Marketing as Service-Exchange:

Taking a Leadership Rolein Global Marketing

ManagementROBERT F. LUSCH STEPHEN L. VARGO ALAN J. MALTER

Organizational Dynamics, Vol. 35, No. 3, pp. 264–278, 2006 ISSN 0090-2616/$ – see frontmatter� 2006 Elsevier Inc. All rights reserved. doi:10.1016/j.orgdyn.2006.05.008www.organizational-dynamics.com

INTRODUCTION

Companies with a superior understanding ofthe customer usage experience create offer-ings that promise greater value-in-use thansimilar competing offerings, which enablesthe most innovative companies in the worldto outperform rivals. The Boston ConsultingGroup and BusinessWeek recently surveyed1,070 senior managers in 63 countries in Asia,Europe and North America, and found thatthe underlying technology of many innova-tive products is not necessarily different ormore advanced than previous models orcompeting offerings; instead, one of the pri-mary keys to building a winner is a firm’sability to embed significantly greater servicepotential in a relatively simple device orservice. For example, the Apple iPod is notvalued by customers because it’s a mobileMP3 player (there are many similar and eventechnically superior devices) or because itcarries the Apple brand (most iPod usersdo not own a MacIntosh computer). Itssuperior value to users stems from its uniquefeel and shape, ease of use, and simplicity ofits software, coupled with a new businessmodel that provides consumers affordableaccess to plentiful content while also givingmusic companies access to a mass marketand mechanism for collecting payment forcopyrighted material. The basic technology

of playing MP3 music files is unremarkable;it’s the constellation of additional servicepotential embedded in Apple’s version ofthe product that makes the iPod MP3 playerso dominant (over 70 percent market share).

Similarly, 3M Company excels at embed-ding ever-greater value-in-use in new ver-sions of its Post-It adhesive products, andNokia engineers excel at customizing thebasic mobile phone interface (screen, menus,contact list) for use by masses of less literateand low-income consumers in India, China,and other developing countries. Other lead-ing innovators such as Google Inc. embracethe concept of ‘‘open innovation.’’ Forinstance, Google extends its already substan-tial in-house research and development(R&D) capability by inviting customers toco-produce imaginative applications fornew technologies and services, such as itsglobal mapping software.

What allows these leading innovators tosurge ahead while other firms engage inendless cutthroat competition and shrinkingprofit margins? We argue that the world’smost innovative companies share a differentmindset, or mental model, of how marketswork compared with the traditional view ofexchange and value in marketing and eco-nomics. Until now, marketing theory andpractice have developed a logic that is heav-ily based upon what is tangible. This logic

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has led to a Newtonian model of marketing—one in which goods are embedded withvalue, produced away from the market orconsumer, and sold through the manipula-tion of marketing-mix decisions that willmaximize firm profit. Under this logic, themarket and the customer are things to actupon: to segment, to target, to penetrate, tomanipulate, and to control. Arguably, thislogic and model worked reasonably well inrelatively small and closed national marketsassociated with the creation of economicvalue through the extraction and combina-tion of static, depletable, natural resources—that is, during the Industrial Revolution. Wit-ness for example the success of GeneralMotors Corp. and Ford Motor Co. duringthe early to mid-20th century using thismodel. However, the world and its marketshave changed, and the logic and model areno longer adequate, if they ever were.

J. Paul Getty said, ‘‘The meek may inheritthe earth, but not the mineral rights.’’ Todaytangible or mineral rights are not the key tolong-term success. Rather, what is increas-ingly apparent is that the application ofintangible resources, like information,knowledge, and ideas – derived from humanresources – is what is being exchanged, bothlocally and globally, and provides the foun-tainhead of cash flow. General Motors Corp.may think it is failing in comparison withToyota Motor Corp. because of productdesign or other product-centric factors. Thetruth is that Toyota is managing its intangibleresources, with human resources on centerstage, more effectively. In a service-dominantlogic of marketing, it is the service that thesehuman resources can offer that becomes thecentral focus. Importantly, a service-domi-nant logic is helpful not only to large globalfirms such as Wal-Mart Stores (U.S.), BritishPetroleum (U.K.), ING Group (Netherlands),Siemans AG (Germany), Hitachi Ltd. (Japan),Nestle S.A. (Switzerland), Samsung Electro-nics Co. (Korea), Peugeot Groupe (France)and others but also to smaller firms playingin increasingly and unavoidably global mar-kets, as well as nations providing the globalstages.

MARKETING’S TANGIBLITYFIXATION

There are a number of reasons why market-ing developed a passion for tangibility.Among them are (1) that marketing thoughtdeveloped from economic thought, whichitself developed from Adam Smith’s fixationon national wealth creation through theexport of surplus tangible goods, (2) thatthe model of science was the Newtonianmechanical model of tangible things beingembedded with properties, and (3) that mar-keting practice developed around a businessfunction focused on the distribution of thetangible products of industry and agricul-ture. Perhaps also, human senses are moreattuned to tangibility and so abstract con-cepts are more easily understood in relationto tangible reference points. For example,when Marconi captured the intangible powerof electromagnetic radio waves, the newtechnology was referred to as ‘‘wire’’-less(without the tangible wire), and in the1970s, Daniel Bell coined the term ‘‘post-industrial’’ society to represent moving froma focus on the manufacture of tangible goodto intangible services. More recently, ThomasFreidman used a tangible ‘‘world is flat’’metaphor in updating Kenichi Ohmae’snotion of open competition and access toinformation.

