Foundations of Service-Dominant Logic

1. Foundations of Service-Dominant Logic Naples Forum on Service Capri, Italy June 17, 2009 Stephen L. Vargo University of Hawai’i at Manoa Robert F. Lusch University of Arizona

2. Suddenly, Service(s) is Everywhere • Service-oriented architecture • Software-as-a-service • Service systems • Services science

3. The Message

4. The Prelude: The Blasphemy of the Alternative Logic • There is no new service economy • There are no producers and consumers • Goods are not “goods.” • Firms do not create value • There is no B2C • There are no services • There are no markets • And yet there are

5. The meaning of logic • The underlying philosophy for organizing and understanding a phenomena • Pre-theoretical • Paradigm level of thought • The lens that provides the perspective • Different from formal scientific and mathematical logic

6. The Importance of the Right Logic • Without changing our pattern of thought, we will not be able to solve the problems we created with our current pattern of thought • Albert Einstein • 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 • What is needed is not an interpretation of the utility created by marketing, but a marketing interpretation of the whole process creating utility. • Wroe Alderson

7. From Arm-Flapping to Airfoil Logic

8. 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 value-laden goods

9. Value Creation Value Destruction Goods/Money Producer Supplier Value Production and Consumption Product/Value Delivery Consumer Supply/Value Chain

10. Services: The G-D Logic Perspective

11. Problems with Goods Logic

12. G-D Logic Background

13. G-D Logic Background (2)

14. What Has Changed?Nothing and Everything

15. 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 • (Prahalad and Hamel (1990); Day 1994) • Resource-Advantage Theory and Resource-Management Strategies • Hunt (2000; 2002); Constantine and Lusch (1994) • Network Theory • (Hakansson and Snehota 1995) • Interpretive research and Consumer Culture theory • (Arnould and Thompson 2005) • Experience marketing • (Prahalad and Ramaswamy 2000)

16. Service-Dominant Logic Basics

17. Foundational Premises (Revised)

18. Foundational Premises (Revised)

19. Resource Integration Economic Currency Market-facing Resource Integrators New Resources Resource Integrator (individual, family, firm, etc.) Social Currency Private Resource Integrators Value Public Resource Integrators Public Currency

20. Clarifications: Service vs. Services • Services = intangible products • Service =The process of using one’s competences for the benefit of some party • The application of knowledge and skills • Service transcends “goods and ‘services’” G-D Logic S-D Logic There are No “Services” in Service-Dominant Logic

21. Clarifications: Cocreation vs. Coproduction Integration With Public-Facing Resources Direct Service Provision Provider of Operand & Operant Resources Service Beneficiary Value in Context Cocreation of Value Coproduction Service Provision via Goods Integration With Private-Facing Resources Coproduction is relatively optional. Value is always cocreated

22. What S-D Logic Might be

23. Service Exchange through Resource Integration and Value Co-creation Market-facing and public and private resources Market-facing and public and private resources Resource Integrator/Beneficiary Resource Integrator/Beneficiary (“Firm”) (“Customer”) Service Value Co-creation Value Co-creation $ (Service Rights) = Resource Integrators

24. Markets (and Market Actors) as Service Systems Resource Integrator/Beneficiary Resource Integrator/Beneficiary (“Firm”) (“Customer”) Service Systems

25. An Extended Pedigree • Social Network Theory • e.g., Giddens (1984); Granovetter (1973) • New Institutional Economics • North (2005); Menard (1995) • Human Ecology • e.g., Hawley (1986); • Business Ecosystems • Insiti and Levien (2004) • Stakeholder Theory • Donaldson and Preston (1995) • Service Science • e.g., Spohrer and Maglio (2008) • Market Practices and Performances • Araujo (2008), Kjellberg and Helgesson (2008)

26. What is needed • Foundations for Positive theory • Shift from products as unit of analysis to collaborative value creation and determination • B2B, service, and relationship • Refocus on operant resources as source of value • Resource-based theories of the firm; resource advantage theory • Elimination of producer/consumer distinction • B2B marketing/network theory • Inframarginal analysis • Models of emergent structure and processes • Complexity theory • Interpretive research • Theory of resource integration and exchange • Theory of the market to inform normative marketing theory

27. The Market, Marketing, and Economics • Other disciplines have found it convenient to institutionalize the distinctions between applied and basic science... In marketing, the problem is rather one of spinning off a basic science from a problem solving discipline. • (Arndt 1985) • “Paradoxically, the term market is everywhere and nowhere in marketing.” • Venkatesh, Penaloza, and Firat (2006) • It is a peculiar fact that the literature on economics…contains so little discussion of the central institution that underlies neoclassical economics – the market • North (1977)

