2. © E. Gummesson 2009 1 SERVICE AND RELATIONSHIP MARKETING (SRM) Stockholm University School of Business February 2009 TOTAL RELATIONSHIP MARKETING PART 1: SUMMARY AND EXAMPLES Supplier Customer Supplier Customer Supplier Customer Supplier Customer Professor Evert Gummesson Supplier Customer Supplier Customer PREVIOUS LECTURE

3. © E. Gummesson 2009 2 This is glimpses from an adventurous and never-ending journey within a Nordic School tradition

4. © E. Gummesson 2009 3 SERVICE AND RELATIONSHIP MARKETING (SRM) Stockholm University School of Business February 2009 TOTAL RELATIONSHIP MARKETING PART 2: * Many-to-many marketing * S-D logic * Service science & summing up TODAY

5. © E. Gummesson 2009 4 How about the economic crisis?

6. © E. Gummesson 2009 5 “Why have relationship marketing, CRM, and one-to-one marketing not become as succesful in practice as their advocates had hoped?”

7. © E. Gummesson 2009 6 “Because the focus is restricted to the simple two-party relationship, a dyad between a single supplier and a single customer. But we all live and act in networks and communities.” MY ANSWER

8. © E. Gummesson 2009 7 Traditional American marketing management and marketing mix Customer centric Centered on one party Customer Relationship marketing CRM One-to-one marketing SupplierCustomer Relationship centric Centered on two parties Many-to-many marketing Network centric Centered on many parties

9. © E. Gummesson 2009 8 Definition: “Many-to-many marketing describes, analyzes and utilizes the network properties of marketing.”

10. © E. Gummesson 2009 9 Madelene, daughter in the city Dagmar, 85, neighbor Ingrid & Gunnar, neighbors Laila, Sverker, Linnea & Fredrik, neighbors Retailer Transport company Electrolux WE & OUR FREEZER

11. © E. Gummesson 2009 10 air Baltic Air China air greenland Air One Atlantic Airways Cimber Air City Airline Estonian Air Qantas Skyways Wideroe Adria 3 REGIONAL PARTNERS 11 SPECIAL SAS PARTNERS Blue 1 Croatia Airlines Star Alliance TAP Portugal Thai United SWISS US Airways Spanair South African Airways Austrian Asiana Airlines Lufthansa LOT Polish Airlines bmi british midland SAS Scandianvian Airlines Singapore Airlines Shanghai Airlines Air New Zealand Air China ANA All Nippon Airways Air Canada 19 FULL PARTNERS THE STAR ALLIANCE, FEBRUARY 2008

12. © E. Gummesson 2009 11 Government EU Hotel chain headquarters Competing destinations Customers: tourists business travellers Hotels Tourist and Congress Office THE HOTEL GROUP Destination marketing by the town of Östersund, Sweden Source: von Friedrichs Grängsjö, Yvonne and Gummesson, Evert, “Hotel Networks and Social Capital in Destination Marketing (forthcoming 2005)

13. © E. Gummesson 2009 12 Networks compete with networks

14. © E. Gummesson 2009 13 Message-ID: 1991Aug25.205708.9541@klaava.helsinki.fi From: torvalds@klaava.helsinki.fi (Linus Benedict Torvalds) To: Newsgroups: comp.os.inix Subject: What would you like to see most in minix? Summary: Small poll for my new operating system Hello everybody out there using minix-I’m doing a (free) operating system (just a hobby, won’t be big and professional like gnu) for 386 (486) AT clones. This has been brewing since april, and is starting to get ready. I’d like any feedback on things people like/dislike in minix, as my OS resembles it somewhat Any suggestions are welcome, but I won’t promise I’ll implement them Linus

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17. © E. Gummesson 2009 16 “Networks are the fundamental stuff of which new organizations are and will be made.” Source: Castells, Manuel, The Rise of the Network Society. Oxford, UK: Blackwells, 1996, s 168

18. © E. Gummesson 2009 17 “No business is an island.” Håkan Håkansson & Ivan Snehota Researchers of B2B networks “Everything touches everything.” Jorge Luis Borges Argentinean author “...nothing happens in islolation.” Albert-László Barabási Professor of Physics “No man is an island, entire of itself.” John Donne (1572-1631) Poet “Tell me who you associate with and I will tell you who you are” Euripides (400 BC) Dramatist

