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S-D Logic
Value Creation, Market and Marketing Theory
37th Annual Macromarketing Conference Doctor Colloquium Berlin, Germany June 10, 2012
Stephen L. Vargo,
Shidler Distinguished Professor, University of Hawai’i at Manoa Visiting Research Fellow, University of Cambridge Visiting Professor, Warwick University Visiting Professor, VTT Technical Research Center of Finland
(and Path Dependency/Lock-in)
S-D Logic
Path Dependence
condition in which current and future states, actions, or decisions depend on the path of previous states, actions, or decisions (Page 2006)
Creates “lock-in”
S-D Logic
THE STATE OF MARKET AND MARKETING THEORY
S-D Logic
Marketing’s Inverted Foundation
Normative marketing theory
(Prescriptive knowledge)
• is (should be) built on positive market/marketing theory
Positive market/marketing theory
(Propositional Knowledge)
• is built on positive economic theory
Positive economic theory
• is built on a goods-dominant (G-D), normative theory national wealth creation
S-D Logic
The Market, Marketing, and Economics
Other disciplines have found it convenient to institutionalize the distinctions between applied and basic science... In marketing, the problem is rather one of spinning off a basic science from a problem solving discipline. (Arndt 1985)
“Paradoxically, the term market is everywhere and nowhere in marketing.” Venkatesh, Penaloza, and Firat (2006)
It is a peculiar fact that the literature on economics…contains so little discussion of the central institution that underlies neoclassical economics – the market North (1977)
Alternative Paths to Understanding Exchange
Newtonian Mechanics Smith’s Bifurcation (productive-unproductive)
Say’s Utility
Marginal utility theory
Goods-Dominant Logic
Industrial revolution
“Goods and Services”
Decreasing returns
IHIP Characteristics
National Statistics
Operand Resources
DOMINANT PATH
Complexity theory
Relativity
S-D logic
Quantum Mechanics
Increasing returns
Operant resources
ALTERNATIVE, DEVELOPING PATH(S)
Markets as Exchange of Output Markets as Exchange of Outcome
FOUNDATIONS OF GOODS (G-D) LOGIC
S-D Logic
Goods-dominant (G-D) Logic
Purpose of economic activity is to make and distribute units of output, preferably tangible (i.e., goods)
Goods are embedded with utility (value) during manufacturing
Goal is to maximize profit through the efficient production and distribution of goods goods should be standardized, produced away
from the market, and inventoried till demanded
Firms exist to make and sell
value-laden goods
S-D Logic
G-D Logic Model: Value Production and Consumption
Producer Consumer Supplier Supply/Value Chain
Macroenvironment is exogenous
S-D Logic
The Inadvertent Route to G-D Logic
Smith’s Model of Economic Exchange
• Division of labor (specialized knowledge & skills)
• Value-in-use (real value)
Smith’s Focus on National Wealth Creation
• Value-in-exchange (nominal value)
• Productive = “labor” contributing to surplus exportable, tangible goods
Economic Science
• “Utility” as a property of goods (exchange value)
• Newtonian model of science = matter embedded with properties
• Producer-consumer distinction
Neoclassical economics
• The science of exchange of things (products), embedded with properties (“utiles”)
• Foundation for all business disciplines
S-D Logic
FOUNDATIONS: THE S-D LOGIC CORE
S-D Logic
A Partial Pedigree For S-D Logic
Service-Dominant
Logic
Services Marketing
Relationship Marketing
Theory of the firm
Core Competency
Theory
Resource-Advantage
Theory
Network Theory
Consumer Culture theory
Experience marketing
S-D Logic
Core Foundational Premises of Service-Dominant Logic
Premise Explanation/Justification
FP1 Service is the fundamental basis of exchange.
The application of operant resources (knowledge and skills), “service,” is the basis for all exchange. Service is exchanged for service.
FP6 The customer is always a co-creator of value
Implies value creation is interactional.
FP9 All economic and social actors are resource integrators
Implies the context of value creation is networks of networks (resource-integrators).
FP10 Value is always uniquely and phenomenological determined by the beneficiary
Value is idiosyncratic, experiential, contextual, and meaning laden.
