Service is the fundamental basis of exchange

Part of a series on making service-dominant logic approachable

 Work In Progress
agile design-thinking exchange innovation job-to-be-done lean marketing-myopia market-orientation product-dominant relationship-marketing service service-dominant unit-of-exchange value
  This article is work in progress - it will probably change (improve ) between visits, so please come back often

There is a fundamental evolution from goods- to service-dominant logics. One that we need to make clear, approachable, and understandable. And it is all to do with what is being exchanged.

[This article is part of a series on making service-dominant logic more approachable]

In today’s all-pervasive goods-dominant logic we see value as the unit of exchange. Whereas in service-dominant logic we evolve this to see service as the basis of exchange. Two small words; two big differences.

Service is the fundamental basis of exchange

Vargo & Lush (2016) – Foundational Premise #1

Let’s see what this means, and why it is important. We’ll see that design thinking, lean development, agile methodologies, relationship marketing, market orientation, reduced marketing myopia and jobs-to-be-done all are included for free in service-dominant logic.

We’ll follow how the definition evolves. As shown in Figure 1.

Figure 1: The evolution of service-dominant logic’s first foundational premise

So we will start with the goods-dominant logic view – that “value is the fundamental unit of exchange”.

Value is the fundamental Unit of Exchange

At the heart of how we typically observe today’s economy working is the concept of value-in-exchange. See Figure 1. This is the point when a manufacturer finally sells its product to a customer. And we should note that everything the manufacturer does is focussed on this moment.

Figure 2: What happens to value in a goods dominant way of thinking

Marketing has identified the product they believe will get the most sales and profit. Manufacturing has built the goods. Embedding value as they go. A car, for example, has more value to a consumer than the individual components. Sales are finding and enticing customers. All for the big moment of a sale. Where the manufacturer finally gets money. And the customer gets the product with the embedded value. This is the value exchange.

Now the customer goes about using up that embedded value. For example by driving the car. That wears down parts etc. But the manufacturer has no interest or insight into that value destruction.

Pretty much the whole of our way of thinking for the last few centuries has been this way. And to distinguish it from the service-dominant logic we want to talk about, we give this thinking and approach the name goods-dominant logic. It neatly characterises what people have been calling the product economy.

A fundamental part of this goods-dominant logic is, therefore, the premise that:

Value is the fundamental unit of exchange

Is goods-dominant logic correct?

Goods-dominant logic has been sufficient to explain and explore the (product-based) economy. But, it has deficiencies.

Figure 3: Some typical challenges when thinking in terms of goods-dominant logic

Firstly the focus on value exchange puts blinkers on us. We may not build what the customer really wants. And we miss the opportunity to “pivot” to capture customer’s changing needs.

Attributes we typically see as positives are sometimes false friends. Goods are tangible, consistent and we can inventorise them. There is little incentive to react to changing customer needs. We criticise services for requiring customer involvement and the inseparability between supplier and consumer. Which implies we’re not actually interested in customers’ views. No need for job-to-be-done theory, design thinking, agile delivery or lean approaches here.

After the exchange, we are typically not interested in what happens as the customer destroys the embedded value. We’ve done our job and made a sale. But there’s post-value exchange value generation we’re leaving on the table here. Additional “services” that could be offered; and even servitization (wrapping a product in a service).

And by having no interest past the point of value exchange we’ll struggle to support the circular economy. With its four stock management cycles of:

  • Maintain / Prolonging & Sharing
  • Reuse / Redistribution
  • Refurbish / Remanufacture
  • Recycle

Secondly, goods-dominant logic is not sufficient to express and explore service. Well, we can try and make a service act like a good. For example, buying IT delivery as a fixed price deliverable. But that is a poor understanding of what truly goes on. And doing so restricts/removes many benefits that other approaches would bring (agile delivery – jointly discovering and prioritising functionality to give maximum value – for one).

What can we do? Well, we can first consider whether it is 1) the output or 2) the process of creating the output that really creates the value.

Application of specialized skills and resources is the fundamental unit of exchange

In goods-dominant logic, value is seen only in the finished output – the goods. But that output is produced as the firm coordinates and applies its resources. The skilled people, input materials, machining etc.

