The Service Dominant Logic of Marketing

Table of Contents

List of Figures

List of Tables

List of Abbreviations

1 Introduction
1.1 Relevance of the Thesis
1.2 Objectives and Delimitations of the Thesis
1.3 Structure of the Thesis

2 The Service-Dominant Logic of Marketing
2.1 Special Characteristics of Services (IHIP)
2.2 How Current Research Challenges the Validity of an IHIP Paradigm
2.3 The New Dominant Logic According to Vargo and Lusch

3 State-of-Literature
3.1 Literature on Services Marketing prior to Vargo and Lusch
3.2 Dialog and Debate on Service-Dominant Logic
3.2.1 Critique on Vargo and Lusch’s New Dominant Logic
3.2.2 Implications for Marketing Practice and Research
3.3 Reactions and Refinements by Vargo and Lusch

4 Similarities with Business-to-Business Marketing
4.1 The Nature of Business Markets
4.2 Similarities of Business Markets with a Service-Dominant Logic

5 Conclusion

Bibliography

List of Figures

Figure 1 - Structure of Literature

Figure 2 - Contrasting Goods-Dominant and Service-Dominant Logics (Lusch and Vargo 2008, p. 2)

Figure 3 - Intersections of B2B Markets and the Service-Dominant Logic

List of Tables

Table 1 - Unique Service Features and Implications (following Zeithaml, Bitner, and Gremler 2009)

Table 2 - Dissolving the Four Marketing Myths (following Vargo and Lusch 2004b, p. 327)

Table 3 - Using operand and operant resources to distinguish the goods- and service-centered views (Vargo and Lusch 2004a, p. 7)

Table 4 The Eight Foundational Premises According to Vargo and Lusch (2004a)

Table 5 - Literature Review: Literature prior to Vargo and Lusch

Table 6 - Literature Review: Dialog and Debate on Service-Dominant Logic

Table 7 - Service-Dominant Logic Foundational Premise Modifications and Additions (Vargo and Lusch 2008b)

Table 8 - Literature Review: Reactions and Refinements by Vargo and Lusch

List of Abbreviations

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1 Introduction

1.1 Relevance of the Thesis

According to the Oxford Dictionary, a paradigm is “a world view underlying the theories and methodology of a particular scientific subject”^[1]. For virtually all of the 20th century, the paradigm in marketing was founded on early economic thoughts; making goods and exchange the focal point of economic research and practice. In the 1980s and 1990s, more and more scholars found that the established paradigm did not fit the current trends and developments anymore. They called for a paradigm shift, but did not deliver clear directives on how to move forward. It was not before 2004 when Stephen L. Vargo and Robert F. Lusch published their award-winning ^[2] article Evolving to a New Dominant Logic for Marketing in the Journal of Marketing, dealing with a potentially new paradigm for marketing. The publication has caused quite a stir, reflected in special sessions at conferences of the American Marketing Association, the European Academy of Marketing, or the Otago Forum (NZ); as well as special issues of Marketing Theory (2006), Journal of the Academy of Marketing Science (2008), and Industrial Marketing Management (2011). The discussion was crowned by a collection of essays from more than 50 scholars in the book The Service-Dominant Logic of Marketing: Dialog, Debate, and Directions of 2006, edited by Lusch and Vargo themselves. Obviously, the significance of the service-dominant logic for current marketing research cannot be denied.

1.2 Objectives and Delimitations of the Thesis

This thesis aims at looking into the reactions and discussions regarding the proposed service- dominant logic (S-D logic) in more detail. Seven years after the initial publication in the Journal of Marketing, no comprehensive overview of the existing literature has yet been made. How did long-established scholars respond to the suggestions and findings of Vargo and Lusch? Was it rather positive or negative? What needs to be done in the future in order toactually implement a service-centered thinking? In the following chapters, I will introduce the basic ideas of S-D logic, followed by a detailed state-of-literature to capture the various publications that arose from the initial Vargo and Lusch article. The vast majority of marketing research (one could name it “mainstream” marketing research) is concerned with consumer, or B2C, marketing. But what about business-to-business relationships? It is interesting to figure out whether the concepts of a service-dominant logic display similarities with concepts of B2B marketing and whether they could successfully be adopted in B2B markets. This is what I am going to examine in the last part of this thesis.

