Understanding the service-dominant (S-D) logic from within the firm

Otago Forum 2 (2008) Academic Papers

Paper no: 9

Marcus Schulz
University of Otago, New Zealand
mschulz@business.otago.ac.nz

Juergen Gnoth
University of Otago, New Zealand
jgnoth@business.otago.ac.nz

Understanding the service-dominant (S-D) logic from within the firm Marcus Schulz & Juergen Gnoth

Understanding the service-dominant (S-D) logic from within the firm

Abstract
The Service Dominant (S-D) logic introduced by Vargo and Lusch (2004) is a lens that offers new insights for understanding marketing problems and marketing phenomena. This paper argues that S-D logic operates on different levels, not just at firm-firm and firmconsumer levels. The aim of this paper is to translate the ten S-D logic foundational premises into an intra-firm and inter-personal context. This translation of the ten foundational premises extends and confirms a more general S-D logic application. We conclude that the practical application of S-D logic begins with a personal understanding of service.

Introduction
According to Vargo and Lusch (2007, p.106; 2004, p.2) the Service-Dominant Logic is not a paradigm, yet it operates at a paradigmatic level of analysis and manifests a changing worldview. This paper argues that the S-DL possesses the capability of creating the foundation for a paradigm shift by applying S-Dl as a lens through which exchange is seen as a dynamic system rather than a linear and transparent cause-effect process. On the surface, this approach appears able to integrate most of the leading non-mainstream marketing approaches (e.g. IMP interaction perspective, market orientation, services marketing, relationship marketing). It seeks to capture elements that are appropriate for managing firms and exchange processes within the widening business framework which can be characterised by the increase in alliances, virtual firms and networks as triggered, for example, by outsourcing practices. A paradigm is a whole system of thinking. It includes basic assumptions, the important questions to be answered or puzzles to be solves, the research techniques to be used, (Neuman 2000, p.65). It is the worldview in any particular field and tells how we view, understand and explain the world (Aijo, cited from Zineldin & Philipson 2007, p.230). Challenging a paradigm is difficult work. Paradigms include basic assumptions so ingrained in managerial thinking that they have turned into personal beliefs and principles that drive the behaviour of entire generations. SD-L seeks to question some of those fundamental beliefs thereby creating new discussions that may, in the end, amount a change in philosophy and practices of perceiving, creating and delivering products and services. The core of the S-DL was originally formed by the eight foundational premises defined by Vargo and Lusch (2004) and have later been revised and modified (Vargo & Lusch 2008c). These authors came to the conclusion that marketing operates under a dominant logic they call it the goodsdominant logic (G-DL) (2006a, p8ff), that prevents us from gaining more and new insights. As Vargo puts it: S-D logic is a lens, a mindset, through which phenomena can be viewed. It is not a theory (2007, p.105). We agree and describe the S-D logic as a creative approach to free ourselves from current beliefs that hamper our ability to perceive a situation in manifold ways. We see S-D logic as a chance to discover new options by looking at the same things differently. We argue that, at the micro-economic level, the S-D logic enhances the sharing of new ideas and knowledge within the firm and helps us breaking free from old mental models (Aitken et al. 2006,
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p.276). The purpose of this essay is to support a marketing paradigm challenge by showing that SD thinking and attitudes are applicable to the intra-firm system. We further argue that, firstly, this application has to be understood and internalized at an inter-personal level before it can be applied to the firm-firm and firm-consumer level. We thereby intend to follow Stephen Vargos invitation to identify and elaborate the links between S-D logic and our own research stream (Vargo 2008, p.211), which is to show that S-D logic begins with a personal understanding of service.

Problems and critics at S-D logic

Responses to the formation of a new dominant logic (Vargo & Lusch 2004) can be clustered in two groups: One group focused on developing the service-dominant logic by critically discussing sensitive text and context issues (Ballantyne & Varey 2008; Lusch & Vargo 2006b; Rust et al. 2006; Vargo 2008). Kohli put it this way: Our thinking is profoundly influenced, indeed trapped, by the words we use and the images they evoke. It is critical that we find new labels and phrases that help us think and conceptualize afresh (Rust et al. 2006, p.291). The other group produced have been more cautious if not skeptical responses, at least about specific aspects of S-D logic (Vargo & Lusch 2008c, p.1). Grnroos (2006, p.3), for example, observed that the consumption of goods is a closed system for the firm and the process of consuming goods is treated as a black box which led him to the question whether a ServiceDominant logic always ends in more effective marketing (Grnroos 2006, p.11). One of the reactions of Vargo and Lusch was an extension of the original eight foundational premises (FPs) that are now composed by ten (2008c). Challenges and repartees like these reflect the controversial debate within marketing management.

