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Thinking Small and Long

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1 Thinking Small and Long
Robert F. Lusch Lisle & Roslyn Payne Professor of Marketing University of Arizona Ohio State University May 19, 2006

2 What I Want to Accomplish
Discuss Small and Long Thinking Share an Experience Illustrate a Method for Small & Long Thinking

3 Small and Long Thinking
S-D Logic Agent Based Modeling Thinking Small All agents exchange service or competences. Agent microscopic actions and interactions. Thinking Long All economies are service economies. Emergence and evolution of macroscopic features (CAS).

4 All Exchange is Service Centered
“the great economic law is this: Services are exchanged for services…. It is trivial, very commonplace; it is, nonetheless, the beginning, the middle, and the end of economic science….” Frederic Bastiat 1860 “services are the application of specialized competences (knowledge and skills) through deeds, processes, and performances for the benefit of another entity or the entity itself.” - (Vargo and Lusch 2004)

5 Growth of Markets & Marketing
Institutions Institutions Institutions As markets grow we develop and impact institutions in society. Relationships are at the core of these institutions. (next exhibit) Goods, money, organizations as intermediaries (two exhibits forward). Service for Service Goods, Money, Organizations, Networks are Intermediaries

6 Evolving To a New Frame of Reference
To Market (matter in motion) Market To (management of customers & markets) Market With (collaborate with customers & partners to produce & sustain value) Through Future

7 Goods vs. Service-Dominant
Marketing To: Mass market Produce product Promote product Price product Distribute product One-sided Transaction oriented Maximize profit Marketing With: Markets of one Service(s) Conversation & dialog Value Proposition Supply & Value Networks Multi-Sided Relational oriented Financial performance as feedback (learning)

8 Resources (internal & external)
Draw Upon Resources (internal & external) Collaborate With Customers & Partners Co-Create Value Proposition Co-Create Service Offering Collaborate: Customers & Partners Co-Create Value Processes & Network Co-Create Conversation & Dialogue Overcome Resistances S-D Logic as a Theory of Marketing

9 Advancing Theory: The Role of the Funeral
Scientific theories, however, are fundamentally different. They are constructed to be blown apart if proved wrong, and if so destined, the sooner the better. “Make your mistakes quickly” is a rule in the practice of science. I grant that scientists often fall in love with their own constructions. I know; I have. They may spend a lifetime vainly trying to shore them up. A few squander their prestige and academic capital in the effort. In that case – as economist Paul Samuelson once quipped – funeral by funeral, theory advances.” (Edward O. Wilson. Consilience: the Unity of Knowledge. 1998; p. 52).

10 Timeline of SD-Logic Four major revisions Two editors Six reviewers
Initial Draft 1995 Refinement Summer 1999 Submission Summer 2000 Submission Summer 2001 Submission Summer 2002 Submission Winter 2003 Submission Spring 2003 Paper Accepted Published January 2004 Four major revisions Two editors Six reviewers One strong reviewer advocated from beginning Sixth reviewer became advocate for publishing with commentaries Editor Ruth Bolton coached and guided along the way

11 Is It All About Services: A Paradigm Inversion (1999)
“While your manuscript has interesting ideas, the current positioning of the paper leaves one feeling that there is not much new in the paper.” - JM Editor David Stewart (November 1999) “The author(s) are to be applauded for taking on such an extremely ambitious essay. To propose a true Khunian paradigm shift in marketing and to succeed is to try to do something that no theoretical paper has achieved that I am aware of—although historians of science will ultimately be the judges of such matters.” JM Reviewer (November 1999) "Every once in a while a paper comes along that is truly exciting--that has the ability to change the way people think. This is one of those papers. If this paper is published in JM, then it has the opportunity to be a classic in our field. I wish that I had written it.” JM Reviewer (November 1999)

