Vargo and Lusch (2004) have caused renewed interest in the reformulation of marketing through their paper titled ‘Evolving to a New Dominant Logic for Marketing’ in which they provide a new perspective that redefines the discipline’s long-standing concept of goods and services. In their paper, they contend that services are more prevalent than goods and that goods should instead be viewed as a medium for the firm’s service.
This paper will discuss the new definitions that Vargo and Lusch provide. First, it will take a look, in better detail, at how they define goods and services as well as provide an example for clarification; second, it will take a look at how the new logic redefines the relationship between the firm and the customer; and third, it will briefly look at the developments that have caused this shift in perspective. The paper will then identify potential benefits of the new logic and then proceed to provide some criticisms about it. Finally, this paper will provide some suggestions on how industries may use it at its present state.
A New Marketing Perspective
Marketing researchers Robert F. Lusch and Stephen L. Vargo, in their award-winning paper, present a new marketing perspective they termed as the service-dominant (S-D) logic of marketing (2004). In this new perspective, the authors present marketing in a manner where goods and services are no longer viewed in the same, conventional sense. Vargo and Lusch defined service as “the application of specialized competences (knowledge and skills) through deeds, processes, and performances for the benefit of another entity or the entity itself” (2004, 2). Along with this new definition, the authors argue that all enterprises are in the business of providing services where those that produce goods only do so as a means of “transmitting” their services to the customer. Applying this viewpoint to the case of automakers such as Toyota or Holden, for example, the S-D logic states that these companies are not in the business of selling cars. Rather, they are in the business of providing mobility services to the consumer through, in their case, the cars that they manufacture. Thus, the S-D logic effectively reverses the prominence of the roles of “service” and “goods” while, at the same time, maintaining that they both remain important in the field of marketing.
The S-D logic of marketing also re-defines the relationship between the organisation and the customer where the latter has been promoted to a co-producer of value who is constantly communicating with the firm to improve the quality of the offering (Vargo and Lusch, 2004, 2). In this sense, businesses are regarded as continuously-learning organisations who do not create value by themselves but, rather, are only able to propose offerings to the customer. The customer, on the other hand, is able to provide direct or indirect feedback regarding what it thinks of the offering which is ultimately reflected in the company’s financial performance. This is referred to as a “sense-and-respond” strategy as opposed to a “make-and-sell” strategy (Haeckel, 1999) which essentially redefines a firm’s objective from merely “making the sale” to maintaining a healthy and ongoing relationship with the customer.
Vargo and Lusch attribute this change of perspective to many developments that have been occurring since the middle of the twentieth century when scholars gradually recognised the importance of services. Zimmerman (1951) and Penrose (1959), for example, deemed human skills and knowledge as the most important resources and not the natural resources on which these are applied. Gummerson also contributed to this shift by stating that activities and things alike render services to the customer (1995, 250–251). Parallel with the rise of importance of services, Vargo and Lusch also reasoned that the current view of marketing could not produce a unified framework because some of its underlying principles could not be applied to services. A number of scholars also claim that the present goods-dominant logic may hinder future development of the field of marketing (Dixon 1990, 342; Vargo and Lusch 2004, 2) thus their call for a new perspective.
Benefits of the New Logic
Judging from the amount of recognition garnered by the paper and the generally positive reactions that was reflected in the Otago Forum, there is little to no doubt about the relevance of the S-D logic among academics. But since Marketing mainly exists for the purposes of the organisation as well as for the benefit of society (Wilkie and Moore 2006; Webster 2006), then it is important to consider how this new philosophy affects the two entities and, more importantly, how a firm may apply it. This section will divide the task by first viewing the relevance of the S-D logic to consumers. Afterwards, it will discuss how it may be useful to a firm.
S-D Logic and the Consumer. First, it is important to note that market-orientation and learning organisations are concepts that have been around for some time. However, because of the prevailing G-D logic, it has been difficult to shift the focus from products to consumers, thus making it also difficult to fully implement the above concepts. Grönroos states:
“goods-based marketing models have been and still are geared towards making promises, whereas the fulfilment of the expectations created by these promises by means other than a pre-produced product is essentially outside the scope of marketing and the realm of the firm’s marketers” (2006).
So then, theoretically speaking, by adopting the S-D logic of marketing—with its emphasis on the role of companies as continuously-learning organisations—firms will no longer be encumbered by the above limitations and the consumer becomes a co-producer of value. Gummerson states that “the shift in focus to services is a shift from the means and the producer perspective to the utilization and the customer perspective” (1995, 250–251). Gummerson states further that the S-D logic may set the stage for actual implementation of the marketing concept (2006, 292). Thus adoption of the S-D logic of marketing could potentially pave the way towards improved offerings and perhaps an even more responsible way of marketing.
S-D Logic and the Firm. Constantin and Lusch (1994) differentiate two types of resources: operand and operant. Operand resources are those that are acted upon to produce a certain output or effect (e.g. natural resources) while operant resources are those that are used on operand (as well as other operant) resources (e.g. human knowledge or skills). Generally speaking, operand resources tend to be static unless acted upon by operant resources which are always dynamic. Vargo and Lusch (2004), through their presentation of the S-D logic, shifts the focus of marketing from operand to operant resources. They stress its importance by stating that “because operant resources produce effects, they enable humans to both multiply the value of natural resources and to create additional operant resources” (2004, 3). Thus, the key benefit provided by this shift in perspective is the maximisation of profits from limited operand resources.
