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.

S-D Logic

Overview of theService-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

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S-D Logic

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)

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S-D Logic

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

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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 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

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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)

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S-D Logic

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

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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); Constantin and Lusch

(1994) Network Theory

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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)

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S-D Logic

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

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S-D Logic

Shift in Focus fromOperand 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

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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 Produce & Sustain

Value)

Through 1950 1950-2005 2005+

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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

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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

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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

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S-D Logic

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

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S-D Logic

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.

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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

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S-D Logic

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

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S-D Logic

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

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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.

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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

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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 e-mail us

Steve Vargo: [email protected] Bob Lusch: [email protected]