However, while it may be surprising ifnot disquieting to many, international tradeis not fundamentally about what is tangibleand perceivable. The economic world is notabout the production and exchange of stuff,creating supply chains for stuff, promotingfor purposes of selling stuff, and setting theprice for stuff that will maximize profit forthe firm and, in the aggregate, determine theeconomic balance of trade for nations.Rather, it is all about service. That is, alleconomic entities are service providers toone another. As we will illustrate, this phe-nomenon occurs within firms, across firms,and across nations.

Service, as we use the term, is the use ofhuman resources for the benefit of anotherparty. We argue that this universal role of

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service in the economy provides a frame ofreference that can help guide a managementand marketing philosophy that is more effec-tive and better contributes to global trade andsustainability than the frame of referencebased on tangible goods, regardless of thetype of industry, organization, or global loca-tion. We call this revised philosophy service-dominant logic (S-D logic).

There is a time and season for all ideas. Inthe mid-19th century, French economist Fre-derick Bastiat espoused a service dominantlogic when he argued that the root of alleconomic activity is the exchange of services.Fundamentally, this exchange of service forservice means that (1) all humans (andhuman organizations) have to exchange istheir ability to serve other human entities,and (2) even when goods are involved, theyare just mechanisms for service provision.Thus, a global organization such as Wal-MartStores uses its human resources to servepopulations through sourcing and distribut-ing service-rendering goods. Wal-Mart’scomparative advantage comes from beingable to provide this goods-sourcing-distribu-tion service more efficiently than the compe-tition. When they do this they create cashflows that provide Wal-Mart the right to theservices of others, while still having cash leftto distribute to shareholders and to fundgrowth. However, the fundamental truth stillholds, service is exchanged for service.

Historically, national wealth was under-stood to be contingent on the manufactureand export of tangible goods. Today much ofthis focus on the tangible continues, eventhough much of what is exported is intangi-ble. For instance, China’s achievements arehighlighted and rewarded by indicators suchas a rapidly growing merchandise trade sur-plus and surging consumption of energy andsteel that measure economic performance inlargely tangible terms. India appears to lagbehind China in terms of merchandise trade,because India’s strength in providing profes-sional services is not as easily captured insuch traditional measures. The tangibilitybias built into many standard economic indi-cators masks India’s greater long-term poten-

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tial. In fact, developing countries that skipthe ‘‘stage’’ of heavy industrialization andjump straight to high-value service exportsmay appear to be regressing economically—when the opposite is true. For example, if aCosta Rican plantation ceases productionand export of bananas to become an eco-tourism resort, Costa Rica’s merchandisetrade balance will appear to be adverselyaffected, even though foreign exchange earn-ings, monetary flows into the economy andper capita incomes may increase. The biasagainst ‘‘service’’ accounting in nationalaccounts similarly understates growth inthe U.S. and other developed economies.

WHAT IS SERVICE-DOMINANTLOGIC?

Service-dominant logic rejects the traditionaldistinction between goods and service (i.e.,alternative forms of products) but rather con-siders the relationship between them. Asnoted, goods are viewed as appliances, orvehicles, terms typically associated withdevices to help perform chores or transportthings from place to place. They serve asalternatives to direct service provision.

Hundreds of years ago, only royalty andthe very wealthy had access to music throughthe musicians they funded and for whomthey often provided instruments. Then alongcame Alexander Bell’s phonograph, Marco-ni’s radio, and so on to today’s portablemusic players such as the Apple iPod.Now, instead of the musicians playingdirectly for the privileged few, they playindirectly to the millions if not billions bycombining their mental and physical skills toplay a musical instrument, digitizing the out-put, and distributing it via the electromag-netic spectrum on a 24/7 basis. In brief,music is now on-demand for virtually everyeconomic class in society. Undoubtedly,goods are a special case, or a special meansof, the more general service provision. WhenApple sells an iPod, IBM a computer, Sony avideo game machine overseas, the criticalexport is not the tangible materials, the good,

but the service potential of a whole host ofintegrated resources (knowledge) embodiedin the materials of these physical platforms.

Service-dominant logic shifts the pri-mary focus from what we call operandresources—tangible, static resources thatrequire other, more dynamic resources toact on them to be useful – to operant resources– dynamic resources that can act on otherresources, both operand and operant, to cre-ate value through service provision. Impor-tantly, static operand resources are usuallyfinite and depletable, while dynamic operantresources are not only non-depletable inmost cases—but also replenishable, replic-able, and capable of creating additional,new operant resources. This shift has impor-tant implications for issues of social well-being and resource sustainability in a trueglobal economy.

IMPROVING MARKETING’SROLE IN GLOBALMANAGEMENT

Goods-dominant logic, with its central focuson the tangible good and the accompanyingtendency to view the customer (andemployee) as someone to do something toin order to maximize firm performance, doesnot appear to be working well presently, if itever did. There is ample evidence that theaggregate marketing system is not servingsociety as well as it could, partly by failing tofully contribute to individual, firm, nationaland global well-being. Some of this failure isreflected in the common perception of mar-keting as intrusive and misleading, alienat-ing customers and society. Additionally,marketing is losing influence in the firmbecause it is increasingly unable to deliverthe revenues and profits that chief executiveofficers (CEOs) and investors demand. Mar-keting is occasionally even portrayed as atool of a new form of ‘‘colonization,’’ usedin the exploitation of developing countries.

