Background
 

Embracing Service-Dominant Logic – part 1

customer destroy exchange firm goods-dominant innovation job-to-be-done logic manufacturing marketing mix offering realisation relationships service-dominant value

You’re already shifting from selling goods towards offering services. But have you also shifted your mindset? Or are you trying to drive service based on thinking about goods?

In this 2-part article, we explore why we should evolve from thinking in terms of a goods-dominant logic and embrace a service-dominant logic instead.

Our story starts in this part. Where we look at the thinking that is most common to us – the so-called goods-dominant logic. It’s a view we have built over 300 years of thinking. One that is focussed on building, exchanging and destroying value. But we’ll see it is not best suited for service.

Over in part 2, we explore service-dominant logic. This emerges after we make several realisations about our current goods-dominant thinking. And it posits that we actually live in a world where everything is a service. From there a lot of today’s “new” thinking in the goods-dominant world comes for free. We’ll also discover that embracing service-dominant logic fires up our innovation possibilities.

Key Take-Aways

  • In today’s common thinking everything revolves around the exchange of value. This is called goods-dominant logic
  • Under goods-dominant logic, value is:
    • Added/Embedded through the manufacturing process
    • Exchanged at the moment of sale to the customer
    • Used-up/Destroyed by the customer through use
  • Goods-dominant thinking has several implications, including that it:
    • drives the 4P marketing mix – 1 P for the manufactured output (the goods) and 3 focussed on facilitating the exchange: price, place, promotion
    • makes us think in terms of a division between producer and customer
    • lose track of value after the exchange
    • does not reflect the relationship building now common
    • is not customer/market oriented
    • implies services are inferior to goods
  • Whilst we can try and look at services through the lens of goods-dominant logic….
    • it reduce services to exchange of units such as man-hours, or other artefacts
    • misunderstand why customers buy services (and goods) – to get a job done
    • it is like having a top performance sports car and driving using only 1st gear
  • To access all the gears, we need to evolve to service-dominant logic. Where:
    • it is service that is exchanged rather than value
    • customer is the focus rather than goods
  • This comes as a realisation as we study services, rather than a revolution. And goods fit nicely into the service-dominant logic
  • Service-dominant logic opens up a world of innovation possibilities

If you’re ready, let’s jump in.

Today’s world: It’s all about exchanging value

Goods are the tangible items we see all around us. They are the things you hold after buying them from a manufacturer or a shop, or a friend. And for over 300 years we have built our economic thinking around these intangible items.

We have created firms that build goods. Marketing departments that focus on selling those goods. And we as consumers buy those goods and are happy using and disposing of them. We even go so far as productising services. So, for example, banks sell financial products in a way that makes them resemble goods.

At the heart of the thinking is how value changes of a good as various actions happen on it. In technical terms, we see goods as operand resources – things happen to them.

Goods are an operand resource – that is to say, actions occur on them. They are built, sold, used etc. This is fundamental to the logic of a goods-dominant lens on the economy.

For example, let’s take a car and in Figure 1 we can see the actions that happen on this operand resource. That is to say, the car is manufactured and inventoried by a firm. It is then sold to a customer by a dealer. And then the customer drives the car. This driving wears down parts over time.

Figure 1: What happens to value in a goods dominant way of thinking

What is really interesting is what happens to value over these actions. And we see that there are three distinct phases. These are adding/embedding value, exchanging value and using up (the exchanged) value.

Value in linear economy
Figure 2: Changes in value as seen in goods-dominant logic thinking.

These we need to explore in turn.

Adding/Embedding value

A firm exists to takes inputs – raw materials or other components – performs some manufacturing, and produce an output. Our car maker, for example, takes engines, wheels, paint, panels etc, assembles them together, and outputs a new car.

We believe that the car has more value than the individual components. So we say that the manufacturer has added/embedded value. And this happens at each step in the supply chain. From the miners extracting raw materials, through part manufacturers, and to the final manufacturer. Each adds/embeds value to their inputs to produce more valuable outputs.

That added/embedded value is usually reflected in the selling price. And that leads us to the key step in our goods-dominant logic: the exchange of value.

Exchanging value

The exchange of value is the moment the whole firm has been working towards. It is when the firm is rewarded for its work. In fact, this moment is so important that the whole marketing mix is geared towards it (see Figure 3).

Marketing mix and value exchange in goods-dominant logic
Figure 3: Marketing mix and value exchange in goods-dominant logic

Marketing has investigated and directed that the right product be built. And now they have set the right price to reflect the costs plus added value. There are no coincidences in the way the goods have been promoted to you, the customer. Nor in how, in our car example, the dealer set up has created the best place to show the value to you.

What happens at the moment of exchange? Well, more obviously the customer hands cash over to the firm and gets the goods in return. More subtly, the firm is exchanging the value it has added/embedded in the goods for another form of value (cash) with the customer, and vice versa. We call this value-in-exchange.

