Introduction

Tracing the history of how a concept has been conceptualized, understood, and approached helps to uncover the roots and pathways that lead to its nuanced meanings today. These pathways diverge and converge as a function of the purposes of the times. A historic account of the development of economics and how it viewed service reveals a divergence in the understanding of value and value creation. This historic account points toward the development of an economic paradigm focused on tangible, transportable, and quantifiable value, with service seen as something left over, less valuable, and tertiary in economic development.

The traditional, dominant “worldview” developed from the idea that tangible goods could have (possess) utility (value) and be transported and exchanged for other goods, also possessing utility, thus increasing the wealth of both parties. We call this paradigm “goods-dominant” (G-D) logic. Arguably, it has become the most pervasive and foundational of the paradigms available for understanding business and economic exchange. Briefly stated, G-D logic postulates:

• The purpose of economic activity is to make and distribute things that can be sold.

• To be sold, these things must be embedded with utility (value) during the production and distribution processes and must offer to the consumer superior value in relation to competitors’ offerings.

• The firm should set all decision variables at a level that enables it to maximize the profit from the sale of output.

• For both maximum production control and efficiency, the good should be standardized and produced away from the market.

• The good can then be inventoried until it is demanded and then delivered to the consumer at a profit.

Introduction

More than 2,000 years ago, Plato described how actors (e.g., people) rely on one another through the exchange of what service-dominant (S-D) logic refers to as service or applied skills and competences. In the mid-1800s, Bastiat identified this phenomenon as services-for-services exchange and argued that it was the basis for understanding economics and economies. As the globally connected network of actors and communities of actors, including business enterprises, governments, and people, become more pervasive, it is easy to believe that more complicated theories, frameworks, concepts, and models are needed to understand the social and economic world. However, S-D logic, as we argued in Chapter 1, is a more abstract, simpler (but broader), more general, and transcending framework for the understanding of human exchange and exchange systems. In a globally interdependent and interconnected world, the simple truth behind Plato’s words is too often missed: we are all human beings serving each other, through exchange, for mutual well-being.

Viewing actors generically allows the development of a logic of human exchange systems that includes the economy and society and transcends academic disciplines. We argue that it also allows for an academic discipline that has robust, practical application. However, this has not generally been the case for marketing science and theory. Rather, actors are typically identified in terms of discrete roles and functions. Perhaps the most common of these actors is businesses or producers, often abbreviated as “B,” and consumers or customers, often abbreviated as “C.” And this simple division of actors actually constrains, limits, and restricts the robustness of theories and other knowledge frameworks.

Introduction

On learning about service-dominant (S-D) logic, some observers say that they agree with its axioms and foundational premises but ask the more fundamental question, “Why ‘service’”? That is, they ask whether “service” is the proper designation for and characterization of this “new dominant logic.” At times, the question has been explicit and, at others, implicit.

This question of “Why ‘service’?” is a potentially critical issue, one that addresses the essential subject matter of markets and marketing and the purpose of business. On a broader level, it also deals with the fundamental nature of human interaction, on which society, markets, and business and marketing practices are built. Language is a form of joint action between actors that helps them coordinate thoughts and meaning and actions. In short, actions are at least partly driven by words and their (shared) meanings. Therefore, how service is conceptualized and the shared meanings we develop around the concept of “service” are crucial to S-D logic and its development and impact.

Introduction

Understandably, when introduced to a somewhat radically different perspective of business, such as service-dominant (S-D) logic, there is a natural tendency to ask: “How can I apply S-D logic to make more money for my firm?” Our response might be disappointing to some: in a truly prescriptive sense, S-D logic cannot be applied, at least directly. This does not mean that there are no normative implications arising from S-D logic. In fact, there are, and they have the potential to provide increased firm viability, including increased profits. They just are neither tactical nor prescriptive but rather strategic and abductive and provided indirectly. As we will discuss, these are provided through the additional insights into what actors can do to shape their destiny and the role and importance of agency that S-D logic offers.

The strategic implications for the application of S-D logic have to do with innovation and market creation, the ongoing (re)creation and institutionalization of value propositions that assist in the value-creation processes of other actors. Thus, S-D logic cannot so much prescribe as it can suggest a perspective for the approach to and the considerations of possibilities. It implies that innovation is achieved through asking the question: “What can I see from an S-D logic perspective that I cannot see from a G-D logic perspective in terms of opportunities for combining and applying available resources to offer value propositions for some other actor?” Arguably, then, the most important endeavor is to step back and examine the landscape.

Introduction

The mantra that emerged in the 1950s about firms needing to be customer oriented and the mantra of the past two decades about firms needing to be society oriented are often viewed as signs of the enlightenment of senior executives and managers. They could also be viewed as signs that the traditional model of the firm, or goods-dominant (G-D) logic, was broken and in need of patching and repairing to make it at least resemble a workable model. Think for a moment: to assert that firms need to be customer oriented acknowledges that the customer is something separate and different and requiring special orientation. Similarly, having a special office or senior “C- level” officer of corporate social responsibility acknowledges that the organization is not so oriented. In brief, the customer and society are seen as exogenous or “out there,” and the firm needs to reorient toward them. However, in the context of G-D logic, the underlying rationale for this orientation is that the firm can push product and agenda to actors. This push model is based on designing production and distribution systems to be as efficient as possible through standardized processes to supposedly deliver value to customers in containerized packages of multi-attribute bundles of tangible and intangible elements characterized as products. Predictably, with this push model, the firm must use heavy doses of advertising and promotion to convince customers and other stakeholders that its agenda is in their best interests.

Preface

For nearly two decades we have collaborated on developing a more unifying and transcending view of business and, more broadly, economic and social organization. It began, more modestly, as an exercise in sense-making for ourselves, concerned with intractable issues such as the distinction between goods and services – and the related implication that goods marketing and services marketing are different – and the notion that service only becomes economically important after industrialization.

Over the past decade, it has grown to more encompassing concerns. For example, we were struck by alternative and competing views and frameworks, for managing business and marketing effort, as represented by the various subdisciplines and research streams in marketing – B2B marketing, international marketing, industrial marketing, consumer marketing, services marketing, retail marketing, tourism marketing, high-technology marketing, social marketing, macromarketing, and so on – that were, for the most part, seemingly irreconcilable. However, it became apparent that all of these had a common driver: the inadequacy of the logic of the underlying model of economic exchange, what we now call “goods-dominant (G-D) logic.” We also sensed that there were similarities in the perspectives of not only these research traditions, but in many business practices in general (as evidenced in the popular, trade press): a move toward understanding business in terms of intangibilities and human experiences, interactions and collaborations, the evolution and integration of resources, and so on. In short, we saw business thought moving toward a convergence that has now become known as “service-dominant (S-D) logic.”

Foreword

Service-dominant (S-D) logic has rapidly become an essential new way to see and think about our world today, its history, and possible futures.

Why S-D logic?

The two-decade collaboration of Lusch and Vargo reflects the influence of thinkers across the ages, integrating elements from Aristotle, Bastiat, Clark, Gummesson, Hunt, Kotler, Levitt, McLuhan, Normann, Penrose, Romer, Smith, Williamson, Zimmermann, and many others, yet nevertheless manages to succinctly tell a unique and compelling story for today’s researchers, practitioners, leaders, and innovators. I first heard the story when Lusch visited IBM Almaden in the fall of 2004, and then again in conversations with Vargo at the Frontiers in Service Conference in 2005. These were exciting conversations, providing fresh perspective on a subject of great economic importance and scientific significance, and conversations have continued to this day as S-D logic has evolved.

This latest book more than any other work brings us all along on their journey together, and invites us to contribute as well. After all, cocreation of value is at the heart of service-for-service exchange and S-D logic. Hundreds have already contributed to this rapidly growing body of knowledge and practice, and this book will invite hundreds, if not thousands, more to contribute in the years to come. This book is a wonderful invitation to cocreate the future together; by first understanding what constrains our thinking today and historically how we got here.

