S-D Logic

Thinking Small and Long

Robert F. LuschLisle & Roslyn Payne Professor of Marketing

University of Arizona

Ohio State UniversityMay 19, 2006

S-D Logic

What I Want to Accomplish

Discuss Small and Long Thinking

Share an Experience

Illustrate a Method for Small & Long Thinking

S-D Logic

Small and Long Thinking

S-D Logic Agent Based

Modeling

Thinking Small

All agents exchange service or competences.

Agent microscopic actions and interactions.

Thinking Long

All economies are service economies.

Emergence and evolution of macroscopic features (CAS).

S-D Logic

All Exchange is Service Centered

“the great economic law is this: Services are exchanged for services…. It is trivial, very commonplace; it is, nonetheless, the beginning, the middle, and the end of economic science….”

- Frederic Bastiat 1860

“services are the application of specialized competences (knowledge and skills) through deeds, processes, and performances for the benefit of another entity or the entity itself.”

- (Vargo and Lusch 2004)

S-D Logic

Growth of Markets & Marketing

G oo ds M o n ey O rg an iza tio ns

M a rke ts

D iv is ion o f L a b or

C o m m e rc ia l o rC iv il S o c ie ty

Institutions Institutions

Institutions Institutions

Institutions Institutions

Service for Service Goods, Money, Organizations, Networks

are Intermediaries

S-D Logic

Evolving To a New Frame of Reference

To Market(matter in motion)

Market To(management of

customers &markets)

Market With(collaborate with

customers & partnersto produce & sustain value)

Through 1950 1950-2010 Future

S-D Logic

Goods vs. Service-Dominant

Marketing To: Mass market Produce product Promote product Price product Distribute product One-sided Transaction oriented Maximize profit

Marketing With: Markets of one Service(s) Conversation & dialog Value Proposition Supply & Value

Networks Multi-Sided Relational oriented Financial performance

as feedback (learning)

S-D Logic

CollaborateWith

Customers &Partners

Collaborate:Customers &

Partners

Overcome

Resistances

Co-CreateServiceOffering

Co-CreateValue

Proposition

Co-CreateConversation& Dialogue

Co-CreateValue

Processes &Network

Draw UponResources (internal & external)

S-D Logic as a

Theory of Marketing

S-D Logic

Advancing Theory: The Role of the Funeral

Scientific theories, however, are fundamentally different. They are constructed to be blown apart if proved wrong, and if so destined, the sooner the better. “Make your mistakes quickly” is a rule in the practice of science. I grant that scientists often fall in love with their own constructions. I know; I have. They may spend a lifetime vainly trying to shore them up. A few squander their prestige and academic capital in the effort. In that case – as economist Paul Samuelson once quipped – funeral by funeral, theory advances.”

(Edward O. Wilson. Consilience: the Unity of Knowledge. 1998; p. 52).

S-D Logic

Timeline of SD-Logic

Initial Draft 1995 Refinement 1996-1999 Summer 1999 Submission Summer 2000 Submission Summer 2001 Submission Summer 2002 Submission Winter 2003 Submission Spring 2003 Paper

Accepted Published January 2004

Four major revisions Two editors Six reviewers One strong reviewer

advocated from beginning

Sixth reviewer became advocate for publishing with commentaries

Editor Ruth Bolton coached and guided along the way

S-D Logic

Is It All About Services: A Paradigm Inversion

(1999)

“While your manuscript has interesting ideas, the current positioning of the paper leaves one feeling that there is not much new in the paper.”

- JM Editor David Stewart (November 1999)

“The author(s) are to be applauded for taking on such an extremely ambitious essay. To propose a true Khunian paradigm shift in marketing and to succeed is to try to do something that no theoretical paper has achieved that I am aware of—although historians of science will ultimately be the judges of such matters.”

- JM Reviewer (November 1999)

"Every once in a while a paper comes along that is truly exciting--that has the ability to change the way people think. This is one of those papers. If this paper is published in JM, then it has the opportunity to be a classic in our field. I wish that I had written it.”

- JM Reviewer (November 1999)

S-D Logic

Is It All About Services: A Paradigm Inversion

(2000)

“The primary concern of the reviewers remains focused on the incremental contribution of the paper.”

“…it is probably too strong to conclude that all goods represent services in disguise.”

