1. S-D Logic The Emerging Service-Logic Mindset: An Introduction and Global Implications Presentation for the Pacific Asian Management Institute PALS Lecture Series July 11, 2006 Stephen L. Vargo, University of Hawaii at Manoa

2. S-D Logic S-D Logic Overview2 The Backdrop Globalization concerns Outsourcing Especially valued manufacturing jobs. Unfair trade concerns Violation of intellectual property rights Environmental concerns Competition for and deletion of scarce natural resources Concerns about Environmental irresponsibility Negative attitudes toward businessespecially marketing Seen as primary villain in creating the above greed driven Frequent instances of corporate corruption Environmental destruction Perceptions of economic colonialism Declining service in a service economy Complaints by business about relevance of business-school education

3. S-D Logic S-D Logic Overview3 The Value Proposition in Brief The mindset or logic we use for understanding business and globalization is flawed and restricting We are (slowly) evolving from a logic of exchange based on stuff (goods) to a logic of exchange based on service (applied knowledge and skills) This transition should be encouraged and amplified This service logic has implications for rethinking firm and societal well-being and national wealth

4. S-D Logic 4 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 Lusch, R.F. and S.L. Vargo, editors (2006), The Service-Dominant Logic of Marketing: Dialog, Debate, and Directions, Armonk, NY: M.E. Sharpe Lusch, R.F., S.L. Vargo (2006), The Service-Dominant Logic of Marketing: Reactions, Reflections, and Refinements, Marketing Theory 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)

5. S-D Logic S-D Logic Overview5 Restricted Exchange FishermanFarmer Fish Wheat Fishing Farming

6. S-D Logic S-D Logic Overview6 Complex Exchange Fisherman Farmer Fishing Plow Making Tool Maker Baker Baking Farming Hook Making FishingFarming Baking Bread, Fish, etc

7. S-D Logic S-D Logic Overview7 Monetized Exchange Fisherman Farmer $ $ Tool Maker Baker Baking Plow Making Fishing Wheat Farming $$

8. S-D Logic S-D Logic Overview8 Monetized & Assisted Exchange Fisherman Farmer $ Tool Maker Baker Baking Plow Making Fishing Wheat Farming Other Service/Goods $ $$s Other Service/Goods Merchant Marketing, Inc Fisherman, Inc Baker, Inc Toolmaker, Inc Farmer, Inc

9. S-D Logic S-D Logic Overview9 Intermediaries Mask the Service- for-Service Nature of Exchange Fisherman Farmer Fishing Farming GOODS MONEY OGANIZATIONS

10. S-D Logic S-D Logic Overview10 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 Industrial revolution Economic science modeled after Newtonian mechanics Microeconomic model based on perfect competition Other disciplines (marketing, HR, etc,) inherited As did society as a whole, including government

11. S-D Logic S-D Logic Overview11 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

12. S-D Logic S-D Logic Overview12 Dissention and Shifts Calls for a paradigm shift in marketing (other disciplines) Shift away from goods focus in marketing Relationship marketing, experiences, value-constellations, co- production, interactivity, solutions, resource advantage, etc Breakout of service marketing, management, operations Service approaches to manufacturing Dell, Nike, etc. Business initiatives to shift from goods companies to services companies GE IBMComputing on demand, Service Science Software as a Service (SaaS) movement etc. Apparent shift from manufacturing to service economy

13. S-D Logic S-D Logic Overview13 Service-Dominant Logic Basics 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 particular types of goods Shifts primary focus to operant resources from operand resources Sees goods as appliances for service deliver Implies all economies are service economies All businesses are service businesses

14. S-D Logic S-D Logic Overview14 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 1950 1950-2005 Future

15. S-D Logic S-D Logic Overview15 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

16. S-D Logic 16 Foundational Premises FP1. The application of specialized skill(s) and knowledge is the fundamental focus of exchange. Service (application of skills and knowledge) is exchanged for service FP2. Indirect exchange masks the fundamental process of exchange. Goods, organizations, 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

17. 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

18. 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

19. S-D Logic S-D Logic Overview19 Goods vs. Service-Dominant: Where do the logics point us? Goods-Dominant Make stuff Sell to Mass market Produce product Promote product Charge for product (price) Distribute product (value) Create transaction Money as goal Service-Dominant Serve and satisfy Respond to markets of one-- customization Find solutions, co-create value Conversation & dialog Offer value proposition Integrate value network & processes Build relationships Profit as feedback (learning)

20. S-D Logic 20 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)

21. S-D Logic 21 Goods Logic Goods Tangibles Operand Resources Asymmetric Propaganda Value Added Transactional Maximize Profits Service Dominant Service Intangibles Operant Resources Symmetric Conversation Value Propositions Relational Financial Feedback Global Sustainability Customer Alienation Respect for Marketing In Firm Less More Less More Less More The Emerging Reorientation of Business

22. S-D Logic 22 General Implications for the Firm Co-create solutions Customers, employees, value-chain partner, stakeholders Making services more goods-like (tangible, separable, etc.) may not be correct normative marketing goal Make goods-more service-like. 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 Treat employees and customers as operant resources Essential parties to value creation

23. S-D Logic S-D Logic Overview23 Implications for Public Policy and Society Rethink industrial and employment classifications Develop better metrics for tracking none- goods exchange Encourage retention of tangible goods and sale of service flows? Encourage operant resource creation through education and research Enforce protection of intellectual property rights

24. S-D Logic S-D Logic Overview24 Global Implications: The Traditional (G-D) Wealth of Nations Historical View of National Wealth (G-D) Operand-resource driven Use labor and capital to create surplus goods (operand resources) for export Import desired operand resources = wealth

25. S-D Logic S-D Logic Overview25 Global Implications: Toward a New (S-D) Wealth of Nations National wealth is based primarily on operant resources (skills and knowledge), rather than operand resources (stuff) Focus on creation of higher-level knowledge and skills Most important imports and exports are operant resources Operant resources become commoditized and must be replaced, replenished, and newly created Outsourcing allows resource development (relieves and enables) Points toward: Education Immigration Competition International trade creates international trade (e.g., Boeing) Reduce barriers to trade

26. S-D Logic S-D Logic Overview26 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.netBob Lusch: rlusch@sdlogic.net