A service-dominant logic of marketing,in contrast, has the potential to (1) improvemarketing productivity at the firm level, (2)

decrease consumer alienation in society, and(3) foster an aggregate marketing system thatis more pro-society by enhancing global sus-tainability and increasing the standard ofliving and quality of life. This is a tall order.But we believe that service-dominant logicoffers a richness that unleashes the potentialconstructive role of marketing in society.

Over the last several decades attemptshave been made to modify the old dominantlogic with concepts such as market orienta-tion, customer orientation, CRM, service qual-ity, and so on—but these have been ways toadjust, reframe, or enhance the old logic ratherthan replace it. The underlying focus ofexchange remained the tangible good. Ser-vice-dominant logic, by contrast, representsa change in the fundamental, framework usedfor understanding exchange and marketing.

Service-dominant logic is more of a phi-losophy and perspective than a theory. It is alens for viewing market exchange processesmore clearly. It provides a mental model ofexchange with different implications forpractitioners and public policy makers thanthe prevailing dominant logic in much thesame way as an understanding of justice canrefocus the notion of democracy, an under-standing of love can refocus the notion of sex,and an understanding of strategy can refocusthe practice of management.

How Service-Dominant LogicCan Help?

Just as modern industry did not eliminatethe need for agriculture or its importance and‘‘post-industrial’’ society (sometimesreferred to as a ‘‘service economy’’ or ‘‘infor-mation age’’) has not eliminated industrialproduction, service-dominant logic is notintended to eliminate the need for most tra-ditional marketing concepts and practices.Instead, service-dominant logic takes therather static concepts of the old logic andreconceptualizes marketing as a continuousseries of competitive social and economicprocesses focused on exchange opportunitiesinvolving value propositions that offer tocontribute to some combination of indivi-

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dual, firm, and/or national well-being. In aglobal management context, the service-dominant logic prescription can be summar-ized as first and foremost identifying ordeveloping core competences, the funda-mental knowledge and skills of an economicentity that represent potential global compe-titive advantage. The firm should then usethese core competences to cultivate relation-ships with potential customers. Collabora-tively working with these customers andthe firm’s other partners in its supply andvalue network, the firm should strive to co-create value with customers. And finally thefirm should gauge marketplace feedback byanalyzing financial performance to helpassess its value proposition fulfillment.

This approach is driven by an innate pur-pose of doing something for and with anotherparty, and is thus customer-centric and cus-tomer-responsive. It leverages the strengthsof the firm and nation to satisfy customerneeds and achieve organizational and socie-tal objectives. The unique matching of firmcapabilities with customer needs, guided byan on-going conversation between them,generates long-term customer loyalty andcompetitive advantage.

The shift from a goods-centered view to aservice-centered view can be captured in

EXHIBIT 1 CONTRASTING THE GOOD

eight commensurate shifts in thinking. Theseare discussed in the following sections andsummarized in Table 1: (1) a shift to a focuson the process of serving rather than thecreation of goods, (2) a shift to the primacyof intangibles rather than tangibles, (3) a shiftto a focus on the creation and use of dynamicoperant resources as opposed to the con-sumption and depletion of static operandresources, (4) a recognition of the strategicadvantage of symmetric rather than asym-metric information, (5) a shift to conversationand dialog as opposed to propaganda, (6) anunderstanding that the firm can only makeand follow through on value propositionsrather than create or add value, (7) a shiftin focus to relational rather than transac-tional exchange, and (8) a shift to an empha-sis on financial performance for informationfeedback rather than a goal of profit max-imization. Collectively, these eight shifts canprovide a frame of reference for developing aunifying global perspective for marketersacross the organization and in all parts ofthe world. Furthermore, it provides them amental model and tools to continuouslyadapt to a rapidly changing and complexglobal environment. Stated alternatively,we view service-dominant logic as a survivalkit for global marketing managers (Exhibit 1).

S AND SERVICE-DOMINANT LOGICS

Goods to Service

When a firm sees itself primarily as amanufacturer with an implied purpose ofselling what it makes, it sees the key tomaking more money as selling more andmore goods. There is little or no logic inselling fewer goods: Why should Volkswa-gen want to sell fewer cars, Royal Dutch/Shell to sell less oil, or Dow to sell fewerchemicals? In contrast, the service-dominantlogic suggests that since these goods areactually mechanisms for service provision,the customer is always buying a service flowrather than a tangible thing, and thus the firmshould perhaps reconsider the nature of itsoffering. Stated alternatively, service-domi-nant logic offers an opportunity for the orga-nization to focus on selling a flow of service.This would encourage it to determine theoptimal configuration of goods, if any, fora level of service, the optimal organization ornetwork configuration to maintain the ser-vice, and the optimal payment mechanism inexchange for providing the service. That is,the organization is encouraged to think aboutthe service system. For example, if a heatingand air conditioning equipment manufac-turer views itself in the temperature controlbusiness, then it could decide to sell climatecontrol for a building rather than justmechanical devices. It could charge per cubicfoot of climate maintained on a monthly orannual basis and/or through a payment planinvolving gain sharing, in which costs arereduced as system performance rises, thusbenefiting financially both the firm and thecustomer. A seller entering into such anarrangement has an incentive to look ateverything about the building that will influ-ence heating and cooling costs. Predictablythat would include the heating and air con-ditioning equipment, but also windows,insulation, temperature control devices, etc.There is also an implied incentive to sell andmake less (or no) equipment and to use fewernatural resources.