“…identify the boundary conditions of your premises.” -Editor David Stewart

S-D Logic

Is It All About Service (2001)

Revision of this manuscript has taken longer than intended. However, we should mention that one of the reasons it has taken ten months to complete this revision is that we kept trying to revise based on the individual comments of the reviewers and finally decided to start anew. Importantly the suggestion of reviewer #5 to organize the manuscript around a set of propositions (and your mentioning of this suggestion in your letter of September 19, 2000) while simultaneously encouraging us to significantly reduce the length of the manuscript led us in this direction. For your information the manuscript has been reduced by approximately 30%. Consequently, this manuscript is almost a total rewrite and is now organized around eight key propositions from which we derive thirteen managerial and societal implications.

Steven L. Vargo & Robert F. Lusch

Resubmission Letter to Editor Stewart

S-D Logic

Transition & Convergence: From an Output to a Process Centered View of Marketing

(2002)

“All three reviewers praise you for undertaking the challenging task of writing a paper that synthesizes a diverse marketing literature (over a substantial period of time)—and attempts to crystallize the debate about the meaning and direction of marketing.”

“As you may recall, I invited a new reviewer (Reviewer 6)…He/she found the paper “interesting and provocative” and rightly observes that it is unlikely (and perhaps undesirable) for the reviewers to converge in their opinions.”

“I ask you to create a shorter and more focused paper (that retains your key arguments). Then, if your paper is accepted for publication, it can provide the basis for invited commentaries by distinguished scholars.”

- Editor, Ruth Bolton

S-D Logic

Evolving to a New Dominant Logic for Marketing (2004)

Marketing inherited a model of exchange from economics, which had a dominant logic based on the exchange of “goods,” which usually are manufactured output. The dominant logic focused on tangible resources, embedded value, and transactions. Over the past several decades, new perspectives have emerged that have a revised logic focused on intangible resources, the co-creation of value, and relationships. The authors believe that the new perspectives are converging to form a new dominant logic for marketing, one in which service provision rather than goods is fundamental to economic exchange.

Abstract, Journal of Marketing (January 2004), p.1

S-D Logic

Invited Commentaries: Day, Deighton, Narayadas,

Gummesson, Hunt, Prahalad, Rust,

Shugan

Vargo & Lusch (2004) observe that an evolution is underway toward a new dominant logic for marketing. The new dominant logic has important implications for marketing theory, practice, and pedagogy, as well as for general management and public policy. … The ideas expressed in the article and the commentaries will undoubtedly provoke a variety of reactions from readers of the Journal of Marketing.

- Ruth Bolton, Editor, Journal of Marketing (2004)

S-D Logic

The Service-Dominant Logic: Dialog, Debate and

Directions M.E. Sharpe (2006) Distinguished Group of Scholars Identify areas

of Consensus, Dissent, and Future Directions. Essays contributed by Achrol, Arnould, Brodie,

Day, Gronroos, Gummesson, Holbrook, Hunt, Jaworski, Kohli, Kotler, Lambert, Levy, Penazola, Price, Oliver, Rust, Sawhney, Wilkie, Woodruff, and others

Lusch & Vargo contribute integrative essays dealing with economic and marketing history, public policy, marketing management, and toward a general theory of marketing.

S-D Logic

S-D Logic & ABM as a Paradigm Shift:From Constructs to Actors

Virtually all social science theory models relations between constructs.

S-D logic views marketing as interactions between entities and ABM provides the method to model and research these interactions.

What emerges from interactions? Macro structures Relations between variables Rules (institutions and norms) Co-creation

S-D Logic

Building Societies from Ground Up

Digital Organisms Genetic algorithms

Fuzzy Logic Data Capturing & Aggregation

ObjectOriented

Programming

S-D Logic

Object Oriented Programming

OOP Integrates Data and Functions.

Every digital organism is an object with its own information and functions it uses to operate.

Every digital organism has receptors, memory, decision system, and effectors.

S-D Logic

Creation of Digital Life

Environment

Environment

Sensory Capability

Memory Capability

Learning & Decision Capability

Effector Capability

Object Oriented Software Program

S-D Logic

Genetic Algorithms & Digital Learning

Learning Mode Genetic Mechanism

Imitation Reproduction

Communication Crossover

Experimentation Mutation

S-D Logic

Decision-Making: From Substantive Rationality to Procedural Rationality

Simon (1978) argues the concept of rationality is “economics” main export to other social sciences.