What is new within S-D logic?

The SD-L focus or lens does not require the immediate abandonment of the exchange paradigm. When exchange is simply modeled as a transaction, for example, it merely reappears as a subset of an extended relational exchange, i.e., as service-for-service (Vargo & Lusch 2008a, p.32). As transactions of old are a minimalistic processes of interaction, we are aware of the fact that the expression services creates some confusion (Rust et al. 2006, p.291; Vargo 2008, p.211; Vargo & Lusch 2008b, p.255). We also agree with Vargo and Lusch that the term might have baggage, resulting from connotations associated with traditional, or goods thinking (Vargo & Lusch 2008a, p.25). Even the singular term service (p.26) might not be sufficiently revealing in order to express a deeper rooted phenomenon. This may well force us to revisit the definition and structure of service for which there is no room here. Suffice it to say that, if we were to follow Gnoth (1990; 1994), and view service as an exchange of skills and knowledge (Vargo and Lusch, 2006), technically, it involves the identification and analysis of a demand and the satisfaction of the same through at least adequate tools, materials, procedures and a person, machine or other object to execute the process. Service is thus the process (1) that involves the provision of a demand by someone (2) and its satisfaction through someone else, i.e., the firm (3). Similar to other mainstream marketing approaches, S-D logic focuses on service and the interactions involved. Indeed, Hakansson and Ford (2002, p.134ff) borrowed from sociology and appear to be the first to introduce the metaphor of threads and nodes into marketing management. They direct our focus onto the process itself, the interaction (thread) between actors (nodes) that easily aligns itself with Vargo and Luschs thesis of a holistic business logic. As such, however, the study of interactions and relationships is not really uncharted ground. Relationship marketing
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(RM) has been with us for more than three decades (Gummesson 1996, p.31) and deals with intrafirm relationships in similar ways. For example, Grnroos speaks about interactive marketing where interactions involve simultaneous production and consumption (2006, p.4). Similarly, Hakansson and Snehota talk about quasi organizations that play an important role when business relationships are established and when resources, individuals and activities are required (1995, p.386). To all intents and purposes, however, and in our opinion, the issue that has not been sufficiently highlighted is that the notion of thread nodes determines the irreducible number of ingredients or the basic elements necessary for every interaction. There are three of them, two nodes and one thread. Every activity throughout our daily life inevitable contains three basic ingredients. One node alone will not work, two nodes without a thread are unrelated and so are only one node and one thread. Let us illustrate this scenario with some simple examples from our daily life: Making a phone call requires (1) the phone, (2) the person making the call and (3) the interaction process (picking up the phone, dialing). Just the phone, just the person and much less the dialing as the process would barely make sense. The same happens while simply looking at any object. It needs (1) the person, (2) the object you are observing and (3) the process of looking. Gummesson (2001), in his journey through methodology land, as he calls it, describes this approach with the process of knowing. He says: The process of knowing (thread) is inseparable from the knower (researcher) and the known (the outcome of the research, here: general marketing theory) (p.27). Only the presence or consilience of all three ingredients offers a holistic ensemble and, on the face of it, a less distorted viewpoint of what are interactive processes where the outcome is usually more than merely the sum of its parts. In line with this view, S-DL ignores questions of causalities, so that even apparently uni-directional transactions are handled as secondary and as consequences; they are merely a subset of a broader notion of exchange (Vargo & Lusch 2008a, p.32) that, nevertheless change the reality for both nodes. S-DL therefore gives us the possibility of gaining a coherent view for a new and more holistic perspective. Vargo and Lusch (2008c, p.5) argue: Even in the somewhat limited focus of the S-D logic of marketing, it is directly applicable to firms, employees, suppliers, customers, and a variety of other stakeholders. We strongly agree with this perception and continue by introducing a translation and subsequent discussion of the 10FPs within a microeconomic environment that captures the firm-employee viewpoint.

