2. Introduction…………………………………………………………………………………………………………….7

3. Goods Dominant View…………………………………………………………………………………………….8

5. Criticism and Examples of Fundamental Premises………………………………….…………….15

6. Conclusion……………………………………………………………………………………………………………….22

7. Bibliography…………………………………………………………………………………………………………….23

8. Abbreviations Used…………………………………………………………………………………………………26Services Marketing Assignment<br />Question: ‘Vargo and Lusch (2004, 2008) advocate Service Dominant Logic (S-D Logic) as the basis of a new unified theory of marketing. Referring to the three of latest version of their foundational premises (FPs) listed below (from Journal of the Academy of Marketing Science, 2008, 36 (1): pp 1–10.), critically evaluate the arguments and evidence for each, with examples to illustrate your points.<br /> FP1 Service is the fundamental basis of exchange<br /> FP3 Goods are a distribution mechanism for service provision<br /> FP 6 The customer is always a co-creator of value<br />Briefing: Firstly, from the course outline and your own search you should read several of the articles on S-D Logic by Vargo and Lusch. Two of these are on Blackboard. <br />Then, focusing particularly on the three FPs in the question you should discuss how these FPs have evolved (600-800) and what each means for services and marketing in general.600-1000<br />Finally, you should critically evaluate the authors’ arguments for each FP using your own arguments and examples as well as those from other authors and theories. 1200-1600<br />Introduction<br />‘Exchange’ is the basic foundation of marketing. Since the 18th century, a Goods-Dominant Logic (abbreviated as G-D Logic hereafter) of marketing represented the transactional-exchange of embedded-value in tangible units of output. But, over the past century marketing concepts have matured. Present-day marketers are facing new challenges in marketing, buoyed by customer-empowerment, shorter product life-cycles and increased fragmentations, with a paradigm shift on customer focus. The meaning of intangible ‘service’ (knowledge and skills) as a process has started playing a critical role in economic exchange by co-creating ‘value-in-use’ through relationships and networks. This is the Service-Dominant Logic (abbreviated as S-D Logic hereafter), a mindset for a unified understanding of nature of current-day organizations, consumers and markets. S-D Logic proposes a revised service-driven framework for all marketing practices (Vargo and Lusch, 2008b:254). (Vargo and Lusch) abbreviated as V&L hereafter. <br />But, resorting to S-D Logic needs careful implementation. <br />Hence, this paper will track the evolution, implication of S-D Logic on services and marketing, recommending practical-strategies and finally, critically evaluates S-D Logic. <br />Goods-Dominant View <br />Early economic thought by Quesnay’s (1758) Tableau économique, considered agricultural surpluses as real economic wealth-creator (Saren, 2010:Lecture9). Production-oriented marketing from (1800-1920) revolved around the tangible goods or “stuff” (Malthus, 1798), with embedded-value, involved in physical distribution of goods. Classical and neo-classical theorists–Smith(1776), Marshall(1890), Say(1821) and Shaw(1912) focused on the tangibles, static and discrete transactions of ‘operand resources’. During the Industrial Revolution, Smith’s (1776) ‘Wealth of Nations’ considered only output of ‘productive skills’ to add to national wealth. This idea formed the G-D Logic, where services were not considered a part of wealth-generating ‘output’. <br />Service-Dominant View <br />S-D Logic considers the dynamic behaviour of 21st century markets- characterised by unpredictability and intense competition, proposing the new mindset. S-D Logic represents firm’s core-competences under a market-driven perspective focusing on ‘operant resources- ‘knowledge or skills’, ‘value-in-use’ rather than ‘value-in-exchange’ in a framework where customer ‘co-creates’ value (V&L:2004a,2008b). S-D Logic presents an antithesis to the G-D Logic, challenging traditional marketing thoughts. <br />Transition from ‘goods-orientation’ to ‘service-orientation’ reflects a unique concept of marketing relating to each era of its evolution. Organisations transcend from ‘market to customers’ to ‘market with customers’, co-creating value and network-constellations (Lusch, 2007a; V&L, 2004a), as depicted below: <br />Evolution of the Foundational Premises:<br />Period from (1900-50) marked the product and sales-oriented era of marketing, where output, gathered ‘time and place utility’ Alderson(1957), Weld(1916), cited in (V&L, 2004b). Say’s (1984) identification of difference in ‘utility’ between ‘value-in-use’ and ‘value-in-exchange’ gained prominence. Marketing remained a ‘sales concept’ with focus ‘To Market’ (Lusch, 2007a).