1.3 Structure of the Thesis

Before turning to the literature review in chapter 3, I will begin with introducing the basic concepts behind Vargo and Lusch’s S-D logic in order to give the reader a better understanding of the subject-matter (ch. 2.3). Besides that, a good starting point to reflect about possible consequences and obstacles regarding a service-centered paradigm for marketing are the unique characteristics of services. In the first part of chapter 2, I will illustrate academia’s common position on services’ particularities and how recent publications challenge this prevailing understanding. In chapter 3, I am going to provide the state-of- literature. The service-dominant logic is for many parts based upon findings from several marketing subdisciplines that arose over the last century. Therefore, I decided to focus chapter 3.1 on the foundational literature that is essential to grasp the insights of Vargo and Lusch. After that, I will give an overview about other scholars’ reactions in consequence of the 2004 publication; consisting of critique and possible managerial implications in chapter 3.2. Since the S-D logic is intrinsically tied to Vargo and Lusch, I do not want to terminate without examining their reactions to this critique and further developments of their conception, which I will do in chapter 3.3. Finally, I am going to point out similarities of service-dominant logic with concepts of business-to-business marketing. I will first outline some general features of B2B markets, and then highlight some areas where analogies can be observed.

2 The Service-Dominant Logic of Marketing

Before turning to the main part of my thesis, the state of literature and possible similarities with business-to-business marketing, I would like to introduce the fundamental thoughts which Vargo and Lusch developed in their publications introducing the service-dominant logic. I will begin with demonstrating and explaining the four characteristics that differentiate between goods and services according to the common understanding of marketing scholars - intangibility, heterogeneity, inseparability, and perishability. In a former, goods-centered marketing view, scholars were convinced that these characteristics pose special challenges to the marketing of services and require different normative strategies. Vargo and Lusch, as well as other scholars, analyzed this predominant belief and came to the conclusion that 1) these four characteristics are not an appropriate distinction and 2) they do not lead to the adequate strategies. Therefore, I will illustrate their position regarding this issue and the resulting implications. After that, I am going to elaborate the ideas behind the service-dominant logic as introduced in Vargo and Lusch’s Evolving to a New Dominant Logic for Marketing (2004a).

2.1 Special Characteristics of Services (IHIP)

Most authors of the augmenting literature on services marketing agree upon one matter: there are characteristics inherent in services which make their marketing unique. Although some scholars may only mention two or three, the prevailing opinion names intangibility, heterogeneity, inseparability of production and consumption, and perishability (IHIP) as attributes which distinguish services from tangible goods. Table 1 shows a summary of the unique characteristics of services and their implications for marketing.

Intangibility is universally cited as the fundamental difference. Because of their performance nature, services cannot be seen, felt, tasted, or touched like goods (Zeithaml, Parasuraman, and Berry 1985). The resulting challenges for marketers can be described as follows: since intangible services cannot be inventoried, it is difficult to manage fluctuations in demand. Furthermore, most services cannot be patented and are consequently easy to copy for competitors. Finally, it is hardly possible to determine the costs of production for one “unit” of service. Therefore, the pricing of services poses a challenge for service enterprises (Zeithaml, Bitner, and Gremler 2009).