The 10 FPs translated to an intra-firm and inter-personal level:

FP1: Service is the fundamental basis of exchange Applying FP1 to the micro-cosmos of the firm turns the focus on the quality and structure of activities (processes) and reminds of some of the first modern explanations of economics. It was Alfred Marshall (1907) who mentioned that the roots of economics go back to man itself and his selfish behavior. In optimizing his activities, the focus on ones strength hence led to the inevitable: specialization. On a micro economic level, and following the division of labour, the consequence of both is the fact that we are all different. We then try to profit from this differentiation as reflected in the consilience of competition and cooperation at the place of work. Different departments within a company have different interests, but also individuals within a company have different strength and weaknesses. This is the basis on which every department and each individual is given a special task that distinguishes them from the other. Yet, together they contribute to the provision of service to customers. When applying the S-DL lens to the intrafirm interaction, it applies here as well as to the B-to-B or B-to-C relationships. Figure 1 illustrates
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that when two nodes interact and nodes can be defined (1) by the boundaries within a company (departments) and (2) by the natural boundary between two individuals it is the thread (the process) that gives life to the relationship. Thus, service systematically and hence logically, occurs not only on a firm-firm or firm-consumer basis, but also in an intra-departmental and an intra-personal level within a firm. Therefore, the application of FP1 to the micro economic environment would lead to the following (M stands for Micro): MFP1: Within the firm, Service is the fundamental basis of interaction between (1) individuals and between (2) departments Figure1: Intra-firm/inter-personal S-D logic

FP2: Indirect exchange masks the fundamental basis of exchange Over time, exchange moved from one-to-one trading of specialized skills to the indirect exchange of skills in vertical marketing systems and increasingly large, bureaucratic, hierarchical organizations (Vargo & Lusch 2004, p.8). The skills-for-skills nature of exchange became masked and large organizations distract our awareness where service-for-service interaction actually takes place and how it feeds into the firm-customer exchange process. Yet, even in this case, people still exchange their services for other services. Money, goods, organizations, and vertical marketing systems are only the exchange vehicles (Vargo & Lusch 2004, p.8). The fundamental basis for exchange within two departments and/or between two individuals consists of information and ideas, and everything else that is involved in an interaction. In particular, it is the notion of dialogue that offers a hitherto largely untraveled pathway to new business knowledge (Ballantyne
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2004, p.114). As will become clearer below, it is genuine dialogue that creates value. Indirect exchanges like salary payment or incentives are mere consequences of the interaction between two nodes and a thread. The micro-economic adaptation of FP2 is therefore, MFP2: Direct interaction is the fundamental source of competitive advantage. FP3: Goods are a distribution mechanism for service provision At the microeconomic level this FP3 is one of the most important premises of S-DL. It encourages rethinking current viewpoints and understanding the real reasons for activity in the firm. Vargo and Lusch found that we are not engaging in the buying-process to exchange money for goods, but that the goods derive their value through the service they provide (2008c, p.7). The interaction between customer and firm does not stop after the exchange. It is an ongoing process where value is co-created throughout the use of goods. This interpretation can be translated into a microeconomic context. Creative ideas are enriched through discussing different opinions (cocreation). Just imagine if this value adding chain were to be interrupted at one point. Information would be worthless without input from a co-creator. Value is co-created only when interaction takes place, not after and certainly not before. Ideas and their exchange are a means for building a thread between two nodes. As long as the idea is not discussed or implemented it represents only a value proposition. Hence FP3 reads, MFP3: Ideas and information are a distribution mechanism for service provision FP4: Operant resources are the fundamental source of competitive advantage Knowledge and skills represent operant resources and are the fundamental source of competitive advantage (Vargo & Lusch 2008c, p.6). This FP has no need to be altered, as knowledge and skills have their roots at an individual level. This premise is directly supported by MFP3 and reflects an intra-personal S-DL view. MFP3 says that ideas and information are worthless unless they are inuse. This implies the existence of knowledge and skills at a personal level. In different words, the fundamental source of competitive advantage has its roots in every single organism that can be responsive to ideas and information. MFP4: The knowledge and skills of the employee is the fundamental source of competitive advantage FP5: All economies are service economies With the above we argue that this FP5 is redundant, considering that FP1 and FP3. FP3 clearly elaborate the reasons why goods have lost their importance to a super ordinate understanding of the service provision. FP1 additionally underlines the roots of service as the fundamental basis of exchange. Furthermore we argue that FP5 underlines the importance of service, but offer no additional viewpoints or findings. FP5: All firms are service economies FP6: The customer is always a co-creator of value Adapting FP6 for the microeconomic point of view means that every intra-personal and intradepartmental relationship is a customer-supplier relationship. Being more precise, every interface (thread) between two departments/individuals (nodes) is characterized by a multi-directional interaction where value-in-use is created via co-creation. In a microeconomic context the consumer can be seen as the receiver of an idea and the co-creator of value by responding to the
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supplier of the idea. Every idea, every value proposition and every thought is restricted until it enters an interactive process. FP6: The employee is always a co-creator of value FP7: The enterprise cannot deliver value, but only offer value propositions This phenomenon can be observed on an intra-personal and/or intra-departmental level as well and directly supports FP6. The individual/department by offering information and ideas, cannot deliver value but only value propositions, while value itself is created in-use during discussions, meetings or other intra-personal or intra-departmental activities. In a microeconomic environment, the ideas of individuals are value propositions that deliver value only in the moment they are inuse (interaction). The same happens on an interdepartmental level, where the interface is not defined by the interaction between individuals but by the interaction between departments. Just imagine the value-adding-chain is interrupted. What value has an engineers idea if there is nobody to share it with and to move it forward? FP7: The individual employee cannot deliver value, but only offer ideas (value propositions) FP8: a service centered view is inherently customer oriented and relational This is another FP that directly supports FP6 and singles out the importance of the interactive process. A service centered view on a microeconomic level helps understand the deeper personal motivations and consequences of actions taken. It offers the opportunity to reflect, uncover direct exchange (see FP2) and understand where value is created. This re-focuses our attention to those focal points where interaction directly takes place and value is created in-use, when two individuals/departments exchange information. This, in turn, helps to foster team building and relationships on various microeconomic levels, as reasons for action can be seen from a new perspective. It is our own attitude towards interaction that hinders our development towards a target-oriented acting. Thinking service-like simply implies the presence of a co-creator. FP8: A service centered view involves the inclusion of an actor and a counterpart within a relational setting FP9: All social and economic actors are resource integrators Individuals and departments act as resource integrators of ideas. Vargo and Lusch realized this in their continuing evolution (2008c) when they adapt their FP9 and re-phrase that the resourceintegration role of the firm is equally applicable to individuals and household (p.8). Substitute households with departments to translate this FP to a micro-economic intra-firm level. FP9: All employees and departments are resource integrators FP10: Value is always uniquely and phenomenologically determined by the beneficiary This FP reflects the difficulty of measuring and predicting value-in-use as it is co-created by individuals, departments and in the market place. The importance of relationships is beyond doubt (network theory, relationship marketing, IMP,), but the challenge remains in the difficulty to measure their dynamic effects. Value is created where interaction takes place. It cannot be easily predicted or determined in advance as it evolves through co-creation.. FP10: Value is always uniquely and phenomenologically determined by the beneficiary Figure 2: the ten FPs from within the firm
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The 10 FPs from Vargo and Lusch (2004)

