Service Dominant Logic (Vargo and Lusch 2004)

Service Dominant Logic (Vargo and Lusch 2004) Contents Introduction to SDL... 1 Reaction of Other Scholars to SDL... 6 The Central Role of Value Co-Creation in Emerging Marketing Thought... 9 Summary... 19 Bibliography... 20 Introduction to SDL Vargo and Lusch (2004) published an article in the Journal of Marketing that is having a profound effect on marketing theory; an effect that is not yet being well reflected in marketing textbooks. In short, Vargo and Lusch (2004, p. 1 assert: Marketing inherited a model of exchange from economics, which had a dominant logic based on the exchange of "goods," which usually are manufactured output. The dominant logic focused on tangible resources, embedded value, and transactions. Over the past several decades, new perspectives have emerged that have a revised logic focused on intangible resources, the cocreation of value, and relationships. The authors believe that the new perspectives are converging to form a new dominant logic for marketing, one in which service provision rather than goods is fundamental to economic exchange. The authors explore this evolving logic and the corresponding shift in perspective for marketing scholars, marketing practitioners, and marketing educators. Figures 1 and 2 present the main points of their arguments. Figure 1 demonstrates the historical evolution of marketing thought from a theoretical perspective. 1

Figure 1: Schools of Marketing Thought (Source: Vargo and Lusch 2004) Figure 2 presents the differences between the traditional economics-driven view of marketing versus the proposed Service Dominant Logic (hereafter SDL) perspective. 2

Figure 2: Operand and Operant Resources (Source: Vargo and Lusch 2004) SDL proposed a series of foundational premises (see Figure 3) that created a great deal of dialogue by marketers (e.g., Lusch and Vargo 2006). Lusch et al. (2007) clarified these fondational premises based on the emerging dialogue (see Figure 4). 3

Figure 3: SDL Foundational Premises (Source: Lusch et al. 2007) Figure 4: SDL Derivative Propositions (Source: Lusch et al.(2007) 4

Vargo and Lusch (2008) provide their most recent clarification of their foundational propositions (see Figure 5). Figure 5: Vargo and Lusch's (2008) Clarification of Their Foundational Propositions Vargo and Akaka (2009, p. 39) summarize as follows: The S-D logic position on the above issues can be summarized as follows: 1. There are no services. There is service, the act of doing something for another party, directly or through a good. We can serve but we cannot make services. 2. There is no new service economy. Service has always been the basis of exchange. Manufacturing (and thus the Industrial Revolution) is just a special case of service provision. 5

3. Value is always cocreated. If goods are used as vehicles of service they might be coproduced but the cocreation of value is not optional. So, what does all of this matter to service science? We suggest that building service science on a G-D logic grounded conceptualization of services (intangible goods), justified on the basis of an apparent increase in the relative predominance of these intangible goods, and thus informed more by concepts of their coproduction than the more-encompassing cocreation of value, places severe restrictions on advancing the positive goal of creating a science of service or the normative goal of assisting organizations in the task of service innovation. What is needed is a true science of service. Reaction of Other Scholars to SDL Brodie et al. (2006) was quick to point out that while it was increasingly being recognized that brands play a major role in contributing to the value of service businesses, SDL had little to say about brands. These authors begin by citing the traditional model of service branding (see Figure 6). Figure 6: The Traditional Service Branding Model (Source: Brodie et al. 2006) 6

This traditional perspective posits brand equity as an asset, or alternatively, as the value of a brand. They then revisit the history of the brand literature to identify the changing perspective of how value is conceptualized and delivered (see Figure 7).Ultimately, these authors call for greater theory development vis-à-vis SDL and brand management. Figure 7: Historical View of Value and Brand Management (Source: Bride et al. 2006) Gummesson (2008) argues that SDL contributes to the reorientation of marketing by aligning the SDL with other developments in marketing management. These authors appear to generally support the basic SDL argument that marketing scholars and educators accept the complexity of marketing focus on a network-based stakeholder approach balanced centricity epitomized by the concept-t of many-to-many marketing. Ballantyne and Varey (2008) similarly seem to support broadening and reframing the marketing world view based upon 200 years of mainstream economic logic in explaining productive capacity. Most recently, Gronroos and Gummerus (2014) present a conceptual analysis of two approaches to understanding service perspectives, service logic (SL) versus SDL. These authors conclude that the SDL is based on a etaphorical view of co-creation and value co-creation, in which the firm, customers and other actors participate in the process that leads to value for customers. The approach is firm-driven; the service provider drives value creation. The managerial implications are not service perspective-based, and co-creation may be imprisoned by its metaphor. In contrast, SL takes an analytical approach, with co-creation concepts that can significantly reinvent marketing from a service perspective. Value gets created in customer processes, and value creation is customer driven. Ten managerial SL principles derived from these analyses offer theoretical and practical conclusions with the potential to reinvent marketing (see Figures 8 & 9). Practically, the analysis and principles help marketing break free from offering only value propositions and become an organization-wide responsibility. Firms must organize service- 7