<br />Period from (1950-80) indicated a rise of market-orientation Kohli and Jaworski(1990), resulting in recognition of ‘utility’ in the market-place. Levitt’s(1960) ‘marketing myopia’, dismissed Beckham’s(1957) ‘value-added calculation’ cited in (V&L, 2004b). However, Say(1821), Lovelock and Gummesson (2004), Mill (1848:447) and Bastiat(1860:40) continued to consider ‘services possess exchange-value’ cited in (V&L, 2004b). <br />From 1950’s customer-focus influenced the ‘marketing discipline’ with views of Drucker(1954), Levitt(1960) and Kotler(1967) cited in (V&L, 2004b). Services marketing-mix extended from 4P’s to 7P’s, accommodating unique features of services- intangibility, inseparability, heterogeneity, perishability [IIHP] (Zeithaml et al., 1985) and ownership of services cited in (V&L, 2004b). <br />In G-D Logic, resources were considered “stuff” (static), captured for advantage. But this ideology transformed to include intangible resources-knowledge and skill. ‘Essentially, resources are not; they become’, (V&L, 2004a:2). <br />Inadequacy of G-D Logic to accommodate this transformed view of ‘resources’ established a major drawback of the logic. This compelled the research and academic world to recognise services marketing as a marketing sub-discipline and treated ‘service’ as a ‘unit of exchange’, based on value-in-use. S-D Logic accommodated both ‘goods and services’ to overcome myopic view of G-D Logic and placed ‘service’ adequately. Now, marketing was not limited to exchange of goods, but rather transformed to exchange of competencies/operant resources/knowledge and skills cited in (V&L, 2004b). This led to the evolution of Fundamental Premise (abbreviated as FP hereafter), ‘Service is the fundamental basis of exchange’. i.e. organizations, markets and society are fundamentally concerned with exchange of service—the applications of competences (knowledge and skills). Implying, service is exchanged for service (V&L, 2008b). <br />With establishment of FP 1, ‘service as a unit of exchange’, it was realised that ultimately, exchange of competencies fulfilled higher order needs, satisfaction, pleasure etc., and goods, were merely a medium for delivering/attaining this fulfilment. Hence, FP 1 supports the evolution of FP 3 that ‘Goods are a distribution mechanism for service provision’. <br />Marketing concepts matured to appreciate resource-advantage theory (Prahalad, 1996); resource-based view (Penrose,1959), market-sensing (Day,1999), suggesting strategies for marketing of ‘intangibles’ and ‘co-creation’ of value cited in (V&L, 2004). From 1980-2000 onwards, services marketing emerged as a process, under a value creation proposition. A transformation from traditional marketing’s value-in-exchange to value-in-use emerged in S-D Logic. Further, Lusch et (1992), Prahalad and Ramaswamy(2000) focused on co-opting and co-production. Oliver et al. (1998) advocated for ‘real-time’ marketing to integrate mass customization and relationship marketing appreciating dynamic consumer-behaviour. <br />In G-D Logic, separation of producer and consumer constituted the framework for profit maximisation. Dismissing this demarcation, both producers-consumers interacted to co-create value in S-D Logic. Acceptance of customer as operant resource, rather than an operand resource (target) emerged, where ‘value’ was embedded directly in the co-creation experience (V&L, 2004a:6). A culmination of these thoughts, led to the evolution of FP 6 ‘The customer is always the co-creator of value’. <br />Implications of FPs on services and marketing and techniques for managerial applications<br />As a marketing sub-discipline, services marketing have been “breaking free” from goods marketing (Shostank,1977). S-D Logic suggests all of marketing needs to break-free from G-D Logic (V&L, 2008b). This part of the paper explores the implications of S-D Logic, calling for a change in strategic indent and core competency of marketers. <br />Implications of FP1: ‘Service is the fundamental basis of exchange’.