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Table 1 - Unique Service Features and Implications (following Zeithaml, Bitner, and Gremler 2009)

Heterogeneity means that there is high variability in the performance of services (Zeithaml, Parasuraman, and Berry 1985). The perceived quality of a service delivery can vary from customer to customer and from day to day. The main problem is the consistency of service performance. Since there are a lot of factors that cannot be controlled by the service provider (e.g. the mood of the customer or the behavior of the employee), it is difficult to maintain a constant level of quality over time. Besides this, every customer has their own special needs and expectations, which makes a standardization of services quite difficult (e.g. Rathmell 1966; Upah 1980).

A third important point to consider is the inseparability of production and consumption that characterizes most service deliveries. Regan (1963) noticed that whereas goods are produced, sold, and then consumed, services are sold and then produced and consumed simultaneously. Customers are present during the service production and will interact with both employees and other customers. Hence it is likely that the service outcome is affected by the employee’s behavior and also by other customers who are present during the service delivery process (imagine for example bad-tempered persons in a waiting queue or unquiet passengers during a flight; both will likely influence the service experience of other customers). The concept of inseparability also implies that direct distribution is the only possible sales channel for services since producer and seller are the same entity (Upah 1980).

Finally, perishability means that services cannot be saved, stored, or returned (Thomas 1978; Zeithaml, Bitner, and Gremler 2009). Take for example an empty seat in public transportation, non-used capacity of a telephone line, or a hotel room not occupied. All of these examples have in common that they cannot be reclaimed or resold at a later time. The challenge for service companies is to synchronize supply and demand. Too much of excess capacity is inefficient, but at the same time, too little supply will dissatisfy customers.

2.2 How Current Research Challenges the Validity of an IHIP Paradigm

While the IHIP characteristics of services have been an acknowledged belief in marketing research for a long period of time - especially at the beginning of the new emerging subdiscipline of services marketing - new thoughts and evolvements have lead to new publications which challenge the general validity of the four IHIP characteristics. While a subliminal skepticism on the part of several marketing scholars could be observed sporadically (Gronroos 2000; Gummesson 2002b; Lovelock 1983), it was not before 2004 that two publications fiercely attacked the validity of the IHIP characteristics: Lovelock and Gummesson with their article Whither Services Marketing? (2004), and also the founders of the service-dominant logic in their publication The Four Service Marketing Myths (Vargo and Lusch 2004b).

Lovelock and Gummesson (2004) doubt that intangibility, heterogeneity, inseparability, and perishability are able to make services uniquely different from goods. Intangibility refers mainly to the fact that services cannot be sensed or touched before their purchase, and thus a high prepurchase uncertainty for the customer is involved. This point is relativized when thinking about the lot of tangible products (e.g. foodstuffs or cosmetics) where the same holds true because of their packaging. Furthermore, many services include tangible elements as well, most of which can be evaluated before purchase, for example a hotel room, where the room’s facilities are the core of the service (Lovelock and Gummesson 2004). They conclude that it may indeed be true that many services are difficult to evaluate prior to the first use, but the same is also true for many goods. Therefore, the concept of intangibility may sometimes be useful, but “it is not a universally applicable characteristic of all services during all stages from prepurchase through delivery, consumption, and output” (p. 27).

Heterogeneity, or variability, as Lovelock and Gummesson (2004) would like to name it, is primarily caused by the interaction of human beings (employees and customers) during the service delivery process. However, external factors like the surroundings or even the weather can affect the perceived service outcome as well. The authors state that it cannot be denied that variability is an inherent characteristic of services, but the trend towards automation (selfservice machines, online forms, etc.) will lead to a much lower level of variability. They oppose heterogeneity as a general distinction between goods and services.

For service consumption being inseparably connected with production, the customer must be directly involved. Lovelock and Gummesson (2004) argue that this condition is not fulfilled for the large group of separable services, like for example cargo transportation, laundry services, or house cleaning. These services are bought in order to avoid doing them by oneself, which means that the customer explicitly does not want to be involved. According to the authors, just dropping off an item or giving instructions how to clean a building is not an involvement in the core service delivery process. Hence, a general differentiation between services and goods according to inseparability is not appropriate, since there are too many separable services.

