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.

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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).

Previous: Collaboration and information technology

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, 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

Next: The prime integrator

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.

Previous: Co-production, co-creation, and pricing

Next: Competitive advantage of the prime integrator

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.

Previous: The prime integrator

Next: Managerial directions


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