The essential shift: from operand to operant resources (From stuff to activities and processes)
S-D Logic
Products
Goods
Services
Clarifications: Service vs. Services
Services = intangible products
Service =The process of using one’s competences for the benefit of some party
The application of knowledge and skills
Service transcends “goods and ‘services’”
•
Service Direct
Indirect Goods
Money
G-D Logic
S-D Logic
There are No “Services” in Service-Dominant Logic
S-D Logic
Value Co-creation through Resource Integration & Service Exchange
Market-facing Resource
Integrators
Private Resource
Integrators
Public Resource
Integrators
Resource Integrator (individual, family, firm,
etc.) Value
Economic Currency
Social Currency
Public Currency
New Resources
S-D Logic
Micro Exchange Embedded in Complex (Eco)Systems of Exchange
Resource Integrator/Beneficiary
(“Firm”)
Resource Integrator/Beneficiary
(“Customer”)
Supply/Value Chain Producer Consumer Supplier
S-D Logic
From the Individual to Market-Based Co-Creation
Source: Ridley 2010
S-D Logic
Resource Integration & Service-for-service Exchange within the Market System
Resource Integrator/Beneficiary
(“Firm”)
Resource Integrator/Beneficiary
(“Customer”)
Resource Integrators Institutions
S-D Logic
The Structure and Venue of Value Creation: Institutions & Service Ecosystems
Institution
• “any structure or mechanism of social order and cooperation governing the behavior of a set of individuals within a given human community.
• (Stanford Encyclopedia of Social Institutions)
Service Ecosystem (S-D logic)
• relatively self-contained, self-adjusting systems of resource-integrating actors connected by shared institutional logics and mutual value creation through service exchange.
S-D Logic
Resource Integration & and the Structuration of Service Ecosystems
Resource Integrators Institutions
Micro
Meso
Macro
S-D Logic
(RE-)THINKING ABOUT THE MARKET
What’s Next
S-D Logic
Markets: Shared or (Co)Created
The MP3-Player Market?
Or The customizable-entertainment- storage- organizer-and-personal- assistant-and-life-applications-with-a- WOW-factor-platform market
The mineral-oil market?
Or The baby-butt-rash-avoidance- mommy-guilt-reducing- body-massage-and- sexual-lubricant market
The sodium- bicarbonate market?
Or The occasional-baking- But-primarily-refrigerator- freshening-teeth-cleaning- clothes-brightening market
S-D Logic
There was no demand: There was no market for…
“Why would anyone want…”
A horseless carriage (Model T)
Talking movies
Television
Personal computer
Microwave
Internet
iPod
iPad
S-D Logic
Issues for a Theory of the Market
There are no (a priori) markets There are just micro-level, service exchanges
gifts, generalized reciprocity, service-for-service
There is a Market (Market System): transitory, linked, contextual configurations of
resources and exchanges
…and yet markets can “exist” They can:
Be envisioned --images of service potential become institutionalized -- Intersubjective realities
Thus, markets become performed within the Market They exist because we act like they do “Markets are functions of marketing” (and other business
practices)
S-D Logic
An Extended Pedigree for S-D Logic
Service-Dominant
Logic
Social Network Theory
New Institutional Economics
Human Ecology
Business Ecosystems
Stakeholder Theory
Service Science
Market Practices and Performances
S-D Logic
The Sciences of the Artificial The world we live in is much
more a man-made, or artificial one, than it is a natural one The significant part consists
mostly of artifacts, called symbols (p. 2)
‘Judgment’ is a heuristic search The real-world economic actor
is a satisficer, who accepts good enough, because (optimization) is not a choice.(p. 29)
Markets and organizations are social schemes that facilitate coordinated behavior, conserving the critical scarce resource of human ability to handle complexity (p. 49)
S-D Logic
New Institutional Economics The division of labor
implies a division of knowledge that requires coordination. Implies institutional
structure will play a critical role in how knowledge will be integrated to solve problems
Institutions = “rules of the game.’
Organizations = players
S-D Logic
The Sociology of the Market Markets (are) a vehicle for
achieving a society of peaceful cooperation (Slater & Tonkiss, p. 20).