19. © E. Gummesson 2009 18 “Society is a network of relationships - and so is business.” And my own conclusions:

20. © E. Gummesson 2009 19 HUB NODE LINK CENTRALIZED NETWORK DECENTRALIZED NETWORK DISTRIBUTED NETWORK THREE EXAMPLES:

21. © E. Gummesson 2009 20 * Nodes and links * Hubs * Random networks * Planned networks * Clusters * Connectors * Preferential attachment * Rich gets richer * Fitness * Fit-get-rich * Winner-takes-all * Scale-free networks * Power laws * Phase transition * Robustness, error tolerance * Cascading failure * Tipping points * Thresholds * Spreading rates * Self-organizing * Six degrees of separation * What is the Internet, really? A SAMPLE OF CONCEPTS AND ISSUES FROM NETWORK THEORY:

22. © E. Gummesson 2009 21 * Nodes and links * Hubs * Random networks * Planned networks * Clusters * Connectors * Preferential attachment * Rich gets richer * Fitness * Fit-get-rich * Winner-takes-all * Scale-free networks * Power laws * Phase transition * Robustness, error tolerance * Cascading failure * Tipping points * Thresholds * Spreading rates * Self-organizing * Six degrees of separation * What is the Internet, really? A SAMPLE OF CONCEPTS AND ISSUES FROM NETWORK THEORY:

23. © E. Gummesson 2009 22 Albert-László Barabási, Professor of Physics, in Linked: The New Science of Networks (2002) underscores network applications to markets: “…understanding network effects becomes the key to survival in a rapidly evolving new economy.” (p. 200) “In reality, a market is nothing but a directed network.” (p. 208)

24. © E. Gummesson 2009 23 Networks of life: the network of a galaxy

25. © E. Gummesson 2009 24 Networks of life: network of interactions between proteins in baker’s yeast Source: Buchanan, Mark (2003), Small World. London: Phoenix, p. 144.

26. © E. Gummesson 2009 25 Source: Buchanan, Mark (2003), Small World. London: Phoenix, p. 81.

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28. © E. Gummesson 2009 27 OVERLOAD? TOO COMPLEX? YES, BUT COMPLEXITY IS CHARACTERISTIC OF LIFE AND BUSINESS!

29. © E. Gummesson 2009 28 SERVICE-DOMINANT LOGIC (S-D LOGIC)

30. © E. Gummesson 2009 29 STAGE 1. SERVICE MANAGEMENT AND SERVICES MARKETING GET STARTED

31. © E. Gummesson 2009 30 GOODS SERVICES THE MARKETING LANDSCAPE IN THE 1970s SOMETHING WAS MISSING!

32. © E. Gummesson 2009 31 THE FOCUS WAS ON * the division of goods and services * differences between goods and services This was perhaps a necessary but transient stage. Let’s scrap it!

33. © E. Gummesson 2009 32 STAGE 2. S-D LOGIC FROM DIVISION TO UNIFICATION

34. © E. Gummesson 2009 33 S-D logic is based on a synthesis of service research and its future directions by Steve Vargo and Bob Lusch

35. © E. Gummesson 2009 34 References: Total Relationship Marketing pp. 9-11 and other pages (see Index) Vargo, S. L. and Lusch, R. F. (2008), “Service-dominant logic: continuing the evolution”, Journal of the Academy of Marketing Science, Vol. 36 No 1, pp.1-10. Vargo, S. L. and Lusch, R. F. (2008), “Why ‘service’?” Journal of the Academy of Marketing Science, Vol. 36 No 1, pp.25-38.

36. © E. Gummesson 2009 35 THE MARKETING LANDSCAPE OF THE FUTURE SERVICE or VALUE

37. © E. Gummesson 2009 36 Foundational premise (FP) of S-D logic Revised and extended version 2008

38. © E. Gummesson 2009 37 FP1 Service is the fundamental basis of exchange The application of operant resources (knowledge and skills), “service,”as defined in S-D logic, is the basis for all exchange. Service is exchanged for service FP2 Indirect exchange masks the fundamental basis of exchange Because service is provided through complex combinations of goods, money, and institutions, the service basis of exchange is not always apparent FP3 Goods are a distribution mechanism for service provision Goods (both durable and non-durable) derive their value through use – the service they provide FP4 Operant resources are the fundamental source of competitive advantage The comparative ability to cause desired change drives competition FP5 All economies are service economies Service (singular) is only now becoming more apparent with increased specialization and outsourcing

