S-D Logic

SERVICE-DOMINANT LOGIC: AN ALTERNATIVE MINDSET FOR INNOVATION

2009 Ministry of the Knowledge EconomyConference on Service Innovation through R&DSeoul, Korea

Nov 10, 2009

Stephen L. VargoShidler Distinguished Professor of MarketingUniversity of Hawai’i at Manoa

S-D Logic

Suddenly, Service(s) is Everywhere

Apparent transitions• From manufacturing economy to service

economy• From goods-oriented firms to services firms

Manifestations• Services marketing• Services operations • Service factories• Servitzation• Service Engineering

• Service-oriented architecture• Software-as-a-service• Service systems• Services science• Service Innovation

S-D Logic

The Message

The transitions are mythical

The apparent transitions are driven by an inadequate logic of the market• “arm-flapping” logic?

The real transition is in the basic logic of economic exchange markets• Emerging from diverse disciplines & sub-disciplines• Pointing to a more robust logic of economic exchange

S-D Logic

The Prelude: The Blasphemy of the Alternative Logic There is no new service economy There are no producers and consumers Goods are not “goods.” Firms do not create value There are no “services” There are no markets

And yet there are

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The meaning of “logic” The underlying philosophy for

organizing and understanding a phenomena Pre-theoretical Paradigm level of thought The lens that provides the perspective

Different from formal scientific and mathematical logic

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The Importance of the Right Logic

Without changing our pattern of thought, we will not be able to solve the problems we created with our current pattern of thought

Albert Einstein The greatest danger in times of turbulence is not the

turbulence: it is to act with yesterday’s logic. Peter F. Drucker

The main power base of paradigms may be in the fact that they are taken for granted and not explicitly questioned

Johan Arndt What is needed is not an interpretation of the utility

created by marketing, but a marketing interpretation of the whole process creating utility.

Wroe Alderson

S-D Logic

From Arm-Flapping to Airfoil Logic

S-D Logic

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 through the efficient production and distribution of goods goods should be standardized, produced away

from the market, and inventoried till demanded

Firms exist to make and sellvalue-laden goods

S-D Logic

Value Production and Consumption

Producer ConsumerSupplier Supply/Value Chain

S-D Logic

Services: The G-D Logic Perspective

Value-enhancing add-ons for goods, or

A particular (somewhat inferior) type good, characterized by (IHIP Characteristics):• Intangibility• Heterogeneity (non-standardization)• Inseparability (of production and consumption)• Perishability

Services Economy = Post Industrial = Less-than-desirable economic activity

Services Innovation = using goods innovation principles adjusted for “services” (IHIP) deficiencies

S-D Logic

Problems with Goods Logic

Goods are not why we buy goods

• Service (benefits) they render• Intangibles (brand, self image, social connectedness, meaning)• Experiences

Goods are not what we fundamentally “own” to exchange with others• Applied knowledge and skills (our services)

Customer is secondary and seen as value receiver and destroyer• “Consumer orientation” is an add-on--does not help

IHIP characteristics do not distinguish services vs. goods

• But they do characterize value and value creation

S-D Logic

G-D Logic Background

Smith’s Bifurcation• Positive foundation of exchange:

• specialized knowledge, labor (service), Value-in-use

• Normative model of (national) wealth creation:• Value-in-exchange and “production”

• Creation of surplus, exportable tangible goods

Say’s Utility: • Usefulness (value-in-use)• Morphed into a property of products (value-in-

exchange)

S-D Logic

G-D Logic Background (2)

Bastiat (1848):

• “Services are exchange for services”

Development of Economic Science

• The “Producer” – “Consumer” distinction• Built on Newtonian Mechanics

• Matter, with properties• Deterministic relationships

• The science of exchange of things (products), embedded with properties (“utiles”)

Marketing (Business Disciplines) Built on G-D Logic Foundation of Economic Science

S-D Logic

What Has Changed?Nothing and Everything

Exchange is about the reciprocal application of knowledge skills (specialized information)

• Service for service

“Dematerialization” and “liquification” (IT and ICT)• The ability to separate and transport information apart

from and matter (and people) (Normann 2001) • Makes Service-logic compelling

S-D Logic

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 (Prahalad and Hamel (1990); Day 1994)

Resource-Advantage Theory and Resource-Management Strategies Hunt (2000; 2002); Constantine and Lusch (1994)

Network Theory (Hakansson and Snehota 1995)

Interpretive research and Consumer Culture theory (Arnould and Thompson 2005)

Experience marketing (Prahalad and Ramaswamy 2000)

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Key S-D Logic Publications

S-D Logic

Service-Dominant Logic BasicsService, rather than goods, is the basis 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”— particular

types of goods • Shifts primary focus to “operant resources” from “operand resources”• See value as always co-created

• Firm makes value propositions• Sees goods as appliances for service deliver• Implies all economies are service economies

• All businesses are service businesses

S-D Logic

Foundational Premises (Revised)Premise Explanation/Justification

FP1 Service is the fundamental basis of exchange.

The application of operant resources (knowledge and skills), “service,” is the basis for all exchange. Service is exchanged for service.

FP2 Indirect exchange masks the fundamental basis of exchange.

