Introducing S-D Logic and its 10 foundational premises
Master Thesis Service-Dominant Logic TheoryPublished July 8, 2011 at 22:48 No CommentsWith this post I want to introduce to you the 10 foundational premises of service-dominant (S-D) logic. If you are new to the topic, take your time to read. Vargo & Lusch worked more than a decade before they published their famous article of 2004, so I think it is OK if you need some time to fully grasp the topic 
. Let’s go:
It is not the evolution of marketing and the changing thought behind it altering companies’ business behavior; it is a general evolution of society and technology affecting the way of doing business. One is equally dependent from the other in order to work and be fruitful. The same applies for S-D logic. Without some major developments in technology and an ever-changing society S-D logic would not have come to where it is now. This post deals with the general setup of S-D logic and draws comparisons to goods dominant (G-D) logic.
The most obvious transition in business in the context of this work is the shift from manufacturing economy to service economy. Goods-oriented firms became services firms and services suddenly were everywhere: Service systems, service marketing, software-as-a-service, services science etc. However, this transition only appeared to be about service and was still built on G-D logic (Vargo, 2009).
Vargo and Lusch developed ten fundamental premises (FP) of S-D logic over the last years (Vargo & Lusch, 2004, 2006, 2008a). To get an overview with a short explanation please refer to Table 1. The most important and relevant FPs in context to this work will be explained in detail in the following paragraphs.
Table 1: Service-dominant logic foundational premises
Source: Vargo and Lusch (2008a)
Service vs. Goods
In S-D logic, service is defined as
“the application of specialized competences (operant resources – knowledge and skills), through deeds, processes, and performances for the benefit of another entity or the entity itself.” (Vargo & Lusch, 2008b, p. 26)
Rather than the plural, “services”, used to describe units of output (immaterial goods), the singular term reflects the process of doing something beneficial for or together with some entity. Hence, goods and service are not alternative forms of products. Goods, on the one hand, are supportive gadgets, tools or distribution mechanisms that are useful alternatives to direct service provision. Service, on the other hand, plays the role of the common denominator of the exchange process: Service is what is always exchanged (FP1). Supporting this argument FP3 says, goods only assist the service-provision process and derive their value through use, which, in turn, is the service they provide (Vargo & Lusch, 2008b). Goods do not drive economic activity; it is driven by applied knowledge, which is service (Vargo & Lusch, 2008a).
Service is nothing that suddenly appeared over the last years, however, there are two main criteria that are different today: (1) the growing ability to separate, transport and exchange information independently from goods or people and (2) increasing specialization of businesses, which in turn allows for more outsourcing. As individuals, organizations, and nations become more specialized they need others for what they themselves cannot do. This creates more possibilities of service provision (exchange of knowledge and skills). Therefore, increasing specialization boosts market growth. The result of intense specialization is an increased interdependency among all involved that leads to more collaboration, which, in turn, stimulates innovation (Lusch, Vargo, & O’Brien, 2007). See Figure 1 for illustration.
Figure 1: Consequences of growing specialization
Source: Own illustration
As one of their fundamental premises (FP5), Vargo and Lusch argue, “all economies are service economies”. A logical conclusion is that all businesses are service businesses, which opens the door to many opportunities in innovation in new and innovative ways (Vargo & Lusch, 2008a). Innovation, in the context of S-D logic is not defined by what companies produce as output but how they can better serve. It is about competing through service as opposed to, in G-D logic, competing with service (Lusch et al., 2007).
From Separation to Collaborative Value Creation
One of the main differences between G-D and S-D logic is their handling of resources, especially “human resources”. In the case of S-D logic the term of “human resources” becomes a whole new meaning since it not only is constraint to internal resources, i.e. employees, but also to the customer as operant resource. In G-D logic the customer was considered as operand resource that must be acted upon to be useful. The customer was considered to be passive and outside of the value creation process. Things were done to the customer as he was unknowledgeable but could be encouraged to purchase and “consume” the firm’s output or production. Thus, he was the “destroyer” of value. The firm was seen as the active source of expertise and knowledge that was used to develop innovative and creative marketing offerings that were produced in the factory. Therefore, the company and the factory were seen as the source of value (Lusch & Vargo, 2009). The strict separation between firms and the customer in G-D logic is illustrated in Figure 2.
Figure 2: Separation between firm and consumer in G-D logic
Source: Lusch and Vargo (2009, p. 8 )
In contrast to that, the consumer plays an active role in S-D logic and is part of the value creation process. He is now considered as operant resource that is capable of acting and producing effects in other resources. As FP6 states, the customer is always a co-creator of value (Vargo & Lusch, 2008a). Now, things are done with the customer in an interactive value creation process (Lusch et al., 2007; Vargo & Lusch, 2008c). Not only consumers but also supply chain partners are viewed as endogenous to value creation and as a source of expertise and knowledge from which the enterprise could and should benefit (Vargo & Lusch, 2004; Lusch et al., 2007; Lusch & Vargo, 2009). In fact, according to FP4, operant resources that serve with their knowledge and expertise are the fundamental source of competitive advantage (Vargo & Lusch, 2008a).
