S-D Logic Overview of the Service-Dominant Logic of Marketing Academic Presentation for the Otago Forum on Service-Dominant Logic November 21, 2005 Stephen L. Vargo, University of Hawaii at Manoa Robert F. Lusch, University of Arizona

S-D Logic S-D Logic Overview2 Related Work Vargo, S. L. and R.F. Lusch (2004) Evolving to a New Dominant Logic of Marketing, Journal of Marketing Harold H. Maynard Award for significant contribution to marketing theory and thought. Vargo, S.L. and R. F. Lusch (2004) The Four Service Myths: Remnants of a Manufacturing Model Journal of Service Research Vargo, S.L. and F.W. Morgan (2005) An Historical Reexamination of the Nature of Exchange: The Service Perspective, Journal of Macromarketing Lusch, R.F. and S.L. Vargo, editors (2006), The Service-Dominant Logic of Marketing: Dialog, Debate, and Directions, Armonk, NY: M.E. Sharpe (forthcoming)

S-D Logic S-D Logic Overview3 Precursors Historical treatment of services Smiths (1776) bifurcation Bastiats (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

S-D Logic S-D Logic Overview4 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 by decreasing cost and increasing number of units of output sold For efficiency, goods should be standardized, produced away from the market, and inventoried till demanded

S-D Logic S-D Logic Overview5 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)

S-D Logic S-D Logic Overview6 Value Proposition Organizations can better benefit customers, society, and, themselves, by adopting a service-dominant (rather than goods-dominant) understanding of exchange and marketing. Corollary: educators can be more relevant by embracing and communicating S-D Logic

S-D Logic S-D Logic Overview7 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); Constantin and Lusch (1994) Network Theory

S-D Logic S-D Logic Overview8 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)

S-D Logic S-D Logic Overview9 Service-Dominant (S-D) Logic Identify core competences, knowledge and skills that represent a potential competitive advantage Cultivate relationships with potential customers develop customized, compelling value propositions Co-create value with customer Use financial performance as an instrument of learning for improving the level of service for customers and markets

S-D Logic S-D Logic Overview10 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

S-D Logic S-D Logic Overview11 Evolution of Marketing Thought To Market (Matter in Motion) Market To (Management of Customers & Markets ) Market With (Collaborate with Customers & Partners to Produce & Sustain Value) Through

S-D Logic 12 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

S-D Logic S-D Logic Overview13 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

S-D Logic 14 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 Resources being used for the benefit of, and in interaction with, the customer, places the customer at 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

S-D Logic S-D Logic Overview15 Evolving Toward a Service-Dominant Logic 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 G-D Focus S-D Focus

S-D Logic S-D Logic Overview16 Marketing Redefined Marketing is the process in society and organizations that facilitate 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.

S-D Logic S-D Logic Overview17 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

S-D Logic S-D Logic Overview18 Implications Making services more goods-like (tangible, separable, etc.) may not be correct normative marketing goal Make goods-more service-like. Firms may consider becoming more pure marketing-services firms Outsource manufacturing (as well as other non- core competences) Consider selling service flows rather than ownership, even when goods are involved

S-D Logic S-D Logic Overview19 Implications (2) Rethink industrial and employment classifications Develop service-dominant lexicon and models e.g., perceived quality, relationship, customer equity Refocus marketing research Processes, experiences, complexity, networks, intangibles, etc. Rethink marketing curriculum

S-D Logic S-D Logic Overview20 S-D Logic Can Direct Macro/Public Policy 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 resources. Public policy to encourage collaboration vs. competition. From value in exchange to value in use. Public data collection on value in use and home production.

S-D Logic S-D Logic Overview21 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 societyTheory of Markets

S-D Logic S-D Logic Overview22 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 us Steve Vargo: Lusch: