What’s the sense of Service-Dominant Logic?

My interest in specifying a model of public service has involved me in the study of more general notion of service. I have been most taken with two models of service, in particular:

  • Resource-Event-Agent model (REA)
  • Service-Dominant Logic (S-DL)

The scholarship associated with the Resource-Event-Agent model has included a substantial investment in specifying an REA ontology using both a formal language representation (the Web Ontology Language or OWL) and a graphical representation (the Unified Modeling Language or UML Profile for OWL). The International Standards Organization has incorporated REA into the Open-edi Business Transaction Ontology (OeBTO).

The scholarship associated with Service-Dominant Logic has been less concerned with formal language representation, and more concerned with bringing a certain perspective to bear on the widest-possible range of human behavior – aspiring to be a “unifying and transcending view of business and, more broadly, economic and social organization” (Lusch and Vargo, 2014). The status of Service-Dominant Logic as a model was enhanced when IBM proposed that Service-Dominant Logic should be the foundation of a new, multidisciplinary “science” of service  (Maglio and Spohrer 2008).

There is no doubt that Service-Dominant Logic has had a far greater impact on our thinking about service than has the Resource-Event-Agent model. The primacy of Service-Dominant Logic is even more evident when one considers the design, delivery, and innovation of service in the marketplace.

There is also an aspirational – indeed, an inspirational – quality to the scholarship associated with Service-Dominant Logic that is lacking in somewhat dry, technical approach of the scholarship associated with the Resource-Event-Agent model.

For all that, the formulation of Service-Dominant Logic needs to be tightened up – in the end, the rhetoric may be less inspiring, but it will also be less confusing.

Let’s first consider the formal elements of Service-Dominant Logic – taking Lusch and Vargo’s (2014) book-length treatment of their model and Vargo and Lusch’s (2015) update as our points of reference.

Institutional Logics

Lusch and Vargo begin with the proposition that “part of our nature as humans is to develop belief systems that become handy ways of seeing and understanding the world around us and for ordering our reality.” [Ch 1] Belief systems enable viewing a complex world in what promises to be coherent terms and provide a lens for perceptually separating noise from signal. Thus, belief systems contribute to comfort, understanding and sense-making.

Belief systems become normative and play a key role in guiding and determining our behavior. Lusch and Vargo promote at least some belief systems to the status of “institutional logics”.1 In 2004, they began to formulate a Service-Dominant Logic (S-D Logic) “to contribute to the understanding of the world of economic and social exchange among human actors.” Service-Dominant Logic is a “mindset” that offers an alternative “worldview” to traditional Goods-Dominant Logic (G-D Logic).

Lusch and Vargo have associated Service-Dominant Logic with a set of terms they call a Lexicona set of propositions they call Foundational Premises, and a set of Axioms that represent a subset of the Foundational Premises.

In 2014, Lusch and Vargo identified ten Foundational Premises including four Axioms. In 2015, Vargo and Lusch introduced a fifth Axiom (an eleventh FP) and revised the wording of one other Axiom and three other FPs. We will designate these two versions of the Axioms/Foundational Premises of Service-Dominant Logic as FP-2014 and FP-2015, respectively. The terms of Lexicon are arranged in a hierarchy; the Foundational Premises are also arranged in a hierarchy.

Lusch and Vargo (2014) present the hierarchical structure of the Lexicon of Service-Dominant Logic (hereafter referred to as Lexicon-2014) in Figure 1 …

Lusch and Vargo 2014 - Figure 3.2 S-D Logic lexicon
Figure 1 S-D Logic Lexicon-2014 (Lusch and Vargo 2014).

… and the hierarchical structure of FP-2014 in Figure 2.

Lusch and Vargo 2014 - Figure 3.1 Axioms and foundational premises of S-D Logic
Figure 2. Axioms and foundational premises of S-D Logic – aka FP-2014 – (Vargo and Lusch 2014).

The Lexicon is used to develop and elaborate the Axioms and Foundational Premises [57].

Let’s consider how meaningful or potentially confusing  this last point might be – and examine the overlap between the terms of the Lexicon-2014 and the terms used to express the FP-2014 and the FP-2015. Before we dive in to this exercise, we first need to identify how Lusch and Vargo use the word “lexicon” and then we need to bring in some basic concepts of semantics.


We would highlight six passages where Lusch and Vargo (2014) discuss their idea of the Lexicon of Service-Dominant Logic. Half of these passages speak of the general idea of Lexicon; the other half address the way a shift in thinking about a concept like Service motivates a shift in lexicon – and the difficulties that can and often do immediately ensue in efforts to communicate about the concept.

General idea of Lexicon

A key challenge we have faced in developing and communicating S-D logic is the precision of its lexicon. We soon realized how important words and language are in framing our view and conceptualization of the world and, hence, how it influences our actions or behavior. We found subtle yet important distinctions between terms such as "services" versus "service," "customers" versus "consum­ers," static and tangible resources and dynamic and intangible resources. Thus, much of what is to be learned from this book concerns how to uncompact new and/or revised meanings for old terms - for example, what are a resource, cocreation, and value? But we also found it necessary to develop new "concepts" and language, which we will introduce and explain here. These include "service ecosystems," "resource integration," "resourceness," and "value-in-context." We believe that, although it will take some effort to develop an understanding of the lexicon, most readers will find it worthwhile. [xxii]
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). [53]
Theories and models are abstractions of reality. Language and words are used to develop abstractions, and these abstractions are then related to each other in order to describe or explain the phenomena of interest. The goal is to be parsimonious, while still being as isomorphic as possible. This implies using as few concepts as necessary to describe and explain the phenomena of interest; while, at the same time, striving for correspondence between the theory or model and real-world phenomena. Predictably, it is very difficult to be both parsimonious and isomorphic with the same theory, model, or logic. We suggest that S-D logic strikes a reasonably good balance between these two objectives.

As noted, we believe S-D logic is reasonably parsimonious in its lexicon. In fact, it deals with only four core, foundational concepts (actors, service, resour­ces, value), and from these we derive ten additional concepts. [55 - also footnote 2 gives "The lexicon of S-D logic is continuing to develop and includes many other emerging terms such as service ecosystems ..."]

A shift in thinking that motivates a shift in Lexicon

All logics also have a lexicon developed by the community that supports and uses the logic. The lexicon comprises the terms and concepts, represented through words or symbols, which communicate meaning and help to coor­dinate thought among the community. To understand S-D logic, its axioms, and FPs, it is critical to become familiar with its lexicon. This can be difficult because some of the language is similar to the language of G-D logic, albeit with nuanced meanings. [54]
From the rapid ascendance and impact of the services marketing and management literature in the 1970s and 1980s, we began to see other currents of change in thinking. As is often the case, when thinking starts to change, it is supplemented or leveraged by the emergence of a new lexicon, which, in turn, further influences thinking and ultimately behavior or action. [202]
Part of the difficulty of mastering S-D logic is the enduring, strong pull of G-D logic. G-D logic is not only embedded in many organizational routines and practices, it is also embodied in our minds, and practices and institutions of society. In fact, even after nearly two decades of intense work on S-D logic and its associated lexicon, we still find ourselves occasionally slipping back to the G-D logic mindset and lexicon. Be forewarned: it takes work and training to see every firm offering, tangible or intangible, as just an input, something whose value is only realized in its use and in the context of and integration with resources from other sources. It is difficult to emancipate oneself from the restricted perspective of the firm-centric model, which treats customers as operand resources, whose role is to be captured for the net present value of their flow of financial resources to the enterprise - what, in G-D logic terms, is referred to as lifetime value of the customer, which is inappropriately paraded as "relationship" marketing. It is difficult not to think about the firm as the center of the wealth creation or as the producer and provider of value. It can be equally difficult to divorce oneself from that view that customers consume and destroy value. It is difficult not to think about innovation as something that primarily occurs in the laboratories and offices of the enterprise, as opposed to something that occurs throughout the service ecosystem, through the social and economic processes of resource inte­gration and service exchange. The pervasive influence of G-D logical lexicon and frameworks on all of the business and management disciplines is a hard one from which to break free. It is extremely difficult not to think about a profit shortfall as the fault of management and employees but rather as due to the inadequacy of the G-D logic model.

We believe commitment to S-D logic and its premises and lexicon, focusing on and understanding its nuances and fully grasping its transcending nature, will reveal not only new solutions to old problems but also unlimited and unbounded opportunities for market expansion and the creation of new markets. That is a fairly bold value proposition but one that we think is achievable through becom­ing untethered to G-D logic and mastering S-D logic. [204]

Terms and hierarchical structure of the S-DL Lexicon

Lusch and Vargo identify four “core, foundational concepts” – Actor, Service, Resource, and Value – in Lexicon-2014, and “derive” from these ten additional “concepts.” As we saw above, Lusch and Vargo characterize Service-Dominant Logic as “reasonably parsimonious” on the basis of the relatively few terms in its Lexicon [55]. It’s disconcerting that, in the same breath (or at least in a related footnote), Lusch and Vargo advise that “The lexicon of S-D logic is continuing to develop and includes many other terms such as service ecosystems …” It’s also disconcerting that Lusch and Vargo do not identify the place of a key term like “service ecosystem” in the hierarchical structure of the Lexicon (Figure 1).

Lexical semantics

In order to take a proper look at the terms of the S-DL Lexicon, we need to draw upon some model of language and meaning – and for this we want to set out some of the basic ideas of lexical semantics.

Wordform An orthographic or phonological form e.g. the written word “sing”, or the spoken word “songs”.
Sense The meaning associated with a wordform.
Lexeme A pairing of a wordform and (one of) its sense(s).
Lemma The grammatical form that is used to represent a lexeme. This is often the base form e.g. carpet is the lemma for “carpets”, or the infinitive form e.g. to sing is the lemma for “sang”.
Lemmatization The process of mapping a wordform to a lemma. Lemmatization is not always deterministic – it may depend on the context e.g. the wordform “found” can map to the lemma find (meaning “to locate”) or the lemma found (meaning “to create an institution”), and on part-of-speech e.g. the wordform “tables” has two possible lemmas, the noun “table” and the verb “table”. Each word sense is represented by placing a superscript on the orthographic form of the lemma, as in table1 and table2.
Lexicon A finite list of lexemes.

Table 1. Lexical semantics: some basic terms and definitions.

We will describe the procedures of lexical semantics only when we need to call upon them in our analysis of Lexicon-2014.

For now, let’s use some of the concepts of lexical semantics to recast Lusch and Vargo’s presentation of Lexicon-2014:2

Wordform Lemma FP-2014 FP-2015
Core concepts
“Actors” Actor 9 9
“Resources” Resource 4, 9 4, 9
“Service” Service 1, 3, 5, 8 1, 3, 5, 8
“Value” Value 6, 7, 10 6, 7, 10
Derived concepts
“Time-bound” Time
To bind1
“Relationally-bound” Relation 8 8
To bind2
“Resource-integrating” Resource 4, 9 4, 9
To integrate 9 9
“Operand” Operand
“Operant” Operant 4 4
“Goods” Good 3 3
“Currency” Currency
“Unique” Unique 10 10
“Co-created” Co- 6 6
To create 6 6
“Proposition” Proposition 7 7

Table 2. Mapping the “core concepts” and “derived concepts” of the Lexicon-2014 to their equivalent wordforms and lemmas.

A few notes about Table 2:

  • we allow that the sense of “to bind” as in “time bound” in different from the sense of “to bind” as in “relationally bound”
  • we associate a single lexeme – resource  with the two wordforms “resources” and “resource integrators”
  • we associate the wordform “cocreated” with two lexemes – to create and co- meaning “along with others

Finally, we note that four (or five) lexemes in Lexicon-2014  –  TimeOperand, Currency, To bind1 (and maybe To bind2) – are not put to use in expressing any members of FP-2014 or FP-2015.

Thus, some of the terms of Lexicon-2014 are not necessary for expressing the terms of FP-2014 or FP-2015.

Table 3 highlights those wordforms that are used to express the terms of FP-2014 and FP-2015 that have no apparent counterpart in Lexicon-2014. Clearly, the Lexicon-2014 is also not sufficient for expressing FP-2014, let alone FP-2015.

Axiom/FP Overlap with Lexicon-2014
FP1 – Axiom 1 2014/15: Service is the fundamental basis of exchange.
FP2 2014/15: Indirect exchange masks the fundamental basis of exchange.
FP3 2014/15: Goods are a distribution mechanism for service provision.
FP4 2014: Operant resources are the fundamental source of competitive advantage.
2015: Operant resources are the fundamental source of strategic benefit.
FP5 2014/15: All economies are service economies.
FP6 – Axiom 2 2014: The customer is always a co-creator of value.
2015: Value is co-created by multiple actors, always including the beneficiary.
FP7 2014: The enterprise can only make value propositions.
2015: Actors cannot deliver value but can participate in the creation and offering of value propositions.
FP8 2014: A service-centred view is customer oriented and relational.
2015: A service-centred view is inherently beneficiary oriented and relational.
FP9 – Axiom 3 2014/15: All economic and social actors are resource integrators.
FP10 – Axiom 4 2014/15: Value is always uniquely and phenomenologicaly determined by the beneficiary.
FP11 – Axiom 5 2015: Value co-creation is co-ordinated through actor-generated institutions and institutional arrangements.

Table 3. Wordforms of the FP-2014 and FP-2015 and their overlap with the Lexicon-2014 of Service-Dominant Logic. Non-overlapping wordforms in FP-2014 are highlighted in blue; additional non-overlapping wordforms in FP-2015 are highlighted in red.

Thus, we see clearly that the terms of the Lexicon are neither necessary nor sufficient for expressing the Foundational Premises of Service-Dominant Logic .

Next time we’ll take up the more complicated challenge of determining (if we can) the exact meaning that Lusch and Vargo want to associate with the lexemes of the Lexicon of Service-Dominant Logic.


Lusch, RF and Vargo, SL (2014), Service-Dominant logic: Premises, perspectives, possibilities, Cambridge University Press.

Vargo, SL and Lusch, RF (2015), Institutions and axioms: an extension and update of service-dominant logic, Journal of the Academy of Marketing Science, 1 – 19.


  1.   Friedland, R and Alford, RR – Bringing society back in: Symbols, practices, and institutional contradictions (1991).
  2. Lusch and Vargo are inclined to dispense with hyphens – we favour them, and have inserted them here into the wordforms “time-bound,” “relationally-bound,” “resource-integrators,” and “co-created.”

Update of Service-Dominant Logic – 2015

In their recent paper “Institutions and axioms: an extension and update of service-dominant logic,” Stephen Vargo and Robert Lusch summarize key steps in the evolution of Service-Dominant Logic since their original formulation of S-DL appeared in 2004.

Within this one paper, Vargo and Lusch provide several perspectives on the evolutionary path of S-DL.


Along its evolutionary path, Service-Dominant logic has recognized and taken steps to address two deficiencies:

  1. An imprecision in delineation of the Foundational Premises (FPs) and specification of the Axioms of S-DL
  2. An absence of a clearly articulated specification of the mechanisms of (often massive-scale) co-ordination and co-operation involved in the co-creation of value through markets and, more broadly, in society.

Present Contribution

To alleviate this limitation and facilitate a better understanding of co-operation (and co-ordination), an eleventh Foundational Premise (Fifth Axiom) is introduced, focusing on:

  • the role of institutions and
  • institutional arrangements
  • in systems of value co-creation (aka service ecosystems)


While Vargo and Lusch have collaborated together and separately with many other researchers in the past decade, their tradition has been to come together (on their own) every two years to refine their specification of Service-Dominant Logic (S-DL):

Evolving to a new dominant logic for marketing
The four service marketing myths remnants of a goods-based, manufacturing model
Service-dominant logic
Service-dominant logic: reactions, reflections and refinements
Service-Dominant Logic as a foundation for a general theory
Service-dominant logic: continuing the evolution
Why “service”?
The service-dominant mindset
From goods to service (s): Divergences and convergences of logics
Service-Dominant Logic, market theory and marketing theory
A service logic for service science
SD logic: accommodating, integrating, transdisciplinary
“Relationship” in Transition: An Introduction to the Special Issue on Relationship and Service-Dominant Logic
From repeat patronage to value co-creation in service ecosystems: a transcending conceptualization of relationship
The nature and understanding of value: a service-dominant logic perspective
Gaining competitive advantage with service-dominant logic
The forum on markets and marketing (FMM) Advancing service-dominant logic
Service-dominant logic: Premises, perspectives, possibilities
An introduction to service-dominant logic
Inversions of service-dominant logic
The service-dominant logic of marketing: Dialog, debate, and directions (Book)
Service-Dominant logic as a foundation for a general theory

Table 1. Bi-annual collaboration of Vargo-Lusch on Service-Dominant Logic (2004 – 2014).

Vargo and Lusch have represented the evolution of Service-Dominant Logic in terms of refinements of its Foundational Premises (FPs) and Axioms:

2004 2008 2015
FP1 The application of specialized skills and knowledge is the fundamental unit of exchange. Service is the fundamental basis of exchange No Change – AXIOM STATUS
FP2 Indirect exchange masks the fundamental unit of exchange. Indirect exchange masks the fundamental basis of exchange. No Change
FP3 Goods are distribution mechanisms for service provision. No Change No Change
FP4 Knowledge is the fundamental source of competitive advantage. Operant resources are the fundamental source of competitive advantage. Operant resources are the fundamental source of strategic benefit.
FP5 All economies are service economies. No Change No Change
FP6 The customer is always the co-producer. The customer is always a co-creator of value. Value is co-created by multiple actors, always including the beneficiary – AXIOM STATUS
FP7 The enterprise can only make value propositions. The enterprise cannot deliver value, but only offer value propositions. Actors cannot deliver value but can participate in the creation and offering of value propositions.
FP8 Service-centered view is customer oriented and relational. A service-centered view is inherently customer-oriented and relational. A service-centered view is inherently beneficiaryoriented and relational.
FP9 All social and economic actors are resource integrators. No change – AXIOM STATUS
FP10 Value is always uniquely and phenomenologically determined by the beneficiary. No change. – AXIOM STATUS
FP11 Value co-creation is coordinated through actor-generated institutions and institutional arrangements. – AXIOM STATUS

Table 2. Development of the Foundational Premises of Service-Dominant Logic.

At a more general level of description, we would describe the evolution of Service-Dominant Logic turns on promoting three new classes of objects:

  • actor
  • institution
  • service ecosystem

… and four dynamics of service:

  • the role of co-operation (versus competition) in service provision
  • the role of institutions in value co-creation
  • the role of experience in service evaluation
  • the role of value co-creation in service innovation

The Service-Dominant Logic of today imagines resource-integrating, reciprocal-service-providing actors co-create value through meaning-laden experiences in service ecosystems governed and evaluated through institutional arrangements.

The major components of this emerging narrative are presented in Figure 1.

Vargo and Lusch 2015 - Fig 1 The narrative and process of S-D Logic

Figure 1. The narrative and process of Service-Dominant Logic.

We’d now like to consider the innovative elements of this narrative, beginning with the three new classes of objects (Actor, Institution, and Service Ecosystem) in Service-Dominant Logic.


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SL Vargo, RF Lusch – Recent developments of Service-Dominant Logic (readings)

Foundations of Service-Dominant Logic

Service Ecosystems

Innovation, Institutionalization, and Technology

Value Co-creation

Experience and Engagement

Stephen P Osborne – The New Public Governance (readings)

All things service

My day job as clinical leader of a large children’s mental health centre in Ontario, Canada presents me with the constant challenge of working with other professionals to devise and resource treatment plans for children and youth with complex emotional, behavioral, and learning needs.

I have been trained formally in the philosophy of language, cognitive psychology, and experimental design and statistics, though at this stage of my life I would describe myself as self-taught. Most recently, I have been studying two domains connected to my professional work – the concepts of “service” and “network”  – with the  idea of specifying more clearly a popular but particularly slippery concept – the “service network”.

In one case study, I intend to examine a database of human services in Ontario that is maintained online at http://211ontario.ca – and explore the “meaning” embedded in this sort of database using semantic web technologies, e.g.  the evolving Core Public Service Vocabulary of the European Commission and an ontology of government services included in a recent release of schema.org.

This is a work in progress.

Originally I had thought about working away under these broad headings:

While these headings still represent reasonable divisions of labour for me, there are three distinct but just-close-enough-to-be-confusing senses in which the term “service” is used in the literature:

  • a software service, like the SSL/HTTPS service, that secures the transfer of data packets over the Internet
  • a “real” world service, like a banking service, that allows someone to pay a monthly utility bill at a local branch
  • a “real” world service that is mediated by a software service, like an online banking service, that uses the SSL/HTTPS service to allow someone to pay a monthly utility bill securely over the Internet

Early on, the metaphor “software as a service” inspired pioneers in computer science to explore and elaborate one concept (software) that was novel and abstract in terms of another concept (service) that was familiar and grounded in human experience.

