Overview of the Service-Dominant Logic of Marketing

1. 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

2. 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 Overview

3. 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 S-D Logic Overview

4. 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 Overview

5. 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 Overview

6. 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 Overview

7. 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 Overview

8. 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 Overview

9. 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 Overview

10. 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 S-D Logic Overview

11. Evolution of Marketing Thought Market With (Collaborate with Customers & Partners to Produce & Sustain Value) To Market (Matter in Motion) Market To (Management of Customers & Markets ) Through 1950 1950-2005 2005+ S-D Logic Overview

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

13. 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 Overview

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

15. 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 Evolving Toward a Service-Dominant Logic G-D Focus S-D Focus S-D Logic Overview

16. 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 Overview

17. 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 Overview

18. 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 Overview

19. 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 Overview

20. S-D Logic Can Direct Macro/Public Policy S-D Logic Overview

21. 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 S-D Logic Overview

22. 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: svargo@sdlogic.net Bob Lusch: rlusch@sdlogic.net S-D Logic Overview