Service-Dominant Logic: Progress and Prospects

1. Service-Dominant Logic: Progress and Prospects AMA Summer Educators’ Conference August 5, 2007 Stephen L. Vargo, University of Hawai’i at Manoa Robert F. Lusch, University of Arizona Melissa Akaka, University of Hawai’i at Manoa Yi He, University of Hawai’i at Manoa Do not reproduce or use without permission of Stephen L. Vargo

2. 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 • What is needed is…a marketing interpretation of the whole process of creating utility. • Wroe Alderson • 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 markets and marketing • S-D logic is more robust and better suited to the long-term viability of marketing • (as a professional practice, science, and societal contributor).

3. 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

4. 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

5. The Roots of GD 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”)

6. Uneasiness with Dominant Model • Characterizations of G-D logic • “marketing myopia” (Levitt 1960),  • “manufacturing logic” (e.g., Normann 2001), • “old enterprise logic” (Zuboff and Maxmin 2002) • 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 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)

7. Sub-disciplinary Divergences and Convergences • Business-to-Business Marketing • From differences • Derived demand, professional buyers, flocculating demand, etc • To emerging new principles • Interactivity, relationship, network theory, etc • Service(s) Marketing • From differences: • Inseparability, heterogeneity, etc. • To emerging new principles: • Relationship, perceived quality, customer equity, etc. • Other Sub-disciplines • Other Intra-marketing initiatives • e.g., interpretive research, Consumer culture theory, etc. • From deterministic models to emergent properties • From products to experiences • From embedded value to individual meanings and life theme

8. 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); Constantin and Lusch (1994) • Network Theory • (Hakansson and Snehota 1995) • Interpretive research and Consumer Culture theory • Experience Marketing • B2B Marketing/Value Creation

9. 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

10. Revised Foundational Premises

11. Revised Foundational Premises

12. 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 • Foundation for service science • Reformulation of economic theory

13. S-D Logic Knowledge Integration “The new dominant logic has important implications for marketing theory, practice, and pedagogy, as well as for general management and public policy. … The ideas expressed in the article and the commentaries will undoubtedly provoke a variety of reactions from readers of the Journal of Marketing.” - Ruth Bolton, Editor, Journal of Marketing (2004)

14. Breadth of Knowledge Integration Category Time Cited/Mentioned *as of December 2006

15. Integration in Marketing Literature Journal of Marketing (7) Journal of Service Research (7) International Journal of Service Industry Management (7) European Journal of Marketing (5) Industrial Marketing Management (5) Journal of Business Research (4) Journal of Retailing (3) Marketing Science (3) International Marketing Review (2) Journal of Business-to-Business Marketing (2) Journal of Public Policy & Marketing (2) Citations Numbers based on Social Science Citation Index.

16. Main Sub-themes of Integration Three main sub-themes underlying the knowledge integration focus on core concepts of S-D logic: The categorization is adapted from marketing schools of thought presented by Shaw and Jones (2005). The numbers represent selected citations relating to or elaborating upon S-D logic (Vargo and Lusch 2004).

17. Elaborations on Core Concepts (1) • S-D Logic Meaning of Service • “Service” as a new and dominant logic (e.g, Achrol and Kotler 2006; Ballantyne and Varey 2006; Bolton and Alba 2006; Brodie, Pels and Saren 2006; Jaworski and Kohli 2006) • Rethinking service marketing (e.g., Edvardsson et al. 2006; Brown and Bitner 2006; Lovelock and Gummesson 2004; Gronroos 2006) • Technology-driven service-orientation (e.g., Rust 2004; Rust and Espinoza 2006; Shugan 2004) • The symbolic nature of service (e.g., Venkatesh, Penaloza and Firat 2006; Brodie, Pels and Saren 2006)

18. Elaborations on Core Concepts (2) • Resource-Based Perspective • Elaborations on the concept of resources (e.g., Arnould 2006; Arnould, Price and Malshe 2006; Hunt and Madhavaram 2006) • Resources as a competitive advantage (e.g., Hunt and Madhavaram 2006; Lusch et al. 2007) • Integration of resources within networks or systems of exchange (e.g., Flint and Mentzer 2006; Gummesson 2006; Kalaignanam and Varadarajan 2006; Mouzas 2006; Lambert and Garcia-Dastugue 2006)

19. Elaborations on Core Concepts (3) • Process of Value Co-Creation • The experiential nature of value (e.g., Prahalad 2004; Shembri 2006; Woodruff and Flint 2006) • Customer participation, dialogue and learning (e.g., Woodruff and Flint 2006; Denegir-knott, Zwick and Schroeder 2006; Ballantyne and Varey 2006) • Relationships and interaction in co-creation (e.g., Day 2006; Gronroos 2006; Gummesson 2006; Oliver 2006; Moller 2006; Rust and Thompson 2006; Wilkie and Moore 2006)

20. Groundwork for a Grand Theory • Need for grand theory of marketing • Gummesson 2006; Hunt and Madhavaram 2006 • “Markets are everywhere and nowhere...” • Venkatesh, Penalosa, and Firat 2006 • S-D Logic as Foundational for a General Theory of Markets (positive) and Marketing (normative) • Lusch and Vargo 2006; Vargo 2007; Vargo and Lusch 2006; Vargo and Lusch 2008

21. What is needed • Foundations for Positive theory • Reorientation to marketing and marketing • S-D Logic • 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 markets to inform normative marketing theory

22. Density Resource Integrator/Beneficiary Resource Integrator/Beneficiary (“Firm”) (“Customer”) Value Co-creation Service Exchange through Resource Integration and Value Co-creation Value Configuration

23. Conceptual Issues The following need further conceptual development (deep meaning): • Social and economic actors • Resources and resistances • Value and value proposition • Co-production and co-creation • Conversation and dialog • Value networks and constellations

24. Foundational Issues Can we understand marketing without a fuller understanding of the nature, scope and role of organizations, markets and marketing? What service systems should be our primary focus? Is S-D logic an organizational logic or a marketing logic? What is consumer welfare under S-D logic? How is firm performance best measured under S-D logic? What are the conceptual aspects of resource integration? How should national accounting systems be designed to be S-D informative? Should S-D logic be the foundation of service science?