In the past two decades, our understanding of the concept of software, the concept of service, and the metaphor “software as a service” have advanced tremendously. Indeed, an entire industry has emerged around “Software as a Service” (SaaS) in “cloud computing.”

Finally, in much the same way that humans have moved from using the metaphor “computer as a brain” to using as readily the metaphor “brain as a computer” – the metaphor “service as a software” is used as readily as the metaphor “software as a service” in our thinking.

Today the prime driver for clarifying the semantics of “real world” service comes from software engineering – and seeks to improve the design and deployment of Web services that are (somehow) meant to facilitate the delivery of “real world” services.

My original thought was to enlist the technologies of software services – e.g. service-oriented computing, service-oriented architecture, service-oriented semantics – to describe and model more clearly and formally the defining features of “real” world services – especially human services, like social assistance, mental health counselling, and so on.

I still believe there is great potential in this exercise – and in the closely related exercise of elaborating how software services can support “real” human services – though we are liable to miss the mark if we take the metaphor “service as a software” too literally.


Service-dominant (S-D) logic

Service-dominant (S-D) logic represents a departure from the traditional goods-dominant (G-D) logic, in which goods were the focus of exchange and services represented a special case of goods. It shifts the emphasis from the exchange of operand resources – usually tangible, inert resources – to an emphasis on operant resources – dynamic resources that act upon other resources.

Robert F. Lausch and Stephen L. Vargo have authored many papers on Service-dominant logic. In a series of posts I extract the foundational and derivative propositions of S-D logic from Vargo & Lusch, "Service-dominant logic: What it is, what it is not, what it might be" in The Service-dominant logic of marketing: Dialog, debate and directions, RF Lusch & SL Vargo eds. (2006) and Lusch, Vargo & O'Brient, "Competing through service: Insights from service-dominant logic" Journal of retailing, 83, (I, 2007) 5-18.

S-D logic views applied, specialized skills and knowledge as the focus of economic exchange and one of the foundations upon which society is built. If goods are involved in the exchange, they are seen as mechanism for service provision.

S-D logic defines service as “the application of specialized competencies (operant resources – knowledge and skills), through deeds, processes, and performances for the benefit of another entity or the entity itself – that is exchanged for service.”

It is important to note the we use the singular term, service, which we feel better reflects the notion of doing something beneficial, rather than the plural term, services, which implies immaterial goods, a sub-class of output.

The following eight foundational premises summarize S-D logic:

  1. The application of specialized skill(s) and knowledge is the fundamental unit of exchange.
    • Service is exchanged for service
  2. Indirect exchange masks the fundamental unit of exchange:
    • Microspecialization, organizations, goals, and money obscure the service-for-service nature of exchange
  3. Goods are distribution mechanisms for service provision:
    • “Activities render service; things render service”
    • Goods are appliances
  4. Knowledge is the fundamental source of competitive advantage:
    • Operant resources, especially know-how, are the essential component of differentiation
  5. All economies are services economies:
    • Service is only now becoming more apparent with increased specialization and outsourcing; it has always been what is exchanged
  6. The customer is always a co-creator of value:
    • There is no value until an offering is used – experience and perception are essential to value determination
  7. The enterprise can only make value propositions:
    • Since value is always determined by the customer (value-in-use), it cannot be embedded through manufacturing (value-in-exchange)
  8. A service-centred view is customer oriented and relational:
    • Operant resources being used for the benefit of the customer places the customer inherently in the center of value creation and implies relationship

S-D logic makes the consumer endogenous to the value-creation process. Value becomes a joint function of the actions of the provider(s) and the consumer(s), but is always determined by the consumer.

S-D logic advocates viewing the customer as an operant resource – a resource that is capable of acting on other resources, a collaborative partner who co-creates value with the firm – and promotes a “market with” philosophy.

In S-D logic, collaboration between the firm (and relevant partners) and the customer allows for a strategic orientation that informs the more tactical Four Ps:

Products are viewed in terms of service flows, in which the service is provided directly or indirectly through an object: promotion is reoriented toward conversation and dialog with the customer; price is replaced with a value proposition created by both sides of the exchange; and place is supplanted with value networks and processes.

S-D logic views the external environments as resources the firm draws upon for support by overcoming resistances and proactively co-creating these environments. This can be illustrated by viewing the ecosystem as an operant resource that is an active party in service provision.

Service-Dominant Marketing

Figure 1. Service-dominant marketing.

Next: Competing with S-D logic

Competing with S-D Logic

The foundational premises of S-D logic inform a “competing through service” strategy and allow for the development of nine derivative propositions addressing competing through service (see Table 1). The overall theme is that applied knowledge and collaboration are the key drivers for firms to more successfully compete through service. To accomplish this, the firm must view external environments, customers and partners as operant resources.

Proposition Rationale
1. Competitive advantage is a function of how one firm applies its operant resources to meet the needs of the customer relative to how another firm applies its operant resources. Since applied operant resources are what are exchanged in the market (FP1), they are the source of competitive advantage (FP4)
2. Collaborative competence is a primary determinant of a firm’s acquiring the knowledge for competitive advantage. The ability to integrate (FP9) operant resources (FP4) between organizations increases ability to gain competitive advantage through innovation.
The continued ascendance of information technology with associated decrease in communication and computation costs, provides firms opportunities for increased competitive advantage through innovative collaboration. Reduced barriers to technology utilization combined with the trends of open standards, specialization, connectivity, and network ubiquity increase the likelihood of collaboration with firms and customers (FP6, FP8).
4. Firms gain competitive advantage by engaging customers and value network partners in co-creation and co-production activities. Because the customer is always a co-creator of value (FP6), and the firm is a resource integrator (FP9), competitive advantage is enhanced by proactively engaging both customers and value-network partners.
5. Understanding how the customer uniquely integrates and experiences service-related resources (both private and public) is a source of competitive advantage through innovation. Since value is co-created (FP6) comprehending how customers combine resources (FP8, FP9) provides insight into competitive advantage.
6. Providing service co-production opportunities and resources consistent with the customer’s desired level of involvement leads to improved competitive advantage through enhanced customer experience. Expertise, control, physical capital, risk taking, psychic benefits, and economic benefits influence customers’ motivation, desire, and amount of participation (FP6, FP9) in service provision through collaboration (FP8).
7. Firms can compete more effectively through adoption of collaboratively developed, risk-based pricing value propositions. Appropriately shifting the economic risk of either firm or customer through co-created (FP6) value propositions (FP7) increase competitive advantage.
8a. The value network member that is the prime integrator is in a stronger competitive position.
8b. The retailer is generally in the best position to become the prime integrator.
The ability to effectively combine micro-specialized competencies into complex services (FP9) provides knowledge (FP1) for increased competitive advantage (FP4).
Firms that treat their employees as operant resources will be able to develop more innovative knowledge and skills and thus gain competitive advantage. Since competitive advantage comes from the knowledge and skills (FP4) of the employees, it can be enhanced by servant leadership and continual renewal.

