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II
List of Figures
Figure 1 - Structure of Literature... 14
Figure 2 - Contrasting Goods-Dominant and Service-Dominant Logics ... 34
Figure 3 - Intersections of B2B Markets and the Service-Dominant Logic ... 41
III
List of Tables
Table 1 - Unique Service Features and Implications ... 4
Table 2 - Dissolving the Four Marketing Myths ... 7
Table 3 - Using operand and operant resources to distinguish the goods- and
service-centered views ... 9
Table 4 - The Eight Foundational Premises According to Vargo and Lusch ... 10
Table 5 - Literature Review: Literature prior to Vargo and Lusch ... 16
Table 6 Literature Review: Dialog and Debate on Service-Dominant Logic ... 23
Table 7 - Service-Dominant Logic Foundational Premise Modifications and Additions ... 33
Table 8 - Literature Review: Reactions and Refinements by Vargo and Lusch ... 35
IV
List of Abbreviations
B2B -
Business-to-Business
B2C -
Business-to-Consumer
FP -
Foundational
Premise
G-D logic
-
Goods-Dominant logic
IHIP
-
Intangibility, Heterogeneity, Inseparability, Persihability
S-D logic
-
Service-Dominant logic
1
1 Introduction
1.1 Relevance of the Topic
According to the Oxford Dictionary, a paradigm is "a world view underlying the theories and
methodology of a particular scientific subject"
1
. For virtually all of the 20
th
century, the
paradigm in marketing was founded on early economic thoughts; making goods and exchange
the focal point of economic research and practice. In the 1980s and 1990s, more and more
scholars found that the established paradigm did not fit the current trends and developments
anymore. They called for a paradigm shift, but did not deliver clear directives on how to move
forward. It was not before 2004 when Stephen L. Vargo and Robert F. Lusch published their
award-winning
2
article Evolving to a New Dominant Logic for Marketing in the Journal of
Marketing, dealing with a potentially new paradigm for marketing. The publication has
caused quite a stir, reflected in special sessions at conferences of the American Marketing
Association, the European Academy of Marketing, or the Otago Forum (NZ); as well as
special issues of Marketing Theory (2006), Journal of the Academy of Marketing Science
(2008), and Industrial Marketing Management (2011). The discussion was crowned by a
collection of essays from more than 50 scholars in the book The Service-Dominant Logic of
Marketing: Dialog, Debate, and Directions of 2006, edited by Lusch and Vargo themselves.
Obviously, the significance of the service-dominant logic for current marketing research
cannot be denied.
1.2 Objectives and Delimitations of the Book
This book aims at looking into the reactions and discussions regarding the proposed service-
dominant logic (S-D logic) in more detail. Seven years after the initial publication in the
Journal of Marketing, no comprehensive overview of the existing literature has yet been
made. How did long-established scholars respond to the suggestions and findings of Vargo
and Lusch? Was it rather positive or negative? What needs to be done in the future in order to
actually implement a service-centered thinking? In the following chapters, I will introduce the
basic ideas of S-D logic, followed by a detailed state-of-literature to capture the various
publications that arose from the initial Vargo and Lusch article. The vast majority of
1
http://oxforddictionaries.com
2
HAROLD H. MAYNARD AWARD (American Marketing Association) for Outstanding Contribution to
Marketing Theory and Thought
2
marketing research (one could name it "mainstream" marketing research) is concerned with
consumer, or B2C, marketing. But what about business-to-business relationships? It is
interesting to figure out whether the concepts of a service-dominant logic display similarities
with concepts of B2B marketing and whether they could successfully be adopted in B2B
markets. This is what I am going to examine in the last part of this book.
1.3 Structure of the Book
Before turning to the literature review in chapter 3, I will begin with introducing the basic
concepts behind Vargo and Lusch's S-D logic in order to give the reader a better
understanding of the subject-matter (ch. 2.3). Besides that, a good starting point to reflect
about possible consequences and obstacles regarding a service-centered paradigm for
marketing are the unique characteristics of services. In the first part of chapter 2, I will
illustrate academia's common position on services' particularities and how recent publications
challenge this prevailing understanding. In chapter 3, I am going to provide the state-of-
literature. The service-dominant logic is for many parts based upon findings from several
marketing subdisciplines that arose over the last century. Therefore, I decided to focus chapter
3.1 on the foundational literature that is essential to grasp the insights of Vargo and Lusch.