<br />In S-D Logic, evaluation of value-in-use is a relative concept, depending on specific needs, wants, perceptions, attitudes and circumstances of every customer, making evaluation of consumption-experience, a subjective issue. Firstly, it implies that marketers face difficulty in decision-making upon rating/improving the service-delivery.<br />High level of customer involvement/activity services for consumers like Do-it-Yourself services Example: Self-use of L’occitane’s Orange facial mask (tangible product) will have different effect (intangible-glow) on different consumers. Service-satisfaction will be a heterogeneous response for each consumer, based on skin-type, age, weather, exposure to light etc. Hence, it remains a challenge for marketers to capture the degree of customer-satisfaction. Marketers engage in customer-feedback, questionnaires and reach the customers through contests, gifts and awards, loyalty programs etc. <br />Secondly, during service interaction, the firm must act as a facilitator of consumption rather than pure manufacturing/commercialisation entity, Gurau(2009:187). Service-marketer must convert consumer-experience into a good ‘moment of truth’ Carlzon(1987) and translate them into service-convenience (Berry et al., 2002). <br />Thirdly, marketers face longer time-gaps in evaluating customer responses. Service-delivery may take a long time to generate responses challenging the marketers to evaluate the service-satisfaction. Example: Heart-transplant surgery for a patient may take months/years of close observation to evaluate the success of the operation. As age, dietary-intake, body resistance, stress-levels, family history etc., are various factors that will determine the success of that particular act of service- heart-transplant surgery.<br />Marketers can improve service-environment or Servicescape (Booms and Bitner, 1981), providing a fulfilling customer experience. Example: Front-line officers at Ritz Carlton Hotels offer personalized customer service, tracking the past preferences of the customer for suit type, food preference etc. (Saren, 2010: Lecture 9). <br />Efficient service blueprinting refines customer service processes. Example: YRC Worldwide, trucking and logistics company, followed service blueprint to make a turnaround in 2007 to “Most Admired Companies” by Fortune Magazine, from that of “least-admired” companies in 1997 (Bitner et al.(2008:69). Constant improvement in service-quality can be indicated by performance measurement of service-process SERVQUAL model. <br />Example: A travel-package to Scotland by Cox and Kings, a leading tour operator; has both tangibles (tickets, passenger seats, food on board etc.) and intangibles (experience, adventure etc.). The trip will have a unique description of the travel experience for each consumer, resulting in heterogeneity in evaluation of customer-experience. Marketers can overcome these challenges by making efficiency primary to increasing efficiency through effectiveness (V&L, 2008b:258).<br />Implications for FP 3: ‘Goods are a distribution mechanism for service provision’.<br />In S-D Logic, the role of goods changes from being an end product, to a transmitter of operant resource i.e. a service-based foundation centred on service-driven principles. <br />Firstly, successful marketers must focus on higher-order needs (like: experience, comfort, relaxation, enjoyment, satisfaction, self-esteem etc.), to be embedded with the goods Rifkin (2000) cited in (V&L, 2008b). Many capital-goods manufacturers are transiting toward being service-providers (V&L, 2008b). Alstom, for-example, a train-manufacturer, added service-advantage to its total offering-maintenance, operation and signalling systems. Hence, Alstom shifted from being the traditional train manufacturer to a service-provider where value is co-created by Alstom and its customers/suppliers. Similarly, General Motors earned more revenues from GM financing unit. <br />IBM, a computer technology, product-oriented company, successfully transformed to being an IT service provider, by setting up IBM Global Services division. Hence, service-business must build a strong, workable, profitable relationship with the product-business. Thus, managers should focus on creating a balance between product and service business Gebauer et al. (2009:104). <br />Secondly, marketers should concentrate on core competence area (without losing base business) and build experiences around the product (Prahalad and Ramaswamy, 2000). <br />Example: Otis Elevator, leading