Service-Dominant Logic: Clarifications and Elaborations Presentation to: Frontiers in Service Conference July 1, 2006 Stephen L. Vargo, University of Hawaii at Manoa

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

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. O’Brien (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)

S-D 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 process—distinct 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

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 1950-2005 2005+

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 Many driven by what we have leaned from understanding services FP1—back to Smith's original thesis—Bastiat’s model Service is the common denominator Sometimes service produces goods

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 FP4 FP5—Classification Often nothing new created FP6—Value resides with the consumer Appliances must be, leaned, used, maintained, etc. Use is usually customized

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 FP7 FP8—Many of our normative and positive models are adjustment to a good-centered model Consumer orientation Relationship Means-end chains Etc BUT these are implied by S-D logic

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)

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

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

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)

Why Service? 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…

What S-D Logic Might be Foundation of a paradigm shift in marketing Perspective for understanding role of markets in society—Theory of Markets Basis for general theory markets and marketing Basis for “service science” Foundation for theory of the firm Reorientation for economic theory

For More Information on S-D Logic visit: 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.net Bob Lusch: rlusch@sdlogic.net

S-D Logic Can Direct Macro/Public Policy From goods to service(s). Tax policy to encourage firms to retain tangible goods and sell service flows? From tangible to knowledge resources. Tax policy to encourage investments in education and skill development vs. housing. From operand to operant resources. Public policy to encourage collaboration vs. competition. From value in exchange to value in use. Public data collection on value in use and home production.

The Inversion Goods Logic Service Logic Products (units of output) Service (processes—applied competences) Goods Services (Intangible goods) Indirect (Goods--Appliances) Direct

Implications of a “Service-Exchanged-For-Service” Paradigm Academic Unifying—organized around the common denominator (mutual service provision) Unique Marketing Origin—internally generated, rather than inherited Resource-Centered—builds on relative resource-expanding nature of operand vs. resource-depleting nature of operant resources Value-defining—shifts focus to value-in use Logically Divisible--Allows sub-discipline of direct service provision Promotes research—provides clear links among firm, customer, society, value, etc Micro implications—Makes service-based concepts central/applicable to marketing IHIP as it applies to value creation/all of marketing Macro implications—Social role of Marketing Value–creating Resource-expanding

An S-D Logic Definition of Marketing Marketing is the process in society and organizations that facilitates 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.

Implications of a “Service-Exchanged-For-Service” Paradigm Practice Managerially compelling—focuses on mission (service) Demands customer orientation/value-in-use Implies relationship marketing Role of operant resources Implies better customer experiences/fairer treatment Promotes social responsibility Marketing has social purpose Education Easily understandable—requires fewer “adjustments” Normative prescripts (e.g., customer orientation/relationship) implied by framework Inviting—increased attractiveness off discipline Society Promotes social responsibility—purpose is to: Serve individuals/society/organizations Facilitate value enhancement/resource expansion through exchange

Evolving Toward a Service-Dominant Lexicon G-D Focus S-D Focus 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

For More Information on S-D Logic visit: 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