S-D Logic Alternative Logics for Service Innovation Global Advanced Technology Innovation Consortium Conference Global Innovation Challenges and Opportunities Sept 27, 2007 Stephen L. Vargo, University of Hawaii at Manoa Please do not reproduce or use without permission of Stephen L. Vargo

S-D Logic Getting the Logic Right The greatest danger in times of turbulence is not the turbulence: it is to act with yesterdays logic. Peter F. Drucker The main power base of paradigms may be in the fact that they are taken for granted and not explicitly questioned. Johan Arndt Value Proposition: There are alternative logics for understanding service innovation A service-centered logic is more robust and better suited than a goods-centered logic for all of innovation

S-D Logic Goods-dominant (G-D) Logic Purpose of economic activity is to make and distribute units of output, preferably tangible (i.e., goods) Goods are embedded with utility (value) during manufacturing Goal is to maximize profit through the efficient production and distribution of goods goods should be standardized, produced away from the market, and inventoried till demanded Firms exist to make and sell goods

S-D Logic Value Production and Consumption Producer Consumer Value Creation Value Destruction Supplier Supply/Value Chain Product/Value Delivery

S-D Logic Services: The G-D Logic Perspective Services are: Value-enhancing add-ons for goods, or A particular (somewhat inferior) type good, characterized by: Intangibility Heterogeneity (non-standardization) Inseparability (of production and consumption) Perishability Service innovation is the application of G-D logic principles of innovation (e.g., efficiency and design), adjusted for the characteristics of services

S-D Logic The Roots of G-D logic Smiths Bifurcation Positive foundation of exchange: specialized knowledge, labor (service), Value-in-use Normative model of (national) wealth creation: Value-in-exchange and production Creation of surplus, exportable tangible goods Says Utility: Usefulness (value-in-use) Morphed into a property of products (value-in-exchange) Development of Economic Science Built on Newtonian Mechanics Matter, with properties Deterministic relationships The science of exchange of things (products), embedded with properties (utiles)

S-D Logic A Partial Pedigree for S-D Logic Services and Relationship Marketing e.g., Shostack (1977); Berry (1983); Gummesson (1994) ; Gronroos (1994); etc. Theory of the firm Penrose (1959) Core Competency Theory (Prahalad and Hamel (1990); Day 1994) Resource-Advantage Theory and Resource-Management Strategies Hunt (2000; 2002); Constantin and Lusch (1994) Network Theory (Hakansson and Snehota 1995) Interpretive research and Consumer Culture theory Experience Marketing B2B Marketing/Value Creation

S-D Logic Service-Dominant Logic Basics Service, rather than goods, is the focus of economic and social exchange i.e., Service is exchanged for service Essential Concepts and Components Service: the application of competences for the benefit of another entity Service (singular) is a processdistinct from services particular types of goods Shifts primary focus to operant resources fromoperand resources Sees value as always co-created Sees goods as appliances for service delivery Implies all economies are service economies All businesses are service businesses

S-D Logic Foundational Premises (Revised) PremiseExplanation/Justification FP1Service is the fundamental basis of exchange. The application of operant resources (knowledge and skills), service, is the basis for all exchange. Service is exchanged for service. FP2Indirect exchange masks the fundamental basis of exchange. Goods, money, and institutions mask the service-for-service nature of exchange. FP3Goods are distribution mechanisms for service provision. Goods (both durable and non-durable) derive their value through use – the service they provide. FP4Operant resources are the fundamental source of competitive advantage The comparative ability to cause desired change drives competition. FP5All economies are service economies. Service (singular) is only now becoming more apparent with increased specialization and outsourcing.

S-D Logic Foundational Premises (Revised) PremiseExplanation/Justification FP6The customer is always a co-creator of value Implies value creation is interactional. FP7The enterprise can not deliver value, but only offer value propositions The firm can offer its applied resources and collaboratively (interactively) create value following acceptance, but can not create/deliver value alone. FP8A service-centered view is inherently customer oriented and relational. Service is customer-determined and co- created; thus, it is inherently customer oriented and relational. FP9All economic and social actors are resource integrators Implies the context of value creation is networks of networks (resource- integrators). FP10Value is always uniquely and phenomenological determined by the beneficiary Value is idiosyncratic, experiential, contextual, and meaning laden.

S-D Logic 11 Difficult Conceptual Transitions Goods-Dominant Concepts Goods Products Feature/attribute Value-added Profit maximization Price Equilibrium systems Supply Chain Promotion To Market Product orientation Transitional Concepts Services Offerings Benefit Co-production Financial Engineering Value delivery Dynamic systems Value-Chain Integrated Marketing Communications Market to Market Orientation Service-Dominant Concepts Service Experiences Solution 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)

S-D Logic Misconceptions of S-D logic It reflects the transition to a services era In S-D logic, all economies are service economies It simply replaces goods with services in primary importance It is a theory S-D logic is a logic, a mindset, a lens, but not a theory Could provide the foundation for a grand theory of exchange General Theory of the market and marketing Model for reframing innovation Reformulation of economic theory

S-D Logic Service Exchange through Resource Integration and Value Co-creation Resource Integrator/ Beneficiary (Firm) Resource Integrator/ Beneficiary (Customer) Value Co-creation Value Configuration Density

S-D Logic Innovation: The S-D Logic perspective Service logic informs innovation in general transcends goods logic Innovation = finding more effective ways participate in resource-integration/value- creation External: assist others (market facing) in their own value-creating activities Internal: efficient and effective use of market- provided resources Customer Supplier Other stakeholder

S-D Logic For More Information on S-D Logic visit: sdlogic.net We encourage your comments and input. Will also post: Working papers Teaching material Related Links Steve Vargo: Bob Lusch: Thank You!