elevators-manufacturer, offered after-market services. Company’s service revenue surpassed elevator sales in 2001, doubling margins from 8.4% (1997) to 17.4% (2003) (Baveja et al., 2004:3). This implies, if Otis ignored its core-competence (quality elevators); no consumer would have demanded the product and/or service at first place. <br />Thirdly, marketers must understand that services is a highly-skilled area (demanding experience and talent), and carefully leverage service-benefits with goods. A failure to distinguish the two, often results in ‘service-traps’ or ‘black areas’ of corporate failures. <br />Fourthly, as, many service sectors exist, but ineffective positioning in consumer’s mind, disables them to reach the customers. Marketers can convey the experience-value to consumers through integrated marketing communications. <br />Example: Master Card Worldwide’s ‘priceless’ campaign in 2005 advertised its ‘Platinum Membership’ using the punch-line ‘There are some things that money can’t buy. For everything else, there is a Master Card’. The video-advertisement is depicted by a scene of a man gifting a diamond necklace to his wife. The advertisement conveyed the message that it is the Master Card (a tangible good) that has created a memorable experience (an intangible) for the consumer (man and his wife). <br />Finally, companies build customer experience around the product by bundling strategy as a means of selling potentially separable components to customers, as integrated system or ‘bundle’, usually by collaborating with their B2B partners (Porter, 1985:425) cited in (V&L,2008b). Core-product and services are sold as a bundle (example: Software-hardware maintenance package). This implies, marketers should combine sales-leadership and deliver specialized-service. Example: Ericsson collaborated with lead customer- Vodafone to create highly customized solutions for commercializing the new generation 3-G mobile system technologies offering convergence-benefits to consumers (Davis et al., 2007:186).<br />Implications of FP6 on services and marketing<br />The first implication for services and marketing is that increased competition, market fragmentation and specialized segmentation make information freely available to the consumers. Product-offer and use-instructions are made easily accessible through digital/integrated marketing communications. Marketers call for customer-complaints to identify service failures and develop recovery strategies to maintain customer loyalty. <br />Secondly, customer co-creation of value may be impacted by interest levels of customers. For example, in a music learning class, the interest and participation of the student will affect the performance at the concert. The performance improves if the customer takes interest in the learning or the reverse, if much of customer-interest is not shown. However, with active customer-interaction, feedback-monitoring, marketers can implement changing consumer-preference feedback into new-product/service development or induce product-improvement. <br />Service marketers can involve in customer-experience management (O’Loughlin et al., 2004). Improvement in service life-cycle management (SLCM) with phases such as service conception, delivery, continuous dialogue within service-providers and consumers, evaluation and co-creation of revised service can be implemented (Lusch et al., 2010a:28).<br />Marketers can use equity-theory (Goodwin and Ross, 1992) to express higher commitment to network associates. Marketers should assist customers in their own value-creation processes by considering customers as network-integrators rather than isolated entities (V&L, 2008b:258). <br />Criticism of FPs and Examples:<br />Critiques of FP1 <br />Application of ‘specialized skills’ for gaining core-competence and customer-centricity (Brown, 2007:293), are criticized as being common even to the traditional (goods) marketing, where core-competence and market-share improvement remain common objectives (Schembri, 2006:390). Taylor’s (1911) scientific-management principles have long been existed to inculcate specialization of manufactured-output under G-D Logic for improving worker-efficiency and standardization of output. <br />Secondly, Buzzel(1963) says marketing is governed by science (scientific-principles) that does not apply to S-D Logic’s ‘knowledge and skills’. Lack of research/empirical evidence on S-D Logic, reduces its competitive advantage. Hence, considering ‘knowledge and skills’, as a fundamental unit of exchange, limits effective marketing. Moreover, S-D Logic is as symptomatic of the marketing of marketing knowledge (Hackley, 2001) cited in (Saren, 2010:Lecture9).