Service-dominant (S-D) logic, in behavioral economics, is an alternative theoretical framework for explaining value creation, through exchange, among configurations of actors. It is a dominant logic. The underlying idea of S-D logic is that humans apply their competences to benefit others and reciprocally benefit from others' applied competences through service-for-service exchange.
Service-dominant logic has been developed by Stephen Vargo and Robert Lusch. The goal of developing S-D logic is to contribute to the understanding of human value co-creation, by developing an alternative to traditional logics of exchange.
Since Vargo and Lush published the first S-D logic article, "Evolving to a New Dominant Logic for Marketing", in 2004, S-D logic has become a collaborative effort of numerous scholars across disciplines and it has been continually extended and elaborated (most frequently by Vargo and Lusch). Among the most important extensions have been (1) the development of service ecosystems perspective that allows a more holistic, dynamic, and systemic perspective of value creation and (2) the emphasis of institutions and institutional arrangements as coordination mechanisms in such systems.
The core At the core of S-D logic is the idea all exchanges can be viewed in terms of service-for-service exchange, the reciprocal application of resources for others' benefit Vargo, S. L., and Lusch, R. F. (2004). 'Evolving to a New Dominant Logic for Marketing', Journal of Marketing, 68(1), 1–17.. Focus on service (singular) steers attention to the process, patterns, and benefits of exchange, rather than the units of output that are exchanged (e.g., goods). S-D logic argues that in order to create value, that is to maintain and increase wellbeing and viability, actors engage in interdependent and reciprocally beneficial service exchange . Hence, value creation occurs in networks in which resources are exchanged among multiple actors and is therefore more accurately conceptualized as value cocreation Vargo, S. L., and Lusch, R. F. (2008). Service-dominant logic: continuing the evolution. Journal of the Academy of Marketing Science, 36(1), 1–10.Vargo, S. L., Maglio, P. P., and Akaka, M. A. (2008). On value and value co-creation: A service systems and service logic perspective. European Management Journal, 26(3), 145–152. . Recently, S-D logic has moved toward a dynamic, systems orientation in which value cocreation is coordinated through shared institutions (norms, symbols, and other heuristics), often massive-scale resource integration and service exchange processes Vargo, S. L., and Lusch, R. F. (2016). Institutions and axioms: an extension and update of service-dominant logic. Journal of the Academy of Marketing Science, 44(4), 5-23. .
Axioms and foundational premises The core ideas of S-D logic are formulated into foundational premises. Vargo and Lusch put forth the original eight foundational premises of S-D logic in the seminal, 2004 article. Since then, the foundational premises have gone through modifications and additional premises have been added as S-D logic has been extended and elaborated Lusch, R. and S. Vargo (2006). Service Dominant Logic: Reactions, Reflections, and Refinements, Marketing Theory 6 (3), 281–288.. Currently, S-D logic has eleven foundational premises (FPs). Five of these have been identified the axioms of S-D logic , from which the other FPs could be derived.
S-D logic axioms and foundational premises Axiom 1/FP1 Service is the fundamental basis of exchange. FP2 Indirect exchange masks the fundamental basis of exchange. FP3 Goods are a distribution mechanism for service provision. FP4 Operant resources are the fundamental source of strategic benefit. FP5 All economies are service economies. Axiom 2/FP6 Value is cocreated by multiple actors, always including the beneficiary. FP7 Actors cannot deliver value but can participate in the creation and offering of value propositions. FP8 A service-centered view is inherently customer oriented and relational. Axiom 3/FP9 All social and economic actors are resource integrators. Axiom 4/FP10 Value is always uniquely and phenomenologically determined by the beneficiary. Axiom 5/FP11 Value cocreation is coordinated through actor-generated institutions and institutional arrangements.
The first axiom (FP1) Service is the fundamental basis of exchange is based on the previously introduced definition of service as the application of operant resources (primarily knowledge and skill) for the benefit of another actor. S-D logic argues that it is always fundamentally service, rather than goods, per se, that actors exchange as they strive to become better off. This 'service' (singular), a process, should not be confused with 'services', (usually plural), usually intended to denote a unit of (intangible) output, which is associated with goods dominant (G-D) logic. The first axiom is at the heart of S-D logic, and thus foundational to the other FPs. For example, it implies that (1) goods are distribution mechanisms for service provision (FP3) and (2) all economies are service economies (FP5). It also follows that money, when it is involved in exchanges, represents rights to future service. In other words, money can be viewed as a placeholder for future service and can be understood as a form of indirect service exchange that often masks the fundamental basis of exchange (FP2).