12 Is It All About Services: A Paradigm Inversion (2000)
“The primary concern of the reviewers remains focused on the incremental contribution of the paper.” “…it is probably too strong to conclude that all goods represent services in disguise.” “…identify the boundary conditions of your premises.” -Editor David Stewart

13 Is It All About Service (2001)
Revision of this manuscript has taken longer than intended. However, we should mention that one of the reasons it has taken ten months to complete this revision is that we kept trying to revise based on the individual comments of the reviewers and finally decided to start anew. Importantly the suggestion of reviewer #5 to organize the manuscript around a set of propositions (and your mentioning of this suggestion in your letter of September 19, 2000) while simultaneously encouraging us to significantly reduce the length of the manuscript led us in this direction. For your information the manuscript has been reduced by approximately 30%. Consequently, this manuscript is almost a total rewrite and is now organized around eight key propositions from which we derive thirteen managerial and societal implications. Steven L. Vargo & Robert F. Lusch Resubmission Letter to Editor Stewart

14 Transition & Convergence: From an Output to a Process Centered View of Marketing (2002)
“All three reviewers praise you for undertaking the challenging task of writing a paper that synthesizes a diverse marketing literature (over a substantial period of time)—and attempts to crystallize the debate about the meaning and direction of marketing.” “As you may recall, I invited a new reviewer (Reviewer 6)…He/she found the paper “interesting and provocative” and rightly observes that it is unlikely (and perhaps undesirable) for the reviewers to converge in their opinions.” “I ask you to create a shorter and more focused paper (that retains your key arguments). Then, if your paper is accepted for publication, it can provide the basis for invited commentaries by distinguished scholars.” - Editor, Ruth Bolton

15 Evolving to a New Dominant Logic for Marketing (2004)
Marketing inherited a model of exchange from economics, which had a dominant logic based on the exchange of “goods,” which usually are manufactured output. The dominant logic focused on tangible resources, embedded value, and transactions. Over the past several decades, new perspectives have emerged that have a revised logic focused on intangible resources, the co-creation of value, and relationships. The authors believe that the new perspectives are converging to form a new dominant logic for marketing, one in which service provision rather than goods is fundamental to economic exchange. Abstract, Journal of Marketing (January 2004), p.1

16 Invited Commentaries: Day, Deighton, Narayadas, Gummesson, Hunt, Prahalad, Rust, Shugan
Vargo & Lusch (2004) observe that an evolution is underway toward a new dominant logic for marketing. 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)

17 The Service-Dominant Logic: Dialog, Debate and Directions
M.E. Sharpe (2006) Distinguished Group of Scholars Identify areas of Consensus, Dissent, and Future Directions. Essays contributed by Achrol, Arnould, Brodie, Day, Gronroos, Gummesson, Holbrook, Hunt, Jaworski, Kohli, Kotler, Lambert, Levy, Penazola, Price, Oliver, Rust, Sawhney, Wilkie, Woodruff, and others Lusch & Vargo contribute integrative essays dealing with economic and marketing history, public policy, marketing management, and toward a general theory of marketing.

18 S-D Logic & ABM as a Paradigm Shift: From Constructs to Actors
Virtually all social science theory models relations between constructs. S-D logic views marketing as interactions between entities and ABM provides the method to model and research these interactions. What emerges from interactions? Macro structures Relations between variables Rules (institutions and norms) Co-creation

19 Building Societies from Ground Up
Digital Organisms Genetic algorithms Fuzzy Logic Data Capturing & Aggregation Object Oriented Programming

20 Object Oriented Programming
OOP Integrates Data and Functions. Every digital organism is an object with its own information and functions it uses to operate. Every digital organism has receptors, memory, decision system, and effectors.

