant resources, especially “know-how,” are the essential component of differentiation • FP5. All economies are service economies. • 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

10. Foundational Premises (3) • FP7. The enterprise can only make value propositions. • Since value is always determined by the customer (value-in-use)—it can not be embedded through manufacturing (value-in-exchange) • FP8. A service-centered view is inherently customer oriented and relational • Operant resources being used for the benefit of the customer places the customer in the center of value creation and implies relationship. • FP 9. Organizations exist to combine specialized competences into complex service that is demanded in the marketplace. • The firm is an integrator of macro and micro-specializations

11. Operand Resources Tangible Value Added Goods Products Transactional Units of Output Promotion Brand Equity Profit Maximization Operant Resources Intangible Co-creation of value Service Experiences Relational Processes Conversation/Dialog Customer Equity Financial Feedback Evolving Toward a Service-Dominant Lexicon G-D Focus S-D Focus

12. Difficult Conceptual Transitions

13. Why Service? • 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 party”—i.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)

14. Why Service? • 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

15. Implications of a “Service-Exchanged-For-Service” Paradigm • Academic • Unifying—organized around the common denominator (mutual service provision) • Unique Marketing Origin—internally generated, rather than inherited • Resource-Centered—builds on relative resource-expanding nature of operand vs. resource-depleting nature of operant resources • Value-defining—shifts focus to value-in use • Logically Divisible--Allows sub-discipline of direct service provision • Promotes research—provides clear links among firm, customer, society, value, etc • Micro implications—Makes service-based concepts central/applicable to marketing • IHIP as it applies to value creation/all of marketing • Macro implications—Social role of Marketing • Value–creating • Resource-expanding

16. Implications of a “Service-Exchanged-For-Service” Paradigm • Practice • Managerially compelling—focuses on mission (service) • Demands customer orientation/value-in-use • Implies relationship marketing • Role of operant resources • Implies better customer experiences/fairer treatment • Promotes social responsibility • Marketing has social purpose • Education • Easily understandable—requires fewer “adjustments” • Normative prescripts (e.g., customer orientation/relationship) implied by framework • Inviting—increased attractiveness off discipline • Society • Promotes social responsibility—purpose is to: • Serve individuals/society/organizations • Facilitate value enhancement/resource expansion through exchange

17. An S-D LogicDefinition of Marketing • 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.

18. What S-D Logic is Not • 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

19. What S-D Logic Might be • 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 society—Theory of Markets

20. 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

21. S-D Logic Can Direct Macro/Public Policy

22. The Inversion Goods Logic Service Logic Service (processes—applied competences) Products (units of output) Goods Services (Intangible goods) Indirect (Goods--Appliances) Direct