S-D Logic Service-Dominant Logic: Update from the Otago Forum Special Session Presentation for the ANZMAC Conference December 5, 2005 Stephen L. Vargo, University of Hawaii at Manoa

S-D Logic S-D Logic Overview2 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 S-D Logic Overview3 Service and Service Resources 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 Represents a Shift in Focus from Operand 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 skillscompetences

S-D Logic S-D Logic Overview4 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 S-D Logic Overview5 Evolution of Marketing Thought To Market (Matter in Motion) Market To (Management of Customers & Markets ) Market With (Collaborate with Customers & Partners to Cocreate & Sustain Value) Through

S-D Logic S-D Logic Overview6 Evolving Toward a Service-Dominant Logic 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 G-D Focus S-D Focus

S-D Logic S-D Logic Overview7 What S-D Logic is Not Reflection of the transition to a services era Implying a Goods-Service dichotomy 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 Applicable only to marketing management

S-D Logic 8 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 partyi.e., Service Thought-leadership: Service marketing concepts and insights transforming marketing thought Service-marketing concepts becoming mainstream 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

S-D Logic S-D Logic Overview9 Thank You! For More Information on S-D Logic visit: sdlogic.net 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 us Steve Vargo: Lusch:

S-D Logic S-D Logic Overview10 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 11 Implications of a Service- Exchanged-For-Service Paradigm Academic Unifyingorganized around the common denominator (mutual service provision) Unique Marketing Origininternally generated, rather than inherited Resource-Centeredbuilds on relative resource-expanding nature of operand vs. resource-depleting nature of operant resources Value-definingshifts focus to value-in use Logically Divisible--Allows sub-discipline of direct service provision Promotes researchprovides clear links among firm, customer, society, value, etc Micro implicationsMakes service-based concepts central/applicable to marketing IHIP as it applies to value creation/all of marketing Macro implicationsSocial role of Marketing Value–creating Resource-expanding

S-D Logic S-D Logic Overview12 Implications of a Service- Exchanged-For-Service Paradigm Practice Managerially compellingfocuses 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 understandablerequires fewer adjustments Normative prescripts (e.g., customer orientation/relationship) implied by framework Invitingincreased attractiveness off discipline Society Promotes social responsibilitypurpose is to: Serve individuals/society/organizations Facilitate value enhancement/resource expansion through exchange

S-D Logic S-D Logic Overview13 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 S-D Logic Overview14 Precursors Historical treatment of services Smiths (1776) bifurcation Bastiats (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 S-D Logic Overview15 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 16 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

S-D Logic S-D Logic Overview17 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 18 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

S-D Logic S-D Logic Overview19 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 S-D Logic Overview20 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 S-D Logic Overview21 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 S-D Logic Overview22 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.

S-D Logic S-D Logic Overview23 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 societyTheory of Markets

S-D Logic S-D Logic Overview24 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 25 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 partyi.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)

S-D Logic S-D Logic Overview26 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