In complex environments actors evolve and their actions and anticipations are unknown from each other; the relevant rationality is procedural rationality.

These environments are the “permanent and ineradicable scandal of economic theory” (Simon 1976).

Mind is the scarce resource; how the actor finds efficient and effective search algorithms is the key.

S-D Logic

Procedural Rationality: How do Individuals Reason & Learn?

Inductive reasoning—ampliative method of reasoning (gap filling)

Extinguish rules or actions that are unsuccessful and adopt rules or actions that are successful—market hypotheses

Information processing and actions not fine-grained but are fuzzy

Memory lingers; little is completely forgotten

S-D Logic

Fuzzy Logic

Lack of crisp, well-defined boundaries

Membership in two or more sets

Imprecise linguistic concepts

Everything a matter of degree

Speed of perception and information processing

Weekend Days

Saturday

SundayFriday

S-D Logic

The Ambidextrous Organization & Evolutionary Biology

When the environment changes slowly then mechanisms of exploitation that work on variation, selection and retention work well. We learn by communicating and do this primarily by crossover.

When there is dramatic shift in the environment or a punctuated equilibria then relying purely on exploitation will not allow the organism to survive. It must explore to innovate or face extinction. We do this primarily via mutation.

S-D Logic

The Ambidextrous Organization: Modeling Exploitation with Crossover

Moderate Crossover (moderate exploitation) is represented by 50% probability of crossover every 30 periods.

High Crossover (high exploitation) is represented by 100% probability of crossover every 30 periods. In this situation the seller takes advantage of every opportunity to investigate the space for a good solution.

S-D Logic

The Ambidextrous Organization: Modeling Exploration with Mutation

High Mutation (high exploration) is represented by 50% probability of mutation every 30 periods.

Moderate Mutation (moderate exploration) is represented by 25% probability of mutation every 30 periods.

Low Mutation (low exploration) is represented by 5% probability of mutation every 30 periods.

S-D Logic

Simple Setting: Complex Market

Buyers are homogeneous. Buyers in market-A are stable and do not change their preferences but in market-B change their preferences randomly every 1500 periods.

Sellers have cost functions and decision alternatives. Decisions include price, product attribute, production level.

Buyer preference is a function of price and product offering.

Sellers have four fuzzy states for each of three decisions. Each market hypothesis has 64 rules. Sellers vary in their exploration & exploitation.

S-D Logic

Organizational Learning Strategies

Low Exploration

ModerateExploration

High Exploration

ModerateExploitatio

n

Seller-Two Crossover = .5Mutation = .25

Seller-OneCrossover = .5Mutation = .5

High Exploitatio

n

Seller-Four Crossover = 1.0Mutation = .05

Seller-ThreeCrossover = 1.0Mutation = .25

S-D Logic

Market-A: Stable World Buyer preferences are fixed or

unchanging. In this situation we would expect

the organization that focuses heavily on exploitation as a learning mechanism and seldom uses exploration to learn to perform best (seller four). On the other hand an organization with high exploration would do poorly (seller one).

S-D Logic

S-D Logic

S-D Logic

Stable World

S-D Logic

Market B: Turbulent World Buyer preferences are randomly

changed every 1500 periods (50*crossover frequency).

In this situation we would expect ambidextrous organizations to do best. The organizations that both, to a good degree, exploit and explore. This would be sellers 2 or 3. Seller four who hardly ever explores should perform the poorest.

S-D Logic

Seller #4: Rulebase #10, Time = 25,000, Turbulent Environment

S-D Logic

Turbulent World

S-D Logic

Profit Payoffs

Stable Environmen

t

Turbulent Environme

nt

Seller-1 (low exploit; high explore)

($256,372) $185,182

Seller-2 (low exploit; mod explore)

($247,593) $105,849

Seller-3 (high exploit; mod explore)

($ 52,813) $307,339

Seller-4 (high exploit; low explore)

$417,781 ($46,703)

TOTAL MARKET ($138,997) $551,667

S-D Logic

Moderating Effect:Market Environment (average profit)

($200,000)

($100,000)

$0

$100,000

$200,000

$300,000

$400,000

$500,000

Stable Turbo

AmbidextrousNon-Ambidextrous

S-D Logic

Concluding Observations