<br />Old wine rebottled<br />Thirdly, Brown (2007:4), Holbrook(2006) and Levy(2006:60) consider ‘S-D Logic as a repackage’ of already existing ideas. Customer-involvement in new product/service development, co-development (Anderson,1993), user involvement (Alam,2002) and customer-interaction (Gruner and Homburg,2000) have already been researched in the past, cited in (Gurău,2009:189). <br />Finally, S-D Logic creates a need to redefine (service) productivity-index. Manufacturing-sector usually has physical units of quantifiable output. But, service-sector output is the not quantifiable ‘intangible-quality’. This exposes the weaknesses of input-output notions of productivity-index. Thus, it is inferred that service-sector needs a ‘service-productivity index’ like Layard’s happiness index, medical QALY (Saren, 2010:Lecture9).<br />This paper agrees with FP1 only in its limited purview. It is analysed that FP1 ‘Service is the fundamental basis of exchange’ may not have a universal application and would be affected with the ‘product-exchange’ or ‘product-and-service exchange’. For example, a consumer willing to purchase ‘Weightwatchers Bread’ from Tesco, involves only in exchange of ‘knowledge and skill’ in the making of ‘bread’ for a price (£2). There is economic exchange (price) with ‘exchange of knowledge and skills’. <br />However, if a customer is willing to purchase sport-hybrid – Honda CR-Z car, the idea of buying a car is for the satisfaction of needs like- comfortable transportation, safety and prestige of owning the car, insurance cover, assurance of quality driving experience, brand value (intangible components) for the exchange of ‘knowledge and skills’ of ‘ability to drive/maintain the vehicle’. <br />The customer selects from brands like- Ford, Porsche, Volkswagen, etc., each offering a unique set of physical-characteristics like- design, colour, style, model, accessories (tangible components). However, buyer decides on Honda CR-Z for the fulfilment of his/her intangible needs. So, it shows that FP1 limits to the ‘products involving service’ (like car), than to pure consumption products (like bread). <br />FP1 is closer in application to B2B, networks and relationships industries like-digital convergence industry-where service is directly exchanged for service, but not relevant to pure product purchases (like bread). <br />FP3: Goods are a distribution mechanism for service provision<br />In S-D Logic, goods continue to play an important, service-delivery role in a subset, as a mode of distribution in economic exchange (V&L, 2004a). <br />Criticisms of FP 3<br />Firstly, S-D Logic underestimates materiality. Dismissing the material importance of goods is a flawed argument, as at times of distress, goods act as store-houses of value. <br />In times of economic turbulence, investments in physical resources like–land, property, gold rises (in chart, 2008-9 witnessed high gold prices 1200 USD/oz), service-economy merely rests on recovery in goods-economy (Saren, 2010:Lecture9). This implies that goods are not mere distribution mechanisms, but rather store-house of value-in-exchange, hence, challenging FP3-that underestimates the material-importance of goods.<br /> <br />However, FP3 is well-justified in its logic, in that, as most services require a vast material support, network of goods, equipment, logistics, transport and infrastructure (Saren, 2010:Lecture9). Achrol and Kotler(2000:324) observe, ‘products substitute for direct service’. In post-industrial high-service economies, example healthcare, the ‘businesses are focusing on providing cost-effective goods-mediated’ alternatives (technology-mediated). Hence, it is agreeable to a large extent, that goods are a distribution mechanism for service-provision.<br />Examples of FP3<br />From the Honda CR-Z example: Page-Number-16 of coursework. It implies that the physical component of the Honda CR-Z is a medium to provide service to consumer. Intangible needs of the consumer- (comfortable transportation, safety, prestige, driving-experience, brand value) are fulfilled by the purchase of physical good (car). The physical components of the car render desired services to the consumer. Hence, proving FP3,’goods are a medium for service provision’.