Figure 3: The collaborative economic system of S-D logic
Source: Lusch and Vargo (2009, p. 9)
Figure 3 illustrates how the firm and a respective partner (consumer or supply chain partner) are no longer seen as separate but rather as an integrated economic system. It is a collaborative process between both. They are co-creating by sensing and experiencing together, integrating resources for individual and collective benefit, and learning how to better serve each other (Lusch & Vargo, 2009).
It is getting obvious that value creation in S-D logic is an interactive process between firm and customer. It must be considered in a relational context. In addition, FP10 suggests that “value is always uniquely and phenomenological determined by the beneficiary”. This means that each individual has a different experience with the service being exchanged and values it differently (Vargo & Lusch, 2008a). Furthermore, the setting of the usage is essential to determine value. The context involves actors that are part of the experience and the other resources that are drawn upon in the usage experience (Lusch & Vargo, 2009). For example, a hotel guest staying in a hotel with his family during holidays experiences the stay differently than somebody staying in the same hotel alone on a business trip. Furthermore, viewing in the context of other resources such as previous experiences and therefore expectations from stays in other hotels, the use of room service, late checkout or airport transfer – all contribute to the experienced value.
After realizing that the customer is always a co-creator of value and that value is always individually determined depending on unique experiences of the respective beneficiary, the logical conclusion is that this service centered-view is inherently customer oriented and relational (FP8). That, in turn, means that no “consumer orientation” is necessary in S-D logic since it is already individually build around each consumer (Vargo & Lusch, 2008a).
Moreover, Vargo and Lusch (2008a) suggest that the enterprise cannot deliver value, but only offer value propositions (FP7). Value is co-created during in-use experience. It emerges through collaboration of dynamic internal and external operant resources of a firm – employees, customers, supply chain partners and maybe even competitors.
Important Prerequisites
Companies that want to have sustained competitive advantage not only have to be willing to learn, they also have to have a collaborative competence, given the interactive nature of service provision (Lusch et al., 2007). Following two meta-competences are critical:
Absorptive competence
“The ability of an organization to be able to comprehend from the external environment the important trends and know-how. This will assist in transforming these external environments into important resources the firm can draw upon for support. Collaborative competency will aid a firm in absorbing new information and knowledge from partners or improve its absorptive competence.” (Lusch et al., 2007, p. 9)
Adaptive competence
“The ability of an organization to adjust to changing circumstances. Once again, by developing collaborative competence the entity is able to use its partner firms as mechanisms for adapting to change brought about by complex and turbulent environments and, thus, improve its adaptive competence.” (Lusch et al., 2007, p. 9)
Developing this superior collaborative competency secures a firm’s competitive advantage. It enhances its ability to grasp information and knowledge from the environment, customers, and its value networks and enables firms to adjust to dynamic, complex and turbulence environments. Businesses have to develop those competences in order to be able to keep up with the developing customer.
My next post will give an overview of todays consumers and why they now play a more active role than ever before.
References
Lusch, R. F., & Vargo, S. L. (2009). Service-dominant logic — a guiding framework for inbound marketing. Marketing Review St. Gallen, 26(6), 6-10.
Lusch, R. F., Vargo, S. L., & O’Brien, M. (2007). Competing through service: Insights from service-dominant logic. Journal of Retailing, 83(1), 5-18. doi:10.1016/j.jretai.2006.10.002
Vargo, S. L. (2009, October 6). Service-Dominant Logic: An Introduction. Presented at the Symposium on Service-Dominant Logic, University of Bayreuth, Germany. Retrieved from http://www.sdlogic.net/Introduction_Germany_2009.pdf
Vargo, S. L., & Lusch, R. F. (2004). Evolving to a New Dominant Logic for Marketing. The Journal of Marketing, 68(1), 1-17.
Vargo, S. L., & Lusch, R. F. (2006). Service-Dominant Logic: What It Is, What It Is Not, What It Might Be. The Service Dominant Logic of Marketing: Dialog, Debate and Directions. Armonk, NY: M.E. Sharpe.
Vargo, S. L., & Lusch, R. F. (2008a). Service-dominant logic: continuing the evolution. Journal of the Academy of Marketing Science, 36(1), 1-10.
Vargo, S. L., & Lusch, R. F. (2008b). Why “service”? Journal of the Academy of Marketing Science, 36(1), 25-38.
Vargo, S. L., & Lusch, R. F. (2008c). From goods to service(s): Divergences and convergences of logics. Industrial Marketing Management, 37(3), 254-259.