Introduction

Resource, as a concept used to discuss economic and social exchange, cuts across many disciplines. Service-dominant (S-D) logic views resources as what actors can draw on for support. Some resources are market facing, but many others are non-market facing; some are tangible, but many are intangible; some are internal to the actor, but many, if not most, are external to the actor; some are operand, but others are operant. Actors themselves are “operant resources” when they apply their resources (primarily knowledge and skills) to provide service to other actors. Service beneficiaries are also operant resources when they use their knowledge and skills to integrate other resources to cocreate value. This view of resources as linked to actors, service provision, and cocreated value offers a systems view of the role of resources in service exchange, actor-to-actor (A2A) networks, and human economic and social progress.

Introduction

In Chapter 5, we introduced a systems view of actors and the cocreation of value to indicate how market exchange and economies function. Although actors exchange directly with one another, they are also part of many indirect and far-removed exchanges involving other actors that are also involved with this system. A systems view also extends to understanding the market. However, markets have historically been characterized as composed of “supply markets” and the movement of resources to customers, receivers, beneficiaries, or “customer markets,” the latter being a source of demand.

Viewing the market as comprising supply and customer or demand markets is misleading and especially so when adopting a generic actor-to-actor (A2A) view of the economy. A supply market is only a supply market when viewing an actor as a seller (supply source or service provider), and a customer market is only a customer market when viewing another actor as a buyer (demand source or service beneficiary). As we have noted, however, all actors are both resource-integrating sources of “supply” and resource-integrating sources of “demand” – that is, offering service and taking on the role of service beneficiaries. Service-dominant (S-D) logic offers some useful conceptual tools for enhancing this macro lens.

Introduction

Part of our nature as humans is to develop belief systems that become handy ways for seeing and understanding the world around us and for ordering our reality. We can refer to these mechanisms as institutional logics. Institutional logics become normative and play a key role in guiding and determining our behavior. Many of these institutional logics arise from our training and education and thus the ordered view of the world from the perspective of an economist is different from that of an accountant, mechanic, sociologist, physicist, fire fighter, or moral philosopher. Regardless, they enable viewing a complex world in what promises to be coherent terms and provide a lens for perceptually separating noise from signal. Thus, they contribute to comfort, understanding, and sense-making.

Just because we are comfortable with our institutional logics does not suggest these logics are always correct or appropriate or do not need to change or evolve. In fact, some institutional logics become so strongly held across individuals that they become paradigmatic and very difficult to shift. It has been found repeatedly throughout history that these paradigms can restrict vision and understanding and scientific advancement. Of course, in business, there are many such “worlds” that need to be understood: cultural, ecological, economic, social, physical, political, technological, and many others. The primary purpose of this book is to contribute to the understanding of the world of economic and social exchange among human actors, both individually and in groups, by proposing an alternative view or perspective, what we call “service-dominant logic” (S-D logic), to the traditional “goods-dominant logic” (G-D logic).

Introduction

All logics are based on premises and assumptions. Often these are not explicit or spoken but are implicit and unspoken. Logics can be observed in everyday practices and language. In the development of service-dominant (S-D) logic we have attempted to be explicit about its premises, assumptions, and language (or what we call its lexicon).

Four axioms form the foundation of S-D logic, as briefly reviewed in Chapter 1. These four axioms serve as a platform for a half-dozen additional foundational premises that, in addition to the four axioms, form the ten foundational premises (FPs) that comprise the underlying structure of S-D logic. These are illustrated in Exhibit 3.1.

As noted in Exhibit 3.1, under axiom 1 (FP1), “service is the fundamental basis of exchange,” we have four derivative FPs: FP2, “indirect exchange masks the fundamental basis of exchange”; FP3, “goods are distribution mechanisms for service provision”; FP4, “operant resources are the fundamental source of competitive advantage”; FP5, “all economies are service economies.” Under axiom 2 (FP6), “the customer is always a cocreator of value,” there are two derivative FPs: FP7, “the enterprise cannot deliver value, but only offer value propositions; and FP8, “a service-centered view is inherently customer oriented and relational.” Axiom 3 (FP9), “all economic and social actors are resource integrators,” and axiom 4 (FP10), “value is always uniquely and phenomenologically determined by the beneficiary,” stand alone without direct derivative FPs. The structure and the order of the FPs under the four axioms are used primarily for pedagogical purposes. As you become more familiar with the FPs and all of their intricacies you will begin to see how all of the FPs relate to each other but with the four axioms as the most foundational. In brief, six FPs are nested under four axioms.