By focusing on the service flows, the cus-tomer is also receiving the benefit rather thanthe device, which relieves the customer from

what are typically undesirable maintenance,disposal, and replacement chores. Further,many firms and households purchase moreequipment (appliances) than they needbecause the marketplace often provides noother reasonable option. The result is that alot of natural resources sit idle in the form ofunused or underutilized tangible goods. Zip-car is pursuing this strategy by maintainingand insuring vehicles it parks throughoutdense urban areas where members canreserve a car for an hour or more. Zipcar isconverting cars to a utility such as electricity,heat and water while at the same time mini-mizing underutilized vehicles.

Service-dominant logic encourages firmsand their customers to think in terms of theseservice flows, rather than in terms of pur-chasing goods. In fact, Jonathon Schwartz,the new CEO of Sun Microsystems Inc., hasgiven free computer workstations to businesscustomers that buy service agreements. Hebelieves that the future of Sun rests in sellingservice rather then computer hardware orsoftware. IBM Corp. has used a similar logicto develop its ‘‘on-demand’’ business model,where information technology (IT) is deliv-ered as a flow of services rather than througha transaction involving change of ownershipof equipment. IBM is also developing a sys-tem to allow insurance firms to provideinsurance to automobile owners equippedwith global positioning system (GPS) track-ing devices that will charge for coveragebased on actual mileage traveled, time ofday, and risk level in the area being driven.

Tangible resources that are part of ourecosystem can also be viewed in terms ofservice provision. For example, natural pol-lination of crops by insects or trees that helpprevent erosion and protect the watershedare examples of service provision, as are treesplanted around houses to provide shade insummer but sunlight and warmth duringwinter. These service flows can be a substi-tute for industrial products. For instance,sediment and nutrients flow into the PanamaCanal due to deforestation along the canal.The sediments clog the canal, while the nutri-ents do so indirectly by stimulating growth

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of waterweeds. The government can pur-chase equipment and hire workers to con-tinuously dredge the canal to keep it clean or,alternatively, replant trees. The trees wouldtrap sediments and nutrients and also helpregulate the supply of fresh water. In brief,the forests would serve as a replacement forbuilding vast reservoirs and filtration beds.

This is not an isolated example. Natureprovides considerable potential service flowsthat entities can transform into serviceexchange. As one notable example, considerthe energy generated from the ocean cur-rents, wind, and solar system. The ebb andflow of ocean tides can power turbines toprovide electricity to coastal areas, where aconsiderable proportion of the world popu-lation lives. By similar outside-the-box think-ing, British Petroleum (BP) has become aglobal leader in developing sustainable alter-native (low or non-carbon) energy programs.Likewise, General Electric Co. is devotingconsiderable knowledge and skills toimproving sources of energy and waterthrough the use of technology.

Tangibles to Intangibles

MasterCard International has developeda global marketing campaign around thetheme of ‘‘priceless.’’ A typical advertise-ment shows consumers purchasing tangiblegoods such as food, wine, furniture, apparel,or jewelery. The advertisement then dis-plays the price (value-in-exchange) of eachof the items. However, each advertisementends with a statement emphasizing that thegoods were only the means to provide a‘‘priceless’’ experience (value-in-use)—forinstance, spending time with your lovedone at a special dinner or watching yourchildren win a soccer game. In a service-dominant logic world, it is central to under-standing: exchange is fundamentally, pri-marily about the intangible rather than thetangible.

A pair of $100 Nike athletic shoes have amaterial content that is a fraction of the $100.However, what a Nike shoe provides theteenager wearing them is a gateway for

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dreaming, experiencing, and expressingself-concept. A cup of coffee at Starbucks isnot about consuming a commodity beverage;it is about experiencing a moment of relieffrom a hectic work and home life. Service-dominant logic recognizes that the mostvaluable and enduring things are not things.Tangible matter decays and/or is discarded,while intangible memories and experiencesare embedded in our minds forever.

The shift from the tangible to the intangi-ble also focuses the marketer on the solutionthat the customer is seeking. It is the oldadage that people don’t buy drills; theybuy quarter-inch holes. In business-to-busi-ness marketing this is called solution selling.But in all firms and industries across theglobe, the increasing mantra is about provid-ing solutions—DuPont and Dow providingsolutions that use chemistry to improve lifeand global sustainability, Cargill providingsolutions to improve yields for farmers orenhance the nutritional value of foods, BPproviding solutions to help industry andconsumers meet their energy needs. Whenthe focus becomes the solution and the intan-gible, what firms learn is that the tangiblecontent cost of their product becomes smallerand smaller and the brand rises in value andimportance. Adidas, Apple, Benetton, Coca-Cola, Rolex, Starbucks, Toyota, etc. all areabout the intangible experience; the tangiblecontent is only the platform or the applianceused for the more important and moreenduring experience.