After that, I will give an overview about other scholars' reactions in consequence of the 2004
publication; consisting of critique and possible managerial implications in chapter 3.2. Since
the S-D logic is intrinsically tied to Vargo and Lusch, I do not want to terminate without
examining their reactions to this critique and further developments of their conception, which
I will do in chapter 3.3. Finally, I am going to point out similarities of service-dominant logic
with concepts of business-to-business marketing. I will first outline some general features of
B2B markets, and then highlight some areas where analogies can be observed.
3
2 The Service-Dominant Logic of Marketing
Before turning to the main part of the book, the state of literature and possible similarities
with business-to-business marketing, I would like to introduce the fundamental thoughts
which Vargo and Lusch developed in their publications introducing the service-dominant
logic. I will begin with demonstrating and explaining the four characteristics that differentiate
between goods and services according to the common understanding of marketing scholars
intangibility, heterogeneity, inseparability, and perishability. In a former, goods-centered
marketing view, scholars were convinced that these characteristics pose special challenges to
the marketing of services and require different normative strategies. Vargo and Lusch, as well
as other scholars, analyzed this predominant belief and came to the conclusion that 1) these
four characteristics are not an appropriate distinction and 2) they do not lead to the adequate
strategies. Therefore, I will illustrate their position regarding this issue and the resulting
implications. After that, I am going to elaborate the ideas behind the service-dominant logic
as introduced in Vargo and Lusch's Evolving to a New Dominant Logic for Marketing
(2004a).
2.1 Special Characteristics of Services (IHIP)
Most authors of the augmenting literature on services marketing agree upon one matter: there
are characteristics inherent in services which make their marketing unique. Although some
scholars may only mention two or three, the prevailing opinion names intangibility,
heterogeneity, inseparability of production and consumption, and perishability (IHIP) as
attributes which distinguish services from tangible goods. Table 1 shows a summary of the
unique characteristics of services and their implications for marketing.
Intangibility is universally cited as the fundamental difference. Because of their performance
nature, services cannot be seen, felt, tasted, or touched like goods (Zeithaml, Parasuraman,
and Berry 1985). The resulting challenges for marketers can be described as follows: since
intangible services cannot be inventoried, it is difficult to manage fluctuations in demand.
Furthermore, most services cannot be patented and are consequently easy to copy for
competitors. Finally, it is hardly possible to determine the costs of production for one "unit"
of service. Therefore, the pricing of services poses a challenge for service enterprises
(Zeithaml, Bitner, and Gremler 2009).
4
Table 1 - Unique Service Features and Implications (following Zeithaml, Bitner, and Gremler
2009)
Intangibility Heterogeneity Inseparability Perishability
Implications
x Cannot
be
inventoried
x No
protection
through patents
x Difficult
pricing
x High
variability
of performance
x Problem
with
consistency of
behavior
x Customers
affect the
transaction
x Employees
affect the
outcome
x Mass
production is
difficult
x Cannot
be
saved
x Difficult to syn-
chronize
supply and
demand
x Cannot
be
returned or
resold
References
George (1977)
Judd (1968)
Sasser (1976)
Berry (1983/2002)
Rathmell (1966)
Upah (1980)
George (1977)
Grönroos (1978)
Shostack (1977)
Berry (1983/2002)
Regan (1963)
Thomas (1978)
Heterogeneity means that there is high variability in the performance of services (Zeithaml,
Parasuraman, and Berry 1985). The perceived quality of a service delivery can vary from
customer to customer and from day to day. The main problem is the consistency of service
performance. Since there are a lot of factors that cannot be controlled by the service provider
(e.g. the mood of the customer or the behavior of the employee), it is difficult to maintain a
constant level of quality over time. Besides this, every customer has their own special needs
and expectations, which makes a standardization of services quite difficult (e.g. Rathmell
1966; Upah 1980).
A third important point to consider is the inseparability of production and consumption that
characterizes most service deliveries. Regan (1963) noticed that whereas goods are produced,
sold, and then consumed, services are sold and then produced and consumed simultaneously.
Customers are present during the service production and will interact with both employees
and other customers. Hence it is likely that the service outcome is affected by the employee's
behavior and also by other customers who are present during the service delivery process
(imagine for example bad-tempered persons in a waiting queue or unquiet passengers during a
flight; both will likely influence the service experience of other customers). The concept of
inseparability also implies that direct distribution is the only possible sales channel for
services since producer and seller are the same entity (Upah 1980).