The 10 MFPs from within the firm

1) Service is the fundamental basis of exchange 2) Indirect exchange masks the fundamental source of competitive advantage 3) Goods are a distribution mechanism for service provision 4) Operant resources are the fundamental source of competitive advantage 5) All economies are service economies 6) The customer is always a co-creator of value 7) The enterprise cannot deliver value, but only offer value proposition 8) A service centered view is inherently customer oriented and relational 9) All social and economic actors are resource integrators 10) Value is always uniquely and phenomenologically determined by the beneficiary

1) Within the firm Service is the fundamental basis of interaction between (1) individuals and between (2) departments 2) Direct interaction is the fundamental source of competitive advantage 3) Ideas and information are a distribution mechanism for service provision 4) The knowledge and skills of the employee is the fundamental source of competitive advantage 5) All firms are service economies 6) The employee is always a co-creator of value 7) The employee cannot deliver value, but only offer ideas (value proposition) 8) A service centered view involves the inclusion of an actor and a counterpart within a relational setting 9) All employees and departments are resource integrators 10) Value is always uniquely and phenomenologically determined by the beneficiary

Findings
The systematic analysis of the FPs for an intra- individual or firm setting shows up some redundancies. We found that on an intra-firm level three core FPs exist that are supported by the remaining FPs. We initially concentrate on the three core-FPs while showing how they are supported by the remaining premises. MFP1: Within the firm Service is the fundamental basis of interaction between (1) individuals and between (2) departments One of the S-D logics core message concludes that service is exchanged for service. This FP reflects the core of all foundational premises while the following FPs help us understand the consequences of service on a firm-firm and firm-consumer level. No matter on what level this FP is seen (firm-consumer, within firm), this foundational premise expresses the departure point of SD logic. MFP4: The knowledge and the skills of the employee are the fundamental source of competitive advantage