Goods, money, and institutions mask the service-for-service nature of exchange.

FP3 Goods are distribution mechanisms 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.

S-D Logic

Foundational Premises (Revised)Premise Explanation/Justification

FP6 The customer is always a co-creator of value

Implies value creation is interactional.

FP7 The enterprise can not deliver value, but only offer value propositions

The firm can offer its applied resources and collaboratively (interactively) create value following acceptance, but can not create/deliver value alone.

FP8 A service-centered view is inherently customer oriented and relational.

Service is customer-determined and co-created; thus, it is inherently customer oriented and relational.

FP9 All economic and social actors are resource integrators

Implies the context of value creation is networks of networks (resource-integrators).

FP10 Value is always uniquely and phenomenological determined by the beneficiary

Value is idiosyncratic, experiential, contextual, and meaning laden.

S-D Logic

ProductsGoods

Services

Clarifications: Service vs. Services

Services = intangible products

Service =The processof using one’s competences for the benefit of some party The application of

knowledge and skills

Service transcends“goods and ‘services’”

•

ServiceDirect

IndirectGoods

Money

G-D Logic

S-D Logic

There are No “Services” in Service-Dominant Logic

S-D Logic

Service Beneficiary

Provider of Operand &

Operant Resources

Direct Service

Provision

Service Provision

via Goods

Value in Context

Cocreation of Value

Integration With Public-

Facing Resources

Integration With Private-

Facing Resources

Coproduction

Clarifications:Cocreation vs. Coproduction

Coproduction is relatively optional. Value is always cocreated

S-D Logic

What S-D Logic Might be

Foundation of a paradigm shift in marketing• Perspective for understanding role of markets in

society—Theory of market• Basis for general theory markets and marketing

More generally, basis/foundation for

• “Service science” • Theory of the firm• Reorientation for economic theory

S-D Logic

Service Exchange through Resource Integration and Value Co-creation

Resource Integrator/Beneficiary

(“Firm”)

Resource Integrator/Beneficiary(“Customer”)

= Resource Integrators

S-D Logic

Service Ecosystems An economic community supported by a

foundation of interacting organizations that co-create value through service exchange . It includes: “Suppliers” “ “Producers” Competitors Customers Customer’s network of resources Other social and economic stakeholders

S-D Logic

Markets: Shared, or Shaped and or (Co)Created

The MP3-Player MarketOr The customizable-entertainment- storage-organizer-and-personal-assistant-and-life-applications-with-a-WOW-factor-platform market

The mineral-oil marketOrThe baby-butt-rash-avoidance-mommy-guilt-reducing-body-massage-and-sexual-lubricant market

The sodium-bicarbonate market OrThe occasional-baking-But-primarily-refrigerator-freshening-teeth-cleaning-clothes-brightening market

S-D Logic

Korean Market Makers

The Thirsty Hippo

S-D Logic

The Messages of S-D Logic

• There is only service

There are no services

• All economies are service based

There is no new service economy

• All parties are resource integrators/enterprises (i.e., Bs)

There are no producers and consumers

S-D Logic

The Messages of S-D Logic (2)

• “Goods” are value propositions for service provision

Goods are not “goods.”

• Value is always co-created

Firms do not create value

• The are imagined and created by linking resources with peoples lives• And yet they do – because we act as if they do.

Markets do not exist

S-D Logic

Perspectives on Innovation• Making better output (goods)

• New technology• Efficient processes• Decreasing returns to scale

• Purpose: increase market share

Goods Innovation

• Making better output (“services”)• Apply goods innovation principles, adjusted

for “IHIP” deficiencies

“Services” Innovation

• Providing input into customers’ value-creation processes• Link firm-available resources to peoples purposes• Effective solutions• Increasing returns to scale

• Purpose: “Owning” the market -- market shaping

Service Innovation

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Innovation in Ecosystems Architecture

S-D Logic

Innovations in Social Connectivity

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Innovation in Outcome-Based Pricing/Performance Contracting: Service for Sale

PowerBy TheHour

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Innovation in Innovation (Cocreation)

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Innovation Meets Marketing

True innovation is not the making of novel units of output

but the designing and creating of new marketsthrough service provision

In S-D logic, these become intertwined, if not indistinguishable

Business has two basic functions: Innovation & Marketing

Peter Drucker

S-D Logic

For More Information on S-D Logic visit:

sdlogic.net

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

Thank You!

S-D Logic

Dynamics of the effectual network

Who I amWhat I knowWhom I know

What canI do?

Effectual stakeholder

commitments

Interactions with other

people

New means

New goals

NEW MARKETSAND NEW FIRMS

Expanding cycle of resources

Actual Means

Converging cycle of constraints

Actual courses ofAction possible

(Affordable loss)

Who We areWhat We knowWhom We know

What canWe do?

S-D Logic

The Source of the “New” Service(s) Economy

G-D logic classification

Increasing division of

laborOutsourcing

Apparent New

Service Economy

S-D Logic

Resource Integration

Market-facing Resource

Integrators

Private Resource

Integrators

Public Resource

Integrators

Resource Integrator (individual, family, firm,

etc.) Value

Economic Currency

Social Currency

PublicCurrency

NewResources