S-D Logic Alternative Logics for Service Innovation Global Advanced Technology Innovation Consortium Conference Global Innovation Challenges and Opportunities.

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 Hawai’i 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 yesterday’s 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 Smith’s 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

Say’s 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 process—distinct from

“services”— particular types of goods Shifts primary focus to “operant resources”

from “operand 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)

Premise Explanation/Justification

FP1 Service 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.

FP2 Indirect exchange masks the fundamental basis of exchange.

Goods, money, and institutions mask the service-for-service nature of exchange.

FP3 Goods are distribution mechanisms for service provision.

Goods (both durable and non-durable) derive their value through use – the service they provide.

FP4 Operant resources are the fundamental source of competitive advantage

The comparative ability to cause desired change drives competition.

FP5 All economies are service economies.

Service (singular) is only now becoming more apparent with increased specialization and outsourcing.

S-D Logic

Foundational Premises (Revised)

Premise Explanation/Justification

FP6 The customer is always a co-creator of value

Implies value creation is interactional.

FP7 The 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.

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

Service is customer-determined and co-created; thus, it is inherently customer oriented and relational.

FP9 All economic and social actors are resource integrators

Implies the context of value creation is networks of networks (resource-integrators).

FP10

Value 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 ConceptsGoods

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 ConceptsService

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-

crea

tion

Value Configuration

Den

sity

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: [email protected] Bob Lusch: [email protected]

Thank You!