<br />FP6: ‘The customer is always a co-creator of value’<br />CRITICISM OF FP 6:<br />Firstly, FP6 does not justify customer-involvement criterion, rather, excessive focus on value-creation negates customer-focus. Dynamism of service-encounter and interactive production (Solomon et al., 1985), Gummesson(1991) varies in the way customers involve themselves in service delivery process. Passive involvement of a customer may not result in co-creation. <br />Example, high customer-involvement services like, Do-it-Yourself services (self-use of Gillette shaving razor used by an individual), online banking, weight-reduction programme at gymnasium, medical treatment may have variable results for different consumers at different times. <br />Secondly, in treatment of customers as ‘operant’ resources, co-creation is seen as a corporate exploitation of labour where the (dis)empowered consumer pays for value-addition (pleasure/satisfaction derived/created), in a state of unawareness and that too without getting paid for it Arvidsson’s (2007). Example: IKEA model of self-assembly of goods reflects customer co-creation/ (exploitation) (Hartman, 2007). Ballantyne and Varey(2007) suggest ‘co-creation’ under the rubric of ‘co-production’. However, dynamic co-creation only takes place within integrated network: suppliers-competitors-consumers, else it leads to consumer-exploitation.<br />Thirdly, Palgrave (2001) explores the tensions between customer-empowerment and entrapment, with regard to existence of consumer sovereignty. Often marketers catch the customers unaware resorting to ‘mystery-shopping/monitoring-and-surveillance’ to gauge consumer-preferences. <br />Fourthly, Achrol and Kotler (2000:327) suggest a low consumer-turnout in relationship-marketing programs unless popular brands like Harley-Davidson, Apple etc., initiate such research. <br />Fifthly, ‘co-creation’ stands invalid for standardised services involving minimal customer-contact. Examples: Dry-cleaning service, cinema, standard software, postal-mail services. In these services, the customer is not co-creating value, rather just receiving value. <br />Example: With Honda CR-Z car-purchase (Page-Number:16), the customer is involved in co-creation of value. The car would have to be driven (self-driven/ chauffer driven) and maintained (regular car maintenance). This means, customer is involved in creation of value of the car. Even while driving the car, display of company’s logo, colour/features of car are advertised-for-free in the society, implying that the customer is adding to the brand value of the company. At the same time, Honda CR-Z offers ‘physical’ components like road-safety kit, free accessories and ‘services’ like customer-care services, component-replacement services etc. to retain brand loyalty of customers.<br />Hence, this paper agrees with FP6 only in a limited sense. Customer involvement in co-creation varies with the type of service. The scale of involvement varies as depicted below:<br />CONCLUSION<br />Growth of economies usually starts with agriculture, industrial development and matures into service-led growth. Implying, product or tangible output holding a strong ‘base’ for services. Service industry thrives on education and affluence. Undoubtedly, services have a distinct phase. In an economy, agriculture-manufacturing-services graduate as stages, it depends, which is more dominant at what stage. It may be noted that product is required before servicing it. <br />S-D Logic has been composed in (2004, 2008), a stage when advanced nations are already services-dependent for major part of their GDP; while many emerging economies are showing a fast growth in services-sector. S-D Logic, indicates a transition in marketing thoughts, but is met with limited application to all marketing. 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MS-Office and Paintbrush softwares have been used for the same.<br />Websites References: Accessed between March-May, 2010<br /> http://www.gettyimages.com<br />http://images.google.co.uk/<br />http://www.bilaney-consultants.co.uk/<br />http://www.sdlogic.net/<br />List of Abbreviations Used<br />Vargo and Lusch have been abbreviated as V&L,year(index order in Bibliography):page number<br />Fundamental Premise/s have been abbreviated as FP or FPs (respectively)<br />Service-Dominant Logic has been abbreviated as S-D Logic<br />Goods-Dominant Logic has been abbreviated as G-D Logic<br />--X--<br />