Perishability is a too simple notation regarding its multidimensionality. Lovelock and Gummesson (2004) observe that perishability involves “productive capacity, the producer’s output, the performance experienced by customers, and the output they obtain from the service” (p. 30). It holds true for manufacturers that they can use inventory of produced goods as a buffer for fluctuations in demand, which is not possible in service industries. But productive capacity is persishable for both manufacturers and service providers. Furthermore, some service output can be classified as durable from a customer’s point of view. Especially in information-based services, the performances can be recorded and then reused and resold later on.

It was not only Lovelock and Gummesson who criticized the predominant IHIP characteristics. The initiators of the service-dominant logic, Vargo and Lusch, described in their article The Four Service Marketing Myths (2004b) why IHIP is based on the wrong assumptions and leads to the wrong implications. According to them, the basic mistake is the definition by exclusion. When developing the four distinguishing characteristics of services, scholars assumed commonly accepted characteristics of goods and then defined services according to the absence of these features. Intangibility means services lack the tangible quality of goods; heterogeneity emerged because it is hardly possible to standardize services like goods are standardized; inseparability becomes an issue when the simultaneous service production and consumption is compared to the sequential production, purchase, and consumption of goods; and services are viewed as perishable because they are difficult to inventory compared to goods. Vargo and Lusch remark further that in virtually all the literature concerning IHIP, the characteristics are seen as drawbacks of services that need to be overcome by marketers. Table 2 shows why they consider the distinguishing features of services a “myth” and what the correct implications would be.

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Table 2 - Dissolving the Four Marketing Myths (following Vargo and Lusch 2004b, p. 327)

The bottom line of these findings can be summarized as follows: the differentiation between goods and services has been useful for services marketing to evolve as a subdiscipline of classic marketing. Many reasonable insights have been developed, be it relationship marketing, importance of service quality, or the concept of value in use. Vargo and Lusch argue that it is time to bring these different mindsets together in order to rethink marketing as a whole. They believe that their service-dominant logic “has the potential to finally break all of marketing free from manufacturing” (2004b, p. 334).

2.3 The New Dominant Logic According to Vargo and Lusch

When having a look at how economies are traditionally described, one will mostly find characteristics like exchange economy, a focus on tangible resources, value-in-exchange, and transactions. Adam Smith with his work The Wealth of Nations (1776/1904) is supposed to be the founder of modern economic thought. According to his standpoint, division of labor, as well as exchange and export of manufactured goods, was the main characteristic of a prospering economy. For Smith, services were not productive in terms of contributing to the national surplus.

Over the last decades, scholars observe a development in another direction. They emphasize intangible resources, co-creation of value, and relationships rather than simple transactions. In their award-winning article in the Journal of Marketing Evolving to a New Dominant Logic for Marketing (2004a), Vargo and Lusch came to the conclusion that recent trends will lead to a new dominant logic, in which service, and not the exchange of tangible goods, is the core of economic exchange.

In the 1980s, services marketing as a subdiscipline of marketing began to emerge. It was in 1977 when Shostack wanted services marketing to break free from product marketing. In her opinion, the dominant thinking at that time was not appropriate to cover the particularities of services. By the end of the 20th century, more and more scholars were convinced that a new paradigm was needed (Achrol and Kotler 1999; Day and Montgomery 1999; Sheth and Parvatiyar 1995). Several of them shared the standpoint that the explicit division between goods and services is outdated and that this realization should be recognized in further marketing research (Rust 1998). The renowned services marketing scholar Gummesson stated the following already in 1995 (pp. 250-51, cited by Vargo and Lusch 2004a):