Another benefit that can be obtained from adopting this new perspective may be found in the firm’s improved ability to find new, perhaps radical, types of businesses. Vargo and Lusch contend that by viewing the market as a set of “processes and service flows rather than units of output,” new opportunities will soon become obvious (2004, 13). In this light, some firms will realise that a change in ownership of goods does not need to occur for them to provide value to the consumer. An example of this is Streetcar from the United Kingdom which has put up a business its owners call a “car club” (Real Business 2006; Mitchell 2006). More than just a car rental service, Streetcar actually provides the “service” of an automobile company but without burdening the customer with maintenance costs (monetary or otherwise) that usually accompanies ownership of a car. Thus, by focusing on services, whether provided directly or “transmitted” through goods, a firm may soon realise that it has access to a wider range of opportunities than it originally thought before.
Criticisms of the S-D Logic
While the S-D logic holds much potential for changing the field of marketing, it is not without its flaws. For example, it is easy to observe that this new perspective is not so much a revolution, but a description of what has already happened in various industries in the past few years. Furthermore, this new logic does not provide any theories that are as actionable as the four Ps. Another criticism is that the chosen lexicon of the S-D logic still retains product-centred concepts thus missing the point of the marketing concept. This section will further discuss these criticisms in more detail.
Vargo and Lusch have successfully presented their new logic of marketing in such a manner that has caught the attention of many scholars (See Gummerson 2006; Peñaloza 2006; Grönroos 2006 for examples). On the other hand, while the academic world views this as potentially ushering in a new revolution in marketing, it is not exactly new among practitioners. The I.T. industry, for example, realised since the 1990s that it is the service that the computer provides and not necessarily the computer itself that is important to the user. This led to the conception of “grid computing” which modifies how humans access computing power such that it is accessed similar to electricity (Amazon.com 2007; Buyya and Venugopal 2005; IBM Corporation 2002). Still from the same industry, Internet giants such as Google have also made this same realisation when they set out to produce and, just recently, deploy spreadsheet and word processing services without requiring the user to purchase and own the software. Further, this time from the beverage industry, big players such as Coca-Cola and PepsiCo since the new millennium began to widen their portfolio by offering healthier beverages, thus effectively acknowledging that it is the service that the beverage provides, and not necessarily the beverage itself that is valuable to the consumer. This and many other examples show that among practitioners, the S-D logic has been an on-going, albeit implicit, phenomenon.
The weaknesses of the S-D logic become even more apparent when it is compared with the four Ps of marketing. Wansink argues that marketers are assured of success because of the actionability of the four Ps (2005). Likewise, in the course of lectures for the subject, Marketing, in semester 1 of 2007 at The Australian National University, Prof. Andrew Hughes stated that because the four Ps allow a firm to link its marketing investments to performance, practitioners continue to regard it as an indispensable tool in their organisation. At its present state, however, the S-D logic does not describe in specific, measurable terms how it affects a company’s bottom-line. Furthermore, while the four Ps enumerate the controls that are available to the marketer (i.e. product, place, promotions, price), the S-D logic, as presented by Vargo and Lusch, does not yet specify anything similar. Given these shortcomings, it appears that, at least at the moment, the S-D logic is still a loose framework undergoing further construction. For this reason, the S-D logic of marketing, while promising, will have difficulty gaining adoption as a theory comparable to the four Ps.
Another criticism of Vargo and Lusch’s S-D logic is that while it attempts to shift the focus from goods to service, it does not go far enough and, at the same time, misses the point of the marketing concept which states that firms should focus on the customer. Rust, for example, points out that the lexicon being used by Vargo and Lusch (See Table below) does not truly represent the shift that they are proposing because it still retains product-centred concepts (2006). Because of this, the S-D logic, while potentially setting the stage for full adoption of the marketing concept, does not yet itself fully adhere to it. Schembri states that “a focus on the product as either goods or services negates any focus on how the customer experiences that product” thus obscuring the needs of the customer (2006, 385).
Table 1: Conceptual Transitions (Source: Vargo and Lusch 2006)
Vargo and Lusch have successfully articulated a phenomenon in the field of marketing that most could only sense. Through their paper, they were able to present all companies as being in the business of providing services and that some use goods as a medium for these services. Because of this, they have initiated a redefinition of marketing that unifies what were previously thought as two disparate concepts. The S-D logic of marketing has the potential to improve the offerings of a firm as well as their ability to look for opportunities. On the other hand, much work still needs to be done at this point in time for the logic to be fully adopted by the industry. However, while Vargo and Lusch’s S-D logic still leaves much to be desired at its present state, it is not altogether useless. At its worst, the new perspective may serve as a marketing philosophy that practitioners can adopt. In fact, as mentioned before, a number of companies have already adopted it even though they may not have been aware of it. Because it allows a producer of goods to see beyond the tangible product, it has the potential to widen the firm’s view and thus allow it to see opportunities it may not have noticed otherwise. For this reason, adopting the S-D logic as a marketing philosophy may be good decision.
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