Operand to Operant Resources

A static operand resource is usually tan-gible and requires something be done to it tobe useful, whereas a dynamic operantresource is largely intangible and can pro-duce an effect. In service-dominant logic,operant resources are the source of compe-titive advantage. Historically, we have beentaught that certain countries (e.g., Singaporeand Israel) did not accumulate wealth or highproductivity because they lacked tangiblenatural resources. However, service-domi-nant logic implies that knowledge, an intan-

gible resource, is the source of nationalwealth and the only sustainable source ofcompetitive advantage.

Knowledge is also something that can beduplicated and shared without the knowl-edge provider giving up the knowledge. Thismakes knowledge quite different from tan-gible resources, which the seller loses whenthey are exchanged. In addition, knowledgecan allow us to increase the usefulness, effec-tiveness, and efficiency of depletableresources. An innovation that doubles fuelefficiency of carbon-based engines has thesame effect as a doubling of oil reserves.Couple with this the development of anengine that doesn’t use carbon fuel, but rathera renewable energy source such as solar andcarbon fuel, and reserves are furtherenhanced. This is precisely what GeneralElectric is pursuing in its ‘‘ecomagination’’(see: www.ge.ecomagination.com) strategy.

The global companies (and countries) thatwill be able to adapt in a rapidly changingtechnological world are those that investheavily in knowledge development. Evenfirms (or countries) that move labor tolower-cost areas of the world, such as Chinaor India, need to recognize that it is in theirinterest to develop the knowledge and skillsof their new workforce. Predictably, as thisoccurs workers’ skills and pay are increased,and they increasingly become customers forservice(s) they don’t presently acquire in themarket, thus expanding both local and globalmarket potential.

Service-dominant logic suggests that allparticipants in the value-creation process beviewed as dynamic operant resources.Accordingly, they should be viewed as theprimary source of both organizational andnational innovation and value creation. Oper-ant resources are not static; they both devolveand evolve in scope and effectiveness. That is,like the goods they can produce, operantresources, if not augmented, become commo-ditized over time. Thus, they must be conti-nually expanded and enhanced. For example,in the U.S., many highly skilled craft special-ties of 100 years ago were first replaced by‘‘skilled’’ manufacturing abilities, and can

now be performed by relatively ‘‘unskilled’’labor or perhaps even by robots (i.e., withouthuman labor altogether)––that is, the humanskills necessary for these tasks have devolvedfrom ‘‘high tech’’ to ‘‘low tech.’’ However, atthe same time, newer, higher-level skills –today’s high-tech jobs, such as design, brand-ing, resource integration, etc. – have evolved.This continual augmentation of dynamicoperant resources is critical to competitiveviability of the nation and the firm alike.

Often, acquiring non-core, higher-levelcompetences and commoditized compe-tences in the market place by outsourcing(foreign or domestic) is not only non-detri-mental to this augmentation process but mayactually be essential to the process. This out-sourcing promotes vitality and growth byallowing the firm or nation to stay focusedon the sustenance and augmentation of moreintegrative and ever more valuable compe-tences, rather than the maintenance of non-competitive resources. In fact, this outsour-cing is at the very heart of market creationand firm and national growth. That is, mar-ket creation requires outsourcing.

As the late organizational consultant andauthor Richard Normann has argued, specia-lization requires outsourcing to relieve actorsfrom performing tasks which can be betterperformed by more specialized actors else-where. He talks about the process in termsof ‘‘unbundling’’ and ‘‘rebundling’’ of assets(‘‘resources’’). This rebundling represents thecreation of new technology or, in service-dominant logic terms, new dynamic operantresources that combine with other operantresources (including those related to custo-mers, employees, and other value-creationpartners) in value creation. Thus, this newtechnology is a higher-level competence thatprovides competitive advantage through adenser level of resource integration. It is this(re)integration of resources that has been iden-tified as the most critical aspect of innovation.

The effect of this innovation is typically tocreate not only more firm and nationalwealth, but often more employees – evenafter allowing for loss of specific jobs fromoutsourcing – and often at higher value (thus

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higher salaries) because of the higher-levelskills involved and the increased demand.

Asymmetric to Symmetric

Service-dominant logic suggests that allexchanges should be symmetric. A focuson symmetric information and treatmentimplies: (1) one does not mislead customers,employees or partners by not sharing rele-vant information that could enable them tomake better and more informed choices, and(2) all exchange or trading partners are trea-ted equitably. The first implication is largelyat the firm level, however, the second pro-vides major guidance for countries.

In a globally networked and open econ-omy, information symmetry becomes essen-tial because the system will drive out thoseorganizations that are not trustworthy orsymmetric in information provision. Organi-zations must promote the symmetric flow ofinformation both across firms and customersand within the firm where different depart-ments and divisions can be internal custo-mers and suppliers of one another. In brief,this argues for truth telling as a globallypervasive norm in business.

A second type of symmetry advocated byservice-dominant logic relates to the treat-ment of trading partners. This has nationaland global, in addition to inter-firm, implica-tions. Essentially the symmetric treatment oftrading partners means treating others theway you would want to be treated. It meansremoving barriers that are artificially createdto give differential advantage to one partnerover others (contrary to the spirit of treatingall ‘‘most favored nation’’ partners equally).