influenced marketing and create a customer focus among all employees, beyond conventional marketing. Figure 8: SL Versus SDL (Source: Gronroos & Gummerus 2014) 8

Figure 9: Figure 8 (Continued) The Central Role of Value Co-Creation in Emerging Marketing Thought Gronroos (2011) analyzes the underpinning logic of value co-creation in service logic. He observes that some of the 10 foundational premises of the so-called service-dominant logic do not fully support an understanding of value creation and co-creation in a way that is meaningful for theoretical development and decision making in business and marketing practice. Without a thorough understanding of the interaction concept, the locus as well as nature and content of value co-creation cannot be identified. Value co-creation easily becomes a concept without substance. Based on the analysis in the present article, it is observed that the unique contribution of a service perspective on business (service logic) is not that customers always are co-creators of value, but rather that under certain circumstances the service provider gets opportunities to cocreate value together with its customers. Finally, seven statements included in six of the foundational premises are reformulated accordingly (see Figures 10-12). 9

Figure 10: Reconciling SL and SDL (Source: Gronroos and Gummerus ( 2014) Figure 11: Value Creation (Source: Gronroos 2011) 10

Figure 12: Value-in-Use Creation (Source: Gronroos 2011) The key point of this is that exactly HOW value is co-created in marketing exchanges is arguably not yet fully understood, at least in a commensurable way. Two very recent studies help shed light on this issue. Interestingly, both derive from the emerging literature on marketing innovation and new product development. The first paper is a forthcoming study in the Journal of the Academy of Marketing Science by Skalen et al. (2014). The abstract of their paper is: Abstract: This paper presents an eight-firm study, conducted from the service-dominant logic perspective, which makes a contribution regarding knowledge of the anatomy of value propositions and service innovation. The paper suggests that value propositions are configurations of several different practices and resources. The paper finds that ten common practices, organized in three main aggregates, constitute and fulfill value propositions: i.e. provision practices, representational practices, and management and organizational practices. Moreover, the paper suggests that service innovation can be equated with the creation of new value propositions by means of developing existing or creating new practices and/or resources, or by means of integrating practices and resources in new ways. It identifies four types of service innovation (adaptation, resource-based innovation, practice-based innovation, and combinative innovation) and three types of service innovation processes (practice-based, resource-based, and combinative). The key managerial insight provided by the paper is that service innovation must be conducted and value propositions must be evaluated from the perspective of the customers value creation, the service that the customer experiences. Successful service innovation is not only contingent on having the right resources, established methods and practices for integrating these resources into attractive value propositions are also needed. The gist of their argument is that the development of value propositions MUST be viewed from the perspective of customers value creation. Figures 13-18 below present some of the supporting diagrams and figures from Skalen et al. (2014). 11

Figure 13: Practices and Their Integration of Resources Part 1 (Source: Skalen et al. 2014) 12

Figure 17: Skalen et al.'s (2014) Anatomy of Value Propositions Figure 17 presents Skalen et al. s (2014) anatomy of a value proposition. In short, these authors assert that three commonalities have been identified regarding the traditional goods-based marketing logic understanding of value propositions (Ballantyne et al. 2011): Value propositions are offerings to the market; their inherent value is delivered to the customer by the firm; they are constructed without any direct customer involvement. The S-D logic, on the other hand, holds that firms offer value propositions, that value is co-created during interactions, and that value is subjectively determined by the customer in context, e.g., when the customer uses products or services (Edvardsson et al. 2011; Vargo and Lusch 2008a). Thus, value cannot be delivered to 16