25. Research Frontiers What is value and how to measure it? What is service-centricity and how to measure it? How do social and economic actors integrate resources? What existing firms, industries and cultures best characterize S-D logic? What are the obstacles to implementation of S-D logic? Does S-D logic improve ethical decision-making and sensitivity?

26. 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

27. 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

28. Related Work (Continued) • Lusch, R.F., S.L. Vargo(2006), “The Service-Dominant Logic of Marketing: Reactions, Reflections, and Refinements, Marketing Theory • Lusch, R.F., S.L. Vargo, and A. Malter (2006), Marketing as Service-Exchange: Taking a Leadership Role in Global Marketing Management, Organizational Dynamics, • Lusch, R.F., S.L. Vargo, and M. O’Brien (2007), “Competing Through Service: Insights from Service-Dominant Logic,” Journal of Retailing • Vargo, S. L. (2007), “On a Theory of Markets and Marketing: From Positively Normative to Normatively Positive,”Australasian Marketing Journal(in press)

29. Related Work (Continued) • Vargo, S.L. and R.F. Lusch (2007), “From Products to Service: Divergences and Convergences of Logics,” Journal of Industrial Marketing Management,” (in press) • Vargo, S.L. and R.F. Lusch (2008) “Why ‘Service’?”, Journal of the Academy of Marketing Science, (in press) • Vargo, S.L. and R.F. Lusch (2008) “Service-Dominant Logic: Continuing the Evolution”, Journal of the Academy of Marketing Science, (in press) • Lusch, R.F., S.L. Vargo, and G. Wessels (2008), "Toward a Conceptual Foundation for Service Science: Contributions from Service-Dominant Logic," IBM Systems Journal, 47, 1 (in press)

30. The Breadth of Knowledge Integration

31. The Breadth of Knowledge Integration

32. The Breadth of Knowledge Integration

33. 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 ofService-System Exchange? Value Co-creation Value Co-creation Value Co-Creation

34. Difficult Conceptual Transitions

35. Value Creation Value Creation Value Creation Resource Integrator/Beneficiary Resource Integrator/Beneficiary (“Firm”) (“Consumer”) Service Systems From Value Creation to Resource Integration

36. Reflections of the Product Model • Marketing is: • The “creation of utilities” (Weld) • Time, place, and possession • “production function” • Concerned with value distribution • Orientations • Production and Product • distribution vs. value-added • Consumer Orientation • Evidence of problem vs. correction • Marketing management and Consumer Behavior • Alderson’s admonition: • “What is needed is not an interpretation of the utility created by marketing, but a marketing interpretation of the whole process creating utility.” • Disconnect between marketing theory and marketing practice • Sub-disciplinary division

37. Sub-disciplinary Divergences and Convergences • Business-to-Business Marketing • From differences • Derived demand, professional buyers, flocculating demand, etc • To emerging new principles • Interactivity, relationship, network theory, etc • Service(s) Marketing • From differences: • Inseparability, heterogeneity, etc. • To emerging new principles: • Relationship, perceived quality, customer equity, etc. • Other Sub-disciplines • Other Intra-marketing initiatives • e.g., interpretive research, Consumer culture theory, etc. • From deterministic models to emergent properties • From products to experiences • From embedded value to individual meanings and life theme

38. 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 party”—i.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) • 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 • Purpose of the firm is to serve…

39. What is needed • Positive Theory • “Market are everywhere and nowhere...” (Venkatesh, Penalosa, and Firat 2006) • Foundations for Positive theory • Reorientation of markets, purpose of the firm, and marketing • S-D Logic, resource-based theory of the firm • 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 markets to inform normative marketing theory

40. Value Creation Value Creation Value Creation Resource Integrator/Beneficiary Resource Integrator/Beneficiary (“Firm”) (“Consumer”) Service Systems From Value Creation to Resource Integration

41. Problems with Goods Logic • Goods are not what we fundamentally “own” to exchange • Application of knowledge and skills (our services) • Goods are not all that “good” • Tangibility is not fundamentally why we buy goods • It is for the service they render • Benefits are generally intangible – brand, image, meaning, experience • Standardization ignores individual preferences • Value (customer determined) is very is perishable • Inventory of tangible goods is resource depleting • Focuses on what we make, not what we do for people • What customers need • “Consumer orientation” does not help • Focuses on efficiency of output processes rather than effectiveness of resource application (inputs) • Does not inform (misinforms) firm transition to service

42. 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

43. Evolution of Marketing Thought Market With (Collaborate with Customers & Partners to Create & Sustain Value) To Market (Matter in Motion) Market To (Management of Customers & Markets ) Through 1950 1950-2010 2010+

44. Value Creation Value Destruction Producer Supplier Value Production and Consumption Product/Value Delivery Consumer Supply/Value Chain

45. Potential Implications • Making “services” more “goods-like” (tangible, separable, etc.) may not be correct normative marketing goal • Make goods-more service-like. • Reconsider the primary nature of the firm • From manufacturing (make and sell) to marketing • resource utilization for service provision • Outsource and other non-core competences • Virtual, “on demand” modular marketing organizations

46. Potential Implications (2) • Selling service flows rather than ownership, even when goods are involved • Shifting to Value-Based Pricing • Based on value-in-use • Network to network marketing • Resource integration for resource integrators