Asymmetry can be seen most often in theerection of non-tariff trade barriers and puni-tive, countervailing duties, which introducenoise into the system and discourage free andopen markets. Globally, effective division oflabor arises when all countries can focus andcapitalize on the competencies in which theyhave specialized and differential advantage.The establishment of trade barriers results inlosses in wealth creation for both individualcountries and the system as a whole. Recent

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rounds of multi-lateral trade negotiationshave lowered average tariff rates dramati-cally, introduced mechanisms for disputeresolution, and have begun to address intel-lectual property rights and services, buttrade-distorting barriers and subsidies stillabound. Trade between developed anddeveloping countries remains particularlyasymmetric. Regrettably, some of the highestbarriers to the global exchange of service areimposed by low-income countries on theirlow-income neighbors, further impedingeconomic growth and development.

Propaganda to Conversation

Advertising, at least as normally prac-ticed, has tended to be propagandistic. Sinceits purpose is to sell the advertiser’s pro-ducts, it typically advocates the views andperspective of that advertiser, the seller, andthus, is one-sided and favorably biased.While this is not necessarily bad, buyersnow have access to more and more informa-tion, causing them to turn away from com-munications that appear to be inaccurate,abusive, intrusive or overly one-sided.

Service-dominant logic argues that com-munication should be characterized by con-versation and dialog. This approach shouldinclude not only customers, but also employ-ees and other relevant stakeholders who maybe affected by service exchange. All stake-holders need to be part of the market dialog.For example, Starbucks promotes its commit-ment to fair trade and sustainable develop-ment in coffee-producing countries throughits partnership with the Earthwatch Instituteand invites customers to join an environmen-tal field research expedition in Costa Rica.Similarly, British Petroleum promotes itscommitment to alternative energy by invit-ing customers to use an interactive onlinetool to assess and reduce their carbon ‘‘foot-print.’’ Toyota promotes its investment inemploying and training thousands of Amer-ican workers in its U.S. production anddesign facilities. All three of these globalfirms are capitalizing on dialog and conver-sation with stakeholders.

This conversational model is becomingincreasingly possible. Thus, marketing con-versation will (should) occur as an integralpart of the marketplace—the market itselfwill be part of the conversation. An illustra-tion of this can be found in the youth fashionmarket that is becoming increasingly globalin nature. The marketplace itself thus rein-forces youth and vitality and furtherencourages the more homogeneous look ofyoung people worldwide.

In service-dominant logic, marketers areencouraged to emphasize listening as much,if not more than, talking. It suggests thatmarketers should focus on hearing the voiceof the market and the signals that arise fromthe market. In this regard, more and morepeople who are not part of a direct economicexchange are voicing their views about theeconomic exchanges of global entities. Forinstance, the voicing of views about the prac-tices of firms or their suppliers in employingchild labor or the marketing practices thatspread global brands that influence localcultures. The service-dominant logic enter-prise will not only listen to all of these voices,but will also participate in the conversations.

Value Added to ValueProposit ion

In the goods-dominant logic, value wasviewed as a property (utility) of a good thatwas added in the manufacturing process,equivalent to value-in-exchange. Thus, if acustomer paid a price for an offering, thenthe exchange of money was assumed toreflect the value in the transaction. This logicimplied that as firms accumulated costs inmanufacturing and distribution (theyexchanged money for capital and labor), theyshould set prices based on these added costs.Traders adopted a ‘‘cost-plus’’ mindset,believing that any cost could be pushed ontothe next party in the supply chain and even-tually onto consumers and society.

Service-dominant logic accepts the impor-tance of value-in-exchange, since it recog-nizes that firms need to obtain cash (viamarketplace exchange) to survive and pros-

per. However, it also recognizes that ultimatevalue is not created (or added) in the factory,but rather co-created with the customer anddetermined by the customer’s assessment ofvalue-in-use. Witness the earlier examples ofNike and Starbucks.

This idea that value is something deter-mined by the customer implies that the firmcan only make an offer of value creationthrough the application of its resources tosome need of the customer—that is, throughservice. Thus, the firm can only make a valueproposition and then, if it is accepted, valueis co-created in concert with the customer.Value-in exchange, as reflected in price paid,is just an indication of the customer’s per-ceived probability that at least some mini-mum desired value will result fromacceptance of the value proposition.

Transactional to Relational

Whenever there is specialization and divi-sion of labor, specialists become interdepen-dent for well-being, if not survival. Asspecialization increases, as it is presentlyon a global basis, so does this interdepen-dence. As entities become more interdepen-dent their potential for collective actionincreases.

One way this collective action is fostered isthrough the development of relational, orsocial, contracts. These relational contractsallow the entities (individually and collec-tively) to relate to the environment. Considerthe traditional agricultural economy, wherefarmers who specialize in growing foodstuffsrequire access to a stream of productioninputs and consumption goods throughoutthe year, while crops are harvested andincome earned during a limited period. Insuch communities, the general store emerged,which provided the products the farmerneeded throughout the year and providedcredit outside the harvest season. Thus, thefarmer and general store became intricatelyinvolved in a relational contract. The farmerneeded the general store, and the general storeneeded the farmer; both were vital parts of asymbiotic and relational exchange system.