Finally, perishability means that services cannot be saved, stored, or returned (Thomas 1978;
Zeithaml, Bitner, and Gremler 2009). Take for example an empty seat in public
transportation, non-used capacity of a telephone line, or a hotel room not occupied. All of
these examples have in common that they cannot be reclaimed or resold at a later time. The
5
challenge for service companies is to synchronize supply and demand. Too much of excess
capacity is inefficient, but at the same time, too little supply will dissatisfy customers.
2.2 How Current Research Challenges the Validity of an IHIP Paradigm
While the IHIP characteristics of services have been an acknowledged belief in marketing
research for a long period of time - especially at the beginning of the new emerging
subdiscipline of services marketing - new thoughts and evolvements have lead to new
publications which challenge the general validity of the four IHIP characteristics. While a
subliminal skepticism on the part of several marketing scholars could be observed
sporadically (Grönroos 2000; Gummesson 2002b; Lovelock 1983), it was not before 2004
that two publications fiercely attacked the validity of the IHIP characteristics: Lovelock and
Gummesson with their article Whither Services Marketing? (2004), and also the founders of
the service-dominant logic in their publication The Four Service Marketing Myths (Vargo and
Lusch 2004b).
Lovelock and Gummesson (2004) doubt that intangibility, heterogeneity, inseparability, and
perishability are able to make services uniquely different from goods. Intangibility refers
mainly to the fact that services cannot be sensed or touched before their purchase, and thus a
high prepurchase uncertainty for the customer is involved. This point is relativized when
thinking about the lot of tangible products (e.g. foodstuffs or cosmetics) where the same holds
true because of their packaging. Furthermore, many services include tangible elements as
well, most of which can be evaluated before purchase, for example a hotel room, where the
room's facilities are the core of the service (Lovelock and Gummesson 2004). They conclude
that it may indeed be true that many services are difficult to evaluate prior to the first use, but
the same is also true for many goods. Therefore, the concept of intangibility may sometimes
be useful, but "it is not a universally applicable characteristic of all services during all stages
from prepurchase through delivery, consumption, and output" (p. 27).
Heterogeneity, or variability, as Lovelock and Gummesson (2004) would like to name it, is
primarily caused by the interaction of human beings (employees and customers) during the
service delivery process. However, external factors like the surroundings or even the weather
can affect the perceived service outcome as well. The authors state that it cannot be denied
that variability is an inherent characteristic of services, but the trend towards automation (self-
service machines, online forms, etc.) will lead to a much lower level of variability. They
oppose heterogeneity as a general distinction between goods and services.
6
For service consumption being inseparably connected with production, the customer must be
directly involved. Lovelock and Gummesson (2004) argue that this condition is not fulfilled
for the large group of separable services, like for example cargo transportation, laundry
services, or house cleaning. These services are bought in order to avoid doing them by
oneself, which means that the customer explicitly does not want to be involved. According to
the authors, just dropping off an item or giving instructions how to clean a building is not an
involvement in the core service delivery process. Hence, a general differentiation between
services and goods according to inseparability is not appropriate, since there are too many
separable services.
Perishability is a too simple notation regarding its multidimensionality. Lovelock and
Gummesson (2004) observe that perishability involves "productive capacity, the producer's
output, the performance experienced by customers, and the output they obtain from the
service" (p. 30). It holds true for manufacturers that they can use inventory of produced goods
as a buffer for fluctuations in demand, which is not possible in service industries. But
productive capacity is persishable for both manufacturers and service providers. Furthermore,
some service output can be classified as durable from a customer's point of view. Especially
in information-based services, the performances can be recorded and then reused and resold
later on.
It was not only Lovelock and Gummesson who criticized the predominant IHIP
characteristics. The initiators of the service-dominant logic, Vargo and Lusch, described in
their article The Four Service Marketing Myths (2004b) why IHIP is based on the wrong
assumptions and leads to the wrong implications. According to them, the basic mistake is the
definition by exclusion. When developing the four distinguishing characteristics of services,
scholars assumed commonly accepted characteristics of goods and then defined services
according to the absence of these features. Intangibility means services lack the tangible
quality of goods; heterogeneity emerged because it is hardly possible to standardize services
like goods are standardized; inseparability becomes an issue when the simultaneous service
production and consumption is compared to the sequential production, purchase, and
consumption of goods; and services are viewed as perishable because they are difficult to
inventory compared to goods. Vargo and Lusch remark further that in virtually all the
literature concerning IHIP, the characteristics are seen as drawbacks of services that need to
be overcome by marketers. Table 2 shows why they consider the distinguishing features of
services a "myth" and what the correct implications would be.