“Customers do not buy goods or services: [T]hey buy offerings which render services which create value [...]. The traditional division between goods and services is long outdated. It is not a matter of redefining services and seeing them from a customer perspective; activities render services, things render services. The shift in focus to services is a shift from the means and the producer perspective to the utilization and the customer perspective“ Referring to these new findings, Vargo and Lusch conclude that the goods-dominant view with its focus on tangible output and discrete transactions makes way for a new, service- dominant view where intangibility, exchange processes and relationships are the focal points. It is essential to be aware of how Vargo and Lusch define services. They refuse to see it as a residual (“what goods are not”, as it has been defined for a long time, e.g. Judd 1964) or as a value added service to enhance a good. Rather, they define it as “application of specializedcompetences (knowledge and skills) through deeds, processes, and performances for the benefit of another entity or the entity itself” (p. 2).

What is also crucial to the understanding of Vargo and Lusch’s theory is the significance of resources. For centuries, resources have been seen as static and tangible, but in the 20th century, scholars supported the position that resources can also be intangible and dynamic. Constantin and Lusch (1994; adopted from Vargo and Lusch 2004a) made an important distinction that is essential for the conception of S-D logic: they defined operand resources, on which an operation or act is performed to produce an effect (e.g. land, minerals, and other natural resources in early stages of civilization); and operant resources which are employed to act on operand (and other operant) resources. In the goods-dominant logic, operand resources were essential. The focal points were production factors such as machines and land, whereas technology and knowledge was only seen as an instrument to convert operand resources into outputs. It was not before the second half of the 20th century that people became aware of the fact that skills and knowledge were at least as important as tangible resources. Penrose (1959) realized that “it is never resources themselves that are the ‘inputs’ in the production process, but only the services that the resources can render” (p. 22, emphasis in original). The emerging point of view was that operant resources, although often invisible, are the key to today’s production processes. Only operant resources make it possible to process operand resources and to derive advantage from them. This complies with the service- centered logic, where operant resources are seen as primary because only they are able to produce effects (Vargo and Lusch 2004a).

Vargo and Lusch used the distinguishing role of resources to describe in which ways the goods-centered and the service-centered views differ from each other in more detail. Table 3 gives an overview of the resources’ influence in several parts of an enterprise.

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Table 3 - Using operand and operant resources to distinguish the goods- and service-centered views (Vargo and Lusch 2004a, p. 7)

The most important findings from this table regarding the service-dominant logic can be summarized as follows: value is not embedded by the firm, but co-created with the customers (value-in-use). A good alone has no value unless it is used and derives benefits for the customer. Consequently, a firm can only make value propositions which the customer has to accept and fill with utility by using it appropriately. This also implies that the customer is no static, operand resource which the firm acts on, but rather a worthwhile, active operant resource, namely an active participant in the value creation process.

Besides this differentiation focusing on the role of resources, Vargo and Lusch have also introduced eight foundational premises that describe the basic groundwork on which their service-dominant logic is built. These foundational premises (FPs) are summarized in table 4.

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Table 4 The Eight Foundational Premises According to Vargo and Lusch (2004a)

While some of these premises have already been mentioned in the discussion regarding the role of resources (FPs 1, 3, 4, 6, and 7), I want to shortly comment on the remaining premises 2, 5, and 8 since the ideas of Vargo and Lusch’s foundational premises will be part of this thesis later on.

FP 2: Indirect Exchange Masks the Fundamental Unit of Exchange

Over the last centuries, especially since the time of the industrial revolution, exchange has changed from one-to-one trading to indirect exchange of skills. The division of labor favored microspecialization, a situation in which every worker is only responsible for their special task within the production process, e.g. assembling the front tires of a new car at the production line. By doing so, the individuals lose the sense of their overall product and do not have the opportunity to interact with the customer anymore. Since workers in the chain do not pay each other and do not deal directly with external customers, they can ignore quality and both internal and external customers (Vargo and Lusch 2004a, p. 8).

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^[1] http://oxforddictionaries.com

^[2] HAROLD H. MAYNARD AWARD (American Marketing Association) for Outstanding Contribution to Marketing Theory and Thought