28. Issues for a Theory of the Market • The performative nature of markets • The market is a function of the marketing (and other business disciplines) • e.g., Araujo (2009) • Markets do not exist • They are images of service potential • Markets as practices • e.g., Kjellberg and Helgesson ( 2008) • …and yet they do • Intersubjective realities • Intuitions

29. Markets: Shared or (Co)Created The MP3-Player Market Or The customizable-entertainment- storage- organizer-and-personal- assistant-and-life-applications-with-a- WOW-factor-platform market The sodium- bicarbonate market The mineral-oil market Or The baby-butt-rash-avoidance- mommy-guilt-reducing- body-massage-and- sexual-lubricant market Or The occasional-baking- But-primarily-refrigerator- freshening-teeth-cleaning- clothes-brightening market

30. The Messages of S-D Logic

31. The Messages of S-D Logic (2)

32. Key S-D Logic Publications

33. Frontiers in Service Conference • World’s leading annual conference on service research in its 18th year • Honolulu, Hawaii, Oct. 29 – Nov. 1, 2009 • Hosted by the Shidler College of Business, University of Hawaii at Manoa • 304 abstracts submitted, 39 countries • Emphasis on Service Science trend • Brian Arthur and John Seely Brown confirmed plenary speakers Center for Excellence in Service

34. Thank You! • 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: svargo@sdlogic.net Bob Lusch: rlusch@sdlogic.net

35. Resource Integration: The Practices Perspective Partially adapted from Kjellberg & Helgesson (20056

36. External Resources RI Resistance Reduction Resource Integration Needs Needs Needs Resources Resources Resources Exchange Resistances Resistances Resistances RI RI Customers Stakeholders The New Fractal Geometry of the Market Value Co-creation Value Co-creation ValueCo-Creation

37. S-D Logic Influence on Service Science • B. Service Client • Individual • Organization • Public or Private • A. Service Provider • Individual • Organization • Public or Private Forms of Service Relationship (A & B co-create value) Value Configuration Density Forms of Service Interventions (A on C, B on C) Forms of Responsibility Relationship (A on C) Forms of Ownership Relationship (B on C) Resource Integrator/Beneficiary Resource Integrator/Beneficiary • C. Service Target: The reality to be • transformed or operated on by A, • for the sake of B • People, dimensions of • Business, dimensions of • Products, goods and material systems • Information, codified knowledge (“Firm”) (“Customer”) Value Co-creation • Understanding service and service innovation requires new abstractions. • Service is the application of competence for the benefit of another. • Service involves at least two entities, one applying competence and another integrating the competences with other resources and determining benefit (value co-creation) – these interacting entities are service systems. • A service system is a dynamic value co-creation configuration of resources, including people, organizations, shared information, and technology connected to other service systems by value propositions. • A service interaction includes proposal, agreement, and realization. • An atomic service system has no service systems as operand resources. Source: Maglio (2009)

39. S-D Logic Influence on Service Science (2) • Given our service system abstraction and the service-dominant logic on which it depends, we can define service science and its variations: • Service science is the study of the application of the resources of one or more systems for the benefit of another system in economic exchange. • Normative service science is the study of how one system can and should apply its resources for the mutual benefit of another system and of the system itself. • Service science, management, and engineering (SSME) is the application of normative service science. Source: Maglio 2009

40. The Source of the “New” Service(s) Economy

41. Potential Implications

42. Potential Implications (2)

43. What is needed • Foundations for Positive theory • Shift from products as unit of analysis to collaborative value creation and determination • B2B, service, and relationship • Refocus on operant resources as source of value • Resource-based theories of the firm; resource advantage theory • Elimination of producer/consumer distinction • B2B marketing/network theory • Inframarginal analysis • Models of emergent structure and processes • Complexity theory • Interpretive research • Theory of resource integration and exchange • Theory of the market to inform normative marketing theory

44. Service Ecosystems • An economic community supported by a foundation of interacting organizations that co-create value through service exchange . It includes: • “Suppliers” “ • “Producers” • Competitors • Customers • Customer’s network of resources • Other social and economic stakeholders

45. Lego

46. Boeing

48. Threadless.com

49. Jones Soda • Relatively new brand, actively solicits and applies user input from the onset • Largely inorganic - corporately created brand community • Consumer packaged good

50. Firefox: Consumer Generated Content