S-D logic asserts that it is not products that are the aim of the customer’s acquisition, but rather the benefit available through the service of the provider. S-D logic inverts the role of goods and service by making service superordinate to goods. In S-D logic, service can be provided directly to another entity or network or through goods – appliances, the basis of FP3. Competition, then, is a function of how one firm provides applied operant resources that meet the needs of the customer relative to another firm providing such applied operant resources. In S-D logic, all competition occurs through service-provision.

Previous: Service Dominant (S-D) logic

Next: Knowledge, collaboration, and sustainable competitive advantage

Knowledge, collaboration, and sustainable competitive advantage

Derivative Proposition 1.

Competitive advantage is a function of how one firm applies its operant resources to meet the needs of the customer relative to how another firm applies its operant resources.

Service per se is not the primary source of sustainable competitive advantage. As FP4 indicates, the only true source of sustainable competitive advantage is knowledge – the operant resources that make the service possible.

S-D logic, grounded in Hunt’s (2000) resource-advantage theory, recognizes that competitive advantage is derived from superior competences.

It is unrealistic for a firm to remain static in their value propositions or offered services; hence, service innovations are instrumental. These innovations are dependent upon the collection of competences, which the firm can continually renew, create, integrate, and transform. However, given the integrative nature of service provision, there is one competence that S-D logic recognizes as pivotal to any firm that wants to have sustained competitive advantage – collaborative competence – because it assists in the development of two additional meta-competences that we contend are critical in complex, dynamic, and turbulent environments:

  • 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.
  • 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.

Better collaborative competency, coupled with improved absorptive competence and adaptive competence, can be used by organizations to lower its relative resource cost and enhance its relative value proposition. Lower relative resource costs focuses on efficiency and enhanced relative value focuses on effectiveness.

S-D logic suggests that the only possible way to offer more efficient and effective solutions to the marketplace is to have superior collaborative competency because it leverages the firm’s ability to absorb information and knowledge from the environment, customers, and its value networks and enables firms to adapt to dynamic and complex environments.

Previous: Competing with S-D logic

Next: Collaboration and information technology

Collaboration and information technology

Derivative Proposition 2

Collaborative competence is a primary determinant of a firm’s acquiring the knowledge for competitive advantage.

Information technology, by facilitating the service-integration function, both within the firm and across the entire value-creation network including the customer, has a dramatic effect on the ability of all entities in the value-creation network to collaborate.

S-D logic recognizes technology as bundled, operant resources. New technologies are created by developing new operant resources, finding novel ways to embed operant resources in operand resources and/or finding ways to “liquefy” operant resources (i.e. unembed them from operant resources so that they can be employed separately). In reality, these processes usually occur in complementary combinations.

As unit computation and communication costs approach zero, more and more entities will be connected and collaboration will become increasingly feasible. Not only are the increased connections and collaborations with employees and suppliers but also with customers. Four factors are driving this trend:

  • Open standards. Open standards deal with co-production and collaboration. Information is increasingly symmetric versus asymmetric as more and more information and experiences are shared. Collaboration becomes the norm and innovation is stimulated.
  • Specialization. As individuals, organizations, and networks become more specialized they need others for what they themselves cannot do. Thus, more and more specialization leads to larger and larger markets. The consequence of intense specialization is increased interdependency among all entities that stimulates more collaboration that, in turn, stimulates innovation.
  • Connectivity. Connectivity makes the market system much more timely and quick in responding to changes in demand and supply. The market then becomes highly flexible.
  • Network ubiquity. The final force that has created an inflection point in the movement toward collaboration is network ubiquity. Increasingly, everyone and everything is connected to each other and each thing. Network ubiquity accelerates the consequences of open standards, specialization, and connectivity. The consequences are higher collaboration and more innovation.

Because of the convergence of these trends, it is logical that all entities (individuals, organizations, and households) will continue to look for ways to transform everything they do using information technology. To start, the mapping of processes consisting of all activities and tasks within and between entities should be undertaken. The goal is to discover ways to use information technology to take waste (usually time or effort) out of the value-creation process, redesign the system to eliminate points of system failure, and/or add valuable experiences to the service-provision process.

This mapping of activities that are involved in the co-production of service can be accomplished with a variety of techniques, often referred to as process mapping, service blueprinting, or activity mapping. All are based on industrial flowcharting; in all cases, the focus is on the mapping of processes and service flows, rather than merely a task, activity or function as it relates to a unit of output.

Service blueprinting also focuses on processes in the firm as it interacts with customers. A typical service blueprint breaks out into four components:

  1. Customer actions
  2. Onstage contact employee actions
  3. Backstage contact employee actions
  4. Support processes

The flowchart might use the horizontal axis to represent time and the vertical axis to model these components and their subcomponents. S-D logic suggests going a step further by mapping the customer’s role in value co-creation. CRM software could evolve to CEM (Customer Experience Management) software in recognition of the central role of customer experiences.

In sum, information technology is a pivotal force in enabling more collaboration and consequently innovation throughout the entire value network.

Previous: Knowledge, collaboration, and sustainable competitive advantage

Next: Collaboration: co-production and the co-creation of value



Collaboration: co-production and the co-creation of value

Derivative Proposition 3

The continued ascendance of information technology with associated decrease in communication and computation costs, provides firms opportunities for increased competitive advantage through innovative collaboration.

The concept that the customer is always a collaborator is both a foundational premise (FP6) of S-D logic and a popular focus in the contemporary marketing literature (e.g., Bendapudi and Leone 2003; Prahalad and Ramaswamy 2004). However, it is often not recognized that there are two components of collaboration. The most encompassing of these components is the co-creation of value. The concept of co-creation of value represents a rather drastic departure from G-D logic, which views value as something that is added to products in the production process. S-D logic, however, argues that value can only be determined by the user in the “consumption” process. Thus, it occurs at the intersection of the offerer, the customer – either in direct interaction or mediated by a good as indicated in FP3 – and other value-creation partners. Therefore, the idea of co-creation of value is closely tied to “value-in-use” and is inherently relational. It is also highly related to the concept of customer experience (Pine and Gilmore 1999; Smith and Wheeler 2002) and also incorporated as a key element of perceived value in Parasuraman and Grewal’s (2000) model of the quality–value–loyalty chain.

The second component of co-production involves the participation in the creation of the core offering itself, and therefore, probably more appropriately (than value-co-creation) referred to as “co-production.” It can occur through shared inventiveness, co-design, or shared production and can occur with customers and any other partners in the value network. Common examples can be a person assembling Ikea furniture, a person advising their hairstylists during the hair styling process, and a retailer and a manufacturer co-producing a retail marketing program. Co-production, like co-creation, is also related to the emerging concept of customer experience.

