Goods-Dominant Logic versus Service-Dominant Logic
Service Design is relatively new and still emerging as a formal discipline. However, this does not mean that all the principles and methods that it is comprised of are also new, rather they are the combination of theory and tools from other disciplines — connected in a new way that enables them to be used for a different purpose. One of such principles, core to Service Design, is Service-Dominant Logic which was created for the field of Marketing by Stephen L. Vargo and Robert F. Lusch in their paper “Evolving to a New Dominant Logic for Marketing”. Service-Dominant Logic has since been expanded on extensively via a rich catalog of publications, but in 2004 this paper laid its foundation.
Traditionally, in both economics and marketing, and consequently most of the traditional business world, the dominant logic was based on the exchange of goods usually as a manufactured output (Goods-Dominant Logic). Vargo and Lusch call for a new dominant logic in which “service provision, rather than goods is fundamental to economic exchange”. This new, Service-Dominant Logic focuses on intangible resources like knowledge, the co-creation of value, and relationships instead of tangible resources, the idea of embedded value, and transactions.
It is important, for going forward in this comparison, to properly define “services”. There is a common misconception that service only refers to “service industries” like government, healthcare, and education, or that treats services simply as residual economic activities that are not tangible goods. This view is limited as services include all instances of “the application of specialized competencies (knowledge and skills) through deeds, processes, and performances for the benefit of another entity or the entity itself” (Vargo and Lusch). Therefore, services are the core of all businesses, even those that involve tangible output. For example, the tangible output of a good is enabled by the service process of designing, engineering, manufacturing, and distributing that good (even in that simplistic abstraction of the ecosystem of services around creating a good).
To understand the significance of Service-Dominant Logic, we need to make explicit business’ current dominant logic, Goods-Dominant Logic, that focuses on operand resources (passive resources that are acted on to produce an effect), primarily goods, as the fundamental unit of exchange. Goods-Dominant Logic views the purpose of economic activity as, to make and distribute things that can be sold. These goods are posited to be embedded with utility and value and should therefore be produced in a standardized fashion away from the market for efficiency and control to maximize profit from their sale. Consequently, from a Goods-Dominant Logic perspective, customers are also seen as operand resources that are to be “segmented” into markets for businesses to “penetrate” and “promote-to”, with the hope of increasing the sales of their goods. While countless businesses have been successful using this mental model, it limits their potential by making them static.
Service-Dominant Logic focuses on operant resources (resources that produce effects), like the application of specialized skills and knowledge (service) as the fundamental until of exchange. This is because operand resources, like goods, are dependent on often intangible operant resources — like skills, knowledge, competence, technology, and mission all coming together via process — for value. Additionally, instead of the value being seen as embedded in a good, value is determined by the experience of customers. Consequently, customers are primarily operant resources as they co-create a business offering’s value. Therefore, Service-Dominant Logic is intrinsically customer-centric and encourages relationships to be built with customers to test, refine, and customize a business’s value propositions. This dynamic exchange is crucial because, from our updated worldview, businesses obtain wealth through their specialized competencies which enable a unique value proposition that gives them an advantage over their competitors.
Goods-Dominant Logic has been with us since the Industrial Revolution, over which countless powerful models and tools have been created, and a goods-centered logic is still a useful perspective. Although, the dominant logic should be service-centric because it is a more holistic worldview that enables more accurate participation in the complex adaptive system that we call the economy.
