Overview of the Service-Dominant Logic of Marketing

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Overview of theService-Dominant Logic of
Marketing

• Academic Presentation for the Otago Forum on
• Service-Dominant Logic
• November 21, 2005
• Stephen L. Vargo, University of Hawaii at Manoa
• Robert F. Lusch, University of Arizona

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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)

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Precursors

• Historical treatment of services
• Smiths (1776) bifurcation
• Bastiats (1848) reconsideration
• Services are exchanged for servicesit 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

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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

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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 paramountThere 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)

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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

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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

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Service

• 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)

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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

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Shift in Focus fromOperand 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

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Evolution of Marketing Thought
Market With (Collaborate with Customers
Partners to Produce Sustain Value)
To Market (Matter in Motion)
Market To (Management of Customers Markets )
Through 1950 1950-2005
2005
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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

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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
  usedexperience and perception are essential to
  value determination

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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

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Evolving Toward a Service-Dominant Logic
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

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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.

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What S-D Logic is Not

• Reflection of the transition to a services era
• 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
• Suggesting that Financial Feedback Equals Profit
• Applicable only to marketing management

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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

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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

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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.
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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

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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_at_sdlogic.net Bob Lusch
rlusch_at_sdlogic.net