7
Table 2 - Dissolving the Four Marketing Myths (following Vargo and Lusch 2004b, p. 327)
Dimension
Dissolving the Myth
Inverted Implication
Intangibility
Services often have tangible results
Tangible goods are often purchased for
intangible benefits
Tangibility should be reduced or
eliminated if possible
Heterogeneity
Tangible goods are often heterogeneous
Many services are relatively
standardized
The marketing goal should be
customization rather than
standardization
Inseparability
The consumer is always involved in the
"production" of the value
The marketing goal should be to
maximize consumer involvement in
value creation
Perishability
Tangible goods are perishable
Many services result in long-lasting
benefits
Inventory represents an additional cost
The goal of the enterprise should be to
reduce inventory and maximize service
flows
The bottom line of these findings can be summarized as follows: the differentiation between
goods and services has been useful for services marketing to evolve as a subdiscipline of
classic marketing. Many reasonable insights have been developed, be it relationship
marketing, importance of service quality, or the concept of value in use. Vargo and Lusch
argue that it is time to bring these different mindsets together in order to rethink marketing as
a whole. They believe that their service-dominant logic "has the potential to finally break all
of marketing free from manufacturing" (2004b, p. 334).
2.3 The New Dominant Logic According to Vargo and Lusch
When having a look at how economies are traditionally described, one will mostly find
characteristics like exchange economy, a focus on tangible resources, value-in-exchange, and
transactions. Adam Smith with his work The Wealth of Nations (1776/1904) is supposed to be
the founder of modern economic thought. According to his standpoint, division of labor, as
well as exchange and export of manufactured goods, was the main characteristic of a
prospering economy. For Smith, services were not productive in terms of contributing to the
national surplus.
Over the last decades, scholars observe a development in another direction. They emphasize
intangible resources, co-creation of value, and relationships rather than simple transactions. In
their award-winning article in the Journal of Marketing Evolving to a New Dominant Logic
for Marketing (2004a), Vargo and Lusch came to the conclusion that recent trends will lead to
a new dominant logic, in which service, and not the exchange of tangible goods, is the core of
economic exchange.
8
In the 1980s, services marketing as a subdiscipline of marketing began to emerge. It was in
1977 when Shostack wanted services marketing to break free from product marketing. In her
opinion, the dominant thinking at that time was not appropriate to cover the particularities of
services. By the end of the 20
th
century, more and more scholars were convinced that a new
paradigm was needed (Achrol and Kotler 1999; Day and Montgomery 1999; Sheth and
Parvatiyar 1995). Several of them shared the standpoint that the explicit division between
goods and services is outdated and that this realization should be recognized in further
marketing research (Rust 1998). The renowned services marketing scholar Gummesson stated
the following already in 1995 (pp. 250-51, cited by Vargo and Lusch 2004a):
"Customers do not buy goods or services: [T]hey buy offerings which render services
which create value [...]. The traditional division between goods and services is long
outdated. It is not a matter of redefining services and seeing them from a customer
perspective; activities render services, things render services. The shift in focus to
services is a shift from the means and the producer perspective to the utilization and
the customer perspective"
Referring to these new findings, Vargo and Lusch conclude that the goods-dominant view
with its focus on tangible output and discrete transactions makes way for a new, service-
dominant view where intangibility, exchange processes and relationships are the focal points.
It is essential to be aware of how Vargo and Lusch define services. They refuse to see it as a
residual ("what goods are not", as it has been defined for a long time, e.g. Judd 1964) or as a
value added service to enhance a good. Rather, they define it as "application of specialized
competences (knowledge and skills) through deeds, processes, and performances for the
benefit of another entity or the entity itself" (p. 2).
What is also crucial to the understanding of Vargo and Lusch's theory is the significance of
resources. For centuries, resources have been seen as static and tangible, but in the 20
th
century, scholars supported the position that resources can also be intangible and dynamic.