the customer in accordance with a value proposition, as the traditional goods-based marketing logic-informed value proposition literature maintains, because value depends on both the interaction and the customer context. Skalen et al. s (2014) investigated the following research question: What is the anatomy of value propositions? One key contribution made by the present study is that value propositions consist of 10 practices grouped into three aggregates (see Figures 13-16), and that these practices integrate operant and operand resources into value propositions. When this resource integration process has been stabilized, and when a stable relationship exists among the practices, a value proposition will exist that is aimed at benefiting the customer s value creation. The practices enable the maximal utilization of the firms knowledge and skills, allowing it to interact with other parties. Thus, this inductive study has contributed toward unraveling the anatomy of value propositions (see Figure 18). Figure 18: Skalen et al.'s (2014) Process of Service Innovation Pires et al. (2014) extends these arguments to the notion of production and co-production. The abstract to their forthcoming article in the Journal of Business Research is as follows: Service logic emphasizes value co-creation, although mostly contending that the customer alone creates actual value. Value co-creation and co-production imply customer and supplier participation, but the literature mostly omits participation issues. This paper disentangles notions of production and co-production from the creation and co-creation of value propositions, and from the assumptions underlying value-in-use. The focus is on participation in exchange by customers and suppliers and their contributions at various stages of the value creation process. The paper uses service logic to develop a process model of customer and supplier participation in exchange with three phases (production, negotiation and usage), explores why suppliers allow customer participation in value proposition creation, and the motivations compelling customers to participate. Understanding how supplier and customer participation impact on value proposition creation and on value-in-use, provides an impetus for improved targeting practices, enhanced supplier ability to compete, and more focused research. 17

Specifically, Pires et al. (2014, p.p. 1-2) assert that Distinguishing between value and value propositions, we contend that value propositions may be co-created and co-produced via customer and supplier participation. Ballantyne and Varey (2006) refer to value propositions as reciprocal promises of value, operating to and from suppliers and customers seeking an equitable exchange (italics added). We adopt Ballantyne and Varey's (2006) definition, and use it as the basis for exploring the gap in the literature related to the process of customer and supplier participation in the determination of value propositions for exchange. That is, contrasting with the perception of value, assessed solely by suppliers or by customers, a value proposition can be variably created and produced solely by the supplier, or the supplier can be assisted by the consumer in co-creation and/or coproduction (Grönroos & Voima, 2013; Lusch & Vargo, 2006; Vargo & Lusch, 2008). In the former case, the customer is passive and merely assesses (assigns some notion of potential value to) the proposition of value offered by the supplier, subsequently accepting or declining the offer (Prahalad & Ramaswamy, 2004b). In the latter case, the customer participates actively in the exchange process before its final assessment, either by cocreating the value proposition offered by the supplier, presumably in a value-adding way that may entail shared inventiveness and co-design, or by shared production of the core offering itself (Lusch & Vargo, 2006). Customer participation is defined as the degree of a customer's effort and involvement, whether mental, physical and emotional, that relate to the production and delivery of a service (Silpakit & Fisk, 1985; Cermak, File, & Prince, 1994). Customer participation involves the customers' technical resources (e.g., labour and knowledge), and their functional (interactional) qualities, including interpersonal aspects such as friendliness and respect (Kelley, Donnelly, & Skinner, 1990; Ennew & Binks, 1999). Figures 19 & 20 present their proposed models based on this argument. Figure 19: Process Model for Participation in Supplier Initiated Exchange (Source: Pires et al. 2014) 18

Figure 20: Process Model for Participation in Customer Initiated Exchange (Source: Pires et al. 2014) In summary, Pires et al. (2014) conclude: To reconcile arguments of value co-creation with the widely held tenet that all value is created by the customer alone is a matter of great complexity that pervades contemporary considerations of the merits of adopting a new way of thinking about marketing in terms of S-D Logic or service logic. While customer and supplier participation in exchange is a major requirement for customer value creation, in order to enable the integration of a supplier's resources with those of the customer in the customisation process, the former has received much less attention in the literature than the latter. This paper presented a simple process model of customer and supplier participation in exchange with three phases (production, negotiation and usage) and two major configurations, depending on whether the exchange process is initiated by the customer or by the supplier. Summary The preceding annotated literature review summarizes the emerging perspective of marketing based upon service dominant logic (SDL). This perspective is remarkably different that the traditional goods-based perspective that evolved from economics theory and practice. SDL theory is described, as well as marketers reactions to the emerging theory. One of the key points of emphasis of this emerging perspective is how value co-creation is visualized, and how value co-creation influences organization s value propositions. Students are encouraged to integrate SDL theory into their arguments when participating in this case. 19

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