The second axiom (FP6), Value is cocreated by multiple actors, always including the beneficiary, contradicts the traditional worldview, in which firms are seen as the sole creator of value. Rather, it suggests that value is something that is always cocreated through the interaction of actors, either directly or indirectly (e.g., through goods). This axiom also enables one to see more clearly that the service-oriented view is inherently relational, because value does not arise prior to exchange transaction, but rather following it, in the use of the exchanged resources, in a particular context and in conjunction with resources provided by other service providers. This value creation is seen as unfolding, over time, with a consequence of continuing social and economic exchange, implicit contracts, and relational norms. The original scope for this axiom was intended to shift the primary locus of value creation from the firm's sphere to the customer's and from the primacy of value-in-exchange, toward the primacy of value-in-use. More recently, S-D logic has begun to use to term value-in-context to capture the notion that value must be understood in the context of the beneficiary's world and the associated resources and other actors . This collaborative nature of value creation is best viewed from a higher level of aggregation than the dyad (e.g., meso- or macro levels) . That is, value co-creation through service-for-service exchange is at the very heart of society. It is also important to distinguish between co-production and the co-creation of value . Co-production refers to the customer's participation in the creation of the value-proposition (the firms offering), such as through co-design, customer-assembly, self-service, etc. Co-production is thus relatively optional and its advisability depends on a host of firm and customer conditions. This is different from co-creation of value, which is intended to capture the essential nature of value creation: it always involves the beneficiary's participation (through use, integration with other resources, etc.,) in some manner.
The third axiom (FP9) All social and economic actors are resource integrators highlights that all actors are, fundamentally, not only providing service but also integrating resources, from various resources Vargo, S. L., and Lusch, R. F. (2011). It's all B2B...and beyond: Toward a systems perspective of the market. Industrial Marketing Management, 40(2), 181–187.Wieland, H., Koskela-Huotari, K., and Vargo, S. L. (2016). Extending actor participation in value creation: an institutional view. Journal of Strategic Marketing, 24(3–4), 210–226.. Thus, the concept of resource-integrator does not just apply to the actor typically referred to as a "producer" (e.g., the firm), but also, to a whole range of other actors, including what is usually referred to as the "consumer" or the "customer". It sets the stage for thinking about the mechanics and the networked nature of value co-creation, as well as the process through which the resources for service provision are created or emerge, the patterns of resource integration and the availability of resources from various market-facing, public, and private sources. It is through the resource integration and its many possible explicit and implicit combinations, facets, and intricacies that value is cocreated.
In the fourth axiom (FP10) of S-D logic, Value is always uniquely and phenomenologically determined by the beneficiary, the term 'beneficiary' reflects the generic nature of actors. In reciprocal service exchange all actors are both providers and beneficiaries. This axiom reinforces that value is experiential. The key message of this axiom is that all value propositions (e.g., goods, service provision, etc.) are perceived and integrated differently by each actor and thus, value is also uniquely experienced and determined. That is, value must be understood in terms of the holistic combination of resources that lead to it, in the context of other (potential) resources . It is thus always unique to a single actor and, it follows, can only be determined by that actor, or at least with the actor as the central referent.
The fifth axiom (FP11) Value cocreation is coordinated through actor-generated institutions and institutional arrangements draws attention to the role of institutions and the process of institutionalization in value cocreation. Here the term institution does not refer to an organization. Instead, institutions are humanly devised rules, norms, and beliefs that enable and constrain action and make social life predictable and meaningful Scott, W. R. (2001). Institutions and organizations. Thousand Oaks: Sage.North, D. C. (1990). Institutions, institutional change, and economic performance. Cambridge: Cambridge University Press.. Institutions and institutional arrangements—higher-order sets of interrelated institutions—enable actors to accomplish an ever-increasing level of service exchange and value cocreation under time and cognitive constraints in service ecosystems . This benefit, however, comes at a potential expense, as institutionalization can also lead to lock-in.
Service ecosystems perspective To fully unlock the complex nature of value cocreation within the society, S-D logic has recently introduced the concept of a service ecosystem Lusch, R. F., and Vargo, S. L. (2014). Service-dominant logic: Premises, perspectives, possibilities. New York: Cambridge University Press.. As actors specialize in providing ever more sophisticated configurations of applied resources for each other, the systemic dependencies and interdependencies among them result as the emergence of complex exchange systems Chandler, J. D., and Vargo, S. L. (2011). Contextualization and value-in-context: How context frames exchange. Marketing Theory, 11(1), 35–49.. S-D logic uses the term 'ecosystems' to identify these systems because it denotes actor–environmental interaction and energy flow. More specifically, the term 'service ecosystem' is used to identify the particular kind of critical flow—mutual service provision . Service ecosystems are defined in S-D logic as "relatively self-contained, self-adjusting systems of resource-integrating actors connected by shared institutional arrangements and mutual value creation through service exchange." .