Constantin and Lusch (1994; adopted from Vargo and Lusch 2004a) made an important
distinction that is essential for the conception of S-D logic: they defined operand resources,
on which an operation or act is performed to produce an effect (e.g. land, minerals, and other
natural resources in early stages of civilization); and operant resources which are employed
to act on operand (and other operant) resources. In the goods-dominant logic, operand
resources were essential. The focal points were production factors such as machines and land,
9
whereas technology and knowledge was only seen as an instrument to convert operand
resources into outputs. It was not before the second half of the 20
th
century that people
became aware of the fact that skills and knowledge were at least as important as tangible
resources. Penrose (1959) realized that "it is never resources themselves that are the `inputs'
in the production process, but only the services that the resources can render" (p. 22, emphasis
in original). The emerging point of view was that operant resources, although often invisible,
are the key to today's production processes. Only operant resources make it possible to
process operand resources and to derive advantage from them. This complies with the service-
centered logic, where operant resources are seen as primary because only they are able to
produce effects (Vargo and Lusch 2004a).
Vargo and Lusch used the distinguishing role of resources to describe in which ways the
goods-centered and the service-centered views differ from each other in more detail. Table 3
gives an overview of the resources' influence in several parts of an enterprise.
Table 3 - Using operand and operant resources to distinguish the goods- and service-centered
views (Vargo and Lusch 2004a, p. 7)
Goods-Centered
Dominant Logic
Service-Centered
Dominant Logic
Primary unit of exchange
Goods. These goods serve
primarily as operand resources
People exchange to acquire the
benefits of specialized
competences (knowledge and
skills), or services. Knowledge
and skills are operant resources
Role of goods
Goods are operand resources
and end products. Marketers
take matter and change its
form, place, time, and
possession
Goods are transmitters of
operant resources (embedded
knowledge); they are
intermediate "products" that are
used by other operant
resources (customers) as
appliances in value-creation
processes
Role of customer
The customer is the recipient of
goods. Marketers do things to
customers; they segment them,
penetrate them, distribute to
them, and promote to them.
The customer is an operand
resource
The customer is a coproducer
of service. Marketing is a
process of doing things in
interaction with the customer.
The customer is primarily an
operant resource, only
functioning occasionally as an
operand resource
Determination and meaning
of value
Value is determined by the
producer. It is embedded in the
operand resource (goods) and
is defined in terms of "exchange
value"
Value is perceived and
determined by the customer on
the basis of "value in use".
Value results from the beneficial
application of operant resources
sometimes transmitted through
operand resources. Firms can
only make value propositions
10
Firm-customer interaction
The customer is an operand
resource. Customers are acted
on to create transactions with
resources
The customer is primarily an
operant resource. Customers
are active participants in
relational exchanges and
coproduction
Source of economic growth
Wealth is obtained from surplus
tangible resources and goods.
Wealth consists of owning,
controlling, and producing
operand resources
Wealth is obtained through the
application and exchange of
specialized knowledge and
skills. It represents the right to
the future use of operant
resources
The most important findings from this table regarding the service-dominant logic can be
summarized as follows: value is not embedded by the firm, but co-created with the customers
(value-in-use). A good alone has no value unless it is used and derives benefits for the
customer. Consequently, a firm can only make value propositions which the customer has to
accept and fill with utility by using it appropriately. This also implies that the customer is no
static, operand resource which the firm acts on, but rather a worthwhile, active operant
resource, namely an active participant in the value creation process.
Besides this differentiation focusing on the role of resources, Vargo and Lusch have also
introduced eight foundational premises that describe the basic groundwork on which their
service-dominant logic is built. These foundational premises (FPs) are summarized in table 4.
Table 4 - The Eight Foundational Premises According to Vargo and Lusch (2004a)
FP1
The Application of Specialized Skills and Knowledge is the Fundamental Unit of
Exchange
FP2
Indirect Exchange Masks the Fundamental Unit of Exchange
FP3
Goods are Distribution Mechanisms for Service Provision
FP4
Knowledge is the Fundamental Source of Competitive Advantage
FP5
All Economies are Service Economies
FP6
The Customer is Always a Coproducer
FP7
The Enterprise can only make Value Propositions
FP8
A Service-Centered View is Customer Oriented and Relational
While some of these premises have already been mentioned in the discussion regarding the
role of resources (FPs 1, 3, 4, 6, and 7), I want to shortly comment on the remaining premises
2, 5, and 8 since the ideas of Vargo and Lusch's foundational premises will be part of this
analysis later on.
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