The Big Picture…
Goods-dominant logic has served us well for the past 300 years. With its view of value being in outputs, and value-in-exchange transactions between manufacturers’ who embed value and customers seeking that value (and then destroying it).
But, we have a growth and innovation problem. And it is clear that applying the same innovation approaches as always is not solving that problem. These approaches are from manufacturing firms, underpinned by goods-dominant logic. Whereas we can observe our world is being eaten by service.
Instead, we need to apply the evolved service-dominant logic to our problem. And under this logic we see:
- Performance not Output
- the application of resources for an entity’s benefit
- rather than the output having value
- Resources
- we integrate resources that apply skills and knowledge (i.e. operant resources)
- rather than supply resources that things need operating on to release value (operand = goods)
- and we see goods as capturing skills and competences (service) so we can move and apply them elsewhere in time and space
- Exchange
- we exchange the performance of specialised skills (although indirect exchange may mask this)
- rather than exchanging outputs/outcomes
- Value
- is co-created when beneficiary chooses to explore a value proposition
- no value is embedded as an act of creation
Doing so sets Blue Ocean strategy, Jobs-to-be-done theory, lean approaches and more as obvious parts of life. And that unlocks innovation.
And, these are all evolutionary steps in thinking, rather than revolutions. But our ingrained goods-dominant thinking is hard to overcome.
The Idea
We have an innovation problem. And since innovation is one of the two (and only two) functions of an organisation, then we have a growth problem. But that is perhaps not news to you.
Because the purpose of a business is to create a customer, the business enterprise has two – and only two – basic functions: marketing and innovation
Peter Drucker (1954) “The Practice of Management”
Sadly, we apply the same old ways of thinkings over and over again. Yet we are not fixing our growth/innovation problem.
Insanity is doing the same thing over and over again and expecting a different result
(often credited to Einstein)
This thinking is goods-dominant logic. And whilst that logic has been sufficient for the last 300 years, we have reached the end of its usefulness (from a growth perspective).
Service is eating the world. And it is time to apply a different logic. And that logic is a service-dominant one. Where instead of thinking in terms of value-in-exchange, we have value-in-use. Instead of focussing on outputs, we focus on how the output is achieved. And instead of goods vs service, we see goods as a means of capturing service so it can be distributed to another time and place and applied.
Let’s start our journey with a quick recap of goods-dominant logic. I give a more in-depth view here.
Recap of goods-dominant logic
Value is in the units of output
Our typical way of thinking, acting, and behaving (logic) is goods-centric. We like tangible things that we can see being manufactured. It allows us to think that manufacturers embed/add value to their outputs (compared to the inputs).
As in Figure 1, the car is more valuable than the engine (together with other parts). The engine more valuable than the metal it is made from. And in turn, the metal is more valuable than the ore it is mined from.
At each stage of manufacturing, we observe value being exchanged.
value-in-exchange
These exchanges take place, typically, in one-off transactions. Where outputs are exchanged for cash. And so we see value is in the exchange.
The part manufacturer buys the value in the metal. The auto manufacturer buys the value in the engine. And the customer buys the value in the car.
Our constant focus is the outputs. The static resources that require some action on them before they release their value.
key resources: operand
The car output that needs to be driven. The engine that needs selling. Or the metal to be sold to make engine.
Until now we’ve called these goods. Though we can call them operand resources. This allows us to contrast with operant resources which are resources that act on other resources.
And finally, under goods-dominant logic, we see services in a similar manner as above.
Services: units of outcome
That is to say, a service has inherent value and is measured in units of service. And it is performed through one-off transactions.
We also define services in relation to goods. They are intangible (by definition). And they are inseparable (need producer and consumer together) as well as require consumer involvement. Further, as they are inseparable and require involvement, we cannot create an inventory, ie services are perishable. And they are inconsistent.
The challenges with goods-dominant logic
Goods-dominant logic has served us well for the past 300 years. But now it is starting to show cracks. We have an innovation problem, which gives us a growth problem. And I believe our pervasive goods-dominant thinking is at the root of this problem.
Can’t (or won’t) see past the point of exchange
See services as poor/troublesome relative to goods
Encourages myopic innovation
Doesn’t reflect how the world works
Introducing Service-dominant Logic
(flow below based on Lush & Nambisan “SERVICE INNOVATION: A SERVICE-DOMINANT LOGIC PERSPECTIVE”
An evolved view of Service
Service is not an outcome
An evolved view of Resources
An evolved view of Exchange
An Evolved view of Value
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The key managerial shifts
Axioms and Premises of Service-dominant logic
There are 11 foundational premises of service-dominant logic. 5 of them are promoted as axioms, from which the others can be defined. These axioms are:
- Service is the fundamental basis of exchange
- Value is co-created by multiple actors, always including the beneficiary
- All social and economic actors are resource integrators
- Value is always uniquely and phenomenologically determined by the beneficiary
- Value co-creation is co-ordinated through actor-generated institutions and institutional arrangements
And we can put the relationships between axioms and the remaining as shown in Figure X.
Evolution of foundational premises
As you’d expect for an evolving topic, there have been several revisions over the years regarding the premises. For clarity, you can find them below.
The original definition comes from 2004’s “Evolving to a New Dominant Logic“, updates in 2008’s “Service-Dominant Logic: Continuing The Evolution” and current use, from 2016’s “Institutions And Axioms: An Extension And Update Of Service-Dominant Logic“.