Because both the “co-creation of value” and “coproduction” treat the consumer as endogenous, they are different from the production concepts associated with G-D logic. Clearly, they are also nested concepts with the former superordinate to the latter in the same way, and with similar implications, as the relationship between service and goods in S-D logic. Traditionally, most marketers and consumer researchers have focused upon buyer behavior related to the product and the transaction, and thus focused on only a subset of co-production (for a good review of relevant literature on customer participation see Bendapudi and Leone 2003). However, if, as S-D logic suggests, value is co-created, it is necessary to shift the focus to relationship formation and consumption behavior. It also implies that co-creation and co-production occur not only between the firm and the customer but also involves other parties (value-network partners), and implies that resource integration is a primary function of the firm (Vargo and Lusch 2006).

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Next: Co-creation of value

Co-creation of value

Derivative Proposition 4

 Firms gain competitive advantage by engaging customers and value network partners in co-creation and co-production activities.

One opportunity for organizations to compete through service is to identify innovative ways of co-creating value. Interactivity and doing things with the customer versus doing things to the customer is a hallmark of S-D logic. Goods may be instrumental in relationships, but they are not parties to the relationship; inanimate items of exchange cannot have relationships (Vargo and Lusch 2004). Consequently, S-D logic places a high priority on understanding customer experiences over time.

As parties specialize, they need to rely increasingly upon other entities for value co-creation—that is, they draw increasingly upon and are dependent on the resources of others. Some of these other resources are private and some public. For example, if one purchases an automobile but also  has access to well-built highways, public parks, enforced traffic laws, and so forth, then, over time, one obtains a different service experience than if these public resources were not present. Similarly, if one purchases an automobile and has access to a garage to keep the auto clean and in good condition the experience of using the auto is again altered. In short, the resources that are endogenous to value creation often include those traditionally categorized as belonging to the uncontrollable, “external” environment. This also suggests that the customer is a primary integrator of resources in the creation of value through service experiences that are interwoven with life experiences to enhance quality of life.

Previous:  Collaboration: co-production and the co-creation of value

Next: Co-production of the service offering

Co-production of the service offering

Derivative Proposition 5

Understanding how the customer uniquely integrates and experiences service-related resources (both private and public) is a source of competitive advantage through innovation.

Generally, customers are increasingly becoming involved in the co-production of many services (Bendapudi and Leone 2003). For example, compare the service of today’s supermarket in relation to that of the small corner grocer of 100 years ago. The corner grocer of yesterday would take the order, pick the groceries from the store or behind the counter, wrap and package the groceries, deliver the merchandise, and provide credit service. Today customers enter the store and navigate it without assistance, choose the merchandise they desire, move through a self check-out counter where they scan their own merchandise, pay electronically, bag their own groceries, transport the items to their car, and then drive home, unload, and stock their pantry. As this example illustrates, co-production is not new to retailing, but in a large part characterizes the historical evolution of retailing. It also illustrates that the retailer has considerable control and influence over customer experiences and thus should be a vital participant in the management, or as S-D logic states, in the co-creation and co-production of customer experiences.
Based upon the work of Lusch et al. (1992), we posit six key factors that contribute to the extent to which the customer is an active participant in the co-production of a service offering. Retailers and other organizations in order to develop innovative service strategies can use each factor.

  1.  Expertise.  An individual is more likely to participate in co-production if s/he has the requisite expertise (i.e., operant resources). Recognizing this, Home Depot and Lowe’s offer do-it-yourself (DIY) clinics to teach people such skills. It then offers to sell the tangible products needed to complete these projects.
  2. Control. Co-production is more common when a person wants to exercise control over either the process or outcome of the service. For instance, many households are practicing home schooling their children because they want to have more control over the educational process and outcomes, providing an opportunity for firms to provide the needs to complete these activities, such as educational software.
  3. Physical capital . Co-production is more likely if the party has the requisite physical capital. For example, for auto or home repair this might involve needed tools, space or both. Retailers such as Taylor Rental or U-Haul can provide some of the needed physical capital.
  4. Risk taking . Co-production involves physical, psychological, and/or social risk-taking. This does not imply that risks are necessarily increased with co-production, since co-production can also reduce risks. For instance, most Western medicines use a goods-dominant logic where the patient is someone that is passive and something is done to him or her in order to cure him or her. However, if the person becomes involved in managing their health and wellness, then the risks of poor health may decline.
  5. Psychic benefits . One of the primary reasons people engage in co-production is for pure enjoyment—the psychic (experiential) benefits. Activities like home gardening, gourmet cooking, personal fitness training, education, or learning a new skill, are all heavily service intense and are engaged in for psychic benefits. For example, Build-A-Bear is a retailer that allows customers to build a customized stuffed animal, which becomes a rewarding experience.
  6. Economic benefits . Perceived economic benefits plays a central role in co-production. Many people participate in co-production because it is a good use of their time. In fact, it can be argued that the rise of self-service retailing, from gasoline stations to mass merchandisers, is primarily driven by the economic benefits. Importantly, value that is created through co-production is tax-free.

The preceding six factors speak not only of the motivations behind the customer’s desire to be involved in co-production, but can also be used to help determine how much the customer wants to be part of service operations (Lusch et al. 1992). Furthermore, a firm may decide that it needs to provide certain services that may help the customer be part of service operations. These factors also are the source of many customer contacts or touch points, which form the basis of managing customer experiences (Smith and Wheeler 2002; Schmitt 2003). Thus, firms should consider mapping the entire experience process that is associated with its offerings to include the customer’s level of involvement in co-production activities and processes. This mapping can be the basis for the customer-experience management framework suggested by Schmitt (2003), which includes: (1) analyzing the experiential world of the customer, (2) building the experiential platform, (3) designing the brand experience, (4) structuring the customer interface, and (5) engaging in continuous innovation (Schmitt 2003, p. 25).

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Co-production, co-creation, and pricing

Derivative Proposition 6

Providing service co-production opportunities and resources consistent with the customer’s desired level of involvement leads to improved competitive advantage through enhanced customer experience.

Only casual observation of the American retail landscape is needed to see the pervasive presence of price competition, especially with the lowering of search costs via the Internet (Alba et al. 1997; Bakos 1997; Gourville and Moon 2004; Lynch and Ariely 2000). Does S-D logic provide any insights for retailers and others on howto more effectively compete on the price dimension? This is important because only through lower costs or enhanced revenues can a firm improve its financial performance. We know analytically that price per unit multiplied by units sold equal revenue. One could argue that if superior service strategies are to yield improved financial returns, then customers should be willing to pay a higher price per unit of service or to purchase more service. While logically correct, this does not inform the marketer about how to achieve better financial returns through superior service strategies. Importantly, S-D logic provides the conceptual tools that can offer insight into the “how” issue.