21 Creation of Digital Life
Object Oriented Software Program Environment Memory Capability Sensory Capability Effector Capability Learning & Decision Capability Environment

22 Genetic Algorithms & Digital Learning
Learning Mode Genetic Mechanism Imitation Reproduction Communication Crossover Experimentation Mutation

23 Decision-Making: From Substantive Rationality to Procedural Rationality
Simon (1978) argues the concept of rationality is “economics” main export to other social sciences. In complex environments actors evolve and their actions and anticipations are unknown from each other; the relevant rationality is procedural rationality. These environments are the “permanent and ineradicable scandal of economic theory” (Simon 1976). Mind is the scarce resource; how the actor finds efficient and effective search algorithms is the key.

24 Procedural Rationality: How do Individuals Reason & Learn?
Inductive reasoning—ampliative method of reasoning (gap filling) Extinguish rules or actions that are unsuccessful and adopt rules or actions that are successful—market hypotheses Information processing and actions not fine-grained but are fuzzy Memory lingers; little is completely forgotten

25 Fuzzy Logic Weekend Days Lack of crisp, well-defined boundaries
Membership in two or more sets Imprecise linguistic concepts Everything a matter of degree Speed of perception and information processing Saturday Sunday Friday

26 The Ambidextrous Organization & Evolutionary Biology
When the environment changes slowly then mechanisms of exploitation that work on variation, selection and retention work well. We learn by communicating and do this primarily by crossover. When there is dramatic shift in the environment or a punctuated equilibria then relying purely on exploitation will not allow the organism to survive. It must explore to innovate or face extinction. We do this primarily via mutation.

27 The Ambidextrous Organization: Modeling Exploitation with Crossover
Moderate Crossover (moderate exploitation) is represented by 50% probability of crossover every 30 periods. High Crossover (high exploitation) is represented by 100% probability of crossover every 30 periods. In this situation the seller takes advantage of every opportunity to investigate the space for a good solution.

28 The Ambidextrous Organization: Modeling Exploration with Mutation
High Mutation (high exploration) is represented by 50% probability of mutation every 30 periods. Moderate Mutation (moderate exploration) is represented by 25% probability of mutation every 30 periods. Low Mutation (low exploration) is represented by 5% probability of mutation every 30 periods.

29 Simple Setting: Complex Market
Buyers are homogeneous. Buyers in market-A are stable and do not change their preferences but in market-B change their preferences randomly every 1500 periods. Sellers have cost functions and decision alternatives. Decisions include price, product attribute, production level. Buyer preference is a function of price and product offering. Sellers have four fuzzy states for each of three decisions. Each market hypothesis has 64 rules. Sellers vary in their exploration & exploitation.

30 Organizational Learning Strategies
Low Exploration Moderate Exploration High Exploration Exploitation Seller-Two Crossover = .5 Mutation = .25 Seller-One Mutation = .5 High Exploitation Seller-Four Crossover = 1.0 Mutation = .05 Seller-Three

31 Market-A: Stable World
Buyer preferences are fixed or unchanging. In this situation we would expect the organization that focuses heavily on exploitation as a learning mechanism and seldom uses exploration to learn to perform best (seller four). On the other hand an organization with high exploration would do poorly (seller one).



34 Stable World

35 Market B: Turbulent World
Buyer preferences are randomly changed every 1500 periods (50*crossover frequency). In this situation we would expect ambidextrous organizations to do best. The organizations that both, to a good degree, exploit and explore. This would be sellers 2 or 3. Seller four who hardly ever explores should perform the poorest.

36 Seller #4: Rulebase #10, Time = 25,000, Turbulent Environment

37 Turbulent World

38 Turbulent Environment
Profit Payoffs Stable Environment Turbulent Environment Seller-1 (low exploit; high explore) ($256,372) $185,182 Seller-2 (low exploit; mod explore) ($247,593) $105,849 Seller-3 (high exploit; mod explore) ($ 52,813) $307,339 Seller-4 (high exploit; low explore) $417,781 ($46,703) TOTAL MARKET ($138,997) $551,667

39 Moderating Effect: Market Environment (average profit)

40 Concluding Observations

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