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Marketing has been moving toward recap-turing and elaborating this relational (asopposed to transactional) orientation for thelast 25 years. This is not surprising; since, asspecialization and exchange increase overtime, so do relationships. In fact, society ingeneral, and the emergence of a global societyspecifically, are relational phenomena. Ser-vice-dominant logic is inherently relational,partly because it implies that parties co-createvalue. Firms guided by service-dominantlogic cannot be indifferent to customers orsociety.

If exchange is fundamentally centered onthe exchange of service(s) for service(s) thenthe marketer needs to step back and take abroader perspective on his or her role. Theone thing that most of us have in common isthat we go to the market to offer our appliedmental and physical competences inexchange (usually using money as anexchange mechanism) for the applied mentaland physical competences (often embeddedin tangible appliances) that we need. Market-ers, however, have only positioned them-selves as responsible for disposing of theoutput side of the firm.

Should the marketer evaluate in whichskills the customer needs to specialize andwhich should be exchanged in the market—that is, which services (intangible or pro-vided through goods) might be acquired toleverage his or her own service provisionand exchange processes? Should the market-ing function become a customer-consultingfunction? Should the marketer become thebuying agent on a long-term, relational basisto source, evaluate and purchase the skillsthat the customer needs, wants, or desires?

As nations or regions become more specia-lized, they become part of a growing globalweb of interdependency. From these interde-pendencies evolve new global relations whererelational exchange becomes more important.This presents special challenges when onetrading partner may try to look out for itsown long-term best interests in ways the othertrading partner may not necessarily desire. Ifone considers that a value-creation networkfor an everyday item such as a shirt or blouse

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involves dozens of entities from many coun-tries, one begins to see the importance ofglobal relational contracting. For example, ashirt, at the minimum, involves the grower ofcotton, a weaver, a fashion designer, multipletransportation firms, a cut and sew operation,a financial institution and a retail marketer. Ifthe retailer is a just-in-time firm, such as TheLimited, then all participants in the supplychain would benefit from some degree ofrelational contracting.

Maximizing Profits to FinancialFeedback

Profit maximization is not in the vocabu-lary of service-dominant logic. Service-domi-nant logic views marketing as an ongoingstream of social and economic processes inwhich firms continually generate and testhypotheses. Firms learn from financial out-comes as they attempt to better serve custo-mers and obtain cash flows for the firm.Service-dominant logic embraces marketand customer orientation and a learningorientation. Therefore, financial success isnot just an end in itself, but an importantform of marketplace feedback about the ful-fillment of value propositions.

Thus, price paid, profits and cash flow areimportant signals (though not the only sig-nals) to the firm regarding the extent towhich it is serving and meeting customerneeds. The ‘‘price’’ that firms receive for theirofferings (value-in-exchange) is essentially aco-produced signal. It represents supply(seller) and demand (buyer) factors comingtogether to agree upon the minimum poten-tial value of resources in use. These prices area much better signal or instruction on con-sumer wants and needs than those that aremandated from top down by a governmentor other planning organization.

EXECUTING ON SERVICE-DOMINANT LOGIC

Executing on service-dominant logic ina globally hyper-competitive marketplace

will be challenging for many organizations.Old ways of doing things and entrenchedhabits die slowly. When this involves notonly ways of doing things in the firm butalso across firms in today’s large global sup-ply and value-creation networks, the chal-lenge is even more daunting.

Don’t be surprised if your biggest barrieror resistance comes from your marketingstaff. They are used to thinking of their jobas built around traditional concepts of pro-duct, price, promotion and place (the magical‘‘4 Ps’’ of marketing). In many respects, mar-keting has failed in the past because market-ing actually had little control over these 4 Ps –even though they thought they did. Much ofproduct development was housed in theengineering department, price and terms oftrade was pretty much the responsibility ofthe finance department, promotion wasusually split between advertising, publicrelations and sales management but oftennot reporting through a singular chain ofcommand, and place was often controlledby a transportation and logistics departmentor the real estate department. This high divi-sion of labor and specialization grew out ofthe classic industrial organization wherespecialists were separated and unifiedthrough a centralized strategic and tacticalplan. This simply won’t work in the future.In a hyper-competitive global environment,change is rapid, turbulent and surprising—and thus a model of separation is givingway to a model of interaction that S-D logicembraces.

There are two meta-competences wehave found to be pivotal to adopting ser-vice-dominant logic. Collaborative capabilityrepresents the ability of the organization towork with other parties in an open, truthfuland symmetric manner. To do so the orga-nization must also have internal specializedcapabilities and knowledge because other-wise no other organization would benefitfrom working with the organization. Absorp-tive capability is the ability of the organizationto absorb new information from the environ-ment, including its collaborative partners.Importantly, both of these are organizational

capabilities that are part of the organization’sculture. We all know cultures change slowly;if your firm does not have these two meta-competences you need to first work atimproving these to provide a platform formore successful service-dominant logicimplementation.

Once you think your organization hasthe base level of collaborative capabilityand absorptive capability, you should con-sider adopting service-dominant logic with aprototype project to help you refine themodel and identify resistances. What couldbe more exciting and bring more potentialcompetitive advantage than pursuing a newbusiness opportunity or a major businessproblem with this new frame of reference?Think about the exciting learning that occurswhen a firm collaborates with employees,customers and partners of its entire supplyand value network to co-create a serviceoffering and value proposition with conver-sation and dialog at the center.

