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

S-D Logic 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 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 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

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

S-D Logic 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 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 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

S-D Logic Evolving Toward a Service-Dominant Lexicon 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 12 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 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 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)

S-D Logic 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

S-D Logic 15 Implications of a Service- Exchanged-For-Service Paradigm 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 IHIP as it applies to value creation/all of marketing Macro implicationsSocial role of Marketing Value–creating Resource-expanding

S-D Logic Implications of a Service- Exchanged-For-Service Paradigm 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 Promotes social responsibility Marketing has social purpose Education Easily understandablerequires fewer adjustments Normative prescripts (e.g., customer orientation/relationship) implied by framework Invitingincreased attractiveness off discipline Society Promotes social responsibilitypurpose is to: Serve individuals/society/organizations Facilitate value enhancement/resource expansion through exchange

S-D Logic An S-D Logic Definition 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.

S-D Logic 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 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 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:

S-D Logic 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 The Inversion Products (units of output) Goods Services (Intangible goods) Service (processesapplied competences) Direct Indirect (Goods--Appliances) Goods Logic Service Logic