39. © E. Gummesson 2009 38 FP6 The customer is always a cocreator of value Implies value creation is interactional FP7 The enterprise cannot deliver value, but only offer value propositions Enterprises can offer their applied resources for value creation and collaboratively (interactively) create value following acceptance of value propositions, but can not create and/or deliver value independently FP8 A service-centered view is inherently customer oriented and relational Because service is defined in terms of customer-determined benefit and co-created it is inherently customer oriented and relational FP9 All social and economic actors are resource integrators Implies the context of value creation is networks of networks (resource integrators) FP10 Value is always uniquely and phenomenologically determined by the beneficiary Value is idiosyncratic, experiential, contextual, and meaning laden

40. © E. Gummesson 2009 39 STAGE 3. COMBINING S-D LOGIC WITH MANY-TO-MANY MARKETING: VALUE IS CREATED IN NETWORKS

41. © E. Gummesson 2009 40 OUR FREEZER Madelene, daughter in the city Dagmar, 85, neighbor Ingrid & Gunnar, neighbors Laila, Sverker, Linnea & Daniel, neighbors Retailer Transport company Electrolux WE

42. © E. Gummesson 2009 41 SERVICE SCIENCE A HUGE DEVELOPMENT PROGRAM RUN BY SERVICE SCIENCE, MANAGEMENT AND ENGINEERING (SSME) USUALLY REFERRED TO AS

43. © E. Gummesson 2009 42 At IBM Stockholm in May 2008

44. © E. Gummesson 2009 43 References: Total Relationship Marketing, pp. 11-12 Maglio, P.P. and Spohrer, J., (2008), “Fundamentals of service science”, Journal of the Academy of Marketing Science, Vol. 36 No.1, pp.18-20.

45. © E. Gummesson 2009 44 Dr. James ("Jim") C. Spohrer is the Director of Service Research at IBM Almaden Research Center in San Jose, CA. Dr. Spohrer is pioneering the development of the emerging field known as Service Science, which seeks to understand service systems and improve service quality, productivity, compliance, and innovation.

46. © E. Gummesson 2009 45 Service Science is the study of service systems, aiming to create a basis for service innovation and improved service systems. Service Science defines service systems as value-co-creation configurations of people, technology, value propositions connecting internal and external service systems, and shared information (e.g., language, laws, measures, and methods). The smallest service system centers on an individual as he or she interacts with others, and the largest service system comprises the global economy. Cities, city departments, businesses, business departments, nations, and government agencies are all service systems.

47. © E. Gummesson 2009 46 Service Science combines organization and human understanding with business and technological understanding to categorize and explain the many types of service systems that exist as well as how service systems interact and evolve to cocreate value. The goal is to apply scientific understanding to advance our ability to design, improve, and scale service systems. The Service Science project has taken a grand grip on service by inventorying what is done in universities, engaging not only business schools but also schools of technology and other disciplines and by starting new training programs and research projects.

48. © E. Gummesson 2009 47 In its beginning Service Science was technologically-focused and was first called Services Science based on the idea that there is an identifiable service sector which grows. After contact with S-D logic the s in services was dropped. This is one of several tokens of IBM’s sensitivity to new knowledge. There is a desire to innovate efficient service systems and to reduce the gap between theory and practice through multidisciplinary cooperation engaging both academe and business. The Service Science project has been in a state of search and in 2007 a strategy could be discerned. The project is promising and can make a pivotal contribution to business and several management disciplines in the current and future economic reality.

49. © E. Gummesson 2009 48 T. J. Watson, Jr., President of IBM 1952-1971 RE-THINK

50. © E. Gummesson 2009 49 IBM Nobel Prize Winners 1987 K. Alex Mueller, along with his colleague, J. Georg Bednorz, was awarded the Nobel Prize in Physics in 1987 for his discovery of high-temperature superconductivity in a new class of materials. 1973 Leo Esaki was awarded the Nobel Prize in Physics in 1973 for his discovery of tunneling in semiconductors. 1986 Gerd K. Binnig, along with his colleague, Heinrich Rohrer, was awarded the Nobel Prize in Physics in in 1986 for his work in scanning tunneling microscopy. 1987 J. Georg Bednorz, along with his colleague, K. Alexander Mueller, was awarded the Nobel Prize in Physics in 1987 for his discovery of high-temperature superconductivity in a new class of materials. 1986 Heinrich Rohrer, along with his colleague, Gerd K. Binnig, was awarded the Nobel Prize in Physics in 1986 for his work in scanning tunneling microscopy.