Vargo and Lush’s 2004 paper “Evolving to a new dominant logic” spends some time discussing the concept of value exchange.

  • The output
  • The process to create the output

Economists decided long ago to focus on the first. That is to say, that value is the output. Adam Smith (“Wealth of Nation” fame) even pushed in 1776 that services are non-wealth generating (unproductive labour). And so observations of how the economy works were funnelled into what we now call goods-dominant logic. Perhaps this was the result of observations back in the context of 1776. But Vargo & Lush (2004) explain take on why this is not really the case.

So, what if we took this second view? That value is created by the firm applying specialised skills and resource to produce the output. It is reasonable. If the firm didn’t have those resources then the output wouldn’t exist. Our premise thus becomes:

The application of specialised skills and resources is the fundamental unit of exchange

We’re effectively still saying the same thing. But with an evolved perspective.

And we can quickly simplify this further. As we will see next.

Service is the fundamental unit of exchange

We can define service as being the application of specialised skills and resources (to the benefit of another party). Which means we can simplify our premise to:

service is the fundamental unit of exchange

Another benefit in thinking in terms of service/application of skills and resources is we can (re) think what we are delivering. A goods-only view just leads to producing the same goods each time.

A service perspective leads us to think each time what is the best application of skills/resources. Which also prompts us to think what job are we solving for our customer (job-to-be-done theory). And in doing both we reduce Levitt’s marketing myopia.

Simply put, we no longer focus on selling a hammer. We try and identify what the customer is hiring us for (the job to be done). For example maybe it is knocking a “nail into a walk to hang a picture”. Now we can consider putting our resources in action to manufacture a hammer. Or to solve this by sending a person to put the nail in. Or can we leverage the sharing economy where we hire the tool rather than buy?

Perhaps it doesn’t need a nail. If we look close at the job to be done it is really “hang a picture”. And there are other solutions than banging in a nail. Additionally we are framing an innovation search – what other ways are there to hang a picture?

But there is still one problem in this definition – the phrase “unit of exchange“.

Service is the fundamental basis of exchange

By using “unit of exchange”, we are still thinking in a goods-dominant way. As Vargo & Lush (2016) note, they are still talking “in terms of units of output, whereas service-dominant logic revolves around processes”.

Ballantyne & Varey’s paper “Introducing a Dialogical Orientation to the Service-Dominant Logic of Marketing” prompted the needed change. They took the view that marketing is a dialogue. And that dialogue underpins co-generation of value through:

  • communicative interaction,
  • relationship development, and
  • knowledge application

There is no measurable unit of exchange in those dialogical actions. Rather using them creates a basis for exchange.

And so we arrive at the final definition:

Service is the fundamental basis of exchange

No longer are we looking at a world where a manufacturer decides what value is and embeds it in a good; looking to exchange that for cash at the point of sale.

We are in a world where we need to have dialogues with our customer in order to exchange service (the application of specialised skills and resources). And where our service may change as a result of those dialogues.

Wrapping up

Service-dominant logic is not a competitor to goods-dominant logic. Rather it emerges as we observe how the economy is really working. Goods-dominant logic has been sufficient, but deficient, for a few centuries. But we now find economies stagnating in growth and our innovation performance being poor.

Applying a service-dominant logic lens gets us going again.

Figure 4: Some of the solutions to GD-Logic challenges that are in a sense naturally part of SD-Logic

By viewing “services are the fundamental basis of exchange” we reposition how value is seen as being created. We shift towards a dialogical means of interaction with customers. And with it, we are sowing the seeds of design thinking, lean development, relationship marketing, market orientation etc. We open our eyes against Levitt’s marketing myopia and look to be solving jobs-to-be-done. This expands our solution space from a narrow product to the whole spectrum on the goods-service continuum.

In addition, service-dominant logic supports us looking past the point of value exchange. We can cogenerate additional value during usage, or prolonged service use. And last, but not least, we can start thinking about the circular economy. Building goods and services that are able to be recycled/reused etc.

Right at the start, I said there were two small word changes between the logics, but big differences. I hope you can see those big differences now.

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