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We refer to the original FP4 (Vargo & Lusch 2004) where operant resources were still called knowledge. It is an individuals capability to take decisions and act upon experiences that clearly differentiates us from physical objects. MFP6: The employee is always a co-creator of value We argue that this is the most important message of S-DL logic and the key to understanding S-D logic at an intra-firm and inter-personal level. Managers under this logic must learn with whom individuals interact best and co-create value; they must instill co-operative attitudes and make higher-order consequences of such co-operation apparent and understood. Under such circumstances, competition between employees can be managed but it occurs on the premise that to solve the firms (service) problem it forms one node while the customer represents the other. Furthermore, whether it is an object, a college or a department, we need to create awareness that value is created only at the time interaction takes place. This understanding will help us to see things differently and to apply new approaches to known problems. We thus observe that the remaining MFPs easily subsume under the three core MFPs mentioned to support an intra-firm and inter-personal view of the Service-Dominant logic. Figure 2 shows the three FPs and allocates the remaining FPs. Figure 3: FPs in an intra-firm/inter-personal context

The alignment of the core FPs and the allocation of the remaining FPs are demonstrated to create a distinct awareness of S-D logic on an intra-firm and inter-personal level. This in turn creates a better personal understanding of service.

Practical applications of S-D logic

S-D logic on an intra-firm and inter-personal level can be applied to all kinds of interface activities within a firm. The focus on (1) service, (2) knowledge and (3) the co-creator (figure 3) allows

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concentrating on the process of interaction instead of the exchange of information or goods. This can be illustrated by the example of an innovation lifecycle: Innovation lifecycles Handling innovation lifecycles within Multi National Enterprises (MNEs) is all about coordinating gateway activities. Innovation is a perfect example for intra-departmental S-D logic. Ideas and information have to be processed as effectively and efficiently as possible. Thinking S-D logic like on an individual and intra-departmental level will help to understand that value lies between employees (nodes) and departments (nodes) and that the focus on transaction-free interaction (thread) reveals insights that could not have been taken from the traditional (GL) exchange perspective. There is still a pre-dominant belief that ideas and information have to be protected at the individual level, sometimes even at the interdepartmental level. Intra-firm competition is healthy up to a point. The more competitive an intra-firm environment is, the more creative it behaves. On the other hand, the more competitive the relationship between departments and individuals, the more it hinders a smooth processing of information that can end up in endless discussions. This is a paradox that can be treated as a trade-off, while S-D logic can help focus on measures that maximize the awareness of necessary trade-offs leading to shorter processing times. This observation is supported by FP6 and the need for a co-creator. It is not a game where one department plays against another department, but where departments are united and play against a (customers) problem. Put it differently: Interface- and information processing activities have only a chance to work successfully if S-D logic thinking is applied; within the interactive process (interface between colleagues and departments), power and egocentric behavior will hamper the development of new ideas. We have to acknowledge the necessity of the cocreator. It is not important who started a process (the chicken-egg question) but the awareness that the outcome is determined only by both actors. Likewise on a macroeconomic level a similar evaluation can be made on patents as they are issued only after a costly verification process, and can be challenged by other parties, and even overturned (Liebeskind 1996, p.96). S-D logic could help to loosen underlying attitudes and strengthen collective awareness. S-D logic makes us eligible to ask questions like: What is more effective: creating as many patents as possible or developing new products instead of spending time on protecting the old ones?

Conclusion
We argue that the Service-Dominant logic has to be understood at a personal level first, before it can be applied to practical problems. S-D logic at a personal level reflects an attitude; it reflects the awareness that things are sometimes different than they seem and that we might act on some secondary level. Instead, there might be some higher-order causalities that cant be observed from the current viewpoint which hinders us from considering different solutions to different problems. On a personal level, S-D logic encourages us to reflect on our actions, and to understand that cocreation requires always a customer involvement (Vargo 2008, p.212). In other words it is our direct counterpart that we interact with that is indispensible to create value. The value-creating activity is not located uniquely with the supplier (node one) nor even exclusively within the customer domain (node two), but between them (via a thread) (Ballantyne & Varey 2006, p.342). It is foundational premise 2 that helps us create the necessary awareness: FP2: Indirect exchange masks the fundamental basis of exchange (Vargo & Lusch 2008c, p.7). The size of complexity within large organizations distract our awareness of where value is co-created. In our opinion S-D
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logic invites us to distance ourselves from an egocentric viewpoint and try to see where value is really created in our daily interactions with colleagues, departments and objects. We believe that S-D logic brings us closer to an important awareness: A holistic worldview is able to offer deeper insights than analyzing only the components of an ensemble. Vargo and Luschs approach engages a deeper level of consciousness. We argue that the pursuit of more S-D logic research is necessary to gain deeper insights into our business processes and to understand why things are as they are. SD-L brings to the fore what is deeply rooted in history of mankind: that we need each other to co-create and that sometimes the reason for doing something is a different one than it seems to be. Sometimes the analysis of the holistic ensemble offers different and new insights.

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