The Emerging Service-Logic Mindset: An Introduction and Global Implications

1. 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. 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 business—especially 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 S-D Logic Overview

3. 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 S-D Logic Overview

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. O’Brien (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. Fish Wheat Restricted Exchange Fishing Fisherman Farmer Farming S-D Logic Overview

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

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

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

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

10. Precursors • Historical treatment of services • Smith’s (1776) bifurcation • Bastiat’s (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 S-D Logic Overview

11. 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 Overview

12. 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 • IBM—”Computing on demand,” “Service Science” • “Software as a Service” (SaaS) movement • etc. • Apparent shift from manufacturing to service economy S-D Logic Overview

13. 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 process—distinct 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 S-D Logic Overview

14. 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 S-D Logic Overview

15. 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 Overview

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. 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 Overview

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. 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) Goods vs. Service-Dominant: Where do the logics point us? S-D Logic Overview

20. Difficult Conceptual Transitions

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

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. 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 S-D Logic Overview

24. 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 S-D Logic Overview

25. 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 S-D Logic Overview

26. 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.net Bob Lusch: rlusch@sdlogic.net S-D Logic Overview