51. © E. Gummesson 2009 50 Benoît B. Mandelbrot (born 1924) is the father of fractal geometry. Worked at the IBM Thomas J. Watson Research Center in Yorktown Heights, New York from 1955 to1987. Partial list of awards (but not the Nobel Prize): 2004 Best Business Book of the Year Award AMS Einstein Lectureship Barnard Medal Caltech Service Casimir Frank Natural Sciences Award Charles Proteus Steinmetz Medal Franklin Medal Harvey Prize Honda Prize Humboldt Preis IBM Fellowship Japan Prize John Scott Award Lewis Fry Richardson Medal Medaglia della Presidenza della Repubblica Italiana Médaille de Vermeil de la Ville de Paris Nevada Prize Science for Art Sven Berggren-Priset Władysław Orlicz Prize Wolf Foundation Prize for Physics

52. © E. Gummesson 2009 51 Mandelbrot extended the scope of science to non-smooth parts of the real world, beyond the circle, square and the triangle.

53. © E. Gummesson 2009 52 A fractal is an irregular geometric object that is self- similar to its substructure at any level of refinement.

54. © E. Gummesson 2009 53 Mandelbrot emphasized fractals as realistic and useful models of many phenomena in the real world that can be viewed as rough.

55. © E. Gummesson 2009 54 Natural fractals include the shapes of mountains, costlines and river basins; the structure of plants, blood vessels and lungs; the clustering of galaxies. Man-made fractals include companies, management, service, and stock market prices, but also music, painting, and architecture.

56. © E. Gummesson 2009 55 ILLUSTRATIONS TO OUR NEED TO RETHINK

57. © E. Gummesson 2009 56 Would we consider to squeeze the automobile into the terminology of a horse and carriage? Or force electronics into the language of mechanics? When are we going to stop squeezing goods, service and other phenomena into non- representative categories and instead recognize their complexity and true nature.

58. © E. Gummesson 2009 57 Economies are traditionally divided into three sectors: The industrial (or manufacturing or goods) sector The service sector The agricultural sector

59. © E. Gummesson 2009 58 But is there a SERVICE SECTOR?

60. © E. Gummesson 2009 59...but we never had so much food and have never been so overweight! According to statistics, the agricultural sector is going down

61. © E. Gummesson 2009 60 From the film ”The Meaning of Life” (Monty Python)

62. © E. Gummesson 2009 61...but we never had so many products! According to statistics, the industrial/manufacturing/goods sector is going down

63. © E. Gummesson 2009 62

64. © E. Gummesson 2009 63...but do we have the service we need? According to statistics, the service sector is going up, up, up...

65. © E. Gummesson 2009 64 Waiting lines – are they good service? “Just now there are many people calling. Your waiting time is 17 minutes. You can also go to our website www…… EMERGENCY CLINIC

66. © E. Gummesson 2009 65 Do the statistics consider the work done buy customers? NO! But most of the value added to any delivery or offering comes from the customer’s or citizen’s work, in part together with suppliers and governments When service systems fail, companies and government organization pass most of the work on to customers and citizens

67. © E. Gummesson 2009 66 Exemples of systems with low capability: the legal system the health care system the financial system They are not really systems, they are loosely connected fragments

68. © E. Gummesson 2009 67 Buying a car: Manufacturing/industrial sector Renting a car: Service sector From a customer perspective: The supplier’s job is to make the car available The service of the car is transportation

69. © E. Gummesson 2009 68 Service Agriculture Manufacturing Example: a restaurant A restaurant is dependent on the factory (kitchen) and the food (from the agricultural and manufacturing sectors). The only sector it can do without and still feed people is the service sector. And yet it is classified as belonging to the service sector! X

70. © E. Gummesson 2009 69 The division in sectors is totally supplier and labor market focused Customers and citizens are not in focus at all! The ”growth” of the service sector is a statistical caricature and a distortion of what is happening in today’s economy.

71. © E. Gummesson 2009 70 The service sector is a ghost!

