1. S-D Logic A Service Foundation for a Science of Service Presentation to: Business Services Research, Tokyo Research Laboratory, IBM Japan, Ltd Aug 18, 2006 Stephen L. Vargo, University of Hawaii at Manoa

2. S-D Logic The Importance of Logics What is needed is…a marketing interpretation of the whole process of creating utility Wroe Alderson The greatest danger in times of turbulence is not the turbulence: it is to act with yesterdays logic. Peter F. Drucker

3. S-D Logic The Essential Message There are two distinct logics that can serve as a foundation for service science Goods-dominant logic Sees services as a special type of intangible outputa type of product Efficiency Driven Service-dominant logic Sees service as a process of using resources for the benefit of another party in exchange for the service of that party Goods are service-delivery mechanisms Effectiveness driven Service-dominant logic offers a more solid foundation

4. 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

5. S-D Logic Historical Treatment of Services Smiths (1776) bifurcation Says notion of embedded utility Desire for a science of economics in the tradition of Newtonian mechanics Bastiats (1848) reconsideration Services are exchanged for services…it is the beginning, the middle, and the end of economic science

6. S-D Logic Service-Dominant Logic: What it is A logic that views service, rather than goods, as 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 processdistinct from services, which implies intangible goods Shifts focus to operant resources from operand resources Value is always co-created Sees all economies are service economies All businesses are service businesses

7. 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 Hunt (2000; 2002) Network Theory (Hakansson and Snehota 1005)

8. 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 Create & Sustain Value) Through 1950 1950-2005 2005+

9. S-D Logic 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 process 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

10. 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

11. S-D Logic 11 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 Operant resources being used for the benefit of the customer places the customer in 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

12. S-D Logic 12 Difficult Conceptual Transitions Goods-Dominant Concepts Goods 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 Concepts Service 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)

13. S-D Logic What S-D Logic is Not A Theory S-D logic is a logic, an approach, a lens, but not a theory Could be used as the foundation for a theory Reflection of the transition to a services era In S-D logic, all economies are service economies Justified by the Superior Customer Responsiveness of Services Companies Services companies just as likely to operate from G-D logic Restatement Of The Consumer Orientation Consumer orientation is evidence of G-D logic, not a fix to it Consumer orientation is implied by S-D logic

14. S-D Logic What S-D Logic is Not (2) Alternative To The Exchange Paradigm Problem with exchange paradigm is assumption of exchange of output, not the notion of exchange S-D logic says service (a process) is exchanged with service Equating Service with Provision of Functional Benefits Co-creation of value implies service best understood in expressive and experiential terms Applicable only to marketing management More generally, could serve as foundation for theory of markets and marketing

15. S-D Logic What S-D Logic Might be Foundation of a paradigm shift in marketing Perspective for understanding role of markets in societyTheory of Markets Basis for general theory markets and marketing Basis for service science Foundation for theory of the firm Reorientation for economic theory

16. S-D Logic Advantages of S-D Logic for Service Science Based on service rather than intangible goods Based on positive understanding of service Generalizable to all economic exchange Can subsume G-D logic Normatively compelling

17. S-D Logic In Brief… Service Science should be built on a Logic of Service logic of intangible goods (services)

18. S-D Logic 18 Related Work Vargo, S. L. and R.F. Lusch (2004) Evolving to a New Dominant Logic of Marketing, Journal of Marketing, 68 (1), 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, (in Press June) Lusch, R.F. and S.L. Vargo, editors (2006), The Service-Dominant Logic of Marketing: Dialog, Debate, and Directions, Armonk, NY: M.E. Sharpe

19. S-D Logic Related Work (Continued) Lusch, R.F., S.L. Vargo(2006), The Service-Dominant Logic of Marketing: Reactions, Reflections, and Refinements, Marketing Theory, 6 (3), Lusch, R.F., S.L. Vargo, and M. OBrien (2006),Competing Through Service: Insights from Service- Dominant Logic, Journal of Retailing, (forthcoming) Lusch, R.F., S.L. Vargo, and A. Malter (2006), Marketing as Service-Exchange: Taking a Leadership Role in Global Marketing Management, Organizational Dynamics, (forthcoming) Lush, R. F. and S. L. Vargo, editors (2007) Evolving to a New Dominant Logic for Marketing: Continuing the Debate and Dialog, Special Issue of the Journal of the Academy of Marketing Science, (forthcoming)

20. S-D Logic Thank You! For More Information on S-D Logic visit: sdlogic.org We encourage your comments and input. Will also post: Working papers Teaching material Related Links Steve Vargo: svargo@sdlogic.netBob Lusch: rlusch@sdlogic.net