And now the goal of the firm has been achieved. It is off to find the next customer to sell the goods to. Or off to improve the goods to sell a newer version to you later. The firm has no interest in what you do with the goods or value. But our story of value hasn’t finished yet.

Using up / destroying value

Let’s switch to being the customer. It’s not great news for the value you have just exchanged for your hard earned cash. Either you are about to use it up over time, or destroy it pretty quickly!

For example, as you drive the car you wear it down. We see this as the value being used-up. Destroying value fits more with consumables. The value baked into a coffee time cake (pun intended 🙂 ) by the baker is destroyed when you eat it in one go.

This way of thinking about value – embedding, exchanging, destroying – never really had a name in the past. It was just how we observed the world working. However as we are going to discuss alternatives, nowadays we call it goods-dominant logic.

Goods-dominant logic – a pervasive concept

It was Vargo & Lush who introduced the term goods-dominant logic in their 2004 paper Evolving to a New Dominant Logic. So-called since our whole way of thinking (our logic) is dominated by how we see goods being handled. And this logic is everywhere.

And it is a logic that is everywhere. Economics is grounded on the idea of these value exchanges. And here’s how the American Marketing Association defines marketing (with my emphasis):

Marketing is the activity, set of institutions, and processes for creating, communicating, delivering, and exchanging offerings that have value for customers, clients, partners, and society at large.

American Marketing Association (2013) (my emphasis)

Purposes and goals of firms are set up to maximise profits in the exchange of value (Figure 4). And this has two implications. Firstly, it drives the firm to make all of its cars as similar as possible. Secondly, it pushes the firm to manage its supply chain effectively.

Goods Dominant Logic
Figure 4: The purpose and goal of a firm under Goods Dominant Logic

And in accounting, we depreciate assets on balance sheets to reflect the value of goods we have acquired are used up over time. We talk of the product/manufacturing economy and in history learn of the industrial revolution.

One can begin to understand why the word “dominant” was used by Vargo and Lush!

But as we see a shift to service economies, the question arises: can we, and should we, apply the same goods-dominant logic to services? Or do services require a new way of thinking?

Exchanging Value in Services – Productization of service

We can discuss the definition of services for quite a while. For our current purpose, let’s say they are offerings that offer to get a job done for a customer. And that the classic way of defining services is by comparing them to goods through 5 Is. That is, compared to goods, services are intangible, inconsistent, inseparable, we can create no inventory and they require customer involvement.

In general, to deliver a service (get the job done) requires interaction between the customer and provider.

Attribute strengths of a general service and one that offers the opportunity to be productized. For a productised service the scores for inconsistency and required interaction are low.
Figure 5: Attribute strengths of a general service and one that offers the opportunity to be productized.

The key to productization of a service is to observe there are some jobs where the customer is willing to give up (or at least minimise) interaction for simplicity/cost/consistency. As we see in Figure 5. It is also often the case that in productized services the customer believes they have the skills needed to use the service without any help.

As an example, Amazon web services are a set of services that are productized. There is a set of prices for various services and defined outputs. Amazon works at making the service consistent and offers very little in terms of interaction to alter service provision. You can have what is offered, no more, no less. And it works. H1 earning in 2019 for services were $53M.

Figure 6: Examples of various productised Amazon Web Services

Banks are similar. They package financial services together into the products they sell. A share trading account, a bank account, mortgages etc. However, the difference to Amazon is that banks recognise the customer may not have the skills necessary to choose the best/right products. And so they typically offer an additional non-productized service – financial advice.

The Reality

However, the majority of service need, and benefit, from interactions between the customer and provider.

Using goods-dominant logic gives us a very simplistic view of services (and of goods). It’s like we have a top-performing sports car and are only using the first gear to drive.

Ng et al sum up the challenge of using goods-dominant logic to think of services in their paper that looked at how Rolls-Royce moved from goods-dominant logic. They wrote:

“G-DLogic, when extended to services, results in the reduction of service offerings into exchangeable units such as man-hours, information and other exchangeable artefacts particularly to ‘service and support’ the product….Even if the offering could be articulated, it is often done so with the customer as a passive entity and the service as an exchangeable offering i.e. what the firm does for the customer that could be exchanged for a price, much like the way a product is an exchangeable offering.”

Ng et al (2012)

Whilst

Why goods-dominant logic keeps us in first gear for service

The goods world view has served well for many years as a basic view. But it is full of deficiencies. These deficiencies are becoming more well known as the true service nature of the world becomes more dominant. What are these deficiencies? All, I would suggest, we:

  • get too narrow a focus on a solution – something Levitt back in the 60’s called marketing myopia and Christensen calls Job-to-be-done theory.
  • miss out on developing business models outside of the “sell this valuable object” type
  • have no visibility on how the customer uses the goods – so miss out on opportunities
  • miss the realisation that the customer is the actor that decides if an offering is of value, not the manufacturer.
  • define services as inferior to goods – the 5 Is are seen as bad things
  • struggle to understand what the real marketing mix is

Let’s explore these quickly.