72. © E. Gummesson 2009 71 SUMMING UP TOTAL RELATIONSHIP MARKETING

73. © E. Gummesson 2009 72 Total relationship marketing is interaction in networks of relationships, recognizing that marketing is embedded in the total management of the networks of the selling organization, and its nano, market and mega relationships. It is directed to long-term win–win relationships with individual customers, and value is co-created between the parties involved. It transcends the boundaries between specialist functions and disciplines. It is made tangible through the 30 relationships, the 30Rs. Total relationship marketing represents a paradigm shift in marketing. p. 40 in Total Relationship Marketing

74. © E. Gummesson 2009 73 HOW ABOUT TRADITIONAL MARKETING MANAGEMENT & THE 4Ps OF THE MARKETING MIX: PRODUCT, PRICE, PROMOTION & PLACE?

75. © E. Gummesson 2009 74 From: Pkotler@aol.com To: Evert Gummesson Copy: Subject: Comments on your papers December 3, 2004 Dear Evert: --- The question becomes whether marketing management theory is useful as a subspecie of network theory or should be totally rejected as leading to specious conclusions and dysfunctional marketing decisions. --- Best regards, Phil EXCERPT FROM AN EMAIL FROM PHILIP KOTLER

76. © E. Gummesson 2009 75 The 4Ps are neither 4 nor Ps any more! See Total Relationship Marketing pp. 320-327

77. © E. Gummesson 2009 76 P

78. © E. Gummesson 2009 77 product: goods and services price promotion: personal selling, advertising, SP place: distribution experiences lifestyles dreams events storytelling information public relations, PR branding sponsoring political influence public opinion lobbying call centers telemarketing TV email Internet mobile phones text messaging scientific research education VALUE PROPOSITION Supplier Customer VALUE ACTUALIZATION

79. © E. Gummesson 2009 78 RM is more total than ever. S-D logic and the integration of goods and services into service and value propositions;; the growing importance of the customer in co-creation and C2C; CRM as part of a company’s business system; many-to-many marketing addressing the whole network of stakeholders; the value-creating network society; and the coming of service science – they all point in the direction of a more systemic and complete view on marketing.

80. © E. Gummesson 2009 79 How about the economic crisis?

81. © E. Gummesson 2009 80 Do we ever learn from our mistakes?

82. © E. Gummesson 2009 81 2001 The ENRON scandal

83. © E. Gummesson 2009 82 July 5, 2006 Enron’s Ken Lay dies of a heart attack in Colorado. He was 64. The charges against Lay carry a maximum penalty of 45 years in prison for the corporate trial and 120 years in the personal trial. October 23, 2006 Jeff Skilling gets 24 years in prison for Enron fraud.

84. © E. Gummesson 2009 83 Guilty of obstruction, Arthur Andersen, one of the five large firms of certified public accountants becomes the first courtroom casualty of the Enron collapse. In 2002 it ceased to exist leaving 85,000 employees behind. THE SCENE: Arthur Andersen's Houston branch

85. © E. Gummesson 2009 84

86. © E. Gummesson 2009 85 ”If history holds one lesson, it’s that we never learn from history”

87. © E. Gummesson 2009 86 Must that be so?

88. © E. Gummesson 2009 87 What can political leaders do?

89. © E. Gummesson 2009 88 1. Make sure companies can get extended credit and other financial support for survival 2. Reduce interest rates 3. Start public investment programs 4. Tax reductions that stimulate investment and consumption 5. Do away with stifling labor market regulations 6. Speed up decison-making processes in public service agencies 7. Psychological crisis, instill hope in people

90. © E. Gummesson 2009 89 What can business leaders do? Suggested in an article in Fortune (European Ed.),January 19, 2009, pp. 66-71 (”How to Manage Your Business in a Recession,” by Geoff Colvin) 1. Reset priorities to face the new reality 2. Keep investing in the core 3. Communicating like crazy, balancing realism and optimism 4. Your customers face new problems, so give them new solutions

91. © E. Gummesson 2009 90 5. Don’t rush to cut prices 6. Focus on capital – how are you getting it and where are you using it 7. Reevaluate people – and steal some good ones 8. Reexamine compensation – what is it offering incentives for 9. Think twice before offshoring 10. Be smart about mergers and acquisitions

92. © E. Gummesson 2009 91 In conclusion: Back to basics! or rather Forward to basics!

93. © E. Gummesson 2009 92 relationship marketing networks and many-to-many marketing S-D logic and service science Forward to basics! is also what we try to achieve by developing marketing thinking along the lines of

94. © E. Gummesson 2009 93 THE END