While it is generally understood that organizations should proactively link co-production and pricing strategies, S-D logic implies extending this price co-production (Lusch and Vargo 2006) link to the firm’s value proposition. A value proposition can be thought of as a promise the seller makes that value-in-exchange will be linked to value-in-use. When a customer exchanges money with a seller s/he is implicitly assuming the value-in-exchange will at least result in value-in-use that meets or exceeds the value-in-exchange. A co-produced value proposition can make the price contingent upon the quality of service experience or other agreed upon output. Sawhney (2006) refers to this as gain sharing or risk and reward sharing. Here the value in exchange (price) is tied to the value realized by the customer. Consequently, gainsharing or risk-based pricing could be a part of developing a service strategy that links financial returns to superior service. If both buyer and seller have something at risk and something to gain, then collaboration will be much more fruitful.

Can a retailer use gain-sharing or risk-based pricing? We argue affirmatively. Consider an example of a retail buyer collaborating with a vendor on a merchandising program. The program might involve a set of integrated services that are tied to value-network management processes – for example, customer relationship management, customer service management, demand management, order fulfillment, manufacturing flow management, supplier relationship management, product development, and returns management (Lambert and Garcia-Dastugue 2006) – involving the retailer, its vendors, and other value-network partners. Adopting “gain sharing or risk-based” pricing, the retailer would pay a price on the basis of the quality and level of service provided and sales revenue achieved. However, for this approach to be successful, the retail buyer and the vendor (and perhaps other value-network partners) should co-create the value proposition. This co-created value proposition would increase the chances of a win–win situation in a field where intense negotiations have left many vendors feeling underappreciated.

Previous: Co-production of the service offering

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The prime integrator

Derivative Proposition 7

Firms can compete more effectively through the adoption of collaboratively developed, risk-based pricing value propositions.

S-D logic points toward collaboration and coordination as essential approaches to innovation and competition. They represent means for integrating activities and resources. Vargo and Lusch (2006), in the ninth foundational premise (FP9) identify resource integration as the essential role of the firm. Christensen et al. (2001) identify it as the most critical aspect of innovation. At one end of a coordination/integration continuum are transactional markets where the “invisiblehand” of the marketplace becomes the key coordination mechanism and integrator. At the other end of the continuum are relational markets (i.e., long-term relationships, partnerships, alliances, joint ventures, and networks), which are highly collaborative (Webster 1992). S-D logic embraces relational and collaborative markets. However, under a collaborative model of coordination, who should be the prime integrator?

etailers have a distinct advantage in being the customer’s closest link to the marketplace. As such, it is possible that within the value network the retailer may be positioned best to develop a core competence in market sensing. It can also be argued that investment in manufacturing is increasingly viewed as constraining market responsiveness (Vargo and Lusch 2004)—in fact, even firms historically considered to be primarily manufacturing firms are increasingly outsourcing the manufacturing process. Achrol (1991, pp. 88, 91) identifies “transorganizational firms,” which he refers to as “marketing exchange” and “marketing coalition” companies, both of which have “one primary function—all aspects of marketing.” Achrol and Kotler (1999) envision marketing as largely performing the role of a network integrator that develops skills in research, forecasting, pricing, distribution, advertising, and promotion, and they envision other network members as bringing other necessary skills to the network. Consider that the consumer is also faced with more and more choices and may be receptive to domesticating or taming the market by adopting and developing a relationship with a limited number of organizations (Vargo and Lusch 2004). Rifkin (2000) argues that consumers will develop relationships with organizations that can provide them with an entire host of related services over an extended period.

As such, S-D logic suggests retailing is best characterized as a service-integration function. This is somewhat different from the typical conceptualization of retailing representing

the final link in a directional distribution flowor supply chain. In S-D logic, the retailer is part of a value network comprising all the parties (including the customer) involved in value creation. The retailer differs from other network members by the fact that his exchange with the customer is direct. Since other network partners are increasingly retaining this direct exchange function, the retail/nonretail lines are often blurred. More generally, since all parties to value creation are service integrators, service-based competitive strategies are not limited to traditional retailers.

However, by redefining their role in terms of this integration function and becoming prime integrators rather than distributors, we believe retailers could remain the pivotal link in the value network. For instance, over the past 20 years a group of independent auto dealers has obtained multiple franchises operating as independent businesses but under a common ownership. One of these mega-dealers has the ability to sell a Mercedes, Honda, Ford, Toyota, Kia, Volvo, Chrysler, and so forth. However, the needs of an auto owner are much broader. They need financing, auto insurance, fuel, maintenance, parking, and places to stop for food and lodging, and also assistance on airline and other travel when use of a car is not economical or timely. The mega auto dealer could relatively easily move into this entire market space and be the household’s major provider of transportation services. Similarly, PETsMART could be the integrator for a household’s entire pet related needs; Home Depot for all the housing related needs; Office Depot for home business related needs, and so forth. This is consistent with Achrol and Kotler’s (1999) observation that marketing may become a customer-consulting function.

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Competitive advantage of the prime integrator

Derivative Proposition 8a

The value network member that is the prime integrator is in a stronger competitive position.

Derivative Proposition 8b

The retailer is generally in the best position to become the prime integrator.

While the network member who is the prime integrator is in a stronger competitive position, we posit it is the retailer who is generally in a unique position to become the prime integrator. In a sense, the history of retail competition is largely a history of managing the level and types of service (and value) that the customer co-creates. Furthermore, retail entrepreneurs and innovators offered different approaches to integrate the customer into the value co-creation process. Notable hypotheses in this area (i.e., The Wheel of Retailing, McNair 1958; Hollander 1960, and The Big Middle, Connolly 2004; Levy et al. 2005) provide a good lens to view this evolutionary phenomenon.

Hollander’s (1960) descriptive notion of a wheel of retailing alludes to such trade-offs as retailers changing their core offering from the entry phase (with assumed relatively low retailer input and relatively high customer input) through the trading-up phase (with an assumed more equal proportion of service load between the customer and retailer at the point of transaction) to the vulnerable phase (where it is assumed the retailer’s input is considerably greater than other phases). Conceptually, however, a firm would be vulnerable at any stage to competitors who are better at integrating resources and services to collaborate with the customer to produce and create higher value, and not just during the vulnerable stage mentioned earlier.

Levy et al. (2005) model the retail landscape along the dimensions of relative offering of the retailer along with relative price and refer to “The Big Middle” marketspace, the space where the largest number of customers is conceptually located and where the largest retailers compete. Under this model retailers … “tend to originate as either innovative [high relative offering, high relative price] or low-price [low relative offering, low relative price] retailers, and the successful ones eventually transition or migrate to the Big Middle [average relative offering, average relative price] (p. 85, items in brackets added).

While the authors, note the oversimplification of the scheme for expository purposes (p. 85), we suggest the model is indicative of the phenomena of retailers actively managing the level of service for which each value co-creator (marketer and customer) is responsible. Accordingly, the retailers’ management of the balance of co-creation responsibilities has always led them to follow a more service-centered view. Despite the advantageous role retailing may serve as a prime service-integrator, and the role that technology can play in aiding service-integration, S-D logic informs all organizations. In the following section, we point out how S-D logic can inform organizations about gaining competitive advantage by becoming more service-centered through the creation of a service culture.

