The Big Picture…
Today’s predominant logic (behaviours, ways of acting and thinking) is known as goods-dominant logic.
We see a world where manufacturers create and embed value. And that value is exchanged with a customer during a one-off value-in-exchange transaction (sale), in return for cash. The customer then goes about using-up (or destroying) that value. Which is great news as then they need a new product, and manufacturers are ready to do a new value-in-exchange transaction.
The same happens for services, although we might use the terms producer and consumer rather than manufacturer and customer.
And this logic has three implications. First, it creates a divide between the entity creating value and the entity seeking that value. Secondly, it focusses on the output/outcome (rather than how that is achieved). And thirdly, it leaves the manufacturer to determine value (price), at least before the market gets to chime in.
It is a logic that has been sufficient, and helpful, for the last 300 years.
However, it drives a myopic approach and has no interest past the exchange point (so we miss, for example, the circular economy). And in today’s world – that is being eaten by service – we need a better logic to fix our poor innovation record and lack of growth. That logic is service-dominant logic.
We typically see the world in a goods-centric way. A manufacturer produces goods. By doing so, they embed value into those goods. That is to say, the output of manufacturing is more valuable than the inputs. And the manufacture then attempts to sell that output/goods. That sale is seen as transferring the embedded value to the customer.
This way of thinking and behaving is known as goods-dominant logic.
Let’s unpack a few of those terms.
What are Goods?
Goods are the tangible outputs of manufacturing processes. That is the physical objects that you can touch and manipulate. Think of a car, a book, or ice cream.
They can also be called operand resources. Which means that they have to be acted upon in order to “release” the value. We have to drive the car, read the book, eat the ice cream.
What about Digital Goods?
When goods exist virtually and are exchanged and used digitally, we call them digital goods. In this case, there is no tangible. Though they often retain a mental link to tangible equivalents. Books, music, newspapers are all examples of goods that are also available as digital goods.
And the types of digital goods is quite wide, including:
- Securities – we no longer hold share certificates
- Virtual goods – avatars, items used in games, WordPress themes etc, that we can buy and trade
- Currency – we are increasingly becoming cash-less societies and there’s increasing interest in crypto-currencies.
- Information – such as this web site
- Education – in the form of online courses
- Computing power – use of cloud resources rather than purchasing hardware ourselves.
What are Services?
I want to be careful here when defining services. Since I will give you a definition now, but spend the rest of this site saying it is wrong!
Services are transactions that involve no tangible goods. Where the value of a service is how much a buyer is willing to pay for that service. And commonly we see them as inconsistent, inseparable (provider and receiver need to be physically together) as well as requiring customer involvement, and we can’t build an inventory of them. These are known as the 5 Is of service (or previously IHIP)
Examples are cleaning services, legal services, healthcare, hairdressing and so on. There is also a raft of X as a Service that blur the lines between digital goods and services. Platform as a Service, Software as a Service etc. All falling into a broader definition of cloud computing.
Why is this wrong? Well, there are many reasons. Not least is that it focuses on services as an outcome – like goods are the outcome of manufacturing. It turns out, as we’ll see, seeing service in terms of how it is arrived at is much more useful than looking at the output/outcome.
What is a logic?
We refer to the way we think, act and behave, as a logic. And the logic that prevails, we refer to as the dominant logic. One of the early definitions comes from Prahalad & Bettis’ “The Dominant Logic: a New Linkage Between Diversity and Performance”:
Dominant logic…is a mind set or a world view or conceptualization of the business and the administrative tools to accomplish goals and make decisions in that business“The Dominant Logic: a New Linkage Between Diversity and Performance” Prahalad & Bettis (1986)
And now we can pull all the above together and describe the observation that today’s dominant logic is a goods-dominant logic.
Let’s take a closer look.
The goods-dominant logic
A goods-dominant logic is one where our thinking, behaving and actions revolve around goods. And it is one that has been sufficient for the last 300+ years. We find the root of it in Adam Smith’s Wealth of Nations. There Smith argues that wealth is generated from goods. And that services are not valuable from an economic perspective.
So, what is this goods-dominant logic? Well, it is a logic that is constrained by how we think of value. Both in terms of where and how that value is created.
Firstly, we believe that value is held in the output (of manufacturing, or the outcome of service provision). Rather than how those outputs/outcomes are arrived at. And secondly, that value is altered during three distinct steps in the lifecycle. These steps you can see in Figure 1.
Simply put, manufacturers add/embed value that they seek to exchange (typically for cash) in a sale; and the customer destroys/uses up that embedded value through use.
Let’s dig into each of those value changing steps.
Embedding value – by the manufacturer(s)
As mentioned, we focus on outputs. The reason for this is we see the output as being more valuable than the input(s). That is to say, the manufacturer has embedded/added value.
And this goes back over the whole supply chain. Right back to the process of digging raw materials out of the ground.
We see a car, for example, as having more value than its individual components, such as engine, wheels, body parts. Similarly, the part manufacturers have embedded value in their parts compared to the raw inputs. The engine is more valuable than the block of metal it was machined from. And the metal block output from the miner is more valuable than the raw mineral in the ground.
Most of our economies are ran with this principle, of doing something to inputs to get an output of increased value. We see this increased value as including our profit. And, common at all exchanges, is the manufacturer sets the price (value) subject to supply and demand.
Value-in-Exchange – sales
So the manufacturer’s main focus is getting maximum exchange (cash) for the value they have embedded.
This exchange we talk about is, in reality, a sale. At this point the manufacturer exchanges the goods in which they have embedded value in for cash. And simultaneously the customer gains ownership of the value (the goods) after handing over cash. It is a one-off transaction. And we call the concept value-in-exchange.
The whole of the organisation has been focussed on this point.
Marketing, for example, 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.
The same view of value-in-exchange we see as holding for services under this logic. Our service outcome has a value, we exchange cash with the consumer for that.
And now that ownership of the value has been exchanged, what happens?
Using up/destroying value – by the customer
It’s not good news for that embedded value, I’m afraid. Once the customer has exchanged cash for it, they own it, and they begin using it up (or destroying it).
They wear down the car through repeated use. Or they destroy it by eating the ice cream.
And when the product has no value left, what happens? The customer is left to throw it away. Which is great news for the manufacturer, as they can engage in another value-in-exchange. Hopefully with the same (now commoditised and cheaper to manufacture) goods. Or if competition has forced it, with an improved or new goods.
But there is another aspect of goods-dominant logic. Once we’ve made the sale we are interested only in the next value-in-exchange with the next customer. We don’t care about what the customer does with that value or if there is any more value to be generated (extra services, servitisation, or the circular economy).
A pervasive concept
Let’s finnish by noting that this goods-dominat logic 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.
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 goods/manufacturing economy. And in history learn of the industrial revolution.
All this, whilst service has been eating the world.
So, goods-dominant logic is bounded by how we think of value. It is embedded, exchanged and destroyed. And we focus on the outputs of manufacturing processes (or the outcome of services) as holding value. Which we exchange in a one-off value-in-exchange transaction.
Goods-dominant logic emphasises a very clear distinction between manufacturers and customers (or producers and consumers if you want to use those terms). One is very much the creator of value, the other the user. And we do not cross this division. Once manufacturers have exchanged, they seldom are involved. Future value opportunities such as additional help or the circular economy are not of interest (or of very low interest).
And, it is this logic that has sustained us, and been useful, for 300+ years since the days of Adam Smith.