“At the micro level of analysis, we must grasp that economic and cultural categories are interdependent “(Slater 2001, p. 59)
The economy is a function of the “performation” of economics (Collon, p. 23).
“Lock-in provides richness…It is only when certain options have been drastically reduced that the market is finally organized and the individual agents can be calculative.” (Callon, 48-9).
S-D Logic
Structuration Theory Structure:
recursively organized sets of rules and resources
the medium and the outcome of organization
Roles/prescriptions
Rules/Resources Practices
Outcome (of practices) as context
S-D Logic
Markets as Practices Markets do not (pre)exist; they
are created from practices
They are performed
Exchange
Representing Normalizing
Integrating
S-D Logic
Emerging Foundation for a Theory of the Market
There are no (a priori) markets There are just micro-level, service exchanges
gifts, generalized reciprocity, service-for-service
There is a Market (Market System): transitory, linked, contextual configurations of
resources and exchanges
…and yet markets can “exist” They can:
Be envisioned --images of service potential become institutionalized -- Intersubjective realities
Thus, markets become performed within the Market They exist because we act like they do “Markets are functions of marketing” (and other business
practices)
S-D Logic
A Market as an Institutionalized Solutions
Resource
Application
(service)
Inter-
subjective
Agreement
Human Problem
Institutionalized Solution
=
A Market
Market performativity
Quasi-predictability
De-institutionalization
Re-institutionalization
S-D Logic
Markets as Institutionalized Solutions (Normalized service-provision practices)
Resource
Application
(service)
Inter-
subjective
Agreement
Human Problems
Institutionalized Solution
=
Market
Market performance
Meaning as institutionalized heuristics? Goods as institutionalized, relational crossing points
S-D Logic
Rethinking. Reframing, and Reconciliation from an S-D Logic Perspective
Markets From a priori to imagined, emergent, and created
Market-ing From functional area to essential function of the firm
Innovation From invention to designing systems for value co-creation
Strategy From prediction and control to effectuation
Technology From exogenous variable to service-provision mechanism
Role of Information Technology From tool to a transformation in value creation
S-D Logic
MASSIVELY COLLABORATIVE VALUE CO-CREATION
S-D Logic
Cost of Light in Hours Worked
S-D Logic
S-D Logic
S-D Logic
S-D Logic
Growth in Prosperity through the Co-creation of Value
S-D Logic
Property rights
Scientific rationalism
Capital markets
Fast/efficient communications
Competition
Consumer society
Work ethic
Health, medicine
Large-scale production
The Drivers of Increasing Returns to Scale
Specialization and
exchange
Rules and Laws
Science and Language
S-D Logic
Integrating
Representing Normalizing
Meso
Macro
Micro
Specialization and exchange
Rules and Laws
Science and Language
Adapted from Kjellberg and Helgesson 2007
S-D Logic
The Path and Paradox of Human Path Dependency
Humans as calculative agents are not “rational” Do not have the capacity
Don’t need to be
Bounded rationality Chuncking (categories, latitudes)
Fuzzy logic
Satisficing (“maximization” is not knowable)
Bounded rationality implies specialization
Specialization implies exchange (markets)
S-D Logic
The Path to and Paradox of Human Path Dependency
Exchange implies “social” interdependence
Social implies institutions (governance) “Rules of the game” Norms, socialization
Norms and socialization imply increasing returns Increasing returns imply path dependency and lock-in Lock-in implies “efficiency”
Efficiency is inherently inefficient
Path dependence begets path independence Path independence is supported by bounded rationality
S-D Logic
Perf
orm
an
ce
Time
Disruptive
technologies
Incumbents nearly always win
Entrants nearly always win
Disruptive technologies are a driver of leadership failure and the
source of new growth opportunities
S-D Logic
Diffe
rent m
easure
Of P
erf
orm
ance
Time
Perf
orm
an
ce
Time
Bring a better product
into an established
market
Two strategies for asymmetric competition
S-D Logic
For More Information on S-D Logic visit:
sdlogic.net We encourage your comments and input. Will also post:
• Working papers • Teaching material
• Related Links Steve Vargo: [email protected] Bob Lusch: [email protected]
Thank You!
