The Big Picture…
Classically we treat value as the fundamental unit of exchange. A manufacturer embeds value during production. And at the point of sale that value exchanges to the customer. The manufacturer then goes off to make the next sale. But, this logic limits our growth opportunities and is not really how the world works.
Instead, let’s treat service – the application of skills and resources for benefit – as the fundamental basis of exchange. So, I benefit from your service, in exchange for you benefiting from my service. (though “Indirect exchange masks this fundamental basis of exchange”). Though this is more an evolution in thinking than a revolution, it might first seem.
Doing so drives us naturally to be relational and look beyond the point of sale. Now additional services, servitization of goods, and the circular economy have a prominent home. So does relationship marketing and marketing orientation (one precursor to improving innovativeness).
We also become beneficiary oriented and make theories such as jobs-to-be-done, blue ocean, etc., as well as approaches such as Agile and lean, part of our day-day thinking.
Today: Value is the fundamental Unit of Exchange
In today’s all-pervasive goods-dominant logic, we treat value as the unit of exchange. (logic is shorthand for our ways of thinking and behaviour).
As consumers, we hand over cash in return for products. And we feel that those products hold a value for which we are willing to pay that price.
As manufacturers, we believe we add value through the manufacturing process. A car, for example, is more valuable than the steel, wheels and plastics on their own. Our marketing teams have already determined what needs consumers have. And of those needs, which consumers will find most valuable. We set prices reflecting the value we have added. And then we gear ourselves up for the final moment: we sell the product and get cash in exchange.
In this goods-dominant logic, we (manufacturers) rarely think of what happens after the sale. But we can round the story off by saying the consumer uses up or destroys, the embedded value. For example, driving the car wears down parts. Or eating a chocolate bar destroys the value.
Economically, we talk about the number of units sold and net margins achieved.
This goods-dominant logic neatly characterises what economists have been calling the goods economy. And with its focus on value and the sale (exchange) of that value, it is fair to say:
Value is the fundamental unit of exchange
And it is a logic that has served us well for some 300 years, underlying our capitalism = profit world.
But that world is beginning to fail us. Growth is hard to find. So, what is it that this goods-dominant logic misses?
What goods-dominant logic misses
When we take a goods-dominant logic approach, we unnecessarily constrain ourselves. We do so with the best intentions. But the focus on the value-in-exchange (the sale) is the culprit.
Firstly, focussing totally on exchange reduces our desire to think after the sale, since we are busy trying to make the next one. We miss post-sales and relational marketing opportunities. A potential approach is called servitization. That is where we wrap a goods in services. That is what Rolls Royce do when they sell “power by the hour” as opposed to just the aircraft engine.
The second impact is missing out on the circular economy. With its four stock management cycles of:
- Maintain / Prolonging & Sharing
- Reuse / Redistribution
- Refurbish / Re-manufacture
When we are disinterested in what happens after the sale, we have less interest in creating products that can take advantage of these stock management cycles. This is both a failure for the consumer as well as our growth and sustainability.
Which leads us to one of the more counter-intuitive points: focussing on maximising value-in-exchange can mean not delivering what the consumer wants. Our lead time from identifying needs to providing is long. And, these days, requirements change quickly. But we often miss those changes as we focus on manufacturing.
Finally, a goods-dominant logic sees services as a poor relation to goods. They are regarded as inconsistent, require customer involvement and are not separable (producer and consumer must be together). But, are these terrible attributes? They imply knowing each other and working together to co-create value. Beyond commodities, these are good attributes.
What can we do? Well, we can reconsider what we are exchanging.
Exchanging the application of specialized skills and resources (service)
Vargo and Lush’s 2004 paper “Evolving to a new dominant logic” spends some time discussing value-in-exchange. Including on page 7 why this goods-dominant logic was useful to early economists (spoiler: in an attempt to bring economics into a science). And, Adam Smith (“Wealth of Nation” fame) even went as fas in 1776 as stating that services are non-wealth generating (i.e. unproductive labour).
However, what if, instead of exchanging outputs, we think of exchanging the way we arrive at outputs. Both must be equally valuable, as they are the same thing. A car, for example, is an output. But the manufacturer has used its knowledge and co-ordinated many skills and resources to produce that car.
Instead of thinking manufacturers embed value in the car, we will see that it is the manufacturer applying the skills and resources they have that is valuable. That is to say:
Application of specialised skills and resources through deeds, processes, and performances for the benefit of another entity is the fundamental unit of exchange.
Although we are saying the same thing, it immediately changes our outlook.
We are more relational
We have a more relational definition. It implies there could be the involvement of both parties. That not every output is going to be the same. Our evolution of the definition still allows me to do the same thing time and time again.
We are more lean, agile, focussing on jobs to be done
But it also opens up the thinking process that if I’m going to apply some skills and resources, it makes sense to ensure I have the right configuration each time. I might want to have an ongoing discussion with the entity that is going to benefit from my deeds, processes or performance. What job are they hiring me for (jobs-to-be-done theory)? Am I applying the right mix of skills and competencies? Do I need to alter my application as I progress? Is the beneficiary changing their needs (either to external influence or through what they see I am doing)?
And we start to think of wider solutions
It is a perspective that also helps reduce Levitt’s marketing myopia. If I focus purely on value-in-exchange then I get myopic (short-sighted) in my solutions. I only look to apply my existing skills and resources more efficiently.
Levitt talks about how the railroads of the US missed the opportunities brought by aircraft. They were too focused on being railroad companies, rather than transportation companies. Very few of them exist today.
Thinking in terms of the application of skills and resources drives a need to review, continually, if you have the right skills and resources. And from a more abstract perspective.
We can evolve the definition even further.
Service is the fundamental unit of exchange
Lush & Vargo define a 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.Lush & Vargo
So, we can simplify our definition as:
Service is the fundamental unit of exchange.
But there is still one challenge with this evolved 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 exchangeVargo & Lush (2016) – Foundational Premise #1
Directly exchanging service is more evident if we go back a few centuries. Grain farmers applied their horticultural skills and resources to grow grains. And pig farmers used their animal husbandry skills and resources to rear pigs. A grain farmer was unlikely to be a successful pig farmer and vice versa. So they specialised.
At specific points, both farmers might swap/barter. The pig farmer is benefiting from the grain farmer’s skill and getting grain. And the grain farmer benefiting from the pig farmer’s expertise and getting a pig for food.
Over time we complicated things by making such exchanges indirect. See the foundational principle “indirect exchange masks the fundamental basis of exchange” for more on this.
Service-dominant logic is not a competitor to goods-dominant logic. Instead, 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 we have poor our innovation performance.
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 maximum cash at the point of sale.
We are in a world where we have dialogues with our customer and where we service (the application of specialised skills and resources) is the basis of exchange.
Well, if service is the basis of exchange, then we should be able to see the next two foundational points in our updated order, that: all economies are service economies and indirect exchange masks the fundamental basis of exchange.