CONCLUDING COMMENTS

At least since the days of Adam Smith’sstudy of what contributes to national well-being, we have been taught to think of thevalue of resources in terms of their tangibi-lity and to view the economic world in termsof the exchange of tangible goods. But theeconomic world has changed, and market-ing is no longer centrally concerned withphysical distribution; it is now more cen-trally concerned with the facilitation ofall economic exchange, which increasinglycannot be understood in terms of tangiblegoods.

Service-dominant logic takes a broader,more comprehensive view of exchange. Itfocuses on the intangible, often informationthat can now be transmitted across nationalboundaries instantly, as well as higher-order skills that can be exported in additionto, or increasingly in lieu of, tangible goods.Thus, it is a logic focused primarily on theapplication of dynamic operant resources—service. This logic points both firms and

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nations toward policies and approaches tothe market that are somewhat contrary totheir existing prevailing logic. It impliesthat just as individual and firm wellbeingare tied to societal wellbeing, nationalwealth is tied to global wealth. The inverse

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of these wellbeing and wealth relationshipsis also true.

SELECTED BIBLIOGRAPHY

The following books and articles provideadditional perspective on the ideas centralto a service-dominant logic of marketing andbusiness.

Books

Barabba, Vincent P., Meeting of the Minds:Creating a Market-Based Enterprise (Boston:Harvard Business School Press, 1995);Gronroos, Christian, Service Managementand Marketing: A Customer Relationship Man-agement Approach (West Sussex, U.K.: JohnWiley & Sons, 2000); Haeckel, Stephen H.,Adaptive Enterprise: Creating and LeadingSense-and-Respond Organizations (Boston:Harvard Business School Press, 1999);Lusch, Robert F. and Stephen L. Vargo(Eds.), The Service-Dominant Logic of Market-ing: Dialog, Debate and Directions (Armonk,NY: M.E. Sharpe, 2006); Normann, Richard,Reframing Business: When the Map Changesthe Landscape (West Sussex, U.K.: JohnWiley and Sons, 2001); Pine, B. Josephand James H. Gilmore, The Experience Econ-omy: Work is Theater and Every Business aStage (Boston: Harvard Business SchoolPress, 1999).

Articles

Achrol, Ravi and Philip Kotler, ‘‘Marketing inthe Network Economy,’’ Journal of Marketing,1999, 63(Special Issue), 77–93; ‘‘Are You BeingServed?’’ The Economist 23 April 2005, 76–78;Jena McGregor, ‘‘The World’s Most Innova-tive Companies,’’ BusinessWeek, 24 April2006), 62–74; Prahalad, C. K. and VenkatramRamaswamy, ‘‘Co-opting Customer Compe-tence,’’ Harvard Business Review, 2000, 78, 79–87; Sawhney, Mohanbir, Sridhar Balasubra-manian, and Vish Krishnan, ‘‘CreatingGrowth with Services,’’ MIT Sloan Manage-ment Review, 2004, 45(Winter), 34–43; ShostackG. Lynn, ‘‘Breaking Free from Product Mar-keting,’’ Journal of Marketing, 1977, 42, 73–80;Vargo, Stephen L. and Robert F. Lusch. ‘‘Evol-ving to a New Dominant Logic for Market-ing,’’ Journal of Marketing, 2004, 68(January),1–17; Vargo, Stephen and Robert Lusch, ‘‘TheFour Services Marketing Myths: Remnantsfrom a Manufacturing Model,’’ Journal of Ser-vice Research, 2004, 324–335; Webster, Freder-ick E., Jr., Alan J. Malter, and ShankarGanesan, ‘‘The Decline and Dispersion ofMarketing Competence,’’ MIT Sloan Manage-ment Review, 2005, 46(Summer), 35–43.

Robert F. Lusch is marketing department head and the Lisle & RoslynPayne Professor of Marketing at the University of Arizona. His expertiseis in the areas of marketing strategy, retailing and distributionsystems. A prolific author, he is the author of over 150 publicationsincluding seventeen books. He is a two-time recipient of the Harold H.Maynard Award for contributions in marketing theory. Previouslyhe served as editor of the Journal of Marketing and as Chairpersonof the American Marketing Association (Tel.: +1 520 621 7480;e-mail: rlusch@eller.arizona.edu).

Stephen L. Vargo is associate professor of marketing at the Universityof Hawaii. His expertise is in the areas of marketing theory andconsumers’ evaluative reference scales. He has published in the Journal

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of Marketing, Journal of Service Research, and other marketing journalsand serves on the editorial review board of the Journal of Marketing,Journal of Service Research, and the Australasian Marketing Journal. He hasbeen awarded the Harold H. Maynard Award for his contribution tomarketing theory (Tel.: +1 808 956 8506; e-mail: svargo@hawaii.edu).

Alan J. Malter is assistant professor of marketing at the University ofArizona. His research examines the changing role of marketing, effects ofgeographic proximity on learning and innovation, and tacit knowledge. Hehas published in the Journal of Marketing, MIT Sloan Management Review,International Journal of Research in Marketing, and Journal of ProductInnovation Management, among others. He has received the Robert D.Buzzell Award for contributions to marketing practice and thought(Tel.: +1 520 626 7353; e-mail: amalter@eller.arizona.edu).

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