Too narrow a solution focus and missing out on business models

Under goods-dominant logic, we thought of our car manufacturer building a car and adding value as they did so. They were trapped into making a sale in order to exchange value. And then they had to move onto the next sale. Innovation thinking coalesces around making a “better” car.

Levitt’s Marketing Myopia calls for organisations to really think about the business they are in. Gummesson (1995) saw that “customers do not buy goods or services: they buy offerings which render services which create value”. Christensen et al’s came up with “Job to be done” theory which aligns with Gummesson’s view. An interesting example they have is how different customers hire milkshakes to fulfil different jobs depending on the time of day.

Lets instead say we think about the job-to-be-done. That of transporting people from A to B. Now we are less myopic and our solution space opens up. Are we transporting on a road, or in the air; or perhaps on water. Could we identify alternatives to physical transport of people – perhaps we need to get into Virtual Reality? 

Miss out on business models

With a goods-dominant focus on exchange, the firm misses the usage rather than ownership business model. Of course that doesn’t stop others from harnessing it and the firm may be happy with that if it thinks it can sell to those instead of consumers. But, look at what the likes of Uber are doing with self-driving cars.

Ownership rather than usage avoids the sharing economy and subscription services. Where, for example, the dealer becomes a garage and you change your car to suit your needs. Use the SUV during the week, and swap to the open-top sports car for the weekend.

Miss opportunities that arise if we have visibility into the usage

The downside with goods-dominant logic is the lack of interest in building relationships after the exchange. Now, sometimes the dealer may start offering post-sales services. But that is a relationship between the dealer and customer rather than firm and customer.

Over the years there have been several streams looking at how to solve this problem. Saarijärvi et al’s paper “Service-dominant logic and service logic – contradictory and/or complimentary” paper includes Figure 7. This shows the proliferation of logics and approaches that have evolved to get us out of first gear.

Figure 7:

If we have visibility after the sales, then we can do things such as remote monitoring the car’s performance and proposing times for services and pre-emptive fixes. And it encourages us to think more about the circular economy. That is, how we design the goods for reuse, refurbishment and recycling. As well as opening those new channels as business streams for the firm.

The 5 Is Can be Positives

The 5 Is. They often are used to describe services as inferior to goods. But:

  • Intangible is great. It’s incredibly scalable and cost reductive. Think physical vs digital goods (CD vs Spotify, Books vs Kindle)
  • Invert Inconsistent and we get customisation. And customisation requires customer communication, which drives relationships
  • Inseparable and Involvement. In service, the customer (beneficiary) always determines the value. And that determination is contextual and experience-based (phenomenological). So inseparability and involvement is a positive thing
  • Inventory is a bad thing. It is a cost. And, actually, goods are often perishable. Both deteriorating themselves (for example food) and/or not keeping up with customer’s changing needs (becoming obsolete).

Figure 8 shows the summer of Vargo & Lush (2004) “The Four Marketing Myths”. This paper inverted the “problems” and pointed out inverted implications. For example rather than intangibility being a “problem” it can be restated as tangibility should be avoided unless there is a marketing advantage.

Benefits of the 5 Is of services
Figure 8: Benefits of the 5 Is of services

Realising the 4 Ps of the marketing mix were not sufficient for services

Remember when we looked at the marketing mix’s 4 Ps? All of the 4 Ps in the original marketing mix are obviously from goods-dominant logic. The first aspect of the marketing mix is the product (the goods). Followed by 3 Ps dedicated to creating and facilitating an exchange – price, place and promotion. As we started looking at the 4 Ps we found a wide range of criticism from various viewpoints.

And we actually came to a resulting marketing mix for services that took some of those criticisms (and proposed solutions) on board. Most notably, as shown in Figure X:

The Resulting Services Marketing Mix
Figure X: The Resulting Services Marketing Mix

We ended up at this resulting mix not because we wanted to make services different to goods. Our journey was one of realisation that in services there are additional aspects to address. And that we needed to re-focus some parts of the original mix.

The resulting marketing mix became more customer focussed. Product evolved to “customer wants and needs“. One way promotion expanded to two-way communication. And we realised competences, process and performance are all aspects.

With all this realisation, it is time for us to embrace service-dominant logic.

Embracing tomorrow’s world: ServiceDominant Logic

So how do we then get access to the 2nd, 3rd, 4th and 5th gears of our top performing sports car?

We need to evolve our mindset.

Let’s leave behind the mindset of goods-dominant logic. Where the focus is on the embedding and exchanging of value. And where services are seen as add-ons or defined as being the opposite of goods.

It’s time to evolve towards a service-dominant logic. A mindset where service, rather than value is the exchange. Where actions are the focus rather than tangible goods. Indeed, we’ll define service as Vargo and Lush do:

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

(2004)

It is time for us to delve deeper into service-dominant logic.

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