Leveraging employees

One of the hallmarks of S-D logic is the superordination of operant resources in relation to operand resources in their relative roles in competitive strategy. That is, as discussed, it is knowledge and skills, including in some cases a firm’s knowledge used in designing and/or making appliances, which drives its success (Vargo and Lusch 2004; Lusch and Vargo 2006). This, of course, implies that the competitive advantage of the firm is more of a direct function of the comparative advantage of competences (c.f. Hunt 2002) than it is the direct comparative advantage of its units of output—that is, its goods. The other hallmark of S-D logic is the idea that value cannot be embedded in operand resources but rather must be co-created through collaboration between firm, customer, and other value-network partner’s operant resources (Vargo and Lusch 2004).

Besides operand and operant resources being differentiated in terms of their ability to cause changes in other resources, they differ in another important regard. Operand resources are typically depletable and static in nature, while operant recourses are capable of being rejuvenated, replenished, and newly created, and are thus dynamic in nature. That is, new, innovative knowledge and skills, often with increased capability for providing increased benefits, and thus increased marketability, can be created endlessly. None of this suggests that a specific set of competences cannot become obsolete, or at least “commoditized.” Indeed, today’s high technology often becomes tomorrow’s “unskilled” labor.

Organizations can reinvent themselves as “service” organizations and develop a service culture by treating employees as the type of resources they are—pure operant resources, rather than operand resources. Reinventing the firm as a service organization using S-D logic requires the organization’s culture and its leadership style to treat employees as operant resources. The leadership of many G-D logic organizations is based largely on the manipulation of rewards and punishments and is, accordingly, a coercive form of leadership. It is also based on asymmetric information with the leader and organization holding much information private and out of the reach of employees and, in turn, employees reacting similarly and withholding vital information from management. Employees are viewed as replaceable operand resources and treated largely in a transactional mode. It is not surprising that these firms find themselves unable to compete and, as such, laying-off or ridding themselves of their most important resources.

By contrast, S-D logic points to all participants in the value-creation process who are being viewed as operant resources. When employees are viewed and treated in this manner they become empowered in their role as value cocreators. Employees as operant resources become the primal source of innovation, organizational knowledge, and value. The role of the leader is to be a servant-leader who is there to serve the employees, rather than the employees serving the manager. Hence, employee–manager interaction comprises conversation and dialog and the development of norms of relational behavior such as trust, open communication, and solidarity. In addition, because of open communication, all information is shared and thus is symmetric. In this work environment, employees can develop new and innovative ways of providing service—that is, new competences that allow the firm to compete more effectively. Further, employees of these firms are (should be) assisted in this process of competence augmentation through internally and externally supported training and educational programs.

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Managerial directions

Derivative Proposition 9

Firms that treat their employees as operant resources will be able to develop more innovative knowledge and skills and thus gain competitive advantage.

Each of the nine propositions that wehave presented points directly to one or more managerial implications. However, none of these propositions will result in the achievement of competitive advantage unless the management adopts a service orientation. S-D logic is more than a series of premises and propositions; it is a revised logic of market exchange that informs a revised logic of competing through service. At the core of S-D logic (see Fig. 2) is the requirement that management should understand that value-creation for both the customer and the firm requires collaborating with customers (and other value-network partners). In turn, this requires recognizing that they are operant, rather than operand, resources. It also requires that management should understand that what it primarily brings to the market is its ability to serve some other party through the application of its own resources, primarily operant—that is through a collaborative effort with its own employees. In brief, the most fundamental implication is that firms gain competitive advantage by adopting a business philosophy based on the recognition that all entities collaboratively create value by serving each other.

Some look for boundary conditions that apply to this philosophy. For example, it has been argued that S-D logic is not applicable to a pure commodity type of business. But S-D logic also applies to commodity industries. Competitive advantage is not based on the commodities themselves, but rather on collaborative ability of the firm to allow the commodities to provide service for some other party. That is, competitive advantage is firm-based rather than product-based and thus, while the goods provided might be commodities, the firm can be highly differentiated. In fact, it could be argued that S-D logic is especially critical in commodity industries.

As Vargo and Lusch (2004) have indicated, many companies that are selling tangible output have found competitive advantage through the adoption of a service logic. Conversely, many firms typically characterized (i.e., by G-D logic classification schemas) as service organizations, such as the airlines, internal revenue service, health care providers, and so forth, have found themselves at a competitive disadvantage by adopting a G-D logic and focusing on output management versus process management. Stated alternatively, any organization can gain competitive advantage by adopting a service-dominant orientation.

Although we think of commodities in terms of goods (especially foodstuffs), S-D logic suggests that virtually all firms that focus on units of output will likely become commodity businesses. Likewise, all firms, including “goods” firms can transform themselves competitively by better understanding how they can serve. For example, retailers can focus on selling merchandise and enticing patronage by constantly cutting prices – that is, treating their business as a commodity – or they can focus on co-creating new kinds of value and service experiences with customers and, in all likelihood, sell at prices considerably in excess of their competitors that, on the surface, might appear to operate in the same business or market.

There is another, very central, managerial direction that S-D logic provides, as implied by the outer circle of Fig. 2. It is tied to understanding the nature and scope of available resources (internal and external), including those that might appear to be resistances until they are overcome by and integrated with the organizations’ other resources. We discussed some of this in conjunction with the idea of viewing the ecosystem as something to collaborate with in the co-creation of service and also in conjunction with the idea integrating firm, individual, and public resources – for example, to increase the value-in-use of an automobile. Unfortunately, most businesses (including retailers) tend to view external environments as resistances, if not countervailing forces rather than resources. For example, “big box” retailers are facing increased opposition as they enter communities for a variety of reasons, such as posing potential harm to small retailers, the social fabric of the community, land-use through construction, under provision of employee benefits, and so forth. It is possible to view these externalities as uncontrollable constraints. But it is also possible to view them as potential resources for the collaborative creation of a better value proposition for both the community and the firm. Consider a big box mass merchandiser on 20 acres that: (1) plants trees near the store and in the parking lot to better protect structures from heat; (2) opens its parking lot to a local farmer’s market for fresh produce; (3) sublets interior store space, not only to Bank of America and McDonald’s, but to small enterprising local entrepreneurs; (4) provides a room for community meetings; (5) provides part time work to community members that are disabled mentally or physically. A truly S-D retailer would view the entire community as a storehouse of resources to collaborate with to not only help the community but to provide the retailer with relative competitive advantage.

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Stephen L Vargo & Robert F Lusch – Readings





  • Vargo, SL and Lusch, RF – Service-dominant logic: Continuing the evolution – 2008
  • Why “service”? – 2008
  • The service-dominant mindset – 2008
  • From goods to service (s): Divergences and convergences of logics – 2008
  • Service-Dominant Logic, market theory and marketing theory – 2008
  • A service logic for service science – 2008
  • “Relationship” in Transition: An Introduction to the Special Issue on Relationship and Service-Dominant Logic


  • From repeat patronage to value co-creation in service ecosystems: a transcending conceptualization of relationship – 2010
  • SD logic: accommodating, integrating, transdisciplinary – 2010